The Real Deal New York

Psst! Wanna fifty?

Commercial landlords lure brokers with new incentives, including double commissions and cold, hard cash
By Adam Pincus | July 31, 2009 05:49PM

Even as the Manhattan office leasing market starts to show some signs of stability, velocity remains far below normal. To deal with the pressure of the weak market, some landlords are offering double commissions to brokers who sign deals in their buildings or are giving crisp $50 bills to agents to simply show a space.

At the same time, brokers said there are landlords who are having a hard time paying even a single commission, and who are trying to drag out payments or reduce broker fees.

Rafe Evans, a vice president at brokerage and management firm Walker Malloy & Company, said as the amount of space piles up, commercial building owners and sub-landlords are using different incentives to stand out.

“They are trying to get noticed among the listings. They are trying to catch a break,” he said.

Financial firm Macquarie Group is offering a double commission for the broker who subleases its space in 1345 Avenue of the Americas, according to an industry source.

Others, such as Midtown landlord Abramson Brothers, have offered a commission and a half, two sources said.

Neither Macquarie nor Abram-son Brothers responded to a request for comment.

But while those bonuses are for brokers who actually close deals, some landlords are giving away $50 gift certificates or cash to brokers who just view or show a space. For example, brokers who bring a potential tenant to 21 West 38th Street, a Brause Realty building whose leasing agent is Newmark Knight Frank, will receive a $50 gift card, according to an e-mail flyer obtained by The Real Deal.

At a recent event at the Caxton Building at 229 West 28th Street, owned by Joss Realty Partners, brokers were handed $50 in cash just for walking through the door, several agents said. Murray Hill Properties is offering free trips, according to their Web site, to brokers showing space to qualified tenants. And the broker who can lease 5,147 square feet in a sublet space with five years remaining at 1251 Avenue of the Americas will get $10,000 or a trip to Thailand, according to another broker flyer.

Broker incentives are a time-honored practice used to generate traffic for overlooked space in a down market. And leasing in June was still far below historic norms. In Manhattan, there was 1.47 million square feet leased during the month, down 34 percent from the 2.28 million leased in June a year earlier, the most recent data from CB Richard Ellis show.

But some brokers told The Real Deal that they found the incentives ethically troubling and said they generally rebuff them. They said such incentives create a conflict of interest between the client and the agent.

Evans said enhanced commissions presented a broker with a quandary to choose between the best deal for the client and a weaker deal that might bring a higher commission.

“There is a fundamental ethical conflict there, and double commissions simply amplify it,” he said, adding, “It is usually glossed over with: ‘I work for the deal.'”

Roger Newman, a senior vice president for property operations at office landlord Paramount Group, which has a portfolio of about 10 million square feet in New York, said his firm rarely uses incentives or bonuses.

“For the most part we don’t do that because we think it might create an uncomfortable situation for the broker and client,” he said.

Marisa Manley, president of boutique firm Commercial Tenant Real Estate Representation, said she has not, and would not, accept a gift card to show a space.

“If you have to take $50 to show the space, is it the right space? We are not in the business of gimmicks and freebies,” she said.

William Cohen, executive vice president at Newmark Knight Frank, said, however, he didn’t believe the incentives presented a conflict of interest. He wrote in an e-mail that there was “no ethical issue.”

But while some landlords have been providing incentives, a few are making agents work harder to get their commission checks, brokers said.

CB Richard Ellis executive managing director Matthew Van Buren said some landlords have been slower to pay. He noted that historically, each landlord has its own payment schedule. But recently some, which he declined to name, were trying to change the rules, he said.

“We have had to hold several to the standards that they have set, and say, ‘Well now, look, there is a standard by which you compensate us for bringing you tenants and we are going to hold you to that standard,'” Van Buren said.

While there is no industry-wide payment schedule, brokers often get half of their commission on the signing of the lease contract and the balance when the tenant begins to pay rent, or after six months, agents said. The commission structure varies from brokerage to brokerage and between landlords, but is generally about 3.2 percent of the total value of a 10-year lease, with a higher percentage for shorter lease terms.

On the retail side, Grubb & Ellis managing director Gary Schwartzman said a few landlords had asked brokerages to reduce commissions.

“Some landlords have requested that the brokerage houses take a look at their normal rates and ask them to consider discounts to those normal rates,” Schwartzman said.

His colleague at Grubb & Ellis, managing director Martin Cottingham, said brokers are looking at a cut to commissions from the brokerage side as well.

He said the firm is occasionally throwing in services for free that would have been paid for separately in the past, generally for smaller clients.

In June, he was working on two such deals — one on Fifth Avenue and one in Harlem — that would cut into the commission by 5 percent to 10 percent.

He noted that they were long-term clients, adding, “I think it is the prudent thing to do.”

Some landlords pay on signing, such as W & M Properties, which manages the Empire State Building and the former Lincoln Building at 60 East 42nd Street, now renamed One Grand Central Place.

The company is well-known for paying commissions on signing in good times and bad, and uses the reputation in the recession to its advantage.

“Everybody asks us whether we do anything different. We have not changed our model, because we have never had to change our model due to the market,” said Fred Posniak, W & M’s senior vice president.

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