April 24

Calculating Leasing Commissions

Calculating real estate agent commissions for leasing commercial real estate can be somewhat confusing, especially to those who don't regularly deal with this situation.

And, because there are so many possible types of real estate agent leasing commission structures one may encounter only makes calculating the actual numbers that much more confusing.

calculating

But, while there may be various potential real estate commission structures, in my decades of experience I've found that most commercial real estate leasing commission structures are quite simple and very similar. And, this is the type of real estate leasing commission structure I'm going to explain in this article.

Types of Commercial Leases

If you're generally familiar with commercial real estate, you probably realize there are many different types of commercial lease structures. In fact, it's common to find that each type of property tends to have a lease that's structured to accommodate issues common to that particular property type.

For example, leases for major supermarkets are commonly structured with the tenant paying a relatively low fixed base rent plus a percentage of their gross sales while leases for most industrial properties are straight forward with stated annual amounts of fixed base rent.

tenant

Then, there's the issue of how the expenses of the property are paid; in some cases property expenses may be included as part of the fixed base rent (known as a "gross" lease), or the tenant may pay for the operating expenses of the property as well as the cost of their utilities in addition to paying their fixed base rent (known as a "net" lease).

In many commercial leases the amount of rent increases on a periodic basis (typically on an annual basis). Calculating the increase in the rent may be done in various way. For example, in some leases the fixed amount may increase by stated amount (e.g. 3% per year), or the increase may be calculated based on an index, commonly the average of the previous 12 months change in the localized or regional Consumer Price Index (CPI).

Another common feature of a commercial lease is that the tenant is given the option to extend the lease for a specified number of additional years at either a stated rental amount or by a stated formula (e.g. the previously referenced CPI method). Tenants are also commonly given the option to either buy the property at the end of the lease (either at a fixed price or the price may be calculated by a formula or some other method), or the tenant may have what's called the "first right of refusal" to purchase.

Generally speaking, a first right of refusal is when the landlord decides to sell and a buyer makes a bonafide offer to purchase that's acceptable to the landlord, before selling to that buyer the landlord must offer the property to the tenant who must either match or beat that bonafide offer within a specified time or they lose their option to purchase.

The Example Lease Contract

For this example I'm going to calculate the real estate agent's commission on a 5-year lease of a 10,000 square foot industrial building. The lease provides the tenant the option to extend the lease for 1 period of 5 years. The tenant also has the right of first refusal which much be exercised within 30 days of receiving notice of a bonafide offer to purchase.

The base rent will start at $10.00 per square foot (sf) and will increase by 3% over the previous year's rent on the first day of every new year of the lease for the first 5-year period. The tenant is also responsible for the payment of all expenses associated with operating, maintaining, and occupying the property (commonly called a NNN lease).

In the event the tenant extends the lease, the rent shall continue to increase at the same 3% rate over the previous year's rent on the first day of each new lease year.

The real estate agent's commission is 5% of the total amount of the lease, including the option period. In the event the tenant buys the property at anytime during the first 5-year term of their tenancy, the broker's commission shall be 5% of the gross sale price.

NOTICE: This is only an example. The amount of rent, the terms of the lease, and the amount and structure of the agent's commission are all hypotheticals and do not necessarily represent actual market conditions.

Calculating the Agent's Commission

Year

Rent

Rate

Commission

1

$100,000

5%

$5,000

2

$103,000

5%

$5,150

3

$106,090

5%

$5,306

4

$109,273

5%

$5,464

5

$112,551

5%

$5,628

Total

$530,914

5%

$26,546

calculating

It's very important to understand that the real estate agent's commission is calculated on the total value of the lease, meaning the amount of money that's collected by the landlord from the tenant.

In the above example, the total value of the lease is $530,914 and the tenant pays all of the property expenses separately. Therefore, the real estate agent's commission would be 5% of $530,914 or $26,546.

But, let's say the property expenses for this building are equal to $4.50 per square foot annually. If the landlord were to collect $14.50 per square foot in rent and then pays all of the property expenses , when calculating the real estate agent's commission we would use $14.50 per square foot for the rent plus annual increases.

Contact us if you'd like more information the amount of real estate commission we would charge for leasing your property.


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