Last week’s post discussed the topic of who really pays a real estate commission as it relates to sales. I mentioned in the close of that post that the topic becomes a bit more complex when it comes to a commercial lease commission, so let’s dive in now.
The typical scenario involves one agent advocating for each side of the transaction. The landlord’s agent has a listing agreement with the landlord that outlines his duties to market the vacant property and advocate exclusively for the landlord as he interacts with tenant prospects. Don’t mistake interaction for advocating on a tenant’s interests – the landlord’s agent works for the landlord and the landlord alone. The agreement will also set out a fee structure in which the landlord’s agency receives a leasing fee for tenants entering into a lease at the property for a certain term for a certain size of space. This is all standard practice and routine.
When a transaction is finalized, the landlord pays a fee to his agent’s brokerage. So it’s easy to see that the landlord has paid that fee. However, once again the same economic rules apply in a leasing transaction as in a sale transaction with respect to gross and net yields on the deal. Landlords have costs they incur just like sellers do. These costs are very accurately calculated and are added into the price the tenant will pay in his base lease rate. So once again, the tenant is funding the landlord to pay the fee, which brings us back to the same argument of who really pays it. The landlord writes the check – with the tenant’s funds.
One important aspect to point out is that since the landlord pays a commission fee to his agent, a tenant’s agent receives his fee to represent the tenant through a sharing of the fee the landlord’s agent receives. In other words, the landlord’s fee covers the cost of the tenant’s professional representation in the transaction. It’s like someone paying for an expert attorney or tax consultant. Occasionally, tenants are under the misguided perception that they are going to save money by handling their lease transaction themselves. This is a mistake for two reasons. First, how can a non-professional in the market understand the process in the same way as the agent who spends all day, every day handling these transactions? And second, if a tenant is not represented the landlord’s agent, he simply keeps the fee himself, saving the tenant nothing. The bottom line is that trying to handle a new lease transaction or a lease renewal on one’s own is time-consuming, can be very costly since the knowledge base is missing and only offers up a very nice opportunity for the landlord and his agent to strike a highly favorable landlord deal.