The truth about leasing commissions
One of the discussions many commercial real estate agents don’t like to have with their prospective clients revolves around the subject of fees or commissions. I have often seen brokers, in an attempt to secure representation agreements with tenants, make the claim that their services are free. This is a play on words: What they should be saying is: “The landlord makes the actual fee payment, and you are not required to make a direct payment for my services”
The money has to come from somewhere
If currency changes hands, it is not free! I believe that it is important clearly define with the prospective client the scope of services to be provided by a brokerage firm and the fees associated with those services. In the office leasing arena, it is typical that both the landlord’s and the tenant’s representatives are paid a fee after the lease is executed between the landlord and the tenant. The fact is most costs associated with the lease transaction including the leasing commissions are rolled into the final negotiated terms and paid back to the landlord in the form of rent over the term of the lease, including both the tenant and landlord agent’s commission. Building owners typically budget real estate commissions into their pro forma statement, and any commission that is not paid rarely finds its way back into the tenant’s pocket.
Leasing commissions are not set and are always negotiable. But generally speaking, in the Houston office market, where I’m based, the tenant representative will request a 4 percent fee of the gross lease value paid by the landlord the tenant contracts with. Also, in most cases, the landlord’s agent will receive 2 percent of the gross lease value, paid also by the landlord for leasing his property. Some cities have slightly different percentages or payment arrangements that are typical for that market. But, for the most part, this is the general cost of the services provided.
I would argue that the tenant, in theory, is not only paying for his broker’s services but also the services of landlord’s agent — which only reinforces the fact that tenants should have professional representation. In most leasing arrangements that brokers have with building owners, if the leasing agent completes a transaction directly with a tenant who does not have representation, that agents gets a bigger fee (usually 4 percent). So, under this scenario, the net cost of the tenant representative is 2 percent of the gross lease value. A good tenant representative’s services will save you five times this amount or more in occupancy cost over the term of the lease in many cases, if not much more. So, the next time a commercial real estate agent tell you his services are “free,” I suggest finding a new one to consider to represent your company.
“Commercial real estate professionals will clearly outline not only their scope of services, but what their fee is, how they get paid and where the money comes from.”
Well, I sometimes work for free …
One last note: The title of this blog post is not entirely accurate. I do sometimes work for free without intending to do so. We take on many transactions or assignments, sometimes requiring weeks or months of effort, that are never completed and where a fee is not paid, because a transaction never takes place.
However, that is a subject for another blog post someday.