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Who Pays Commercial Real Estate Commissions?

Published: 10-03-24 Category: General CRE

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Agents and brokers specializing in commercial real estate (CRE) understand the importance of clarifying the commission structure of a transaction, whether it's a purchase or a lease.

Since commercial transactions are almost always in a higher price bracket than residential real estate sales and rentals, it's easy to assume that there's a mandatory commission structure that all parties are happy to follow.

However, as one broker recently declared: “Commercial commissions are much more Wild West than formal.” Instead, many brokers only follow one rule: Negotiate the best commission you can.

Therefore, answering the question, “Who pays the commission during a commercial real estate transaction?” isn't always simple.

Here, we'll explore the intricacies of commercial real estate commissions in both purchase and lease transactions, together with the latest trends.

We'll begin by illustrating the different agents' roles in a typical transaction.

Listing and Buyer Agent Duties

A listing agent, sometimes called a seller's agent, works for the property's landlord or owner.

They're responsible for marketing properties online and/or within CRE publications, screening questions from possible buyers and tenants, protecting the best interests of the owner or landlord, and offering professional representation.

A buyer's agent is responsible for locating appropriate real estate properties and spaces for sale or for rent. They work for investors, business owners, and tenants. They prioritize their tenant and investor clients' best interests, acting as their representatives.

Here are details of both agents' roles in a typical CRE purchase.

Purchase Transactions

During a typical CRE buying transaction, the commission structure follows a similar pattern to that of residential real estate but with some key differences.

Generally, the seller is responsible for paying the real estate commission in a purchase transaction. This commission is usually split between the listing agent (who represents the seller) and the buyer's agent.

The total commission often ranges from 4% to 8% of the sale price, depending on the deal's property type, location, and complexity.

The commission is typically split evenly between the listing agent and the buyer's agent. For example, if the total commission is 6%, each agent would receive 3%.

While 50/50 splits aren't uncommon, it's not a hard and fast rule, especially if one agent was responsible for additional tasks such as researching local age and income groups. Commission payments to each agent are generally based on the agreement between the parties involved.

Before all parties sign off on a sale and its commission fees, there will probably be a little (or a lot) of negotiating.

Negotiation Poker

Many CRE brokers and agents freely admit that negotiating is something they actually enjoy. Perhaps they're familiar with the source of the word broker. which is derived from the Old French word brocheor.

Brocheor is a form of the 14th-century French verb brochier, which describes someone who opens or “broaches” a keg (yes, that kind). Originally used to describe a wine trader, brocheor was eventually used to describe other business people, including one in a sordid business!

As mentioned earlier, CRE commissions are frequently negotiated. The factors that can influence a transaction's commission rate include the property's value and type, current market conditions, and the overall complexity of the transaction.

While buyers don't directly pay the commission, they should be aware that the cost is often factored into the sale price. In some cases, sophisticated buyers might negotiate for a lower purchase price in exchange for paying their agent's commission directly.

Commissions for lease transactions have major differences, including the ones we'll discuss next.

Leasing Transactions

Anyone involved in a lease transaction knows that the commission structure is calculated differently, although it's just as negotiable as a purchase commission.

In most cases, the landlord or property owner is responsible for paying the commission in a lease transaction. This fee is typically calculated based on the total lease value over the entire lease term.

Here's a common type of lease commission calculation based on a percentage of the lease's total value.

For example:

For a lease term of up to five years: 5% of the total lease value;
For a lease term of six to 10 years: 3.5% of the total lease value; and
For a lease term over 10 years: 2.5% of the total lease value.

Like any similar transaction, these percentages can change based on the agents' negotiation skills and the state of the market for the type of property being leased.

Agents may also receive commissions for lease renewals or expansions. These are typically lower than the original lease commission and are paid by the landlord.

If an agent is representing a highly desirable tenant, they may request a full commission. This could be the same, or close to, the same amount that the landlord would have paid in full if his agent had brought the tenant to the leasing table.

After a sale or lease transaction is finalized, it's time to pay the agents and/or brokers involved.

Sales and Leasing Payment Structures for Agents & Brokers

Unlike commercial and residential real estate transactions, where the commission is paid in full at closing, lease commissions usually follow one of the three schedules.

Full payment upfront: The entire commission is paid when the lease is signed.
Partial upfront payment: A portion is paid upon lease signing, with the remainder paid over time.
Installment payments: The commission is paid in installments over the lease term.

Understanding who pays the commission in commercial real estate transactions is essential for all parties involved. Always consult with a qualified commercial real estate professional to understand the specific commission structure for your transaction.