How Leasing Brokers are Paid

13 Replies

I was wondering how leasing brokers are paid based on finding a commercial tenant for retail/restaurant space?

I'm trying to figure out if I should go the commercial broker route in listing some nice, hip retail spaces. I was also contemplating just listing them myself and throwing them up on loopnet/costar/MLS etc and just test the market

I've heard 6% commission is paid on total rents for the length of the lease term-- but is that capped and is that total amount paid upfront on lease signing?  I mean for instance if I sign a lease at $4500 a month for a 5 year lease that is $4500 rent x 12 mo x 5 years = $16,200.
It seems like a lot if for instance the tenant breaks the lease 6 months into the lease for example.  

Are there standard or common clauses or anything I can put in the Listing Agreement to guarantee I would be able to pay reduced commission based on uncertainties with certain potential tenants?

You are right in the way that you calculated the way brokers are paid.  If the lease is longer than 5 years, sometimes they are paid on a percentage of the second 5 years, as well (such as 4% of the total rents for years 5 through 10).

Most established brokers would not accept if you tried to put in a clause to pay a reduced commission, or some sort of commission contingency.  Their argument is that they will be bringing you tenants, and it is up to you to qualify the tenant and decide if the tenant is a good, strong tenant for you.  You can choose to reject the tenant if you don't think they can make it through the lease.  Some brokers may offer to re-lease at a reduced cost; you could always ask.

One commission structure that we use is half upon lease signing, 25% at the second month of rent payments, and 25% after 6 months of rent payments.

How good your space is will determine what type of broker would be willing to work on it.  Very busy brokers will (or at least SHOULD) only take on assignments that they will actually do work on to lease.  A good broker won't just post it on Loopnet and CoStar.  He (or she) will also call on tenants who he thinks would be a good fit.  If you have a strong "A" location, they could have relationships, and be calling on McDonald's, Taco Bell, Panda Express, etc.   Your chance of those tenants leaving 6 months into the lease are very low.

If your location is more of a "B" location, then you will probably be dealing more with mom and pop independent retailers/restaurants.  You will have to evaluate the tenant's financials carefully, and take a large security deposit if necessary.  Require the tenant to personally guarantee the lease.  Hold a large enough deposit that you can pay the broker in case the the tenant leaves. 

"Are there standard or common clauses or anything I can put in the Listing Agreement to guarantee I would be able to pay reduced commission based on uncertainties with certain potential tenants?" 

No, because when you qualify a tenant's credentials, you ultimately take on the risk. 

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Originally posted by @Mike L. :

One commission structure that we use is half upon lease signing, 25% at the second month of rent payments, and 25% after 6 months of rent payments.

If your location is more of a "B" location, then you will probably be dealing more with mom and pop independent retailers/restaurants.  You will have to evaluate the tenant's financials carefully, and take a large security deposit if necessary.  Require the tenant to personally guarantee the lease.  Hold a large enough deposit that you can pay the broker in case the the tenant leaves. 

 Gotcha thanks.  

Yeah the structure where I would pay within first several months might make sense. But I understand if a broker finds a great tenant, negotiates, and does contract they deserve a solid, full commission.

I'd say this is a "B" hip location not an A.

I actually have some local mom and pops that I am contemplating giving a loan to for their start up costs or possibly long rent credits... but that might just ad more risk to the risk I'm taking on as a landlord leasing to an indy mom and pop.  

Do you often see negotiations like that for an independent small retail shop that a landlord feels good about?

If the location is good and you market the space properly then usually national and regional tenants would pay a higher per sq ft for that location.

If it's a C location or off the beaten path then small mom and pop operators tend to go after those spaces at reduced rents per sq ft. They want to be in the area but their business cannot sustain high per sq ft leases for the top notch locations like the national brands can.

If you have an empty space you want a "void analysis" for the highest and best use there tenant wise and rent wise.

If it's a mom and pop tenant then make sure they are a "destination" tenant. This means customers have to go there to spend money and can't do it online. About 90% of retail closures annually were furniture and retail related. Restaurants tend to go out also due to poor location, inexperienced operator, bad food quality, bad service, prices too high for the demographic base, restaurant type for the area over saturated with local competition due to constant couponing to drive sales.

(Example: A tenant wants to open a pizza place in your space but there are already 7 pizza places in a high mile radius which is too many for the population levels you have etc.)

What the other person said makes sense about the landlord needs to properly vet the tenant however that leasing broker knows they are bringing a weak tenant so should expect not to get all the commission upfront is the way I see it.

