Expert: Jim Avancena, CPM - 7/24/2008

Question
QUESTION: Hi Jim.
Thank you so much. I am asking in reference to a commercial space in Massachusetts. We are leasing a space in an industrial park. My realtor just told me that his commission is 18% to be paid upfront (although he said it being something for 5 years at 5, 4, 4, 3, 2 % - which I am not sure why that is necessary if we have to pay upfront). My real questions lies with the tenants broker. My broker said it is standard that the tenant's broker is going to ask us to pay his fee as well. Is that standard? that we should have to pay both fees to lease this space?
thank you!!!
Susan

ANSWER: Susan-

Do you own the space you are leasing and you therefore are the landlord; or are you a tenant that is SUB-leasing space that you have under lease?

Usually the LANDLORD, or the Tenant that is subleasing or assigning the premises being leased, pays the commission to the agent representing the space AND the agent representing the prospective tenant. One-half of the total fee that is being offered by the party that is leasing, sub-leasing or assigning the premises, is paid to each broker.

You don't simply pay whatever the agents are asking you to pay for commission.  Although the party leasing the premises is legally allowed to pay whatever commission they wish in order to facilitate completing a transaction; most lessors pay commission that is the same as, or close to, the generally accepted market commission in your market area, for similar space and terms.   If you have had a unusually difficult time getting the space leased, you may feel you want to offer a higher than normal market commission as a means of providing extra assurance that the premises gets leased to this or other prospective tenants.

I am not aware of the reasonable; or "fair", market commission that should be paid in the real estate market that you are in, so I would check either with the local commercial board of realtors to get their input, and/or, find some other space similar to the space you are leasing and ask those other parties leasing space what they are offering for commission on their space.

The terms and amount of commission can be significantly different depending upon the area of the country you are in, and the type of space you are leasing; i.e., office space, retail, warehouse, flex, etc.  Verify what should fairly be paid with others that are more objective than your broker and the tenant's agent!

Good hunting.

-Jim

---------- FOLLOW-UP ----------

QUESTION: Thanks Jim. I am the landlord. it is a commercial office space in a building with other tenants in an industrial park. My broker is telling me I might have to pay his commission as well as the prospective tenant's commission. That is the part that did not seem right to me.
Also, have you heard about a commission being explained as 'over 5 years at 5%, 4%, 4%, 3%, 2% respectively' (18%) but that it is paid in full upon signing the lease. this is confusing to me.
I appreciate your reply
Susan

Answer
Susan-

Sorry to tell you, it is very common to pay the entire commission for the full five (5) year lease term "upfront".   However, I cannot confirm if the rate you indicated is a fair market "rate" to determine commission for your marketplace.

In the Washington area, office space commission is normally quoted as being one specific percentage of the rental income, such as "three percent (3%) of the aggregate base rent over the lease term".    That is, if you add up all of the rent the tenant will have paid each month over the complete five (5) year term, it computes to one aggregate figure.   Multiply that figure by 3% and that is the TOTAL commission you would pay for making the transaction.  One half would be paid to your broker, and one-half paid to the tenant's brokerage firm.     

If the total rent paid over five years is $250,000, you would pay a total commission of $7,500.  $3,750 to your broker, and $3,750 to the tenant's broker.

I am not saying that what your broker has told you is not appropriate for your marketplace; my example of 3% is how it is currently done in the Washington, DC area.  

Note a few other points.

If you doubt that the tenant you are considering leasing the space to is credit worthy enough to stay in business and pay you all five years of monthly rent, you should consider increasing the amount of the security deposit you require as stated in the lease.   If you wish, you can increase the security deposit by the amount of the commission you will waste if the new tenant goes out of business soon.  Only do this however, if the tenant has dubious credit.  A tenant like IBM will laugh in your face if you ask for a greater security deposit!

This would also be the case if you are spending significant funds of your own to prepare the space for the new tenant's occupancy.    If you have to do remodeling - move walls, re-carpet, paint, etc. etc., and you doubt the credit worthiness of the prospective tenant, you should consider increasing the security deposit also in the event you spend your funds to prepare the space and the tenant goes out of business after a few months.

If there are any rent free months that you have granted during the five year lease term as an incentive to complete the transaction, you do not add that month's value of rent into the calculation of the total rent paid over the lease term.

Finally, if you have any doubt, check to assure that both of the brokers have current real estate licenses.  Normally this is public record in the local municipal or county office that regulates business licensing.   You cannot pay an unlicensed person a commission.

If something doesn't seem right about what you are told about procedures in making this transaction, you probably are correct to be concerned.   You should try to put things off a short period of time and go check out your concerns.

We haven't discussed it, but be certain everything about the other terms of your lease are appropriate.  There are plenty of other problems that could be lurking in the lease text.

Good luck.

-Jim