Commercial buildings often have high turnover. Finding new tenants can be very time consuming, which is why many landlords choose to work with commercial property brokers to fill the vacancies. As a bonus, brokers have experience and relationships and can often find new tenants far more quickly than a landlord can, meaning the landlord can start collecting rent sooner. Naturally, though, a broker will not work for free, which is where leasing commissions come in.
What Is a Leasing Commission?
Rather than the landlord paying the broker a flat rate for bringing in any tenant he can find, commercial property brokers are incentivized by giving them a commission based on either a portion of the rent or a fee per square foot. This helps motivate them to find a long-term tenant who will rent as large of a space as possible inside the building.
How Leasing Commissions Are Calculated
Whether a broker is paid a portion of the rent or a fee per square foot will generally depend on the type of property. Retail, medical offices and industrial leases are usually paid based on a percentage of the rent. The rate is usually higher at the start of the lease and goes down over time. A typical structure is 6 percent of the total rent for the first five years of the lease, 3 percent of the total rent for the next five years and 1.5 percent of the rent for the remaining term. Optional lease extensions can result in an additional payment to the broker, generally at the lowest rate agreed upon in the lease. Commission percentages will vary by the market, property type and the broker herself.
Example of a Leasing Commission
As an example using the 6 – 3 – 1.5 percent commission structure above, imagine a business is paying $5,000 per month in rent and signs a 15-year lease agreement with an option to extend the lease another five years at the end of the lease term. The commission for the first five years would be $18,000 (the monthly rent of $5,000 times 12 months times five years times the .06 commission rate). The commission for the next five years would come out to $9,000 (the monthly rent of $5,000 times 12 months times five years times the .03 commission rate). The commission for the final five years would be $4,500 (the monthly rent of $5,000 times 12 months times five years times the .015 commission rate). In total, the broker would have made a $315,000 commission on the deal.
At the end of the lease, if the tenant decided to extend his lease for five more years, the broker would receive an additional $4,500. If he decided to renew after that, the broker who negotiated the terms of the new lease renewal agreement would get paid, and the rate would likely be lower than that initially charged by the first broker.
General Office Space Leasing Commissions
In general office spaces, the broker fee is generally calculated based on square footage of the rented space. The rate is usually a dollar per square foot, but again, this may vary based on the market and the broker. Assuming a dollar per square foot rate, this commission is much easier to calculate. For example, if a tenant rents a 15,000 square foot space, the commission will be $15,000.
Expansions and Renewals
For expansions, the broker should get paid an additional fee for the new property space based on the increased rent and the commission rate of the time period the expansion took place. As an example, if the company from the first example above expanded at year seven of its 15-year lease, the landlord would owe the broker a commission on the increased rent at a 3 percent rate for the rest of the first 10-year period and a 1.5 percent rate for the next five years.
When Are Brokers Paid?
Brokers hope to get paid as soon as possible after the lease agreement is signed, and many will put that in the listing agreement. However, property owners will generally benefit by making the broker agree to be paid only after the tenant moves into the space and begins paying rent. This will motivate the broker to try to get a tenant in and paying rent as soon as possible, and it will help ensure the broker will only choose to work with stable tenants who will stay financially solvent long enough to pay the first rent check. It is not unheard of for companies to go under within a few months of moving into a new building before they ever even paid rent. This ensures you at least won't pay a leasing commission on top of giving a deadbeat company free rent.