Typical Commission % for a renewal of a Commercial Lease???

Question

Hey All!

I'm about to get a lease renewed (hopefully) on a commercial property.  I have a commercial brokerage negotiating the lease for me.  I was just curious on what the standard % commission for a 5 Year lease would be?  I've seen numbers ranging from 6-3% upfront of the total yearly lease.

Thanks BP community!  Have a great day!

-Ryan

Joel Owens · Answer

When agreeing to a lease you STRIKE OUT any leasing agent perpetuity clauses where they keep getting paid upon renewal.

If it's a national tenant that is premium it is okay to pay the leasing commissions at the time of occupancy. Leasing brokers will try to get it sooner but it's not great practice to do so.

If tenant is a franchisee or mom and pop then you want a tiered structure. You could be out a lot of money if the tenant goes out. You could try to decrease the number of years to 1 or 2 and then have rent increase in options where there is no leasing commission if you negotiated correctly.

Give free rent instead of heavy TI to a mom and pop tenant. I never agree to rent being paid in blocks of 3 to 5 years unless a national tenant. Mom and pop extract the increase every year. They could go out in year 3 and you never saw the rent increase if they pay in blocks etc.

Gino Barbaro · Answer

@Ryan Rogers

Hi Ryan

In my market, the standard fee is 6%.  It may be a bit high, but if they can find and sign me a tenant, then I am willing to pay.  I worked out and agreement with a broker that I would pay his fee split up into increments.  The lease was also five years and I did not want to lose out if the tenant bailed early.  I paid him a pretty sizable portion the first year, then some the third year and the final amount the fifth year.  I was only able to do this because I was already doing business with the broker.

Gino

Mark Creason · Answer

Ryan,

Are they renewing a lease on an existing tenant?  I would expect 6% for a new listing, but that is high for a renewal.  I would think 2.5% makes sense.  Typically, we would expect to get paid 1/2 at lease signing and 1/2 when lease takes force.

Mark

Christopher Telles · Answer

As in so many areas of real estate typical doesn't typically apply. CRE lease commissions tend to vary depending on where the property is located across the nation. As you've mentioned they do tend to run the rates you quoted of 3-6% for the aggregate lease value of the lease for the first five year tiering downward for the next five, and then so on a so forth for extended lease terms.

You mention you're working on a lease renewal so immediately the question that comes into play is does the originating brokerage have claim to a renewal commission?

The next question is why are you being represented by a brokerage on a lease renewal? If its because you're unfamiliar with CRE leases, I get it. However, the pure essence of having a broker involved means you're opening up a commitment to pay when you could have eliminated the need to pay any commission by representing yourself with an existing tenant.

Brokers typically earn their commission for the heavy lifting work of finding tenants or buyers and then getting them interested in certain property's, not necessarily for "transacting", assuming they are knowledgeable about the marketplace.

Assuming the originating brokerage doesn't have a claim to a commission then my suggestion would be to use the mere fact you brought the two most important aspects of the transaction to the table, the tenant and the landlord, and you're willing to pay a commission (the tenant rep side and or landlord side) which is roughly half of a full commission typical for your marketplace. Then, try negotiate terms based on the premise you've made it easy for the broker to "transact", by bringing the parties to the negotiating table, and you want to pay the commission on terms amenable to both them and you.

If you get the 1/2 a commission part accepted I wouldn't push for terms. Pay the fee and move on. Here's why, the tenant already exists at the property which means the property owner has already accepted the tenants credit worthiness to lease the property (if you're a subsequent new owner you had a chance to review credit during your due diligence, if you didn't then that is on you). However, you can use the renegotiation process to get updated financial statements and then if financial condition has deteriorated since the originally lease use that information as a negotiating chip to throw on the table when the time is appropriate, assuming their financial condition is still acceptable.

Note: if you question whether a former brokerage has a claim to commissions (they do not necessarily have to be actively involved in a subsequent transaction to have such a claim) my suggestion would be to stop moving forward with lease extension negotiations until you're able to clarify who is owed what by whom and when.

Gino Barbaro · Answer

@Ryan Rogers

The problem is, I don't know if the brokers will like it.  It also depends on the quality of the tenant.  If the tenant is a huge company that won't ditch, it may be harder to convince broker.  Just tell him you are in for the long haul and you want to establish a relationship.

We have a broker on our team who was willing to take a note for part of his commission.  We paid him off when we refinanced the property.

The lesson is You never know unless you ask

Gino

Ryan Rogers · Answer

Love it Mark, that's the structure I went with.  Thanks! :)

Ryan Rogers · Answer

Thanks Chris!  I appreciate your thoughtful response!  It helped a lot! :)

Ryan Rogers · Answer

I like the spacing out of the upfront lump sum Gino!  Thanks for the advice!

Ryan

Typical Commission % for a renewal of a Commercial Lease???

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