Selecting a Leasing Broker

The cost of space continues to be one of a law firm's largest costs of doing business. (The highest, as you might expect, is personnel.) Accordingly, choosing the right space at the right price, and choosing the right broker to assist the firm in selecting that space, is one of the most important decisions a firm can make. Working with the right broker can not only save the firm hundreds of thousands (or even millions) of dollars over the life of a five-year or 10-year lease, it also can free up management to spend time on other issues that affect the practice of the firm and leave obtaining the best deal for occupancy to those with greater expertise.

In order to assure that a firm chooses the best broker for the job, management should begin by soliciting proposals from a minimum of three or four brokers through an appropriate Request for Proposal (“RFP”) process. While the RFP need not be a formal one, relevant information about the firm and its needs should be provided to each potential broker. The information should include, at a minimum, the general geographic market in which the firm requires space, e.g., the city of Baltimore or Westchester County, the general parameters of the firm's space needs (there is a big difference between 15,000 square feet and 100,000 square feet!), and the firm's timeline, that is, the expiration date of its current lease.

To be certain that the RFP process provides the firm with relevant information from each broker to reach the best decision, the RFP should also request detailed responses to the following 10 essential questions.

What landlord clients does the broker's firm currently represent in your geographic market? As a starting point, the firm will want to identify those brokers who represent landlords with whom the firm may end up negotiating a lease. As part of this inquiry, the firm also should ask which specific buildings are involved in the broker's landlord representation. This is not to suggest that a landlord broker should be disqualified from representing the law firm in seeking space in any buildings, even where the broker's firm represents the landlord. It simply may lead the firm to make further inquiries, such as how the broker would choose among several landlord clients, should the law firm be interested in more than one property represented by the broker. Perhaps most important, this question gets potential conflicts of interest out on the table for early discussion in the broker's representation of the firm and how the broker would deal with them. This issue is discussed further below.

What tenant clients does the broker's firm currently represent in your geographic market? Conflicts of interest for a broker can arise not only from representing a building in which the firm is interested, but also from representing a tenant that may be competing for the same space as the firm. Here, two further questions are key: What are the space requirements of the broker's other tenant clients, and what is the timing of their lease expirations, i.e., when will they be in the marketplace? If your firm is looking for 15,000 square feet of space, it is unlikely it will be competing with a firm seeking 200,000 square feet, but it certainly will be competing with a firm seeking 25,000 to 30,000 square feet. As to lease expirations, information should include any that will occur within 18 months of the firm's own lease.

Has the broker represented law firms in lease negotiations in the past three to five years? If so, who and where? Law firm leases tend to provide unique issues that one would not find in many commercial retail or other general office lease transactions, so the firm will want to be certain the broker representing it has strong experience in the law firm leasing market. Any broker can talk a good game about experience, but understanding how law firms think about and use their space can be a valuable tool in negotiating with a potential landlord.

Has the broker represented landlords in lease negotiations with law firms in the past three to five years? If so, who and where? A broker who has been on the other side of the table from a law firm is privy to the way landlords think about law firms as tenants. Having this intelligence going into the process with a new landlord (or an existing landlord) can help focus the firm early on how the landlord might view the law firm as a tenant. For example, would the landlord view the law firm as a more stable tenant or a higher risk tenant than, let us say, a financial services firm? What is the landlord's expectation from law firms on issues like security for the law firm's lease obligation?

Who are the individuals in the broker's firm who will be responsible for the engagement? The old adage that what is most important in real estate is “location, location, location” applies equally to broker representation. In that case, however, it is “reputation, reputation, reputation.” Ask who will lead the leasing term and whether he or she will assure his or her availability throughout the process, from the pre-letter of intent stage through lease negotiations and execution.

Even if not yet engaged, is the broker currently being considered as tenant representative for any potential clients requiring space comparable to that of your firm? The issue of potential conflicts of interest arises again. Might your broker end up representing one of your firm's major competitors looking for a similar amount of space in your market, even if not engaged by the competitor at the time you make your selection? To avoid that possibility, you may want to negotiate a veto power over such future engagements. In setting the scope of any veto rights, a firm should have in mind a relatively broad range of space requirements, perhaps anywhere from one-half of the firm's needs to 150% of these needs. Even if the space needs of a competitor are not precisely the same as the law firm's, a smaller or larger amount of space in the same building may still block the firm's expansion opportunities, especially in a longer-term lease scenario.

