“Only a fool thinks price and value are the same.” - Antonio Machado
There is a famous story involving Henry Ford and Charles Steinmetz, a small man who was a giant among scientific thinkers of his era. Ford Motor Company's River Rouge plant in Michigan had a generator problem that none of his electrical engineers could solve. Ford called in Steinmetz, who listened to the generator, took a few notes, and instructed Ford’s engineers to remove a plate from the generator at a place he had marked with chalk. Problem solved, much to the amazement of Ford’s engineers. Steinmetz then provided an invoice for $10,000, which Henry Ford challenged, requiring an itemised billing. The bill had just 2 items: $1 for making the chalk mark and $9,999 for knowing where to make the chalk mark. Henry Ford paid the invoice.
This is how it is with tenant representation services, where a fee can be related to the time spent on the job or assessed in relation to the value received. The former is a simple calculation, requiring judgement concerning the impact of the advice and representation. As a lease arrangement is a long-term commitment that can either help or harm the lessee business, it makes good sense to focus more on the value of the tenant representation service than the time spent providing it. The key question is the extent to which the service provided de-risks the lease commitment for the lessee, having regard to the lessee’s business requirements and risks over the term of the lease. Here are a few pointers for assessing the value of these services rendered with regard to the fees charged.
Pointer number 1 – ensure the fees are market benchmarked
“The bitterness of poor quality remains long after the sweetness of low price is forgotten.” Benjamin Franklin
The most common requirement for tenant representation services is when an office, retail or industrial client seeks advice and representation relating to a ‘stay or go’ transaction. The advisor provides expertise relating to workplace strategy, the market, and lease negotiations, and the objective is to achieve an optimum accommodation arrangement that best supports the tenant’s business over the lease term. Whilst there are several fee models and a wide range of fees charged, the market benchmark will normally be linked to the square meters of the leased premises or a percentage of the first year’s gross rental. At LPC our pricing policy is to ensure fees are market benchmarked and to deliver optimal outcomes for the tenant relating to the location, premises, and commercial terms. This simplifies the fee arrangement and facilitates the appropriate focus on driving value for the tenant.
Pointer number 2 – avoid fee models that drive the wrong outcomes
“Nowadays people know the price of everything and the value of nothing.” - Oscar Wilde
The industry is dominated by global firms that derive most of their income from landlords (for example, leasing agents & asset sale services) while providing tenant representation services to commercial tenants. This conflict of interests disadvantages tenants, and the fee models applied can drive sub-optimal outcomes for the tenant. An example of this is a fee model that links the advisory fee to the first-year gross rental, a link that can incentivise acceptance of rent and outgoings that do not reflect the best achievable outcome for the tenant. It is important to ensure a market-related fee for services provided but to adapt the fee model to remove any incentive to accept a sub-optimal outcome for the tenant.
Pointer number 3 – know where value is found
“Risk comes from not knowing what you’re doing” - Warren Buffett
The value of tenant representation services is found in how well the leasing arrangement supports the business requirements and risks in the future. The reality is that a lease commitment is a material expense item, and it can become a long-term obligation that cripples the tenant organisation. Regrettably, this eventuated for many hospitality tenants during the pandemic as they experienced interrupted use of their leased premises with uninterrupted lease obligations, resulting in a sharp increase in business distress and insolvencies. Underpinning this unwanted outcome is tenant disadvantage (and landlord advantage) when accessing leasing information and lease negotiation expertise. Warren Buffet is right that “risk comes from not knowing what you’re doing”.
At LPC our advice and tenant representation are founded on our perspective that business comes before space.
What we mean is that it is essential to fully understand the tenant’s business requirements and risks in the future before determining what location, premises, and commercial terms are best aligned with the business. This work pre-defines the intended accommodation arrangements and lays the groundwork for a 4-phase lease negotiation process that builds tenant leverage and intentionally de-risks the outcome for the tenant in relation to cost, risk, flexibility, obligations, and guarantees. In this way, tenant risks are reduced by knowing what one is doing and knowing what to avoid.
Pointer number 4 – assessing value
“There is nothing so painful as being stuck where you don’t belong.” - Anonymous
If the guidance in pointer 3 is followed, a tenant will be well placed to minimise their accommodation risks. To ensure risk minimisation, it is essential to apply qualitative assessment (discounted cash flow assessment) to build leverage with landlords in relation to the more obvious and measurable cost items. Equally important is a qualitative assessment of the risk, flexibility, obligations, and guarantees linked to the obvious and less obvious lease provisions. In combination, these assessments will help a lessee perceive the real value of the lease terms and how well the location, premises, and commercial terms align with future business requirements and risks.
Why LPC?
At LPC, we partner with tenants and occupiers across Australia and New Zealand to optimise their office, industrial and retail property portfolios. We provide an integrated suite of services, including transaction management, portfolio and lease management and project management. We provide conflict-free advice and tenant representation, meaning we have no ties with owner-developers or landlords. Tenants' and occupiers' interests remain at the core of what we do as we negotiate on your behalf and endeavour to rebalance the scales in a market favouring landlords.
