Landlord Paying Tenant Broker's Commission?

[Robert Farb]

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]

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.