Who pays the broker when you sign a lease for office space?
The good news? It’s not you. At least, not directly.
Think of the relationship between home buyers and their real estate agents. It works much the same way as does the relationship between you and your office broker. Residential real estate agents don’t get paid until their buyer clients find a house and sign the closing papers. And when this happens, it’s the seller of the home – the property’s previous owner – who pays the agent’s commission through the proceeds of the home sale.
It works the same in an office lease. Your office broker won’t get paid until you sign a lease. And the owner of the building in which your office space sits will be the one issuing a check to your broker.
Two kinds of brokers
As you search for office space, you’ll most likely meet two types of brokers: the tenant rep and the listing agent.
The listing agent represents the owners of buildings, the people who are leasing out office space. Their job is to negotiate the best deal – they want their clients to get the highest monthly rent, for example – on behalf of building owners.
You’ll be working with a tenant rep. These agents work with clients who are looking to lease or buy office space. Their jobs are the opposite of listing agents: They want to get the best deal for their clients. The best tenant reps will negotiate lower monthly rents and more favorable terms for their clients.
When you sign a lease, the listing agent will receive a commission of 4 percent to 6 percent of the lease’s value. The listing agent will then split that commission with your tenant rep. This split is often done on a 50/50 basis, though not always.
If you sign a five-year lease for 2,000 square feet at $30 a square foot per year, a commission of 5 percent would equal $15,000. If the listing agent agreed to a commission split of 50 percent with the tenant rep, your tenant rep would receive $7,500.
Should you work with a tenant rep?
The pay structure would seem to make working with a tenant rep an easy decision. Because you don’t pay the tenant rep, why wouldn’t you want to take advantage of a commercial broker’s market knowledge and experience?
A skilled tenant rep can help you determine whether monthly rents are too high for a particular building or neighborhood. A tenant rep can help you negotiate a lower rate. A rep might even be able to convince a building owner to make improvements to an office before you move in.
However, depending on the type of office space you are seeking, you might have to perform your office search on your own. Tenant reps might not be willing to work with you if you are seeking a particularly small office space or if you are searching for a lease with a short lifespan, such as less than a year.
The reason? Tenant reps won’t receive a sizable enough commission on such deals – they receive fewer commission dollars for smaller short-term leases – to make working with a worthwhile endeavor.
But if you are looking to sign a big enough office lease to attract the attention of tenant reps, make sure to do your homework. Interview several commercial brokers, asking to references, before you sign an agreement with any tenant rep. You want to find the right rep for you and your business. And that takes research.