Yes, we are going to talk about it.
Some of you may have heard the news in 2024 about a massive lawsuit that was settled by the National Association of Realtors, regarding commission fixing.
This settlement put in place new rules regarding residential real estate commissions. Commercial transactions were largely unaffected because commercial operates in a different way.
However, the overall goal of this settlement was to provide greater transparency around the fees paid as commissions to Real Estate Agents. Our goal in this article is to increase the transparency around these fees, so that you can make an informed decision.
But first, bear with our disclosure, since we are talking about Commissions:
The following is not meant to be legal or consulting advice. Each consumer should do their own research and consult with their attorney regarding any questions herein. All commissions are negotiable between the agent and client.
1. Commissions are negotiable
First off- commissions have always been negotiable. Real estate Brokerage is regulated at the state level in every state in the US, and one underlying principal is that the commission amount paid is negotiable.
Just like the price for the real estate itself is negotiable, the fee paid to the real estate professional is likewise.
In Commercial Real Estate, the Commission percentage can be much more varied than residential, with ranges from 1%-10%.
But wait, that is a huge range- how does that help? Read on- we will explain.
2. Expect to pay more for skilled and experienced agents. Higher quality often costs more.
In Commercial real estate, businesses and investors are often dealing with large, expensive decisions regarding properties. Because real estate is a competitive business and is service oriented, it is reasonable to expect someone who provides you with a superior result to cost more.
You would not want to hire the cheapest attorney, but rather the most competent one that matches the skills you need.
Having a knowledgeable commercial agent who has a track record of results can make a substantial difference for the client. This is why recommendation, reviews and past results speak volumes when deciding who to hire and how much to pay them.
3. Agent Cooperation is different in Commercial
- In most states throughout the US, you can be a ‘Seller Agent’ or a ‘Buyer Agent’ or you can be simply a ‘Transaction Licensee’. The term ‘Agency’ means you are representing that party, with a fiduciary duty to keep their interest in mind. In many states, you can facilitate a transaction as a ‘Dual Agent’ which means you must remain neutral and not disclose confidential information from one side to the other.
- Some states, like Maryland, do not permit Dual Agency, in the form of the same person representing both buyer and seller. Pennsylvania does permit Dual Agency with proper disclosure of this.
- A list agent can assist buyers in a purchase, as a Transaction Licensee, without representing that client in a dual agency practice. This is mis-understood by a lot of buyers, who think they are automatically represented if they go directly to the list agent.
For many years, it was the standard practice in residential real estate that 6% fee was charged, which was split with 3% going to the seller Agent and 3% going to the buyer Agent. Now, the NAR settlement put in place guiderails that provide sellers with the option to only pay their Selling Agent, and encourage Buyer Agents seeking compensation from the seller to negotiate that as part of the transaction.
- For the most part, Commercial real estate has been unaffected by this NAR Settlement, because there is much more variance in the commercial real estate side of the business, both in property pricing and in the depth of a Commercial Real Estate agent’s services.
You can co-op without compensating
For example:
The Seller has a $15,000,000 apartment complex that they want to sell.
They contact their selected Company and agent, who spends many hours reviewing financial information, developing pro-forma income and analyzing the property.
The agent recommends a pricing and marketing strategy, and negotiates a fee for their services with the seller.
The Company and agent have a large database of qualified buyers for this type of property, and knows that they may work directly with the buyer, either as a Transaction Licensee for the buyer or as a dual agent.
The seller agrees to pay them a fee for selling the property themselves. If another agent sees the property for sale and brings in a buyer, they must have the buyer compensate them, or write their requested compensation into the property purchase proposal.
Often the seller will only want to pay their selected Brokerage Company, leaving the buyer to compensate their agent, if they choose to hire one. This is more common in Investment sales. Often, we structure listing fees with a two-tier structure. This way if the owner wants to compensate a buyer agent, that is built into the deal up front, but they save money if we sell it directly to the buyer.
