1. How does the commercial real estate ("CRE") industry work?
Most owners of real estate hire real estate agents to lease their
property on their behalf. The agent obtains a listing agreement, which
calls for that agent to act on the owner's behalf as a fiduciary in
leasing the property. The agreements are performance based, meaning the
agent earns a commission upon the signing of a lease. The commission is
typically paid one-half upon lease execution and one-half upon tenant
occupancy. Owners of real estate can lease their own properties without
having to have a real estate license.
Real estate agents are required by law to have a salesperson's
license issued by the state that the agent does business in. All agents
must pass an exam in order to obtain a license. The agent then "hangs"
their license at an office with a designated Broker. The Broker has
additional licensing and educational requirements that they must meet
in order to have agents that work for them. The Broker is ultimately
responsible for any acts committed by an agent whose license is "hung"
in their office. Most all states have continuing education
requirements, meaning that each licensed agent and broker must obtain a
certain number of educational credits (also called clock hours) in
order to renew their license.
Commissions are paid to the Broker who then pays the agent
responsible for the lease. Agents typically work on "splits" with the
house. Splits can vary anywhere from 50/50 to 90/10 in favor of the
agent. Agents are typically independent contractors who are then
responsible for paying their own taxes.
In some cases, a tenant will retain an agent to find a space
on the tenant's behalf. Most listing agreements require that the
listing agent split the commission earned with the tenant's
representative. In most cases, commissions are split 50/50. There are
exceptions to this rule. In soft markets where vacancy rates are high
and tenants are at a premium, the owner may pay the tenant's
representative a full commission. In this case, the listing agent
usually continues to receive a half commission, which results in a
commission and a half being paid out by the owner.
2. How do CRE professionals ("agents") get paid?
Commercial Real estate agents are typically paid a commission upon the
signing of a lease. The commission is paid by the owner of the building
and is typically paid one-half upon lease execution and one-half upon
tenant occupancy. The commission is most often calculated as a
percentage of the lease value and usually ranges between four and six
percent. For example, if a tenant signs a 3-year lease for 2,000 square
feet at $20 per SF per year, a 5% commission equals $6,000 (3 yrs x
2,000 SF x $20 x 5%).
To further complicate matters, the agent's Broker is the one
that gets paid the commission. The Broker then pays a portion of the
commission to the agent, depending on the agent's split. Commission
splits range anywhere from 50/50 (most common) to 90/10 in favor of the
agent. Using the above example, the agent would receive anywhere from
$3,000 to $5,400.
3. How do commercial real estate commissions work? There are several reasons why it is important to understand how commissions work:
1. One of the most common pitfalls a tenant makes is to tour properties
without having decided on a brokerage relationship. If you plan on
hiring a tenant rep, do so in advance of going on a property tour. If
you plan on trying to find space on your own, make sure that any
properties you have an interest in are shown to you by the listing
agent (or owner, if the property is not listed). The reason this is so
important is that in most cases, all an agent has to do is to bring the
tenant to a property and he/she is legally entitled to a portion of the
leasing commission as the "procuring" broker. A tenant may never see
the agent again, but since that agent showed them the property, that
agent will be paid a commission. These situations can also get real
messy. For example, if later on that tenant hires a tenant rep, a
commission dispute will likely occur if the tenant enters into a lease
on a property that was shown to them by another agent.
2. Knowing how much your tenant rep will earn is important
when it comes to how much service to expect. The larger the commission,
the more work you should expect and the more diligent you should be in
hiring your tenant rep.
3. Commercial real estate commissions are, in most cases,
calculated as a percentage of the rent due under the lease. The higher
the rent and longer the term, the more commission is paid. This may be
great for the landlord, but is usually contrary to what the tenant is
trying to achieve.
4. Commissions are paid only if a lease is successfully executed. The
quicker a lease is signed, the faster the agent gets paid. While this
may be great for the agent, be careful to ensure that you are making
compromises that make sense and not just to hurry up and get the deal
done.
4. What's the difference between a leasing agent and a tenant rep?
The leasing agent has the listing on the property and represents the
interests of the building owner. A tenant representative or "rep"
represents the interest of the tenant in a lease transaction. Some
agents work exclusively on listings, others will take on tenant
representation engagements only, while others will work on both.
5. Are all properties listed? No. In some
cases, an owner will lease the property directly. Sometimes, the owner
will employ an in-house leasing agent. Typically, these are called open
listings, where the owner will pay a full commission to any broker who
brings a tenant to the property. An in-house leasing agent is usually
paid on a salary basis, so their incentive to enter into a lease is
different that from a listing agent who is paid a commission.
