Who Really Pays Commercial Real Estate Brokers’ Commissions?

Traditionally, commercial landlords have cut commission checks to real estate brokers when lease transactions are completed, whether those brokers represented the landlords or the tenants.  Landlords proclaim that because they cut commission checks, using their own funds (or, funds provided by their lenders), that they pay commissions.   That’s a logical argument.  Many landlords believe that because they don’t receive value from brokers or advisors who represent tenants, that tenants should pay the commissions due their representatives.

In contrast, many tenants believe that because landlords only cut commission checks when tenants sign leases, and that since landlords expect to be reimbursed for commissions through tenant rental payments, in actuality it is the tenants who really pay all commissions, not just those due their representatives.

So, who is right?

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10 Responses to “Who Really Pays Commercial Real Estate Brokers’ Commissions?”


  1. 1 Christopher LoSapio February 16, 2010 at 3:59 pm

    This is the industry-wide fundamental problem with commercial real estate. There is an inherent conflict of interest between tenants and the brokers that represent them. Since brokers’ comissions are based on aggregate lease amounts and they are paid by the landlord, it fosters mistrust among the tenants they represent. Flat fee brokerage or brokerage fees based on square footage and paid by the tenant should become more prevalent.

    To answer the question posed: undoubedtly, the tenant pays a broker’s fee through the form of rent.

    • 2 realstrat February 16, 2010 at 11:17 pm

      Chris:

      I agree with all of your points. One method that we’ve seen better brokers and advisors successfully deploy is to maintain transparency with their tenant clients regarding their compensation, including open discussions and written communications about commission bonuses and or discounts proposed to them by landlords. When your client knows he or she can expect the truth, it may not eliminate the potential for conflicts of interest, but it can go a long way to reduce its likelihood.

      Thanks for writing in!

    • 3 jim hill February 19, 2010 at 4:42 pm

      I think the system is fine and its not broken. The owner/landlord has a marketing/commission fee budgeted into operations cost. I think if the seller refuses to pay commisions to the buying broker it will deter a large sector of agents that seek out tenant for specific spaces. Maybe we need the current administration to step in and determine what is fair compensation and which party is financially responsible. What do you think?

  2. 5 Steve A. Massell, CCIM February 17, 2010 at 3:01 pm

    As a 24-year professional, my value proposition has always been that I bring market knowledge (current concessions, best properties, as well as a knowledge of landlord reputations), deal structure creativity, lease clause dissection, as well as the preferred vendors (legal, telecommunications, moving, furniture, economic devlopment agencies, and so on) to earn my compensation. Not many tenants have this expertise – and would end up getting a worse experience and economic package dealing directly with landlords – compared to the savings I can bring to the table and with landlords compensating me. Lastly, most landlords need the brokerage community to fill their buildings, and see this as a cost of doing business.

    • 6 realstrat February 17, 2010 at 3:07 pm

      I truly appreciate a professional who understands how he fits into the universe…short and concise! Continued success to you and yoru tenants. Thanks for writing in!

  3. 7 joseph sklencar sr February 17, 2010 at 3:51 pm

    Brokers create value by bringing tenants to the commercial properties, thereby creating value for landlords. Landlords, therefore should be responsible for all commissions, as part of the transaction costs which are funded by their lenders.

  4. 9 Chris LoSapio February 18, 2010 at 2:58 pm

    Steve: I would definitely agree with you and it sounds as though you may be one of brokers that is committed to adding value for clients; however, I have seen the brokers engage in the scenario you present and often they are scrutinized even more by clients.By bringing in preferred vendors, most clients are expecting that the broker is receiving bonuses (ie. kickbacks) from them and if you are not and say you are, they will be skeptical; if you are, and say you are it again presents another conflict in that your recommendation can be viewed as flawed since you now have a stake.

    Joseph: Yes, they do create the value for the landlord but during the negotiation, they represent the tenant’s interest. In that scenario, a larger benefit for the landlord would result in a higher commission but the broker is supposed to be benefiting the tenant’s interests. Of course, brokers cannot outright manipulate negotiations in most cases but information can be presented in certain ways to benefit the broker/landlord since their interests are aligned. It is a flawed structure.

    • 10 realstrat February 19, 2010 at 11:21 pm

      Chris:

      Honesty, integrity, transparency, accountability, frequent and proactive communications, disclose, conflict avoidance…in addition to precisely focused expertise and requisite experience, those are the criteria that all companies should use when selecting an advisor or broker. Then the system will weed out the trash and will no longer be broken!


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THIS WORK IS DESIGNED TO PROVIDE PRACTICAL AND USEFUL INFORMATION ON THE SUBJECT MATTER COVERED AND REPRESENTS THE OPINION OF THE AUTHOR. HOWEVER, IT IS PROVIDED WITH THE UNDERSTANDING THAT THE AUTHOR IS NOT ENGAGED IN RENDERING LEGAL, FINANCIAL, ACCOUNTING, OR OTHER PROFESSIONAL ADVICE TO THE READER. IF LEGAL, FINANCIAL, ACCOUNTING, OR OTHER PROFESSIONAL ADVICE IS REQUIRED, THE SERVICES OF A COMPETENT PROFESSIONAL SHOULD BE SOUGHT. THE AUTHOR SPECIFICALLY AND EXPRESSLY DISCLAIMS ANY LIABILITY THAT MAY BE INCURRED AS A RESULT OF THE USE OR APPLICATION OF THE INFORMATION THAT IS CONTAINED IN THIS WORK.

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