4. The higher the property price, typically the lower the percentage
Due to antitrust laws, it is illegal for brokers to have an agreement that establishes a standard commercial real estate commission. A commercial real estate commission rate will mainly depend on the price of the property.
A typical commercial real estate commission can vary from 4-6% in deals under $1 million. Once you go above $1 million in property value, the commercial real estate commission will begin to decrease.
For example, a property with a $10 million sale price could pay a commission rate of 1-4% due to the extremely large sticker price of the property. In some instances, the commission may be a flat fee. Though not common, some brokers and sellers prefer to agree upon a flat fee, where a predetermined commission is received upon closing regardless of the property’s final sale price.
Special Circumstances:
- If you are selling a business along with your Commercial Real Estate, it would be common that the overall fee would be higher. This is because a business with the real estate is much more complicated, and the buyer pool is smaller. Consequently, the broker will often put in many more hours in finding a qualified buyer, and working through the financial reviews with them.
- Sometimes for investment properties there is a sliding scale to a listing broker. This might look something like 2% on anything up to $15MM and then a higher percentage on the value between $15MM – $16MM and an even greater bonus above $16.5MM. This way the owner and agent interests are aligned to seek the higher return collectively.
5. Commercial lease structure
Because it is a specialized service, it is common for Commercial Brokers to engage in leasing as well. Commercial real estate commission for a lease transaction is typically based on the value of the lease over the term.
- For example, if a five-year lease has a monthly payment of $6,000, the lease commission would be based on the total payments over the course of five years. In this example, the commission would be based on the $360,000 lease value over the initial term.
- In some cases, the landlord may try negotiating the commercial real estate commission rate to be reduced for longer leasing terms.
- If the property in our example was being leased for 10 years, the broker could agree to a rate of 4% for the first 5 years and a rate of 3% for the remaining 5 years.
- Additionally, the broker can negotiate to be paid a commercial real estate commission upon lease renewal. This is typically a reduced commission rate.
Frequently, businesses who need to lease locations for their business will hire a Tenant Representative Broker. The broker make work on multiple locations for them in a certain region. Because Tenant Representation can come with a lot of work, it is common that tenant rep brokers would be paid a higher fee up front. This fee may decrease over time.
For instance:
-6% the first year lease value
-5% the second year lease value
-4% the third year value And so on. The Landlord often also pays their listing broker as well to advertise the property and connect with other brokers, but commonly is closer to the 3% range on the listing side, which is a total 9% fee for the first year.
- This varies widely by region. In some areas of the country no one would ever think to pay a tenant rep broker more than three percent and a request for more is seen as unreasonable. In some larger markets tenant rep brokers can get as much as 5 or 5.5% on the initial term.
- The leasing fee to both brokers is often paid 50% at lease signing and 50% when the tenant begins paying rent. Fee for a renewal is paid at the time of renewal of the lease options or exercise of options.
6. Like any business, there are expenses
Often times people look at the total number they are paying in Commission and think it is very substantial. For every property that closes though, there are at least 3 others that will not close, and the costs are spread over the collective property risk pool for the broker.
There are ongoing costs for staff, software, platform fees, advertising, office space, mileage and more.
The portion of commission that agents pay to the Brokerage company is much higher in commercial than in residential, and this is because of the much more sophisticated tools used and significant time that is put into larger and more complicated Commercial Real Estate transactions.
Conclusion
We reiterate again that all fees are negotiable between the parties involved. But like any business for professional services, there is a threshold value that a competent advisor will accept for their services. Similarly, I am always happy to pay my accountant for their services when they save me lots of time, money and headache. We trust you will likewise find a trustworthy CRE advisor who will help make your commercial real estate experience easy, positive and profitable.
Our company works with Investors, Developers and Businesses to provide solutions across the US. If we can assist you with your Commercial Real Estate needs, please reach out to us here.
