What Are Leasing Commissions?

Landlords have the responsibility of finding new tenants to fill their vacancies. Commercial buildings often have high turnover, and landlords don’t have the time to find each tenant on their own. Instead, landlords often turn to experienced commercial property brokers with large client bases to find new tenants for them at a faster rate. Brokers with many established customers and good relationships with attorneys, general contractors, furniture vendors, and escrow officers will have an easier time finding potential tenants. Depending on the type of property, brokers are either paid a percentage of the total rent or a fee per square foot of the rented space as a commission. Commissions on retail, industrial, and medical leases are typically paid based on a percentage of rent while office spaces are generally calculated by the square footage of the property.

Leasing Commission Rates

Brokers are paid commission rather than flat rate fees to incentivize them to find tenants who will rent the largest spaces possible. The larger the space or higher the rent, the higher the broker’s commission will be. Antitrust laws make it illegal for there to be any industry standard for the percentage brokers receive. Instead, commission rates are negotiated between the broker and client. Therefore, the rates will vary depending on market prices, property type, and the broker. Commission rates are generally between 4-8% of the total transaction amount whether it’s a sale price or lease value. The rate typically starts out higher at the beginning of the lease and decreases over time. If there is a lease extension, there may be additional payment to the broker and is usually another payment of the lowest rate that was agreed upon in the lease.

Example of a Leasing Commission Calculation

Consider a business that signs a 5-year lease agreement paying $5,000 rent per month. The business hires a broker, and they agree that the broker will be paid a 5% commission rate. The commission will be calculated as follows:

[(5,000 * 12) * 0.05] * 5 = $15,000

The 5,000 rent is multiplied by 12 months to get the total rent paid per year, which is then multiplied by the 5% rate, multiplied by 5 years to get the total commission for the entire lease term of $15,000.

Now, consider another business that signs a 15-year lease with a 6 – 3 – 1.5 percent commission structure, where the commission is 6 percent of the total rent for the first five years, 3 percent of total rent for the next five, and 1.5 percent for the last 5. If the monthly rent is $10,000, the calculation is:

[(10,000 * 12) * 0.06] * 5 = 36,000 for the first five years, + [(10,000 * 12) * 0.03] * 5 = 18,000 for the next five years, + [(10,000 * 12) * 0.015) * 5 = $9,000 thereafter.

If they choose to extend the lease for another five years, the commission rate would be the lowest agreed-upon rate of 1.5 percent, for another calculation of:

[(10,000 * 12) * 0.015) * 5 = 9,000, and a total commission of $63,000.

For a commission calculated by a fee per square foot, the rate is generally a dollar per square foot but may vary depending on the broker. If there was a 10,000 square foot space being rented to a tenant, the broker’s yearly commission would be 1 * 10,000 = $10,000.

How Does a Broker Get Paid?

A commercial broker can represent the landlord or tenant (or both). If the owner and tenant have separate brokers facilitating a deal, they usually split the commission. Commissions for a commercial lease are generally paid by the lessor. The payments are split into two payments; the first is paid at the lease signing, and the second half is paid once the tenant has occupied the space. In addition, a portion of the commissions that brokers receive goes to the brokerage firm.

Before founding 3E in 2016, Managing Member Eric Bergin was Director at Rockpoint Group, where he was responsible for for the Finance Group, as well as acquisitions, asset management, and investor reporting activities.