Commercial real estate commissions are negotiable between the agent and the principal. Commercial Real Estate negotiations have many aspects that need to be explored by both parties prior to the agreement of a contract.
Important Issues that Should be Discussed and Investigated by the Owner in a Lease or Sale Negotiation:
- Market Conditions
- Custom and Practice regarding splitting fees with other agents
- Sale, Lease or Sublease
- Marketing Expenses
- Principal’s needs
- Complexity of the property
- Continued relationship
In the majority of commercial real estate transactions, commissions are dependent on what a real estate agent expects for his or her services subject to the size of the transaction. In my experience, commissions range from 4-6% depending on the type of property and its size. For example, a 1,000 square foot unit for lease in a shopping center is usually a 6% fee, since it would be difficult to find an agent willing to work for anything less. On the other hand, the expected fee would be approximately 4% for a lease or sale of a 500,000 square foot distribution center.
The cost of the commission not only incorporates the size of the space but also the agent’s underlying costs to market the property which we will discuss later in length. In addition, costs include amount of time it might take to lease the property and the expected splitting of commission fees by cooperating brokers involved in the transaction.
Some owners want the lowest commission fee they can find without regard to the underlying factors. In some cases, for example, a property may go vacant without any notice to the buyer. This unexpected vacancy may be a hardship on the owner. The lease may have been long term; however, the tenant may get forced out of business. In this case, it is recommended that the owner of the property pay a full fee. Consequently, the landlord may request terms whereby he or she can pay the original fee over time to the agent.
When a tenant has defaulted in their lease obligation, the owner of the property may litigate the matter and obtain a settlement from the defaulting tenant. In this rare situation, the owner is required to lease the vacant space as soon as possible in order lessen the damages of the defaulting tenant. In a case where there is a mitigation of damages, the owner would be wise to offer a “bonus” commission for leasing the space as soon as possible.
Custom and Practice of Splitting fees with Cooperating Agents
In office leasing the practice of splitting commissions is usually one-third to the listing agent and two-thirds to the leasing agent. If the market is good for leasing, the listing agent should be ok with the one-third to two-thirds split. However, in a slow market the listing agent will suffer from the split commission. As a result, he or she should negotiate with the owner for a potential bonus which the owner should not oppose.
Office leasing is clearly the exception of splitting fees with cooperating agents. Shopping centers and industrial properties are exclusively a fifty percent split between the agents.
Sale, Lease or Sublease
The first thing to research is what does the agent have to offer for sale or lease in the current marketplace. The sublease is usually the most difficult transaction on a property. In the case of a sublease, the agent must deal with the party who needs to exit the property and then acquire approval by the owner for the new tenant on the property. Also, a sublease is usually for a shorter lease term which may be more difficult to find a tenant. A full market broker fee is recommended for subleasing.
In the case of a first-time lease or sale of a property there is an opportunity for the owner of the property to negotiate a tight fee schedule. The owner may desire not to pay for lease extensions or options to lease or sell the property. It is the agent’s decision to determine if he or she wants to work at a discounted fee.
The property demands may require a substantial amount of marketing expenses. These expenses are not always the responsibility of the agent.
A marketing strategy is an important investment in commercial real estate. For example, a new multi-story office building should have an entertaining and informative website illustrating the flexibility of the property and its uniqueness. Also, other advertising expenses must be considered by the parties. Targeted email campaigns, listing property on commercial real estate listing sites such as CoStar, online video content, social media ads, Google AdWords, advertising in trade journals, property signage and direct mailers should also be considered.
Marketing expenses should always be negotiated up front contractually. These expenses are not necessarily the agent’s responsibility but sharing the expenses may be practical. Therefore, marketing expenses may not be included in considering the agent’s commission.
Typically, the owner of the property desires to have his or her property sold or leased in the shortest amount of time. A fair commission based upon industry standards is appropriate in this situation.
Complexity of a Property
Not all properties are alike and those that do not fit the conventional scheme of a building may be very difficult to lease or sell. Examples of challenges in marketing a property may be; irregular dimensions of the property, environmental contamination, shortage of parking, blighted areas, poor condition of the property plus code violations that must be remediated prior to occupancy.
The obstacles mentioned above clearly demonstrate that the commission should be a full non-discounted fee. It is not uncommon for challenging properties like this to take years before a transaction may occur.
Further, providing an additional fee for the agent to oversee the remedies of some of the obstacles over a long period of time with his or her supervision is recommended.
Some relationships may only be a onetime experience. On the other hand, these relationships can last for several years. Therefore, commissions must be examined carefully.
The agent who has worked hard to satisfy his client over a long period time should be rewarded for his exceptional success with leasing or selling of the property. In this case, the fee should be dictated by the agent and the owner should readily agree to the request. This case should not be a discounted commission due to the long-term relationship.
A sale or lease of a property with no expectations of further fees should be at full market rate.
Real estate commissions are negotiable and usually, there is no simple one price fits all.