Landlord Paying Tenant Broker's Commission?

Question

I've been managing the marketing of a couple of Industrial/Flex Units in San Diego that I own for the last few weeks. After many showings I have now successfully found a tenant that looks promising and we're currently in negotiation.

In the initial proposal that's been sent over I see that the Broker representing the prospective tenant is stipulating a 4% Leasing Fee that would be paid by me, The Landlord. This is on the Total Base Rent over the 5 Year term and amounts to almost 14K.

I have a problem with this on a number of levels...but was curious...is this typical? I don't know this guy, he was hired by the tenant NOT me and is representing them NOT me. Furthermore, if it becomes evident in the not to distant future that this relationship is not working and the Tenant departs...I'm stuck having paid a commission for something I neither wanted, needed or received in full.

I'm having a hard time determining why this expense should not be covered by the client who hired the Broker. If I'd hired a broker to assist me I'd pay him...but I didn't. Now I'm expected to pay for a guy that someone else hired to perform a service? Hmmmm....

Any feedback would be much appreciated.

Max Reynolds · Answer

Hey Robert - this is standard in the commercial real estate space. Typically Landlord's hire a broker to represent them for marketing their vacancies with a 6% leasing fee. If a tenant comes along with a broker, that fee is split 50/50 (3% to each side). If the broker has brought you a quality tenant, that is of great value and I would compensate him. You could wait for a tenant to come along unrepresented to avoid this fee however most tenants do have broker's representing them and then you face one of your biggest expenses, vacancy. My recommendations would be that the fee is 3%, commission is only applicable to base rent (if a NNN lease), only applicable to the initial term (not renewals), and is paid 1/2 upon lease execution and 1/2 upon the tenant opening for business. Your lease should state that if the tenant doesn't fulfill their lease term, they are responsible for reimbursing prorated commissions. At lease signing, you get 1st month's rent + security deposit so you won't have to come out of pocket. As both a broker and owner of a commercial property, I would pay the leasing commission.

Max Reynolds · Answer

As mentioned above, the lease should state that if the tenant doesn't fulfill their lease term, they are responsible for reimbursing prorated commissions. That language is in the industry standard AIR lease that I use. $14k may sound like a lot but at my recommendation of 3% it should come out to about 1.5 months of rent. You could wait 1.5 months to see if another tenant comes along without a broker however in that price range the chances are more than often the tenant will have a broker helping them find a space and you run into the same situation at a later date. Then you also run the risk of the space sitting vacant for more than 1.5 months.

Nathan Gesner · Answer

Doesn't matter if it is "normal" for your market or not.

They can't force you to pay it. You need to decide if you want to pay $14,000 for this renter or not. I would tell them I didn't hire the Broker and didn't offer to pay compensation, therefore the renter can pay it himself or I'll keep looking for another renter.

@Max Reynolds what protections are there for the Landlord in this situation? If he pays $14,000 as a Broker fee and the tenant stops paying rent three months later, does the Landlord just eat that cost? I hope there are protections written in.

Robert Farb · Answer

Max, thank-you for your insight. It's apparent you're well versed in this area and I appreciate the time you took to post.

Looks like you're in San Diego too...what part?

My properties are in Kearny Mesa and my wife & I live in Del Mar.

Rob

Russell Brazil · Answer

The tenants going to pay what theyre going to pay. So you csn counter at Zero....but then the amount the tenant pays is going to be reduced by the same amount as that commission when they counter back.

Russ Kitzberger · Answer

What is the average commission for a house sale in San Diego?  Do you think it would be worthwhile to be a CRE agent vs a home agent at the %'s you are proposing?  Is the CRE brokerage business sustainable considering the costs and complexities of CRE transactions vs residential transactions (or any other sales business)?  I am seeing almost no tenant reps in many markets with the labor crunch and downward pressure on fees (commissions)... How about you?

Theresa Harris · Answer

I also wonder what happens if they break the lease and move early. What recourse do you have?

Landlord Paying Tenant Broker's Commission?

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