Most tenant rep brokers will tell you that their service is free; their fee is paid by the landlord and it doesn’t cost you, the tenant, anything. Generally, we agree with this statement. To understand why a broker may not always be free, we must look at each of the four most common type of leasing scenarios:
- You hire a tenant rep broker and lease space in a listed property.
- You don’t hire a tenant rep broker and lease space at a listed property.
- You hire a tenant rep broker and lease space directly from an owner.
- You don’t hire a tenant rep broker and lease space directly from an owner.
Scenarios 1 and 2 are by far the most common, as most commercial space is listed by the owner with a real estate agent. In Scenario 1, your tenant rep broker is indeed free. This is because when you sign a lease at a listed property, the listing agent is required to split the commission due on the lease with your tenant rep broker.
If you did not have a tenant rep broker, such as in Scenario 2, the listing agent would keep the entire commission for himself; hence the split results in your broker being free. There is a bit of gray area here, which happens when you are leasing space in a soft market. Since tenants are at a premium, the market dictates that a full commission is paid to your tenant rep broker. This adds 2-2.5% percent to the cost of the transaction to the owner, which the owner will try and recover in other areas of the lease. It is unlikely that you will pay a higher rent, as your alternatives in the marketplace prevent that. You may end up with lesser tenant improvements, but your tenant rep is there to make sure you don’t.
Scenarios 3 and 4 offer the most debate. Under Scenario 3, while you don’t pay the tenant rep broker directly, the owner does. This adds cost to the lease and the owner will try to recover that cost, either with a slightly higher rent or lower lease incentives (i.e., one less month of free rent provided). However, we would offer that a good tenant rep broker will negotiate for a better lease than a typical tenant can achieve without representation. Clearly, there are savings under Scenario 4, but it takes a lot of work by the tenant to be able to receive the full benefit of those savings.