It is also essential to understand that when you are
negotiating with an owner, the terms of your lease take on a much
greater importance. The owner is going to receive your entire rent
payment, while the listing agent receives only a small percentage as
his commission. Also understand that if you hire a tenant rep, there is
a possible conflict of interest. He may get paid a full commission on
an open listing versus receiving a half commission on a listed
property.
6. Do I need to broker to help me find space?
No. OfficeSpace.com can do that for you. What you need a broker for is
their expertise surrounding the leasing process. A good broker is much
more than just a space finder; you should view them as you would your
attorney or accountant. You want their advice as to what space is best
suited for your business and what are the best terms that the space can
be leased for. A good broker will help you in all aspects of the
commercial space transaction. That starts with understanding your
business and ends with a signed lease. Finding the space is simply one
small step in the overall process.
7. When would I want to find space on my own?
The best circumstance to find a space without retaining the services
of a tenant rep broker is when you are looking for a small space and/or
short-term lease. Generally speaking, since the total lease
consideration is small, the commission that will be paid is even
smaller. It is hard to find a good broker that is willing to work for a
small commission. Remember, it takes the broker just as much time to
help you lease 5,000 square feet for five years as it does to lease
1,000 square feet for three years. In addition, the listing agent will
usually work harder to lease a small space if the commission does not
have to be split.
8. I've thinking about moving my office; where do I start? The first thing you need to do is to decide if moving is right for you:
9. I'm leasing a space for a new business; where do I start? The first thing you need to do is to determine your needs:
10. Whom does a broker work for? Brokers
generally work in two capacities, as listing agents or as tenant reps.
Some, if not most, do both, meaning that they have property listings
and they also work as a tenant rep. If you are working directly with
the property listing agent, make no mistake, that broker is working for
the property owner. If you hire a tenant rep that also has listings,
then you need to have a very good understanding of what listings they
have and what conflicts, if any, that creates. For example, in addition
to the fiduciary issues that come with representing both parties in a
transaction, the agent will most likely make more money if you lease a
space at his listing. Instead of having to split the commission, he
collects both sides.
11. How much does it cost to use a broker?
Most brokers will tell you that their service is free; their fee is
paid by the landlord and it doesn't cost you, the tenant, anything.
Generally, we agree with this statement. To understand why a broker may
not always be free, we must look at each of the four most common type
of leasing scenarios:
Scenarios 1 and 2 are by far the most common, as most commercial space
is listed by the owner with a real estate agent. In Scenario 1, your
tenant rep broker is indeed free. This is because when you sign a lease
at a listed property, the listing agent is required to split the
commission due on the lease with your tenant rep broker. If you did not
have a tenant rep broker (Scenario 2), the listing agent would have
kept the entire commission for himself; hence the split results in your
broker being free. There is a bit of gray area here, which happens when
you are leasing space in a soft market. Since tenants are at a premium,
the market dictates that a full commission is paid to your tenant rep
broker. This adds 2-2.5% percent to the cost of the transaction to the
owner, which the owner will try and recover in other areas of the
lease. It is unlikely that you will pay a higher rent, as your
alternatives in the marketplace prevent that. You may end up with a
lesser tenant improvements, but your tenant rep is there to make sure
you don't.
Scenarios 3 and 4 offer the most debate. Under Scenario 3,
while you don't pay the tenant rep broker directly, the owner does.
This adds cost to the lease and the owner will try hard to recover that
cost, either with a slightly higher rent or lower lease incentives
(i.e., one less month of free rent provided). However, we would offer
that a good tenant rep broker will negotiate for a better lease than a
typical tenant can achieve without representation. Clearly there are
savings under Scenario 4, but it takes a lot of work by the tenant to
be able to receive the full benefit of those savings.
12. How do I hire a broker? The best way
to get a broker to work for you is to hire them as your exclusive
tenant representative. Most brokers have representation letters for you
to sign and once they know that you are committed to them, they will
work hard for you.
13. How can I put myself in a priority position with leasing agents?
There are two primary reasons leasing agents do not return calls. One
is that they are too busy and the space you are interested in is simply
too small and the other is that they perceive you to be a flake. There
is not much that you can do about the agent being too busy, but there
is everything you can do to be convincing. Put yourself in the leasing
agent's shoes and then compare the following messages:
"Hi Bob. I drove by your leasing sign that was on a building that I can't quite remember. I'm thinking about starting a new business and am trying to get a feel as to what's out there. Can you give me a call back at 555-1212 and let me know what spaces you have for lease?"
"Hi Bob. I found your listing on remax.com. I've been looking at my options for a while now and am very interested in viewing the 915 square foot space that you have listed on the 2nd floor of the Atrium Building. Can you please call me at 555-1212 to set up a time when I can tour the space?"
