Thursday, October 22, 2015

How Commercial Real Estate Leasing Fees Are Computed and Paid

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One of the biggest differences between commercial real estate agents and our residential brethren is that leasing commercial real estate is a big part of a commercial real estate broker's practice.
Generally, residential real estate agents sell houses. Certainly, they can lease houses as well but typically they specialize in selling them.
This post will provide an easy guide to how commercial real estate leasing fees are computed and who is responsible for paying them.
The fees (leasing commissions) work this way:
  • Fees are paid by the owner of the building after the lease is signed.
  • The tenant has no obligation to pay the fees. A misconception occurs, frequently, that somehow the rent that the tenant pays is inflated by the amount of the fee. The fee is included in the rent and the rent is determined by the market conditions. I suppose if no commercial real estate brokers existed then the rents would theoretically be cheaper but owners build fees into their rents as a cost of doing business.
  • Generally, one half of the fee is paid at the lease signing and the other half is paid once the tenant moves in and starts paying rent.
  • The fees are computed based upon the tem of the lease, the rent paid over the term, and the percentage that the owner has agreed to pay. As an example, 20,000 square foot building x $.60 per square foot in rent per month x 60 months =  $720,000 x 6% = $43,200.
  • The percentage of the lease consideration - total rent paid over the term of the lease - that the owner pays in fees varies by the product type - office, industrial, retail - and the market conditions that exist - tenant's or owner's market. In other words, if there are more buildings in the market than tenants to fill them, the owner may offer bonus fees to attract a tenant. We have seen this occur in the office space leasing realm in Southern California, recently.
  • Generally, the owner’s representative takes half of the fee and the tenant’s representative takes the other half.
Ok, that is it. Simple, right! The hard part is finding a tenant. Oh, well, leave that up to the professionals - your commercial real estate broker.

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