Real Estate Broker Commissions

Most commercial real estate brokers get compensated for their work in the form of commissions. The commission is calculated as a set percentage of the total lease value or sales price of the property in the transaction. For example, a 4% commission on a lease worth $1,000,000 would be $40,000. Real estate commissions are typically paid by the landlord/seller of the property, even if the broker was hired by the tenant/buyer. Keep in mind that each party can hire and be represented by its own broker thus making it very likely to have two brokers involved in the transaction (cooperating brokers).

Real Estate Commission Rates on New Leases

Real estate commission rates vary depending on the type of transaction and the brokers involved as explained in the previous paragraph. In leasing, the real estate commission rate depends on whether the transaction is a new lease or a renewal. In addition, the commissions vary depending on whether only one or both parties in the transaction (the landlord/seller and the tenant/buyer) are represented by a broker. Keeping in mind that each commission agreement is unique, here is a sample commission rate schedule:

• If only one of the parties in the transaction is represented by a broker, the landlord/seller is expected to pay a 4% commission to that broker;
• If both parties have brokers, the commission rate increases to 6%, with 4% going to the broker representing the tenant and the remaining 2% going to the landlord's broker.

Real Estate Commission Rates on Renewals

In leasing, the above percentages apply to new leases only. If the transaction is a lease renewal, the real estate commission rates are lower:

• If there is one broker involved, the commission is 2.5% or 3%;
• If there are two brokers, the rate may increase to 4% with the tenant's broker claiming 2.5% and the landlord's broker - 1.5%.

Commissions are usually paid to the brokers in two parts. Fifty percent (50%) of the total commission due is paid upon execution of the lease agreement, and the remaining fifty percent (50%) is paid upon tenant taking occupancy of the leased space.

It's important to mention that real estate broker commissions may vary from market to market and depend on numerous factors such as vacancy rates and economic conditions. It's not uncommon for landlords to offer higher commissions (6% for example) or commissions based on gross rent (as opposed to the standard base rent) as an incentive to brokers to bring deals to the table in tough markets.