Definition
Leasing commissions (LC) are fees paid to brokers or leasing agents for securing a tenant and executing a lease. They are typically calculated as a percentage of total lease value (base rent over the lease term) and are treated as a leasing cost in underwriting.
How They’re Calculated
Commission structures vary by market and property type but often follow a percentage formula:
Common approach
- LC = Agreed commission % × Total base rent over lease term
Commissions may be split between the tenant rep broker and the landlord rep broker, depending on who sourced the deal.
Typical Ranges
- Office/Retail: Often 3%–6% of total lease value
- Industrial: Often lower than office/retail
- Renewals: Typically reduced percentage compared to new leases
- Multifamily: Often structured as flat fees or internal payroll costs
Why It Matters
Leasing commissions are part of the total cost to stabilize a property. Along with TI Allowance, downtime, and concessions, LC directly affects cash flow timing and return on invested capital.
Investor Uses
- Lease-up underwriting: Include LC in Year 0 or during rollover years.
- Rollover modeling: Forecast future commissions at lease expiration.
- Capital planning: Budget reserves for TI/LC exposure.
- Comparing deal economics: Higher rent may be offset by higher leasing costs.
Example
A tenant signs a 7-year lease at $40,000 per year. Total base rent is:
- $40,000 × 7 = $280,000
If the agreed commission is 5%:
- LC = 5% × 280,000 = $14,000
That $14,000 is typically paid upfront (sometimes in installments) and should be modeled as a cash outflow in underwriting.
Accounting & Treatment
- Capitalized: Often amortized over the lease term for accounting purposes.
- Cash flow impact: Paid near lease execution; affects short-term liquidity.
- Debt underwriting: Lenders may require TI/LC reserves.
Common Pitfalls
- Ignoring renewals: Even renewals often carry commissions.
- Underestimating rollover clustering: Multiple expirations can create large LC spikes.
- Confusing gross vs. base rent: Commissions usually apply to base rent only.
- Forgetting market shifts: Higher vacancy environments can push commission percentages upward.