There are a lot of good reasons to use a commercial real estate broker, whether you are a landlord looking to find suitable tenants for your space, a tenant seeking out a space that makes sense for your company, or an investor interested in buying or selling commercial property. Using a broker will save a lot of time as they will be doing the footwork for you, and it also means you have another person watching your back to help ensure you make sound and considerate decisions based on your individual needs. It’s not hard to see the value, but you may be wondering how your best interests are being considered if your broker is making money off of you. To alleviate some of the confusion, it helps to understand how your broker gets paid.
Your Broker Makes Commission
Similar to residential agents, commercial brokers make their profit by taking a commission on each transaction they facilitate. The commission amount paid is dependent on the agreement made by both parties involved in the transaction (buyer and seller in the case of a sale or landlord/owner and tenant in the event of a lease). While anti-trust laws make it illegal to set an industry standard as to what these percentages are, they typically fall between 4-8% of the total transaction amount (sale price or lease value).
A commercial broker will receive commission from the sale of a commercial property through the representation of one or both parties involved in the transaction. The exact commission they will receive cannot be accurately determined until negotiations on the sale price are completed and all involved parties have agreed to a particular sale amount. The commission percentage is typically higher on lower-priced sale properties and lower on higher-priced properties. If two brokers are involved in the transaction, the commission percentage will be split equally between them. The commission is traditionally paid by the seller, although this can be negotiated as well.
To give an example, a commercial property that sells for $1 million with a negotiated commission percentage of 6% will mean that $60,000 of that sale price will be passed onto the broker. If two brokers were working on the transaction (one representing the seller and the other, the buyer), they would each get $30,000.
A commercial broker can receive a commission off of a commercial lease by representing either the landlord/owner or the tenant (or both). Commission is similarly calculated in this type of transaction by considering the overall value of the lease throughout its duration and taking a percentage of that. If the owner and tenant have different brokers representing them, it will most likely be an even split between the two (unless otherwise specified in the negotiations). The commission on a commercial lease is traditionally paid by the seller and split into two payments. The first half of the commission is due at the lease signing and the second half is paid once the tenant is occupying the space.
To put this into perspective, let’s look at another example. Let’s say an owner and tenant agree on a lease for a 5-year term on a 3,000 square foot property at a rate of $10/square foot.
5 Years x (3,000 SF x $10) = $150,000 Total Lease Value
If the broker(s) have negotiated a 5% commission off of this lease, $7,500 ($150,000 x .05) is allotted to the broker. In the event that two brokers were facilitating the deal together, they would each stand to make $3,750.
The money acquired by each broker on the transaction typically goes back to the brokerage firm. From here, the brokerage will keep a portion of the commission and the agent will receive a percentage of that. How much an agent receives is largely dependent upon their seniority and standing within the brokerage. For junior brokers, this number may fall in at around fifty or sixty percent, while seasoned senior brokers may pull in as much as seventy or eighty percent.
Additionally, many brokerages will require their agents pay a desk fee, which can be as high as $50,000 annually depending on the output and production of the individual broker. This figure is utilized in many different ways. It can be used by the brokerage as leverage to set requirements on production level if brokers would like to stay associated with the firm. It can also be used as a means of negotiating a higher commission split or as a means of capping the fees that the brokerage may take from the broker.
Hopefully you now have a better understanding of the value of working with a broker and where your money is going after your transaction is complete.
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