Commercial real estate commissions are most often calculated as a percentage of the lease value and usually ranges between three and six percent. For example, if a tenant signs a 3-year lease for 2,000 square feet at $20 per SF per year, a 5% commission equals $6,000 (3 yrs x 2,000 SF x $20 x 5%). As far as how the money flows, the agent’s designated broker is the one that gets paid the commission. The designated broker then pays a portion of the commission to the agent, depending on the agent’s split. Commission splits range anywhere from 50/50 (most common) to 90/10 in favor of the agent. Using the above example, the agent would receive anywhere from $3,000 to $5,400.
There are several things to consider when it comes to how commercial real estate commissions work:
- One of the most common pitfalls a tenant makes is to tour properties without having decided on a brokerage relationship. If you plan on hiring a tenant representation broker, do so in advance of going on a property tour.If you plan on trying to find space on your own, make sure that any properties you have an interest in are shown to you by the listing agent (or owner, if the property is not listed). The reason this is so important is that in most cases, all an agent must do is bring the tenant to a property and they are legally entitled to a portion of the leasing commission as the “procuring” broker. A tenant may never see the agent again, but since that agent showed them the property, that agent will be paid a commission. These situations can get messy. For example, if later on that tenant hires a different tenant rep, a commission dispute will likely occur if the tenant enters into a lease on a property that was shown to them by another agent.
- Knowing how much your tenant rep broker will earn is important when it comes to how much service to expect. In a perfect world, everyone would get the same amount of attention, but since we know this won’t be the case, generally speaking, the larger the commission, the more work you should expect and the more diligent you should be in hiring your tenant rep.
- Commercial real estate commissions are, in most cases, calculated as a percentage of the rent due under the lease. The higher the rent and longer the term, the more commission is paid. This may be great for the landlord, but may not be what the tenant is looking for.
- Commissions are paid only if a lease is successfully executed. The quicker a lease is signed, the faster the broker gets paid. While this may be great for the broker, it’s important to make sure that you’re only making compromises that make sense and not rushing for the sake of getting the deal done.
- Sublease commissions are a totally different structure. The landlord has already paid someone for the initial lease on the space and is not responsible for paying commission again. So, there may be no commission on a sublease space or a significantly reduced commission perhaps being paid by the sublessor. Sublease spaces can be the same amount of work for your broker as a regular space.