Going Commercial

November 1, 2003

When Mike Colohan and his wife, Sandy Murphy-Colohan, launched a Keller Williams residential brokerage in downtown Denver in July 2002, it was hard not to notice the number of commercial real estate offices around them.

Commercial transaction volume in the area was strong, thanks to high interest by investors spooked by the stock market. And both Colohans had commercial experience, Mike as a developer and Sandy as an associate with a big commercial company.

So within four months of opening their office, they launched a commercial division, Keller Williams Downtown Commercial, recruiting experienced associates from some of the nearby commercial brokerages and attracting several residential associates from within their own office who had some commercial experience.

By July of last year, with about 14 of its 149 associates operating principally in commercial sales, the company was generating close to 25 percent of its revenue through the new division. “We were fortunate to take on some terrific associates,” says Mike Colohan.

Launching a commercial division can be a smart move for a residential brokerage whose associates are already generating commercial leads.

“If you’re selling a house to someone, there’s a chance the buyer is also looking for other investment opportunities,” says Ryan Mowery, office assistant manager and commercial division manager at John L. Scott–Tacoma North in Tacoma, Wash.

This ready-made source of business can help you establish success in the commercial arena. And your residential associates can generate referral fees, passing the leads along to their colleagues a few desks away. “If you have a big residential office, you could almost live off the commercial leads you generate in-house,” Colohan says.

But what does it take to launch a commercial division? Success starts with determination.

You need to convince other commercial brokers of your competence and get the word out to potential investors to whom you’ve sold homes that their residential company is also a commercial player.

Identity matters

To overcome the perception that you’re a residential company in commercial clothing, it’s imperative to launch a commercial division with a distinct identity.

“Commercial brokers protect their listings from residential brokers, because they’re afraid if you bring in a buyer you’ll muck up the deal,” says Colohan. Forging a separate identity signals that you have professional commercial associates.

A separate identity is also critical in persuading commercial associates to leave their brokerage and join yours. They probably won’t make the move to a brokerage with primarily a residential identity. “You need to have commercial signs and separate phone numbers,” says Colohan. “You can’t operate from the back of a residential office if you’re going to attract anyone from outside.”

It’s not necessary to make the division operationally distinct, though. In fact, by sharing costs for office space, administrative services, MLS and association dues, and so on, you enhance your bottom line, say brokers.

Nor is it necessary to make the division legally distinct, as a separate LLC for instance. But if you keep the two under one legal structure, you have to be careful about the extent to which you separate the identities. Among other things, you have to keep the name of the residential brokerage somewhere in the name of your commercial arm. Otherwise, federal regulators might challenge whether your commercial division is really part of the larger operation and make you submit separate filings—for a new LLC, say—to create a distinct entity. Thus, the commercial division at John L. Scott Tacoma North is known as John L. Scott TCN. TCN stands for Tacoma Commercial Network.

Attracting outside expertise

You can ramp up the expertise of your commercial division in two ways: Help residential associates who want to move into commercial get the experience and training they need, or recruit experienced associates with established practices. You’re likely to do a little bit of both, brokers say.

Attracting experienced associates is the fastest way to build your commercial business. Experienced associates bring their clients and listings, which gets your signs out into the community. And as more associates see your signs, they see you as a growing player and may consider joining you.

But, before you get to that point, why would they want to join you? For one thing, they might believe they can write themselves a better deal. “Associates are attracted to us because of the opportunity to make more money,” says Colohan. “At our office they can create their own business, and we’re very flexible on commission splits—up to 90 percent in some cases.”

That’s quite different than moving up the ladder in the big commercial operations, brokers say. At those established operations, an associate may work for years helping veteran associates while developing clientele. The commission splits are typically in the 50–50 range for newer associates, and at some companies, less experienced associates have limited flexibility in what market sector—multifamily, office, retail, or industrial—they concentrate on. “If the company already has associates in apartment brokerage, you won’t be able to do apartments,” says Colohan.

John L. Scott TCN recruited its first outside associate in mid-2003, and it’s hoping to add another three or four before the year is out, says Mowery. A move into new office space and the launch of a commercial Web site will play a big role in its recruiting strategy, says Mowery.

Building from within

If you have residential specialists who are ready to transition into commercial sales, encourage them to identify a market niche, such as apartment sales.

It’s important to them and you that any early leads they uncover not be mishandled. A deal gone bad can give the brokerage a black eye and inhibit recruiting. Associates in transition should consult with you about whether to take or refer these early leads that come their way.

If you don’t think they’re ready to professionally represent the client and do the due diligence, Mowery says, ask them to refer the lead to a commercial colleague in-house, collect a referral fee, and shadow the colleague to learn how the deal’s done.

What else can you do to help associates make the change? Training is essential. Particularly beneficial are programs offering specialist designations, such as the certified commercial investment member (CCIM). The designations can help boost your credibility as much as that of your associates. “The right credentials help dispel the idea that, as primarily a residential brokerage, we’re not competent in commercial,” says Mowery.

However you go about launching your commercial division, the goal is the same: to stop those commercial leads from walking out the door.

“A lot of residential associates run into deals under $1 million,” says Colohan. “If you have 100 associates, you find a few deals a month.” Most associates just tell those leads to call a commercial broker, he says. Instead, why not be that commercial broker?

Spot commercial potential

You can’t build a commercial division on dabblers, says Hal Kahn, broker-owner of Kahn, REALTORS®, in Newburgh, N.Y.

Commercial deals can become complicated quickly. To put together an industrial project, for example, you need to handle zoning, engineering, development, and marketing issues, among others. That said, it’s possible to identify residential associates with the potential to handle some commercial.

Kahn’s commercial division is small—three associates—but generates about 15 percent of revenue for a company of 25 associates. In part that’s because about a dozen of his residential associates take on relatively simple commercial transactions, such as residential development or small investment properties.

If you have residential associates who want to move into commercial sales, Kahn says, be realistic about whether it’s the right move for them.

  • Are they good with numbers? Commercial sales are more math intensive than in residential sales.
  • Can they detach from the emotional side of sales? If making homebuyers smile is a key reason they like real estate, they may not enjoy the more businesslike culture of commercial sales. “If you don’t like dealing with engineers, you wouldn’t like it,” Kahn says.
  • Are they aggressive negotiators? The back-and-forth in putting together a deal is more intensive on the commercial side.
  • Can they go six to nine months without a paycheck? Commercial deals typically take a long time, so the payoffs tend to be fewer and farther between than in residential. When they do happen, however, the commission is typically bigger than in a residential deal.
Robert Freedman

Robert Freedman is the former director of multimedia communications at NAR.

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