Commissions for commercial real estate brokers that help lease buildings.
For the landlords on here. How do you pay out commissions to brokers who find you a tenant. Say a broker has a tenant that wants to lease your property for 3 years bringing in about 1 million in revenue during that time. Do you pay their commission up front or do you pay early just in case the tenant goes bankrupt or leaves for other reasons?
[{"id": "it3ajki", "text": "I have always paid up front for Base Rent only @ \\~6% for full NNN leases.    IF you have net leases (or something other than full NNN) then you may want to negotiated that percentage down as your broker is essentially capturing expense reimbursement.\n\nThe issue you raised has not escaped my attention, and I am not really all that happy with the divergence in interests (i.e., the broker has an interest in getting any warm body in the door where you care about being paid over the long term).  If you have question about your broker, be careful with your listing agreement that it says the tenant must be reasonably acceptable to you.  Otherwise your broker presenting a \"warm body\" may give rise to the legal obligation to pay their commission whether or not you close the transaction.\n\nHaving said all that, please let me know if I'm not pushing hard enough and you can get paid on actual collections.", "replies": [{"id": "it3w6su", "text": "Oh I\u2019ve haven\u2019t come across a situation where you have to pay the broker even if you don\u2019t want lease the building to their perspective tenant.", "replies": [{"id": "it4fuwp", "text": "Most brokers won't actually enforce against you (it would be the last time they ever got business from you), but the provisions often exist in the listing agreement if the broker delivers a tenant who prepared to pay the rent specified in the listing agreement.   There is a huge amount of distance between presenting a tenant and getting someone in the premises (e.g., negotiation of lease, approval of buildout plans, etc) to the point where I doubt it would be enforceable in most cases, but I always knock that provision out when I see it. Review your listing agreement carefully and you might find a similar provision in the section where it discusses when commission is earned.", "replies": [{"id": "it4gq2a", "text": "Thanks for the heads up. I\u2019ll have to check one of our agreements to see if it says anything like that in there. I wouldn\u2019t think so though since we turned down many tenants and never had to pay a commission.", "replies": [{"id": "it7akbg", "text": "Let me know if you find it.  Like I said, I doubt the broker would ever try to enforce it because its probably effectively unenforceable in court and its a jackass move.  I'm a former \"white shoe\" firm lawyer and investment banker so over-lawyering is part of my DNA.", "replies": [], "depth": 5}], "depth": 4}, {"id": "it5xfnp", "text": "I lien a LL about once a year for non payment.  Quick to lien, quick to release that lien when paid.  I don't work for clients who do not pay per the terms of our listing agreement, so fuck the threat of denying their future business.  If that's how they roll I prefer it to be with another, usually inferior, broker.", "replies": [{"id": "it7996j", "text": "Slow down there Speed Racer.  \n\nWe're talking about a provision in some listing agreements that says something to the effect of **\"Commission is earned when ..... c. Broker finds a tenant who is ready, willing and able to complete the lease as specified in this Listing Agreement\"**.  We are **NOT** talking about trying to stiff the broker once the lease is executed and the tenant is in the building.   If you don't have that provision in you listing agreement then don't worry about it.  If you do, I would have a serious chat with your general counsel (or outside counsel if you don't have a GC) as to the enforceability of this provision before you tried to enforce it because you'll probably loose that case if the LL has any reasonable basis (or even merely an articulable basis) for rejecting the tenant that you served up.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "it7gsmj", "text": "Our LA says \"Ready, Willing &amp; Able\" as that is the standard in our state for \"earning\" the commission.  The \"Able\" part gives the LL reasonable protection against just getting any warm body to sign.  Are they able to perform all of the obligations (financial and otherwise) under this lease?", "replies": [], "depth": 2}], "depth": 1}, {"id": "it3cvwo", "text": "Half at execution, half at possession \n\nMore common for weak tenants or long build outs. Everyone else gets paid in full at signing", "replies": [{"id": "it3vshz", "text": "That\u2019s how we do it now. I wanted see if there was a way for the broker to have recourse if a tenant winds up breaking the lease.", "replies": [{"id": "it6ylww", "text": "That\u2019s what a proper security deposit is for as well as lease language which favors the LL in the event of a default.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "it3q7re", "text": "50 at execution, 50 at lease commencement. It\u2019s on you to do the diligence on the prospect, not the brokers. If these are your brokers (landlord rep) they should already have a good idea of what your risk tolerance is for new tenants and flush that out before presenting to you. Still though - at the end of the day, you\u2019re the one signing the lease.", "replies": [{"id": "it3x619", "text": "We do our own risk assessment on the tenants.  It sounds like you\u2019re a broker. Does that mean you are trying to get collections from landlords that haven\u2019t paid you? Couldn\u2019t you just put a lean on the property?", "replies": [{"id": "it3ye53", "text": "Not a broker, but work closely with them. Most commission agreements will give the tenant rep ability to place a lien, but I\u2019ve never seen it happen.   