How does the commercial real estate (“CRE”) industry work?

Most owners of real estate hire real estate agents to lease their property on their behalf. The agent obtains a listing agreement, which calls for that agent to act on the owner’s behalf as a fiduciary in leasing the property. The agreements are performance based, meaning the agent earns a commission upon the signing of a lease. The commission is typically paid one-half upon lease execution and one-half upon tenant occupancy. Owners of real estate can lease their own properties without having to have a real estate license.

Real estate agents are required by law to have a salesperson’s license issued by the state that the agent does business in. All agents must pass an exam in order to obtain a license. The agent then “hangs” their license at an office with a designated Broker. The Broker has additional licensing and educational requirements that they must meet in order to have agents that work for them. The Broker is ultimately responsible for any acts committed by an agent whose license is “hung” in their office. Most all states have continuing education requirements, meaning that each licensed agent and broker must obtain a certain number of educational credits (also called clock hours) in order to renew their license.

Commissions are paid to the Broker who then pays the agent responsible for the lease. Agents typically work on “splits” with the house. Splits can vary anywhere from 50/50 to 90/10 in favor of the agent. Agents are typically independent contractors who are then responsible for paying their own taxes.

In some cases, a tenant will retain an agent to find a space on the tenant’s behalf. Most listing agreements require that the listing agent split the commission earned with the tenant’s representative. In most cases, commissions are split 50/50. There are exceptions to this rule. In soft markets where vacancy rates are high and tenants are at a premium, the owner may pay the tenant’s representative a full commission. In this case, the listing agent usually continues to receive a half commission, which results in a commission and a half being paid out by the owner.

Posted in: Leasing Commercial Real Estate

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