Definition
A broker commission is a fee paid to a licensed real estate broker for successfully facilitating the sale or lease of a property. The commission compensates the broker for marketing, negotiating, sourcing buyers or tenants, and guiding the transaction to closing.
Sales Commissions
In property sales, broker commissions are typically calculated as a percentage of the final purchase price.
- Common range (commercial): 1%–6% depending on asset size and complexity.
- Split structure: Often shared between listing broker and buyer broker.
- Payment timing: Paid at closing from transaction proceeds.
Leasing Commissions
In leasing transactions, commissions are usually based on a percentage of the total lease value (base rent over the lease term).
- New lease: Higher percentage (e.g., 3%–6% of total lease value).
- Renewal: Reduced percentage compared to new leases.
- Payment structure: Often partially upfront and partially amortized.
Underwriting Impact
- Disposition costs: Reduce net sale proceeds and affect IRR.
- Lease-up costs: Considered part of tenant acquisition costs.
- Capital budgeting: Must be modeled in pro forma and exit analysis.
- Refinance planning: Leasing commissions can affect DSCR projections.
Example (Sale)
A commercial property sells for $8,000,000 with a 3% commission:
- $8,000,000 × 3% = $240,000 broker commission
- Net proceeds before other closing costs = $7,760,000
Example (Lease)
A tenant signs a 5-year lease at $25 per square foot on 10,000 SF:
- Total lease value = $25 × 10,000 × 5 = $1,250,000
- At 4% commission = $50,000 leasing commission
Common Pitfalls
- Forgetting renewals: Renewal commissions must be budgeted.
- Ignoring amortization: Leasing commissions are often amortized over lease term.
- Underestimating negotiation: Commission rates can vary by asset size.
- Overlooking dual agency rules: Regulatory and disclosure requirements apply.