Broker Commission Question regarding Improvements + Buildouts
I’m working with my broker (of approximately 5 years) on establishing a brokerage agreement on some light industrial/storage/flex + small office space that will be a little over 16K sq. ft total between two buildings.

The buildout is about $2.2M total ($138/sq ft) and it will lease at between $9-10/sq. ft NNN. We’ve always had a ‘6% commission established for the net value of the lease’, but it is not yet written/finalized.

In the past any buildouts needed to a specific tenants needs and wants were small in amount (&lt;$40K) and things I handled direct with the tenant in terms of collecting back the improvement costs made, never needing to take any additional loan or anything like that — and depending on the amount, occasionally charging a little interest (2-3%) if the amount was more than $10K…never anything substantial for anyone.

We are being approached by a lab-user that is requesting approximately 3K square feet, and according to their (lab space specific) architects would cost between $500-700/sq ft to build new (from scratch, bare dirt).

They wish to have the buildout improvement costs (costs above and beyond the “grey box” I would already be providing them) spread out over the term of the lease (5 years + 5 year option) and would pay my interest rate (5%) plus 2% for a total of 7% “premium”. For this $1.5M improvement to the space (for easy math) I would definitely need to take out an additional note to cover all the costs associated with the improvements.

1. There is a provision in the brokerage agreement “Broker can negotiate build-outs for the suites to be folded into rent”.

Is this typical? Given the (additional) financing required for this buildout — is it actually costing me more than 7% (because of the 6% commission on the net value of the lease)?

2. Relative to this deal (relative to the lab improvement space, not building in general) — can anyone shed any light or experience with anything similar? I’m 100% going to have my attorneys review things on a deal this size but as we are just in the negotiating phase of a LOI (with tenant) and brokerage agreement (with broker) - I wanted to ask.

Thanks everyone!
[{"id": "i8ghoig", "text": "if a tenant needs extra TI and the TI needs to be amortized over the lease term, i've never paid commission on the this portion.  your brokerage agreement appears to have been prepared by the broker and if not yet executed, you should have legal reword this.\n\neven if you separate out base rent and say the TI is 'additional rent', the broker may be due a commission on the 'additional rent' based on the existing wording of your brokerage agreement.\n\nalso, if TT is looking for early termination, make sure they are responsible for repayment of unamortized portion of the TI work (plus/or an early termination payment).", "replies": [], "depth": 1}, {"id": "i8gwj2z", "text": "It's all negotiated. My guys have been paid on TI and not paid on TI and even paid on expense reimbursements sometimes. Depends on the deal and relationship. Paying commission on amortized TI is a bit of a perverse incentive, though.", "replies": [], "depth": 1}]