All Forum Posts by: Ryan Rogers

Ryan,

Are they renewing a lease on an existing tenant?  I would expect 6% for a new listing, but that is high for a renewal.  I would think 2.5% makes sense.  Typically, we would expect to get paid 1/2 at lease signing and 1/2 when lease takes force.

Mark

As in so many areas of real estate typical doesn't typically apply. CRE lease commissions tend to vary depending on where the property is located across the nation. As you've mentioned they do tend to run the rates you quoted of 3-6% for the aggregate lease value of the lease for the first five year tiering downward for the next five, and then so on a so forth for extended lease terms.

You mention you're working on a lease renewal so immediately the question that comes into play is does the originating brokerage have claim to a renewal commission? 

The next question is why are you being represented by a brokerage on a lease renewal? If its because you're unfamiliar with CRE leases, I get it. However, the pure essence of having a broker involved means you're opening up a commitment to pay when you could have eliminated the need to pay any commission by representing yourself with an existing tenant.

Brokers typically earn their commission for the heavy lifting work of finding tenants or buyers and then getting them interested in certain property's, not necessarily for "transacting", assuming they are knowledgeable about the marketplace. 

Assuming the originating brokerage doesn't have a claim to a commission then my suggestion would be to use the mere fact you brought the two most important aspects of the transaction to the table, the tenant and the landlord, and you're willing to pay a commission (the tenant rep side and or landlord side) which is roughly half of a full commission typical for your marketplace. Then, try negotiate terms based on the premise you've made it easy for the broker to "transact", by bringing the parties to the negotiating table, and you want to pay the commission on terms amenable to both them and you.

If you get the 1/2 a commission part accepted I wouldn't push for terms. Pay the fee and move on. Here's why, the tenant already exists at the property which means the property owner has already accepted the tenants credit worthiness to lease the property (if you're a subsequent new owner you had a chance to review credit during your due diligence, if you didn't then that is on you). However, you can use the renegotiation process to get updated financial statements and then if financial condition has deteriorated since the originally lease use that information as a negotiating chip to throw on the table when the time is appropriate, assuming their financial condition is still acceptable.

Note: if you question whether a former brokerage has a claim to commissions (they do not necessarily have to be actively involved in a subsequent transaction to have such a claim) my suggestion would be to stop moving forward with lease extension negotiations until you're able to clarify who is owed what by whom and when. 

@Ryan Rogers

Hi Ryan

In my market, the standard fee is 6%.  It may be a bit high, but if they can find and sign me a tenant, then I am willing to pay.  I worked out and agreement with a broker that I would pay his fee split up into increments.  The lease was also five years and I did not want to lose out if the tenant bailed early.  I paid him a pretty sizable portion the first year, then some the third year and the final amount the fifth year.  I was only able to do this because I was already doing business with the broker.

Gino

 Hello and welcome to BP!  Cash flow is only in the title.  Cash flow needs to be at least two hundred dollars per unit per month.  We are taught that you can't count on the future in any way regardless of what you think.  It does not matter what everything else is doing.  Just walk away and look at something else.  Prices are high right now so I would not take a chance on anything unless it is a hell of a deal.  You did not tell what it is or how old it is.  Those two things are pretty important.  I am 59 years old and I found BP about 6 months ago and I am still trying to decide what to do.  I have been in the construction business since I was 17.  I also have earned a college degree in business that emphasized real estate.  I also got a broker license that year, 1980.  My father has been in the real estate business for about 40 years and I learned a little bit from him.  If you think I could help you in any way please contact me at any time.  Good luck!

@Ryan Rogers with ROE, ROI, Cash on Cash and all of the other ratios that you can (and should) calculate on a regular basis, they are all just indications of how your investment is doing right now. As an analogy, your car has many gauges indicating speed, RPM, engine temperature, oil pressure etc; your task is to make sure that they are indicating the proper value for your car's current situation and position. I.e. if your speedometer is indicating 120MPH, if you are on the autobahn, you're probably OK, but if you're on a two lane highway heading into a small village, it is probably not OK.

Same thing with ROE, you have to compare it with what else you could be doing with the equity. If your ROE is 10% and the other investments you are considering would give you a 7% ROI (yes ROI, because you are measuring the returns on the equity you would invest into a new investment); you would probably elect to keep your equity where it is. If, on the other hand, you found an investment that would return a 15% ROI, you would look at your portfolio to determine which investment has the lowest ROE and refinance it to liberate some of that equity. If you were looking to sell a property to cash in on your equity, you would also want to look at appreciation potential before making the decision to sell it.

Your real estate portfolio does not exist in a vacuum, where one ratio would always tell you the right thing to do with a particular property.  You have to consider your investment plan, philosophy, risk tolerance, where the economy is in the economic cycle, your local market situation and a whole host of other factors.   The more factors you can consider, the better your decision.  The better your decisions, the higher the likelihood that you will make money in this business.  However, there are no guarantees.  If you want to buy low and sell high, you need to have the brains to get out near the top and the balls to get in near the bottom. 

I hope this clarifies ROE a little.

Erik