Time value of money in commission structures--is this absurd?
Say I'm paying a broker 6% of the total rent over the lease term. How often, if ever, is the total lease value subjected to discounted cash flow when calculating commission? This can make a significant difference on say a 10 year lease. Would it ruin my relationship with my broker to insist paying the NPV of the total lease value?
[{"id": "h329dnl", "text": "I've never heard of any owner trying this with a broker, but I see your point. \n\nEverything is negotiable.\n\nPS, I'm a broker.", "replies": [], "depth": 1}, {"id": "h329m3k", "text": "What discount rate are you going to offer?", "replies": [{"id": "h32fmj7", "text": "Should at least be inflation", "replies": [{"id": "h32kfpt", "text": "Yeah, just inflation", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "h32ab9w", "text": "This is a way to ensure you never do a deal with that broker again.   \n\nSource--landlord.   Pay the brokers.  They are your lifeline for tenants.", "replies": [], "depth": 1}, {"id": "h32b66q", "text": "Don\u2019t get run over by the train picking pennies off the track", "replies": [{"id": "h32kk1l", "text": "lol that's a good idiom. But geez, it doesn't feel like pennies right now.", "replies": [{"id": "h32z09k", "text": "I'm a broker so I'm biased, but yes, this is stepping over dollars to pick up dimes. It's an especially efficient way to burn a bridge if you have a rep agreement or have otherwise agreed to the fee ahead of time.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "h32dfqy", "text": "Don't complicate it with NPV.  Just negotiate a different commission rate next time you enter into a new contract with a broker, e.g., 5.5% or whatever. If you already have a signed deal at 6% of the total rent, leave it as is or your broker might fire you.", "replies": [], "depth": 1}, {"id": "h32kdue", "text": "The irony. The people here screaming \u201cpay the broker\u201d are brokers themselves. The reality is brokers are a dime in a dozen, you can pay them whatever you believe is fair to pay them. The broker really should be glad to have your business at all, he sounds very ungrateful if he\u2019s making demands with your money like this.", "replies": [{"id": "h32ua05", "text": "Agreed with this UNLESS they\u2019re a top broker in the market.\n\nBrokers are a dime a dozen, but if you\u2019ve got one who is truly top of market it\u2019s worth paying them.", "replies": [], "depth": 2}, {"id": "h340h7n", "text": "Owner/landlord here. Pay your brokers.", "replies": [], "depth": 2}, {"id": "h3llqqd", "text": "You seem to have a wonderful attitude towards life...", "replies": [], "depth": 2}], "depth": 1}, {"id": "h33imbz", "text": "You won\u2019t get a decent broker to work if you do this. I would just lease it out yourself if you want to go that route. What you\u2019re going to end up with is a shit broker bringing you shit deals and then who care about what commission you\u2019re paying because the tenant will default in a few years. How about hiring the best broker in market, pay 7% and demand what you need to make the economics work for you?", "replies": [{"id": "h3abxrh", "text": "Great advice", "replies": [], "depth": 2}], "depth": 1}, {"id": "h34qzt5", "text": "Some brokers are really smart and some are really dumb. But I promise you everyone at their shop will know and remember the guy that paid out commissions at NPV.", "replies": [{"id": "h3abvx3", "text": "So true lol", "replies": [], "depth": 2}], "depth": 1}, {"id": "h34tpw9", "text": "I\u2019ve not seen a discount rate applied, but I\u2019ve seen staggered commission rates on initial lease terms (not option periods)\u2014say 6% for years 1-5, 4.5% for years 6-10, and 3% for years 11+", "replies": [{"id": "h34vihj", "text": "We do that in PA and I\u2019m in a good-sized suburban market. 5 year lease = 6/5/4/3/3% of the base rent, split between cooperating agents.", "replies": [], "depth": 2}], "depth": 1}, {"id": "h3j06sm", "text": "The broker's commission should be based on what the broker has some control over:  1) Bringing you a ready, willing, and able tenant, and 2) total lease value.  The broker has no control over the discount rate you're using to calculate NPV and also does not control what you're netting out of NPV, right?  So it seems like basing it on total lease value creates a more rational commission incentive structure.", "replies": [], "depth": 1}, {"id": "h5619se", "text": "That is exactly the logic behind the 6/5/4/3/3 commission structure (or similar).", "replies": [{"id": "h7gxs24", "text": "Well, now I feel dumb.", "replies": [], "depth": 2}], "depth": 1}, {"id": "ha71a57", "text": "As an office broker, I would not bother bringing you another deal if this was presented after the lease was signed and executed. Typically I find owners that try this stuff are going to try and screw my client next. \n\nFor my market, I do see listing agreements with a scaled commission. Years 1-5: 7.5% (5% to Tenant and 2.5% to List Broker) Years 6-10 3.75% (2.5% to Tenant 1.25% to List . 10+ Negotiable. If this is retail then I am not an expert in this specialty and it will be different.", "replies": [{"id": "habefnz", "text": "Thanks for the feedback! Can you explain the listing agent/tenant rep split? Where and when is this kind of split the norm? I'm only familiar with 50/50 co-brokes.", "replies": [], "depth": 2}], "depth": 1}]