Definition
A leasing commission (LC) is a fee paid to a broker or leasing agent for bringing a tenant to a property (a new lease) or helping secure a renewal. Leasing commissions are most common in commercial real estate (office, industrial, retail) and can also show up in larger multifamily or institutional settings (often as part of a broader leasing/marketing budget).
How Leasing Commissions Are Priced
Commission structures vary by market and property type, but most fall into a few common formats:
- Percent of rent: a percentage of base rent (sometimes including escalations).
- $/SF: a dollars-per-square-foot amount, usually tied to total leased area and term.
- Term schedule: a higher rate for early years and a lower rate for later years (common in office).
- Renewal commission: typically lower than a new-lease commission (because the tenant is already in-place).
Why It Matters
Leasing commissions are a real cash outflow that reduces returns, especially when leases roll often or vacancy is high. In underwriting, LCs are part of the “friction†of keeping a building leased, alongside downtime, tenant improvements, and concessions. If you miss them, you can materially overstate NOI-to-cash flow conversion.
Investor Uses
- Rollover underwriting: model commission costs when leases expire and space re-leases.
- Comparing deal quality: two properties with the same NOI can differ if one has heavier rollover and higher LCs.
- Evaluating strategy: short-term leases may boost rent resets but can increase LC frequency and volatility.
- Lease negotiation: balance longer lease terms (lower rollover cost) vs. flexibility and mark-to-market opportunity.
How It’s Modeled in a Pro Forma
Leasing commissions are usually treated as leasing costs tied to new leases and renewals and shown either as an operating line item (more common for short durations) or as a leasing-capex/transactional cost (common for commercial underwriting). Typical modeling components:
- LC for new leases: applied when a tenant vacates and a new tenant signs.
- LC for renewals: applied when an in-place tenant renews.
- Timing: often paid at lease execution or within the first months of the lease.
- Probability weighting: apply renewal probability to split expected costs between renewals and new leases.
Example
An office suite is re-leased for 10,000 SF on a 5-year term at $30/SF base rent. If the market commission is modeled as 4% of base rent:
- Annual base rent = 10,000 × $30 = $300,000
- Total base rent (5 years) = $300,000 × 5 = $1,500,000
- Leasing commission = 4% × $1,500,000 = $60,000
If a renewal commission were 1% instead, the renewal LC would be $15,000, which materially changes rollover cost assumptions.
Common Pitfalls
- Forgetting renewals: renewal commissions can be smaller, but they still add up.
- Applying LCs to gross rent incorrectly: many deals base LC on base rent, not gross rent.
- Ignoring downtime interaction: vacancy loss + LC + TI can stack in the same period and pressure DSCR.
- Double counting: don’t count LCs both as opex and as capex unless you’re intentionally separating categories.
- Assuming the same LC across all space: anchor retail, small-shop retail, and office often price differently.