If I am the landlord taking a risk on a weak tenant then I am sure not going to give TI and all this leasing commission to the broker right away. The only way is if I had a dead space none of the national to regional tenants wanted and was already at 90% occupancy for a strip center. Then I could back fill a non-performing space that was hard to rent anyways.

The mom and pops try to get the cherry spaces for nothing and if I was them I would try to do the same. The reality is the national tenants and regional typically pay more for high brand exposure and traffic.  

"If I am the landlord taking a risk on a weak tenant then I am sure not going to give TI and all this leasing commission to the broker right away"

Not sure about other markets, but try calling up 10 commercial brokers in LA and see which one would comply with delayed commissions.

Originally posted by @Martin Z. :

"If I am the landlord taking a risk on a weak tenant then I am sure not going to give TI and all this leasing commission to the broker right away"

Not sure about other markets, but try calling up 10 commercial brokers in LA and see which one would comply with delayed commissions.

 Especially for someone the broker doesn't have a long term relationship with already.

Originally posted by @Will F. :

I actually have some local mom and pops that I am contemplating giving a loan to for their start up costs or possibly long rent credits... but that might just ad more risk to the risk I'm taking on as a landlord leasing to an indy mom and pop.  

Do you often see negotiations like that for an independent small retail shop that a landlord feels good about?

No, not often at all.  That's really risky and is like putting a lot of eggs in one basket.  I wouldn't get too "buddy buddy" with your tenants because it will make it that much harder for you to enforce the rules when things aren't going so well.

California might be different. I don't do projects there.

I still stand by not giving TI for a weak tenant. A landlord paying out leasing commissions and TI's for a weak tenant just doesn't make sense.

The tenant simply isn't proven. I wouldn't generally accept a tenant under such circumstances as a landlord but that is just me.

Now if debt was so low but their net worth was very high with a personal guarantee that is a different situation. If It is a franchise concept I would try to get the corporate parent company to guarantee the lease and take over if the franchisee failed.

Some landlords will give lower rent per sq ft and no TI with free months of rent if tenant spends the money building out. If the tenant is a Starbucks it's a whole other ball game. It's all about the quality of the tenant and having a known commodity. If a landlord doesn't put proper measures in place to lease up then when they go sell down the road the property is not as marketable.

I have seen landlords fill up centers and when they go to sell have weak leases the buyers will inherit so the cap rate price has to be higher along with credit to the buyer to purchase the property. You have to begin with the end in mind. A landlord shouldn't in a moment of weakness break from standard lease up protocol to fill out a commercial space.  

Additionally the landlord needs to make sure that leasing commissions ONLY go through primary term and not perpetuity ( forever ).  

Upfront, I wouldn't give a dollar, totally agree. But even on a credited tenant, what's a landlord to do if the space is large. Imagine having a retailer ask for 30 /SF build out on a 50k square foot building. Would reduced lease rate work in that scenario? Don't they ask for build out costs because they can't write off build out construction from their books? or is there something I"m missing

Yeah most of my clients do not go for the (big box) stuff 50k square feet with one tenant. That's more for REIT's and large funds that buy those types of spaces for investment. These spaces if they go dark can sit for years. Now you could put demising walls in and cut up the spaces for higher rent per sq ft to multiple tenants.

I have seen owners just give a little below market rent per sq ft then spend that kind of money on interior TI.

If it was a national credit rated tenant then maybe some TI.

Also just wanted to mention even if you find a broker who's OK with a delayed commission, a lessee's agent may also be involved. Now you have a 2nd broker to convince. As a landlord, I'd worry more of avoiding vacancy or keeping it limited rather than the commission payout. Vacancy is one of the major costs.

A couple of thoughts on this topic, commercial brokers hate delayed commissions. The theory is that their work is done up front and its the LL job to figure out the risk. Also, while brokers don't participate in the downside (tenant leaves early) they also don't participate in the upside such as if a tenant is a huge success and becomes the next Starbucks or something and your property becomes a lot more valuable. Industry standard here in Southern California is 50% of the commission is paid on lease execution and 50% upon tenant opening or commencing rent. You will have a tough time finding a good broker that will agree to something different. 

Believe it or not, LL's investing in tenants is much more common today in retail. With consumers (especially in LA) preferring the mom and pops over the national chains, some of the most successful retail developments have substantial LL investment. This can take the form of a tenant improvement allowance or an actual equity position in the company. That said, do you want to be in the LL business or the restaurant (or whatever) business?  Maybe both. 

Also, it is very common to get a % rent clause in retail if you are investing or providing a substantial TIA. That way if the tenant is crushing it, you will participate in some of the upside. 

I would love to hear more about the project. I'm available anytime for free advice, and I promise I won't try to sell you on CBRE. 

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