What is the Cost of a Tenant Representative? The Truth about Leasing Commissions
One of the discussions some commercial real estate agents, particularly less experienced agents, don’t like to have with their prospective clients revolves around the subject of fees or commissions.
Commercial real estate agents, both the landlord’s and the tenant’s agents, are typically paid a commission based on the value of the lease transaction. The commission is typically paid to both parties by the landlord and is generally a percentage of the total value of the lease. The specific percentage may vary depending on a variety of factors, such as the size and complexity of the transaction, the location of the property, and the agent’s level of experience and expertise.
I have often seen “tenant-rep” brokers, in an attempt to secure representation agreements with tenants, 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 Money Has to Come from Somewhere
If currency changes hands, it is not free! I believe that it is important that the scope of services to be provided by a brokerage firm and the fees associated with these services be clearly defined to the prospective client.
In the office leasing arena, it is typical that the broker(s), both the landlord’s and the tenant’s representatives, are paid a fee after the lease is executed between the landlord and the tenant. The fact is that 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’s commission and the landlord’s 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 Houston 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 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.
I would argue that in theory, the tenant is not only paying for his broker’s services but also the landlord’s agent’s services, which only reinforces the fact that tenants should have professional representation. In most leasing arrangements 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 (4%). So under this scenario, the net cost of the tenant representative is 2% of the gross lease value. A good tenant representative’s services will often save you five times this amount or more in occupancy costs over the term of your lease, if not much more. So the next time a commercial real estate agent tells you his services are “free,” I suggest finding a new one to consider to represent your company.
“A commercial real estate professional will clearly outline not only his scope of services but also what their fee is, how they get paid, and where the money comes from.”
Well… I sometimes “work for free.”
One last note: the title of this blog post is not entirely accurate. I do sometimes work for free without intending to do so. There are many transactions or assignments we take on, sometimes requiring weeks or months of effort, that are never completed, and a real estate commission is never paid because a transaction never takes place. However, that is a subject for another blog post someday.
