Tenant rep broker or going direct? Leasing in NYC

A company looking for commercial space in New York City has two basic options. It can hire a tenant representative broker (a tenant rep) to run the search and negotiate for it, or it can go direct: find spaces itself and deal with each landlord and the landlord's leasing agent.

Both work, and plenty of small tenants sign good leases without a broker. But the choice is less about saving a fee than most people assume, because of how commissions are paid in New York. This guide explains who works for whom, who pays, what a tenant rep actually does, when going direct makes sense and how to choose a rep. It is general information, not legal or financial advice, and whichever route you take, a real estate attorney should review the lease.

Who works for whom

• The landlord's agent (often called the listing broker or exclusive leasing agent) is hired by the landlord to fill the space. Its duty runs to the landlord. It can be helpful, quick and honest with you, but its job is the best deal for the owner.
• A tenant rep is hired by the tenant, usually under a written representation agreement, and its duty runs to the tenant. It surveys the market, arranges tours, collects proposals and negotiates terms on the tenant's behalf.

Some large brokerages represent landlords in some buildings and tenants in others. If the same firm would represent both sides of your deal, that is a conflict: ask how it is handled and get the arrangement disclosed to you in writing before you go further.

Who pays the commission

In New York City, the landlord customarily pays the brokers on a direct lease, including the tenant's broker. That is market custom, not law, and it comes out of the landlord's leasing budget, which is part of what the rent pays for.

How it is usually figured:

• A full commission is a percentage of the base rent over the initial term of the lease, on a schedule that is highest in the first year and steps down after that. Schedules commonly start around 5% of the first year's base rent. Escalations and other charges are usually left out.
• On a five-year lease, a full commission comes to roughly 19% of one year's base rent.
• When the tenant has its own broker, the landlord typically pays the tenant rep one full commission and its own agent half of one.
• When the landlord's agent finds the tenant with no outside broker, that agent typically earns one full commission.

An example with round numbers: 5,000 SF at $60 per SF is $300,000 a year in base rent. On a five-year lease, a full commission would be about $57,000. With a tenant rep, the landlord pays about $57,000 to the rep and about $28,500 to its own agent. If the tenant goes direct, the landlord pays its agent about $57,000.

So a tenant who goes direct saves the landlord about half a commission, not the whole fee, and gets none of that back unless it asks for a lower rent or more free rent in return. Landlords set their own policies, so confirm how a building pays before you assume anything.

Two exceptions. On a sublease, the company subletting its space usually pays the brokers, as the landlord would on a direct lease (see the guide to subleasing office space). And not every landlord pays outside brokers. If you hire a rep, the representation agreement should say what happens then.

What a tenant rep does

A good rep earns its commission in a few specific places:

• The market survey. Beyond the listings you can find yourself, a rep sees spaces that are coming up, subleases and buildings willing to deal, and can tell you what similar tenants recently paid.
• Competition. Asking several landlords for proposals at the same time, and letting each know it, is the main source of negotiating leverage. A rep runs that process; a tenant going direct has to run it alone.
• Comparing offers. Two proposals with the same asking rent can be very different deals once you account for the loss factor, free rent, the work allowance and escalations. See rentable vs usable square feet and gross vs net leases.
• The term sheet. Most of the economics are settled in the letter of intent, before the lease is drafted: rent, term, free rent, the work letter, the security deposit, renewal and expansion rights. A rep negotiates those points; your attorney then turns them into the lease.
• The build-out. For space that needs work, a rep can help budget it and coordinate architects and contractors with the landlord's schedule.

A tenant rep is not a lawyer. Lease language, guaranties and liability are your attorney's job.

When going direct makes sense

• A small, simple deal, such as a small office or a storefront, where you already know the neighborhood and the building.
• You have time to tour, compare and negotiate yourself, and you are comfortable asking for concessions.
• The space is unusual or off the brokerage market, such as a direct listing from an owner.

If you go direct, do the rep's work deliberately. Look at several spaces, get every proposal in writing, compare them on the same basis with the commercial rent calculator, and remember who the landlord's agent works for. Always hire a real estate attorney before you sign.

When a tenant rep is worth it

• Larger or longer leases, where a small difference in rent, free rent or the work allowance adds up to a lot of money.
• Space that needs a significant build-out.
• A first lease, or one in a neighborhood or property type you do not know well.
• Renewals. A tenant that can credibly show it could move tends to get a better renewal offer. A rep can run a real search alongside the renewal talks to create that leverage.

How to choose a tenant rep

Ask every candidate:

• Do you or your firm represent landlords, in general or in buildings I am likely to consider? How would you handle that?
• What have you done recently at my size, property type and neighborhood?
• Who will do the work day to day? The senior broker in the pitch is not always the person on your tours.
• What does the representation agreement say? Look at the term, exclusivity, how either side can end it, and any tail, a clause that pays the broker if you lease a space it showed you within a set period after the agreement ends.
• How are you paid if a landlord does not pay outside brokers?

Check the license too. New York real estate brokers and salespeople are licensed by the Department of State, and the license records are public.

Where Leasemark fits

Leasemark is a marketplace, not a brokerage. It works either way you search.

• Tenants, buyers and tenant reps can post a requirement for free with the size, budget and neighborhoods. Owners and brokers with fitting space can ask for an intro, and contact details are shared only when both sides accept.
• Owners and brokers can list a space for free and see what tenants need on the requirements board.
• To see what is out there first, browse office space for lease in NYC or start from a neighborhood.