Commercial Property Lease Commission

4 Replies

Hello BP community!

I am an agent representing the tenant in a commercial lease and upon agreeing verbally on a 5 year lease, the listing agent/seller wants to breakdown the lease to 2 years lease with the option to extend the lease for 2 additional 2 year periods.  (2+2+2)

Is he trying to cut off my commission for the 2 additional 2 year periods?

Any thoughts of how you would approach the situation will be appreciated.

Thank you in advance.

Ask to be paid in full for the renewals when/if they occur.  Also ask why they want to structure the deal that way, it seems a little odd but they could have a valid reason.

Hi Andreea - Seconding what Keegan said, it does seem a bid odd the landlord would prefer a shorter initial term, but may be a valid reason. If you have an experienced tenant with a track record, then would try to push for the 5 year initial term and be paid on the 5 years now (50% at lease execution and 50% at commencement). If you're tenant is a start-up or someone with shaky financials, and the landlord will only agree to a 2 year initial lease term with the options, do try to secure it on the options then. FYI - depending on the type of property and conditions in your market, you may or may not have success with this. For example, in my market (Philly) and sector focus (retail), commissions are rarely, if ever, paid on options, extensions, expansions.

Thank you @Kegan Russell and @Damon DiPlacido

If my client/tenant is offering a substantial security deposit of $20,000 and both parties agrees that landlord will return the amount quarterly over the term of the lease, should my client ask for interest? If yes, what would be reasonable?

I'm thinking this option in case the landlord's valid reason is the considerable amount of commission.

I won't agree as an owner to leasing commissions on options just the initial signing. The reason is simple it is a cost to the buyer they will pay and can affect the future sales price.

If buyer does not want to pay then they will seek a credit from the seller for future renewal leasing commission owed.

I can see a seller doing a 2 year lease if they have high occupancy at a retail center for instance already. If this is a single building space maybe they want to sell off for redevelopment in a few years or figure if the area is growing they can eventually dump out this tenant for a national one that could improve the value of the property.

I do not know the asset class or who your tenant is you are representing.

If they are a weak tenant I have even seen little to no leasing commission paid upfront and the rest as the tenant makes ongoing payments then the leasing broker gets paid also.

The tenant reps say that the landlord decides whether to take the tenant or not so just pay the commission. I say if I take  a punt on a weak tenant then I am not paying tons of leasing commissions right up front or TI. I want to tenant to absorb a lot of costs so if they go out I am not paying a ton of fees again.

If tenant is single unit operator starting out, they have low net worth and liquid, and business model might move online in a few years then high risk.

If tenant rep broker is bringing weaker type tenants to owner for leases they might start focusing on higher quality tenants where landlords can feel better about paying all the commissions upfront. If it's a national tenant you want them on the primary lease as long as possible. The national tenant and security of a guaranteed lease for a long time helps the value of a property in many cases.

If I had a choice to take a weaker tenant and pay all these fees to back fill a last space I think I would leave it empty and wait for a better tenant to come along as the owner. If this was a retail center for instance in a weaker location then maybe back fill with weaker tenants as national ones will pass on the site. I would have to buy those sites for next to nothing to still make a high cap off of low rents so as to not put too much sales per sq ft pressure on the local tenants to be profitable.  

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