Smart owners will pay the brokers or else risk never getting future prospects.", "replies": [{"id": "it5wo4q", "text": "we lien LLs all the time for non payment.  It's the only stick that a broker has against non payment, and one that usually burns off over time.  like anything else, if you sign a legally binding contract perform on the payment or the person not getting paid will also utilize the terms of the listing agreement and the remedies therein.", "replies": [{"id": "it661cm", "text": "Yea absolutely, not arguing against the concept of a lien for non payment just saying I\u2019ve never personally see it used.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "it3w3jl", "text": "Commission structure will vary slightly depending on the area and product type.  In Dallas, market commission for office &amp; industrial landlords is 4.5% to the tenant rep broker and 2.25% to the landlord broker with 50% of the gross commission due upon execution and the remaining 50% at commencement or tenant occupancy.  Retail landlords usually pay 4% to the tenant rep and 2% to the landlord rep of base rent only. If the tenant has an early termination option without a termination penalty, the commission calculation usually does not include the terminable portion of base rent.\n\n&amp;#x200B;\n\nAssuming you are a landlord and the tenant is not a strong credit tenant, I would make sure you have either a strong security deposit, letter of credit, and/or a personal guaranty.  In any lease, the landlord will assess the overall cost of the deal and risk of the tenant when considering lease securitization.  My preference is to require the tenant to provide a letter of credit that will burn down after some nominal amount of time as long as they never went into default. If you have a good real estate broker and/or real estate attorney, they can help with risk assessments and securitization options.\n\nedit: typo", "replies": [{"id": "it45jeg", "text": "Thanks for the info!", "replies": [{"id": "it7bpvy", "text": "Just as heads up, what DallasOil said is spot on if you are going to be putting this transaction into the ABS market.  If you are thinking of doing that, I would suggest that you need to contact your bankers and be hiring specialist counsel to do this deal as you have a large checklist of items get done to get your asset eligible for consideration by the firm who is going to package your asset in a transaction.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "it4q3hz", "text": "I have two UHNW clients who I let amortize my leasing commissions. Naturally, they are ride-or-die for me even though CBRE, Cush Wake, etc. are always soliciting them. Everyone else pays up front.", "replies": [], "depth": 1}, {"id": "it4r97t", "text": "Bring me the tenant first, then we will talk. Oh no, that is my guy we are friends and will totally do this deal without you. Thanks though will get you next time buddy.", "replies": [{"id": "it4u8hi", "text": "Not sure what you mean by that. Are you saying the landlord will cut out the broker if brought to tenant first without paying a commission? If so why not just have an agreement that\u2019s says if the prospective tenant passes our approval process than we agree to pay your commission fee.", "replies": [], "depth": 2}], "depth": 1}, {"id": "it525kt", "text": "3% on initial term.  50% upon Lease Execution.  50% upon Rent Commencement.  Base rent only.", "replies": [], "depth": 1}, {"id": "it5es2y", "text": "I personally feel that the broker shouldn\u2019t be on the hook if the tenant does fail within the term. After providing a well qualified tenant and after review of due diligence items tenant provided, once agreed upon it becomes more of ownership\u2019s responsibility. Half due at lease signing and half due at tenants open for business. If it\u2019s really a big concern for ownership have a clause stating tenant will reimburse all commissions in the event business should fail (on top of the remaining lease amount)", "replies": [{"id": "it5fkad", "text": "Why should they keep getting paid if they brought in a bad tenant who moves out?", "replies": [{"id": "it5t926", "text": "If the proper application process is conducted, credit check and business plan reviewed than a bad tenant will be discovered. I\u2019ve seen it before many times", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "it65mgj", "text": "Include language in your lease to the effect that the tenant is on the hook for any remaining amortized amounts for LC\u2019s and TI if they break the lease/default. \n\nWe do in ours.", "replies": [{"id": "it6e5nq", "text": "That\u2019s a really good idea. Thanks for the tip.", "replies": [], "depth": 2}, {"id": "it79i76", "text": "That's a great idea.  Thanks.", "replies": [], "depth": 2}, {"id": "itcy83a", "text": "I've had your comment in the back of my head for a bit.  Just out of curiosity do you include language in your lease agreements that exclude these amounts being part of an what is normally an executory contract?  In other words is there a provision that says that the amounts are extended by you (i.e., lent) on behalf of the tenant at the closing the the lease and are effectively repaid over the course of the initial term of the lease but are fully performed on your side at closing.   If this type of provision isn't included, I would suspect that repayment of these amounts can be set aside in bankruptcy. \n\nFor a primer on executory contracts: https://legaldictionary.net/executory-contract/", "replies": [], "depth": 2}], "depth": 1}, {"id": "it7plzd", "text": "I usually just ask for the first months rent due at lease signing", "replies": [], "depth": 1}]