14. What is a representation letter and should I sign one?
A representation letter is something a tenant rep broker will ask you
to sign. It has several purposes. First and foremost, it demonstrates
your commitment. Once the tenant rep broker has that letter from you,
they know that are much more likely to get paid a commission on your
lease. This means that they will work hard for you. In fact, a good
tenant rep broker will not do much more than a simple market survey
without a signed letter. If you want to get the most out of the
brokerage community, we recommend that you sign an exclusive agreement
rather that working with several different agents on a non-exclusive
basis.
15. Is finding a space without hiring a broker a good idea?
Generally speaking, the answer is no. You as the tenant enter into a
lease once every so often. A broker negotiates for space on a daily
basis. Would you go into an IRS audit without having your CPA by your
side? Same reasoning applies here.
Now let us examine a couple of cases where you might lease
space on your own. The biggest driver is the dollar value of the lease
commitment. The less space you lease and the shorter the term, the less
rent that is due under the lease. Less rent means a smaller commission.
A listing agent is much more motivated to lease space directly to a
tenant versus having to share their commission. This is especially true
for small spaces that generate small commissions. Also, if you are
leasing a small space, you sometimes can't get a tenant rep to work for
you because it is simply not worth their time.
16. What is the best way to select a broker? There is no one best way to select a broker, but there are several things to avoid:
17. Now that I've hired a broker, what should I expect from him/her?
A broker is like any other service professional. You should expect
them to represent your interests, to give you good advice and to help
you through the first phase of the leasing process; that is helping you
determine how much space you need, what are your most important
selection criteria, and then finding and negotiating for the space that
best meets your needs. Don't be afraid to ask your broker all kinds of
questions. Know how much money your broker is going to make on your
lease. That will help you determine just how demanding you can be and
how much work you should expect. Remember that your broker doesn't get
paid unless a lease is signed, therefore their primary aim will be to
make the transaction happen. No matter which broker you hire to
represent you, the person who cares most about your interests is you.
Ask questions, know your options. Make sure your broker understands
what is important to you in the lease negotiation.
18. My broker doesn't have much experience; should I be worried?
The answer to this question depends on the size of your lease. If your
plans call for a large space with a long lease term, then your broker's
experience is a very important consideration. On the other hand, if you
are leasing a small space, then you may be better off using a broker
that is fairly new to the business. The reasoning here is that a
younger broker is looking to establish himself and will work harder for
a small commission. As the tenant, you need to know how much commission
your lease is going to generate and then determine how to best get your
money's worth from your broker. If you are working with someone that is
new to the business, then you need to understand what kind of training
the broker has had. It is also important to know if the broker is
working together with an experienced broker or is totally on his own.
You need to know what resources the broker has available to him,
particularly if he has never leased a space from the landlord and/or
listing agent you are negotiating with.
19. What is the difference between a large and small space?
Opinions vary on the answer to this question. We like to think of a
small space user as any company with an office space need that is 3,000
square feet or less. A medium space user has a space need between 3,000
square feet and 10,000 square feet, while a large space user needs more
than 10,000 square feet.
The definition also changes based on space type and
metropolitan area. The numbers tend to be bigger for industrial users,
where 5,000 square feet or less is considered to be small. In New York
City, 10,000 square feet is considered small. On the other hand, 5,000
square feet is huge in a city like Albuquerque.
It is also important to answer this question from the building
owner's perspective. For example, a 3,000 square foot space user is
much more important to the owner of a 20,000 square foot, 2-story
building than the owner of a 500,000 square foot, 25-story building.
Some owners prefer to have large space users so as to limit the number
of tenants they have to deal with in any one building. Other owners
prefer smaller space users, as this reduces their vacancy risk when it
comes to any one tenant moving out of the building. Generally speaking,
small tenants tend to be the most profitable type of tenant for the
owner. They tend to be less sophisticated and therefore less demanding.
A full floor tenant is much more likely to require a specific and
therefore costly build-out, while a small user can often take
possession of a space with a simple painting and re-carpeting.
When you are negotiating for a small space, it is important to
understand the nature of the space that is available. Often times,
significant discounts can be achieved on niche spaces. Depending on
your flexibility, you can usually get a deal on an "option" space; that
is a space where another, usually larger, tenant carries a right to
lease that space in the future (in which case you will be forced to
move). Another example might be in leasing a slightly larger space than
you really need. If you are looking to lease 1,000 square feet but the
landlord can only offer you a 1,200 square foot space, he may be
willing to come down in price to meet your budget.
20. Now that I've found a space, how long of a lease should I sign?
This can be one of the most difficult decisions you will need to make.
There are a number of factors that come into play here (yes answers are
more indicative of a longer lease term, while no answers indicate that
short term lease flexibility is more important):