Our ongoing blog series answers our clients’ most pressing questions about commercial real estate. In this blog, we will start to explore how commercial real estate commissions work, including the parties involved and the factors that affect the amount and timing of commissions.
When it comes to commercial real estate commissions, the common phrase, “One size fits all” does not apply. There are numerous ways in which commissions are determined and numerous factors which affect the amount of commission a Commercial Real Estate (CRE) agent receives.
Commissions are often negotiated and can depend on the complexity of the deal, the size of the transaction, market conditions, and the broker’s experience. Commission rates can vary widely from one transaction to another.
To understand the specifics about commissions and listing agreements (which we will cover in detail in our next two blogs), it is important to understand the basic terminology and the factors that play into agent commissions.
Understanding the Parties in a Commercial Real Estate Transaction
CRE agents facilitate the buying, selling or leasing of commercial property, connecting buyers or tenants with sellers or landlords in their respective markets.
Most CRE agents don’t receive a salary; instead, they get paid on commission, earning a percentage of the value of the sales or leases they facilitate. This means that a CRE agent’s income is directly tied to the number of sales or leases completed and the monetary value of those transactions.
Commissions are typically paid by the two involved parties in the transaction:
- Sale: Seller and Buyer
- Lease: Landlord and Tenant
In the majority of commercial real estate transactions, commissions are paid to one or two agents:
- Listing Agent: The agent responsible for marketing the property, fielding inquiries, showing the property or space, negotiating and facilitating the escrow for the property owner or lease on behalf of the landlord.
- Buyer’s or Tenant’s Agent: The agent responsible for locating available commercial real estate space that fits the criteria of the buyers or tenants, scheduling tours, negotiating, scheduling inspections and facilitating the escrow or lease process.
When both a Listing Agent and Buyer’s Agent are involved, the commission is typically split 50-50. If an agent is part of a brokerage firm (not their own broker), a percentage of that agent’s commission will go to the firm. We’ll delve further into the firm’s involvement in the next section.
Factors Affecting the Commission Amount and Timing of Payment
Although federal antitrust laws prevent states from establishing industry-standard commission rates, commission percentages for commercial real estate transactions typically run between 4% and 8%. How commissions are paid and how much an agent earns are determined by multiple factors, including:
1. Sale vs. Lease
Commissions will vary based on whether a commercial property is sold or leased. A typical sales agreement stipulates the property owner (Seller) to pay the entire commission through escrow at the closing of the sale. A wire is typically sent from escrow to the brokerage within a day or two of closing. For a lease transaction, the owner (Landlord) pays the entire commission. One difference is that it is not paid within a day or two after the deal closes. Landlord’s typically pay 50% of the commission upon “signing of the lease” (which includes a fully executed lease, tenant’s certificate of insurance in place and security deposits cleared) and the other half at a later time— it could be upon tenant occupancy, after substantial completion of tenant build out of the space or after the tenant is officially open for business.
2. Number of agents involved in the sale/lease
If the sale involves a Listing Agent and a Buying Agent, the two will typically split the commission 50-50. If only one agent is involved, that agent would receive the entire commission. Think of this as an extra incentive for the Listing Agent to prospect buyers and tenants for the listing instead of just putting up a sign and waiting for people to call.
3. Size of the property/length of the lease
Most commissions are based on percentages of the sale price or gross value of the lease. For example, if a commercial property sells for $1M and the commission rate is 5%, the total commission on the sale would be $50,000. If there are both a Listing Agent and a Buying Agent involved, each would receive half or $25,000. Then, that $25,000 would be split between the agent and the brokerage firm (see #4 for more details on this split).
For leases, the percentage may look something like this: the tenant signs a 5-year lease for 15,000 square feet at a cost of $18 per square foot for a total of $1,350,000 (15,000 X $18 x 5 years). If the commission rate is 5%, the total commission would be $67,500. Once the commission is split between two agents, each receives $33,750 which then will be divided up according to the agents’ agreements with their brokerage firms.
4. The brokerage firm
While CRE agents work for brokerage firms, they are typically considered independent contractors. This means that in exchange for the support they receive from the firm, they are required to share commissions with the brokerage. This is most commonly referred to as a “split”.
The percentage of the agent’s commission that goes to the broker can vary based on the size of the firm, the agent’s experience, annual production, and several other factors.
The typical split is 60-40: the agent receives 60% while the brokerage firm gets the remaining 40%. In some cases, the split can be based on a sliding scale in which the portion of the agent’s split can increase based on the amount of commission the agent brings in during a calendar year.
If the agent works within a team of brokers who work on shared commissions, others may be entitled to a share of the commission along with the agent and the brokerage.
Now that we covered the basics about commercial real estate commissions, check back here for our next blog to learn how professional/institutional commercial real estate owners pay commissions and effectively manage risk.
