Expert: Jim Avancena, CPM - 11/28/2007

Question
Exactly how is the commision to a buyer's agent calculated on a commercial lease?  If it states a BAC of 3.5%, what is the amount used to make the calculation?

Answer
Kent:
Normally, once a transaction progresses to the point that it appears probable a commercial lease will be ratified, the landlord's agent provides the buyers agent with a detailed commission letter that describes exactly how the buyers agent commission; or perhaps referred to as the "cooperating" agents commission,is calculated, AND, the letter is executed (signed) by the landlord (also, called the "seller" or "lessor") or other authorized agent for the landlord that allows the buyers agent to be assured how, when, and the specifics of how their commission will be calculated after the lease is fully ratified.  The "buyers" agent needs this commission letter because often there are mis-understandings regarding the details of a commission, and it confirms the agent will be paid.

Usually the buyers agent commission is calculated by determining the total amount of rent that will be paid by the tenant during the initial term of the lease and multiplying that amount by the percentage commission that has been agreed to earlier.

The total amount of rent paid in the initial term of the lease is most commonly calculated by including the following specifics:

1. The acceptable length of the "initial term" of the lease will likely be indicated in the commission letter to be 1 month to ten (10) years.  

2. When a lease provides for options to extend the lease after the initial term; for example, a lease with a five (5) year extension option, the commission for the option lease term is commonly paid at the start of the option term.

3. If the lease rental is structured on a full service basis; meaning that the stated rate of the rent per square foot contains the base amount of operating costs and taxes, usually simply calculating the amount of the monthly rent payments - plus any escalations that are possible to determine specifically at the time the lease is signed - result in the total amount of the initial term base rent that will be used to calculate the commission.

4. Rent escalations that are possible to calculate when the lease is executed would be an increase such as i.) a two (2) percent increase in the rent every twelve (12) months, or ii.) a one dollar ($1.00/sf) per square foot rent increase every 12 months of the initial term.  An escalation based on the Consumer Price Index each 12 months is impossible to determine in advance, so that escalation would have to be excluded.
5. Commonly, most commission agreements also exclude the dollar value of any lease concessions stipulated in the lease, such as, 1.) any periods in the initial lease term when the tenant is not required to pay rent, or 2. the dollar value of the above standard tenant improvements the landlord agrees to install for the tenant, in some cases, the value of any improvements the landlord agrees to install for the tenant.

5. Rarely, a lease will contain an option for the tenant to terminate the lease before the initial term expires, and usually the landlord and tenant's agent are careful to specify how the commission is effected by the specific  option to terminate.   Note that many of these uncommon option to terminate provisions include how much the tenant must reimburse the landlord for the unamortized value of the tenant improvement costs and (beware!) IF ANY PORTION OF THE AGENTS COMMISSION must also be reimbursed because the initial term was not completed.  Often the tenant will agree to reimburse the landlord for its agents commission because the provision is providing the tenant with a flexible lease term, that benefits the tenant.

The commission letter for any type of real estate transaction involving any product type (Office, warehouse, land sale, etc.) is provided to the agent - in advance of the transaction being ratified - to specifically prevent ANY ambiguity in calculating the agents commission.  If the language in the commission letter is not clear or understand COMPLETELY, get the matter clarified immediately, and if you think the provision is uncommon; get the clarification in writing.  Consider if there are any matters that should be addressed in the commission letter that are not included, and clarify those terms also.

Finally, if you and/or your broker do not have a current and up to date license in the area where the transaction is being made, do not expect the landlord to pay your share of the commission.  Be certain that administrative matter is clear in advance.     

Commission matters can be quite complicated, I have tried to address the most common issues, but always go as far as you must go to get the commission terms squared away in advance.

Good luck,

-Jim