Broker representing a tenant asking me for 6%

[Brad G.]

I have a commercial rental unit that I showed to, and have been in discussion with, a regional sales rep of a large corp who is needing some warehouse space. I am a small minnow in the ocean of commercial property and generally rent to local small business owners. He finally got approval to lease the unit from his supervisor. Today I got a call from a broker who was representing the corp. This caught me off guard because it hadn't been mentioned to me previously that a broker would be involved BUT I have been reading bigger pockets and studying the processes, terms and lingo so I recovered myself quickly and began answering his questions about rent, length of lease, terms etc. The negotiations for the lease had pretty much already been agreed to by myself and the company sales rep so there wasn't much to discuss. At the end of the call he brings up his 6% commission on the lease and tells me that I will need to pay that. RED FLAGS start going off and I said that I hadn't hired him and I didn't feel I should pay him. He mentioned that I could pay it upfront and then add it to the rents over the term of the lease so that the tenant would pay it back but I am not really comfortable with that because I gave someone my word on a monthly rent price and that would contradict what I promised.

 Long story short this didn't feel honorable to me - him coming in at the end of a deal and asking me to pay his commission after all the work was already done. I told him I would get back with him after talking to my partner, which I did. I simply told him that we were not willing to pay his commission and that the corp he was representing would have to pay for his services. I really want them as a tenant but and I hope it doesn't throw a wrench in the deal.

Any thoughts? Is this common or were my instincts correct???

Thanks

Brad

[Joel Owens]

No legal advice given.

Most tenants have a tenant rep broker they use. If they do not have that they have a commercial attorney negotiate the LOI and then the lease.

On commercial deals if a landlord lease broker and a tenant rep broker exist on a deal then 6% is typical total that seller pays. This is mainly for retail properties I do not know about warehouse. Fees might be higher for rents compared to lower for warehouse as rent is much less per sq ft but space tends to be much bigger that is leased. If there is just one broker for landlord or tenant rep then usually 4% is paid.

When you pay,if you pay, and for how long is negotiable. Tenant rep brokers will try to get their fee all upfront at lease execution and then additionally try to get something again at the option period renewals. As an owner you do not want to agree to getting paid on options because when you sell it is a cost to the buyer and they will offer you a lower purchase price because of it. In fact when the payment is going to be made to the leasing broker company there is a form signed and notarized saying they have been paid in full and there are no other claims past,present, or future for additional compensation owed.

If you have just this one tenant for your space then the value of the property is linked to the guarantee of the lease and how long it is for primary term. You want things such as ongoing quarterly updated business and personal financials. Guaranty personally and with their business across all locations not just a remote entity they set up for this property that they can easily bankrupt and walk away from.

You could put a stipulation in for tenant owed leasing commission that say out of 20,000 owed 5,000 would be paid upfront upon lease execution with non-refundable good faith deposit from the tenant and then remaining 15,000 would be paid out as monthly installments over the primary term of the lease. The payments would only be paid out each month when tenant pays rent and upon tenant default the payment gets suspended. If tenant does not cure default in XX time then tenant leasing commission goes completely away.

Everything is negotiable. If you have been having discussions with corporate tenant by phone or e-mail and not even to LOI stage yet then you have nothing. Until that formal lease is executed everything can change. See if they are asking for any TI or free rent as well.

I have found in the retail space maybe only about 20% talk directly to you and if they do most still have a relationship with a local tenant rep broker they want to use. So from now on you might want to factor that as a given cost into your leasing expectations. If it doesn't happen then icing on the cake but if it does it is par for the course and not a shock to you.