Does the broker have a conflict of interest policy? This question stumps most brokers. While lawyers live and die by conflict of interest policies, they are far less common in other businesses, including the real estate broker businesses. Nevertheless, it is important that the law firm and the broker discuss frankly the law firm's expectations and how the broker will handle conflicts of interest, should they arise. Some brokers rely solely on transparency and full disclosure. Others seek to mitigate a conflict either by resigning from one side of the representation or, if the broker's firm is large enough, by establishing separate roles and confidentiality for team participants through a “Chinese Wall.”

What services does the broker offer in terms of conceptual space planning and other ancillary needs? The role of a leasing broker today is broader than simply finding space for a prospective tenant. Space is unique, and a law firm can make an informed decision as to which opportunity is best only by comparing things like rentable square footage versus usable square footage and other building operating efficiencies or inefficiencies. Also important is understanding the operating expense and tax escalation experience of certain buildings versus others. What is the true cost of leasing one space versus another? As an experienced broker will tell you early in the process, base rent is only one of the costs of occupancy, and focusing solely on it can lead to higher costs than expected in the long term. It is worth stating the obvious. Lawyers are experts in the law, not in space planning. Having assistance available in making these decisions can be invaluable.

How will the broker charge for its services? Although practices vary from market to market, the most common practice is for the landlord to pay all tenant brokerage commissions related to a leasing transaction, but that may not be the end of the matter. In more competitive markets, brokers may be willing to “rebate” a portion of that commission to the tenant, a factor that can be taken into account in determining the net cost of space. Like free rent from a landlord, a firm can use the rebate to defray a portion of its build-out costs or leasing costs, thereby reducing its out-of-pocket expenses in the early part of the term.

Is the chemistry right? This is not a question for the RFP, but rather a question the firm really must ask itself. After considering a broker's responses to all of the other questions, a firm must consider the issue of chemistry between the members of the law firm's leasing team and the members of the leasing broker team. Where a move involves a significant amount of space, the process is likely to last for anywhere from 24 to 30 months, so the teams will be working closely together for a long time. It is important, therefore, to make certain that the fit is right on a personal level as well as a professional level.

The cost of space continues to be one of a law firm's largest costs of doing business. (The highest, as you might expect, is personnel.) Accordingly, choosing the right space at the right price, and choosing the right broker to assist the firm in selecting that space, is one of the most important decisions a firm can make. Working with the right broker can not only save the firm hundreds of thousands (or even millions) of dollars over the life of a five-year or 10-year lease, it also can free up management to spend time on other issues that affect the practice of the firm and leave obtaining the best deal for occupancy to those with greater expertise.

In order to assure that a firm chooses the best broker for the job, management should begin by soliciting proposals from a minimum of three or four brokers through an appropriate Request for Proposal (“RFP”) process. While the RFP need not be a formal one, relevant information about the firm and its needs should be provided to each potential broker. The information should include, at a minimum, the general geographic market in which the firm requires space, e.g., the city of Baltimore or Westchester County, the general parameters of the firm's space needs (there is a big difference between 15,000 square feet and 100,000 square feet!), and the firm's timeline, that is, the expiration date of its current lease.

To be certain that the RFP process provides the firm with relevant information from each broker to reach the best decision, the RFP should also request detailed responses to the following 10 essential questions.

What landlord clients does the broker's firm currently represent in your geographic market? As a starting point, the firm will want to identify those brokers who represent landlords with whom the firm may end up negotiating a lease. As part of this inquiry, the firm also should ask which specific buildings are involved in the broker's landlord representation. This is not to suggest that a landlord broker should be disqualified from representing the law firm in seeking space in any buildings, even where the broker's firm represents the landlord. It simply may lead the firm to make further inquiries, such as how the broker would choose among several landlord clients, should the law firm be interested in more than one property represented by the broker. Perhaps most important, this question gets potential conflicts of interest out on the table for early discussion in the broker's representation of the firm and how the broker would deal with them. This issue is discussed further below.

What tenant clients does the broker's firm currently represent in your geographic market? Conflicts of interest for a broker can arise not only from representing a building in which the firm is interested, but also from representing a tenant that may be competing for the same space as the firm. Here, two further questions are key: What are the space requirements of the broker's other tenant clients, and what is the timing of their lease expirations, i.e., when will they be in the marketplace? If your firm is looking for 15,000 square feet of space, it is unlikely it will be competing with a firm seeking 200,000 square feet, but it certainly will be competing with a firm seeking 25,000 to 30,000 square feet. As to lease expirations, information should include any that will occur within 18 months of the firm's own lease.

