August 14, 2018

The Cost of Tenant Representation – Part 2: My Tenant Rep Costs How Much

Not hiring a Tenant Rep is the biggest mistake a small business owner makes when searching for office space.  The deal negotiated directly with the Landlord will cost the Tenant over the term of the lease, no matter how savvy a business person. The Tenant just doesn’t know what they don’t know.

You might have these questions:

  • Isn’t leasing office space a DIY?
  • Why pay for something I can read up on and do myself?
  • If I hire a Tenant Rep, how much do they cost?

No Tenant Rep Example

iWeb, a web based company, had the perfect office in a thriving live, work, play complex that supported their business culture. Prior to their lease expiring, the fully leased complex was sold to new ownership. There was a waitlist for new Tenants. The new owner smelled blood and held firm on steep renewal lease rates which were beyond iWeb’s financial means.

iWeb was forced to relocate. Additionally, the new Landlord handed iWeb an overage invoice of $12,500.00 for operating expenses over the last five years that the previous Landlord had verbally waived.

Industry Lingo: In a lease, when building operating expenses exceed the projected building operating budget, it is referred to as anoverage. Each Tenant in the complex is charged back their prorate share of excess operating expenses. A lease overage is in addition to the original lease rate.

iWeb made four classic mistakes when leasing their chic space:

  • They did not hire a Tenant Rep.
  • They did not understand their lease obligations.
  • They did not get a verbal agreement in writing.
  • They did not hire a commercial real estate attorney when reviewing the lease.

Yes, iWeb did hire an experienced attorney to fight the overage charge. The attorney said the lease was black and white, they would have to pay the backdated expense. Possibly, he could negotiate a payment plan.

Cost of NOT Hiring Tenant Representation

In the example above with iWeb, not having Tenant Representation cost iWeb thousands of dollars, not to mention aggravation and time. iWeb incurred the following:

  • Relocation costs.
  • Overage fees that may have been avoided.
  • Attorney fees.

So, what does Tenant Representation cost when you utilize their services?

$0.00.  Nothing, nada. Zero, zippo.  The Landlord pays for your Tenant Representative. Yes, the Landlord. I know, it is baffling, but let me explain.

Here’s how it works: A Landlord hires a Listing Broker to market and lease vacant building space. A contract is signed between the Landlord and the Listing Broker’s commercial brokerage house. This contract details the commission fee for services rendered and is paid for by the Landlord.

Once a lease is fully executed on the subject property, the Landlord pays the agreed upon commission to the brokerage company. The commission value represents a percentage of the gross value of the entire lease term.

Ins and Outs of Commissions

Here’s where commission payment gets interesting. If the Listing Broker is the only Broker involved in the transaction, the contracted brokerage company receives the entire commission. Now it’s clear why a Listing Broker is eager to assist the Rep-less Tenant with the lease. They make twice the money.

When the Tenant has representation, the gross commission is typically split fifty-fifty between the Tenant Reps brokerage company and the Listing Broker’s brokerage company. Once the lease is fully executed, the Landlord pays the Listing Broker the full commission. The Listing Broker distributes 50 percent of the total commission to the Tenant Rep’s brokerage company.

Commission example: The gross amount of a five-year lease is $250,000.00.  Let’s assume the Listing Broker receives 6% of this gross lease value for services rendered.

$250,000.00 x 6% = $15,000.00 total gross commission paid to Listing Broker’s brokerage company.

If a Tenant Rep is involved, 50 percent of the total commission goes to your Rep’s brokerage company.

$15,000.00 / 2 = $7,500.00 half of gross commission for Tenant Rep’s brokerage company.

Neither hand’s on Broker receives 100 percent of the commission.  Up to 50 percent of the fee goes to the Broker’s commercial brokerage company. If either Broker is part of a team of Brokers, the commission is split with their team.  It’s not uncommon to receive as little as $1,800.00 for a $15,000.000 commission based on company splits, after six months of work. For the Tenant Rep, it may be another few months before their portion of the commission is received.

To recap, the Landlord pays for your Tenant Rep.  

Part III The Cost of Tenant Rep – to be continued…