A number of factors play into real estate commission plans, but ultimately, the type of real estate being sold is the biggest influence to shaping how commission plans are structured. In our Guide to Real Estate Commissions, we talked about the basic structure for real estate commissions including who is paid commission and the schedule in which those commissions are paid. However, as mentioned above, these variables depend largely on the type of properties being sold. This is especially true with commercial properties, which is a niche segment of real estate that follows a different pay structure than other real estate commissions.
How are Commercial Lease Commissions Determined?
Similar to regular brokers, commercial brokers are paid commission for each transaction that they facilitate. Whether they are representing the landlord or owner, or the tenant or buyer, the commission payout amount is determined by a mutual agreement between the broker and their client. For commercial property sales, this would be the buyer or seller. In the case of a lease agreement, it would mean the landlord or the tenant leasing the property.
There is no industry standard for the commission percentage that a broker may receive, due in part to Antitrust Laws. These laws are in place to ensure that commission rates are fair and mutually agreed upon between the client and their broker prior to any sale.
Commercial properties often require a lot more time and effort from the broker than traditional properties, therefore, commercial brokers can usually negotiate a larger commission percentage. In some cases, it can take several months and even up to a year or longer before a deal can be agreed upon by the seller and buyer.
Commission Percentages for Brokers
The commission is paid by the seller or property owner and the amount is only determined once the total price of the property has been negotiated and is agreed upon by all necessary stakeholders. The commission percentage is usually higher for low-valued properties and begins to decrease with high-valued properties.
Commercial leases will be calculated in one of two ways: a percentage of the total base rent a tenant will pay over their lease term; or as a dollar rate per square foot per year. These compensation calculation methods are utilized for both sales and lease agreements and average about 4-8% of the total transaction amount.
Commercial real estate brokers have a lot of freedom when it comes to setting their commission rates. Brokers can choose whatever rate they deem appropriate and they have the ability to change their rate based on the property that they are selling. Additionally, some brokers may choose to set a minimum commission amount for properties that are likely to have the sale price negotiated down or reduced. However, whatever rate the broker is asking for, they need the necessary stakeholders to agree on the commission price and sign a listing agreement to consent to the payment.
Brokerage Commission Splits
The commission earned on a commercial lease transaction is split between the brokerage firm and the broker. The commission ratio will vary depending on the firm, however, a broker’s seniority and quota attainment are usually factors in determining their share of the commission. A 60/40 split between the broker and the firm is typical, with the broker receiving the larger cut.
It is also common for firms to determine the percentage a broker receives on a sliding scale or tiered commission basis. This would mean that the more business the broker brings into the firm, the higher portion of the commission they receive.
When are Commercial Lease Commissions Paid?
Commissions earned from each transaction will first go to the brokerage firm. After the firm receives the payment, the broker will be paid a percentage of the total commission earned and the firm will keep the rest.
While the expected payment schedule is to receive commissions upon closing the sale, in leasing transactions it can be divided into two separate payments with the first half being paid to the broker at the time the lease is signed and the second half paid after the tenant moves into the space. Or, there may be an agreement between the seller and the broker to space the commission payments out over the course of several months. As with the commission rate, the payment schedule is negotiable, but must be agreed upon prior to the sale in the listing agreement.
The turnaround time for commission payments is approximately 30 days after the sale or lease is executed. However, the actual payout to the broker depends on how quickly the brokerage firm is able to process these payments as they are received.
How to Manage Commercial Lease Commissions
In order to effectively manage all of the variables involved in commercial lease commissions, it’s important to have software that is reliable and agile. Core Commissions provides brokerage firms a flexible solution that is capable of integrating with multiple data sources to make tracking and reconciling payments across platforms simple and efficient.
Core’s single-button processing allows you to process commission cycles at any point once payment is received from a sale or lease agreement and simplifies broker commission splits for accurate payouts every time.