How Your Tenant Rep Broker is Paid
How Your Commercial Real Estate Broker Gets Compensated
One of the most common questions asked by business owners looking for commercial real estate is, “How exactly does a tenant representation broker or commercial real estate agent get paid?”
Tenant representation broker real estate fees, or commissions, are most commonly paid by the building owner who is leasing or selling the building. The owner typically provides a commission payment to both their property listing broker as well as the tenant representation broker who presents them with a tenant. While there are exceptions to this approach, this is by far the most common way that fees are paid.
Fee Timing
These fees are paid after the full execution of the transaction. In the case of a lease, a portion of the commission is paid at the time the lease is executed and the remaining portion is paid at the time the lease commences. For a building sale or purchase, fees are typically paid at the time of closing.
Fee Amounts
The fees themselves can be calculated in several ways. Most often they are either based on a per square foot amount per months of term or a percentage based on either 1) the total net rents of the lease, or 2) on the sale price of the building. These fees are not typically fixed and vary based on market conditions and transaction terms as well as how aggressive individual building owners want to be in their marketing efforts to lease or sell their building. For example, building owners may pay higher fees if they are trying to draw tenants to their property in more difficult markets. Broker fees may also vary depending on the real estate sector they are working in, such as industrial, office, or retail.
What if the landlord will not pay the fee?
On some occasions, the owner will not agree to pay the fee, and the agreement between the tenant representation broker and their client will cover how this is handled. The client may pay all or a portion of the typical market fee and other times the broker has agreed to work on the transaction at their own risk. There are also scenarios in which the broker has agreed for the market commission to be paid directly to the customer with an agreement in place for a certain negotiated fee to be paid to the broker upon collection.
Real Estate Fees Should Be Transparent for All Parties
Fees between buildings and types of real estate transactions can vary significantly from property to property, so it’s important that these broker fees are highly transparent. It just makes sense from a client’s perspective to be aware of the differences in the amounts being paid to their representation. Just like the price of a building or the leasing rates, market commissions should be a visible part of the negotiation process so that both the client and the tenant representation broker are aware of the differences in the fees for each potential outcome.
Benefits of Working with a Tenant Representation Broker
A broker specializing in tenant representation works exclusively with tenants looking to buy or lease space. They do not represent building owners. A broker representing both landlords and tenants can create a ‘dual agency’ circumstance where the broker is fiduciarily responsible to both the landlord and tenant in the same transaction. In a case like this, they cannot look out solely for the tenant’s or the landlord’s best interests.
Additionally, when working with a tenant representation broker, clients have access to recent relevant transaction knowledge and subscription-only databases that they otherwise would be without. How will the client know if they are looking at all options and, even so, are they getting the best potential terms in the market? There is also a lot more to a lease or purchase than just the price or rental rate. There are cash incentives, expansion and contraction flexibility, termination options, relocation conditions, and many other detailed conditions that are negotiable if you know the market possibilities. A tenant representation broker will know these things and what the most recent transactions have contained so that you can take advantage of these recent comparable transactions.
When it comes down to it, consulting with a professional is always wise as opposed to negotiating with a building owner or their representation directly. Keep in mind that while they may be a friendly party, the building owner or landlord’s broker is not there to serve your best needs but rather the landlord only.
If you have any immediate office or industrial real estate needs or you would like to talk to us about any other commercial real estate topic, please reach out to a Rokos broker today!
Rokos Advisors is an award-winning Minneapolis – St. Paul based commercial real estate/tenant representation firm specializing in helping businesses find the perfect office or industrial space for their company.