Our goal as brokers and agents is to be appropriately compensated for the skills that we bring to the transaction. In simple terms, to be paid a full commission for completing a sale or lease of property. In our quest to be properly paid it is important that the client or customer who is paying us knows the extent of what we will do to deserve our fee. At the point of listing or signing a tenant/buyer representation agreement is when your fee should be stated. If the client then suggests a lower fee, should you concede? No. Think about it, if you reduce your fee at this point, what message you are giving about your negotiation skills.
What do you bring to the transaction? Explain why you and your company should be retained. People do not know how qualified you may be unless you tell them. What will you be doing to sell or lease or find the required space? Your focus will vary depending who you are representing (seller/landlord or buyer/tenant) but generally will include material items and your personality skills and convections. A partial list follows:
- Market Intelligence – your local market knowledge
- Market Research – to help determine the proper pricing
- Financial Analysis skills
- Marketing Plan including Internet promotion
- Pre-qualification of customers – guiding them to determine their specific requirements and financial planning
- Negotiating Skills – to help your client through the Negotiation Process
- Coordination of all the “players”, inspections and events required to close;
Talk about your tenacious personality; discuss other properties you have handled; promise regular communication.
You need to create a perception in your client/customers mind that differentiates you from other agents. Show the value of your services to justify your fee. Remind them that you are making a commitment; you are investing your time and only get paid when you close.
In a sale or representing the buyer the commission is a negotiated percentage of the sales price.
In a lease or tenant representation we are entitled to a commission fee based upon all the financial benefit that the tenant brings to the landlord. This may include a fee for the initial term, another fee if an option to renew, expand or buy is exercised. (all of this must be clearly stated in your listing agreement)
The commission fee is usually calculated in one of four different ways: a split rate commission, an aggregate rate commission, a graduated commission or a fixed fee.
For illustrative purposes I will use some numbers in the following examples but ALL COMMISSION RATES ARE NEGOTABLE.
A Split Rate Commission is a certain percentage of the rent each year for a certain time period (usually the first three years of a lease) then another lower percentage rate for the balance of the lease term. For example, a commission fee may be calculated based on 7% of the gross rent each year for the first three years and 3% of the gross rent each year for each year thereafter. Due and payable upon lease signing.
If a five-year lease for 1,000 SF were negotiated to begin at $20 PSF and escalate at 3% per year over the five-year period the landlord would collect $106,183 in rent. Using the Split Rate Formula based, based in this example, upon 6% for the first three years and 3% thereafter, the commission would be $5,040.
An Aggregate Rate Commission is a single rate of commission applied to all the money the landlord will receive in rent during the term of the
lease. The rent is calculated for each year of the lease including escalations, added together and the negotiate commission rate is applied.
Using the same example with a 5% Aggregate Rate commission: a five-year lease for 1,000 SF, negotiated to begin at $20 PSF and escalate at 3% per year, over the five-year period the landlord would collect $106,183 in rent. The commission fee would be $5,309
($106,183 X 5% = $5,309).
A Graduated Commission would begin with a certain percentage of the rent as a fee for an initial period and then as time went on the percentage rate would be consistently reduced. For example, a ten year lease, the fee to be calculated as 5% of the rent to be collected for years 1 and 2; 4% of the rent to be collected for years 3 and 4; 3% of the rent to be collected for years 5 and 6; 2% of the rent to be collected for year 7 and 8; and 1% of the rent to be collected for years 9 and 10. All due and payable upon lease signing.
Some commissions are based on a multiple of a months rent. A three year lease may have the commission based on three months rent. Sometimes we are representing multiple spaces in a building and a Fixed Fee per transaction can also be agreed to.
Remember we are entitled to be paid based upon all the money the landlord will receive during the entire term of the lease and for any options, if exercised. All commission rates are negotiable.