Pulling Back the Kimono on Real Estate Brokerage Commissions

Q. If a commercial landlord pays the brokerage fees, isn’t this a conflict-of-interest for a tenant’s broker (and is the tenant going to get “screwed”)?

 

A. In theory, yes, but it’s standard practice and not something to be worried about.  In fact, it offers the tenant the potential for “no-fee” representation!

The rational explanation

Prior to the inception of tenant-only commercial real estate brokers, all brokers acted as agents of the landlords and the leasing commission structure was created as an inducement to the broker(s) to find suitable tenants for the landlord.

What is really occurring

In practice, the commission structure serves to align the brokers’ interests with the landlord.  This is why most of the commercial real estate firms are in the business of representing landlords for their lucrative leasing and management agency agreements.  In fact, if a candidate broker relies on landlords for most of its business, the savvy tenant will want to have its own advisor (in the form of a tenant broker) to represent its interests.

How leasing fees are calculated

Leasing commissions are calculated as a product of square footage, base rent and the lease year commission rate (typically between 2-5%).  For every additional lease year in a lease term, additional commission dollars are created.  Thus, a landlord’s broker is incentivized to maximize the lease term, rent and square footage.  Yes, this is an inherent misalignment with a tenant’s interests!!

How to mitigate the impact

Most real estate brokers work for the landlords and those that don’t are incentivized by a compensation structure implemented in landlords’ best interests. That said, here are some suggestions when working with a commercial real estate broker:

  • Research/understand the client history of the broker’s firm;

  • Research/understand the client history of the individual broker;

  • Check previous clients’ references!

  • Take advantage of a tenant representative firm to protect one’s interests;

  • Never pay a fee to a commercial broker if requested to.