Who really pays the office leasing advisor?

A guide to how advisors are paid in the office leasing market, and what you should know before signing a lease.

Independent tenant advisory services are sometimes presented as “free”. In practice, the picture is more complex, and understanding who pays whom, and for what, has a direct bearing on the terms of your lease. Below we explain how advisory firms are typically paid in Poland, when a tenant genuinely benefits from having an advisor, and when it should be especially vigilant.

How advisor remuneration works

An independent advisor works on behalf of the tenant, yet its fee usually does not come directly from the client. In the standard market model, it is paid out of the budget of the landlord of the office building in which the lease is signed. The parties are, of course, free to agree otherwise: the client is entitled to propose any fee arrangement it likes with its advisor.

Does the client indirectly bear the cost of the advisory firm?

The short answer is yes. Although the tenant does not pay the advisor directly out of its own pocket, the cost is de facto built into the lease terms. And while many advisory firms market their services as “free”, in economic terms the tenant contributes to funding them.

How it works in practice

The landlords of most office buildings allow a prospective tenant to choose an advisory firm to guide it through the process and, where needed, provide the additional services required to complete the lease, such as a space needs analysis, office design or fit-out supervision. This is a form of tenant incentive, factored into the overall cost of securing that tenant.

The landlord pays the advisor a “success fee”, that is, a fee for bringing the lease to signature. Like its spending on staff, marketing, legal services or architects, the landlord later factors this cost into its rent calculations. As a result, the tenant pays a rent that already includes all of these items, whether or not it makes full use of the advisory services.

Is leasing with an advisor more expensive?

In most cases, no. Counter-intuitively, involving an independent advisory firm usually does not increase the cost of the lease, and it often reduces it. There are several reasons for this.

• Pricing is set in advance. Landlords agree in advance with the banks financing the development the rents at which they may let space. The advisory firm's fee is not part of the lease, so the landlord will not grant a discount simply because the client came without an intermediary.
• An independent intermediary negotiates more. Bringing in a professional advisory firm typically secures terms that are, on average, better by a double-digit percentage than in negotiations conducted directly by the tenant.
• A package of additional services. Within its fee, the advisor can give the tenant access to a team of specialists, such as an interior architect, a technical advisor, construction experts or a project manager, whom the client would otherwise have to engage itself.

For example, if the transaction is completed without an advisory firm chosen by the tenant, the landlord will still not lower the rent. It will usually pass the budgeted fee to its own advisor (the building's exclusive letting agent) or, because of its commitments to the bank, simply leave the pricing unchanged.

When a tenant really overpays

There are situations in which the fee model can work against the tenant. It is worth knowing them so that you can choose your negotiating partner with your eyes open. The risk arises when:

• the advisory firm operates a non-transparent fee model and negotiates a fee with the landlord above the market standard, passing the difference on to the contract terms;
• the advisor represents both sides of the transaction at the same time (a conflict of interest) or in reality acts in the landlord's interest;
• the advisory firm works with a limited list of landlords and does not analyse the full range of options on the market;
• the advisor depends on the landlord, for example as its exclusive letting agent, property manager or in handling the sale of the property, and consequently does not negotiate firmly enough;
• the agent promotes the building that pays it the highest commission rather than the one that is best for the client;
• the advisor does not offer the high-value additional services needed to complete the lease efficiently;
• the client does not receive a complete list of the options available on the market.

Summary

The cost of a tenant advisor is embedded in the price of leasing an office, even if the tenant does not see it directly. This is market standard, similar to mortgage brokerage or the way insurance agents are paid. The fee structure itself is not a problem. Problems arise only when transparency is lacking or when the advisor also represents the other side of the transaction.

What to look out for in practice:

• choose a firm that represents tenants only, with no risk of a conflict of interest;
• make sure the advisor does not represent the landlords you will be negotiating with (as exclusive letting agent, property manager or in the sale of the building);
• insist on a transparent fee model and set out the agent's incentives clearly in your engagement agreement;
• check the package of additional services the advisor provides within its fee;
• consider including a performance fee element if you want the most ambitious possible approach to the negotiations.

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Filip Kościkiewicz Partner [email protected]