Expert: Jim Avancena, CPM - 2/22/2008

Question
I am in the process of obtaining my broker's license and am interested in leasing commercial property.  How is commercial leasing commission figured?  I live in the Chicago area.  Thanks.

Answer
Mark-

Although I have not made any transactions in Chicago, it is most common for office space commission compensation to be paid as a small percentage share of the total rent paid (including amounts for scheduled pre-determined rental increases over the full lease term), excluding any optional lease periods and first deducting any monthly rent payments not actually paid based on negotiated months of rental abatement.  

The percentage share  paid as compensation will vary depending upon the geographic area and the specific type of leasing transaction; i.e., warehouse, office, retail, flex, etc.   Normally the percentage rate of commission in an area is related to the overall strength or weakness of the leasing market in that area.

It is common for the commission compensation to be paid in two stages; one-half of the full amount paid within 30 days of when the transaction is fully ratified, and the remaining on-half paid once the tenant takes occupancy of the lease premises.

For example, recently I was paid a three (3%) percent commission on a ten (10) year office lease and after deducting the rental abatement included in the rent, the total amount of rental to be paid over the full term was 3.4 million dollars including a two (2%) annual base rent escalation (scheduled increase) each year.  These basic terms meant commission would be paid in two payments of fifty-one thousand dollars, one half paid to me when the lease was fully executed, and the 2nd and final payment paid when the tenant moved into the space.

I this particular lease the landlord also included an incentive of an additional $1.25 per square foot of the amount of leased space, paid in one lump sum when the tenant moved into the space.  It is not common to have incentive compensation bonus payments like this, although neither is it odd.  Sometimes a vacation package might be included along with the commission, like a one week all expenses paid trip to the location of your choice.

It is also common for a broker to agree to limit the amount of commission paid when an extremely large amount of office space is being leased in a single transaction.  For instance, if a government agency or large corporation is leasing seven buildings in an eleven (11) building office park and the space totals five hundred-thirty thousand square feet (530,000 sf), the broker may agree to accept a total of one (1%) percent in total commission.

If the transaction involves a cooperating broker, that is, one agent representing the landlord and one agent representing the tenant, it is most common for both agents to be paid in exactly the same way as indicated above, only each agent gets paid one-half of the total commission, paid in two stages.

In the earlier days of the commercial leasing industry,(20+ years ago) agents were paid on the same percentage basis except that they received a monthly commission check from the landlord each month over the full lease term as and when the tenant paid their monthly rent.   

I hope this answer is helpful.

Good Luck,

-Jim