The Truth About Leasing Commissions

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he Truth about Leasing Commissions

One of the discussions many commercial real estate agents don’t like to have with their prospective clients revolves around the subject of fees or commissions. I have often seen brokers in an attempt to secure representation agreements with tenants, that make the claim that their services are free. This is a play on words, what they should be saying is; “the Landlord makes the actual fee payment and you are not required to make a direct payment for my services”.

The Truth about Leasing Commissions

We believe that it is important that the scope of services to be provided by a brokerage firm and the fees associated with these services should be clearly defined with the prospective client. 

iStock_000020510192SmallIn the office leasing arena, it is typical that the broker(s) both the Landlord’s and the Tenant’s representative are paid a fee after the lease is executed between the Landlord and the Tenant. The fact is most costs associated with the lease transaction including the leasing commissions are rolled into the final negotiated terms and paid back to the landlord in the form of rent over the term of the lease, including both the Tenant and Landlord agent’s commission. Building owners typically budget real estate commissions into their pro-forma and any commission that is not paid rarely finds its way back into the tenant’s pocket.

Leasing commissions are not set and are always negotiable, but generally speaking in the Los Angeles office market, the tenant representative will request a four percent (4%) fee of the gross lease value paid by the Landlord the Tenant contracts with. Also, in most cases the Landlord’s agent will receive two percent (2%) of the gross lease value, paid also by the Landlord for leasing his property. Some cities have slightly different percentages or payment arrangements that are typical for that market, but for the most part, this is the general cost of the services provided.

Since commissions are built into the overall building operating expenses, in rent the tenant is not only paying for his broker’s services but also the Landlord’s agents services, which only reinforces the fact; that tenants should have its own professional representation. In most leasing arrangements listing brokers have with building owners, if the leasing agent completes a transaction directly with a tenant who does not have representation, they get a bigger fee (6%) for representing both the Landlord and Tenant. This creates an inherent conflict of interest since their main source of income and fiduciary responsibility is to the Landlord. So under this scenario, the net fee of the tenant representative is 3-4% of the gross lease value. A good tenant representatives services will save you more than this amount or more in occupancy costs over the term of your lease if not much more money, in many cases.

A commercial real estate professional will clearly outline not only his scope of services, but what their fee is, how they get paid and where the money comes from.

Source: The Tenant Advisor

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