Has the broker represented law firms in lease negotiations in the past three to five years? If so, who and where? Law firm leases tend to provide unique issues that one would not find in many commercial retail or other general office lease transactions, so the firm will want to be certain the broker representing it has strong experience in the law firm leasing market. Any broker can talk a good game about experience, but understanding how law firms think about and use their space can be a valuable tool in negotiating with a potential landlord.

Has the broker represented landlords in lease negotiations with law firms in the past three to five years? If so, who and where? A broker who has been on the other side of the table from a law firm is privy to the way landlords think about law firms as tenants. Having this intelligence going into the process with a new landlord (or an existing landlord) can help focus the firm early on how the landlord might view the law firm as a tenant. For example, would the landlord view the law firm as a more stable tenant or a higher risk tenant than, let us say, a financial services firm? What is the landlord's expectation from law firms on issues like security for the law firm's lease obligation?

Who are the individuals in the broker's firm who will be responsible for the engagement? The old adage that what is most important in real estate is “location, location, location” applies equally to broker representation. In that case, however, it is “reputation, reputation, reputation.” Ask who will lead the leasing term and whether he or she will assure his or her availability throughout the process, from the pre-letter of intent stage through lease negotiations and execution.

Even if not yet engaged, is the broker currently being considered as tenant representative for any potential clients requiring space comparable to that of your firm? The issue of potential conflicts of interest arises again. Might your broker end up representing one of your firm's major competitors looking for a similar amount of space in your market, even if not engaged by the competitor at the time you make your selection? To avoid that possibility, you may want to negotiate a veto power over such future engagements. In setting the scope of any veto rights, a firm should have in mind a relatively broad range of space requirements, perhaps anywhere from one-half of the firm's needs to 150% of these needs. Even if the space needs of a competitor are not precisely the same as the law firm's, a smaller or larger amount of space in the same building may still block the firm's expansion opportunities, especially in a longer-term lease scenario.

Does the broker have a conflict of interest policy? This question stumps most brokers. While lawyers live and die by conflict of interest policies, they are far less common in other businesses, including the real estate broker businesses. Nevertheless, it is important that the law firm and the broker discuss frankly the law firm's expectations and how the broker will handle conflicts of interest, should they arise. Some brokers rely solely on transparency and full disclosure. Others seek to mitigate a conflict either by resigning from one side of the representation or, if the broker's firm is large enough, by establishing separate roles and confidentiality for team participants through a “Chinese Wall.”

What services does the broker offer in terms of conceptual space planning and other ancillary needs? The role of a leasing broker today is broader than simply finding space for a prospective tenant. Space is unique, and a law firm can make an informed decision as to which opportunity is best only by comparing things like rentable square footage versus usable square footage and other building operating efficiencies or inefficiencies. Also important is understanding the operating expense and tax escalation experience of certain buildings versus others. What is the true cost of leasing one space versus another? As an experienced broker will tell you early in the process, base rent is only one of the costs of occupancy, and focusing solely on it can lead to higher costs than expected in the long term. It is worth stating the obvious. Lawyers are experts in the law, not in space planning. Having assistance available in making these decisions can be invaluable.

How will the broker charge for its services? Although practices vary from market to market, the most common practice is for the landlord to pay all tenant brokerage commissions related to a leasing transaction, but that may not be the end of the matter. In more competitive markets, brokers may be willing to “rebate” a portion of that commission to the tenant, a factor that can be taken into account in determining the net cost of space. Like free rent from a landlord, a firm can use the rebate to defray a portion of its build-out costs or leasing costs, thereby reducing its out-of-pocket expenses in the early part of the term.

Is the chemistry right? This is not a question for the RFP, but rather a question the firm really must ask itself. After considering a broker's responses to all of the other questions, a firm must consider the issue of chemistry between the members of the law firm's leasing team and the members of the leasing broker team. Where a move involves a significant amount of space, the process is likely to last for anywhere from 24 to 30 months, so the teams will be working closely together for a long time. It is important, therefore, to make certain that the fit is right on a personal level as well as a professional level.