How do commercial real estate commissions work?

There are several reasons why it is important to understand how 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 rep, 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 has to do is to bring the tenant to a property and he/she is 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 also get real messy. For example, if later on that tenant hires a 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 will earn is important when it comes to how much service to expect. 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 is usually contrary to what the tenant is trying to achieve. Commissions are paid only if a lease is successfully executed. The quicker a lease is signed, the faster the agent gets paid. While this may be great for the agent, be careful to ensure that you are making compromises that make sense and not just to hurry up and get the deal done.

Posted in: Leasing Commercial Real Estate

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