You’re looking at a real estate broker who’s proposing a 6% broker fee. How do you determine if that fee is reasonable? While a good broker will easily be worth their commission, tread carefully as there will be those, as in in any industry, that will try to push for an unnecessarily high broker fee. Understanding the norm for real estate commissions, and how they are generally calculated as applied to the type of transaction in which you are involved, is a valuable tool in negotiating how a prospective broker should be compensated.
Purchase and Sale Transactions
For some, the thought of a real estate broker commission brings to mind a purchase and sale transaction. If you are seeking to purchase or sell commercial real estate, the typical industry go-to rate is around 5% to 6% of the purchase price of the property. This amount will be paid to the broker or brokers at closing. If more than one broker is involved in the transaction, the brokers may split the broker fee. This split is typically a 50/50 split with 50% of the fee paid to each broker, without an increase in the overall broker fee.
Some brokers may decrease the percentage charged as a broker fee if the sale price of the property is large enough to justify the reduction. A lower fee can also be the result of the broker incurring less marketing expenses, which may occur because average or high marketing expenses are not always appropriate if a seller is seeking to sell a unique property tailored to a specific use.
There is less consensus as to what a standard broker fee for a lease transaction looks like. An example of how the broker fee in a lease transaction can vary dramatically is if outside brokers are part of the transaction, which can significantly increase the overall broker fee paid out by 150%. Fees for industrial leases are generally dependent upon the length of the lease and the amount of estimated net rents expected to be collected over time under the lease. Fees average between 5% to 7% on most 1-year to 5-year industrial leases, where the broker fee is frontloaded in the first few years of the lease. Industrial lease terms beyond 5 years generally incorporate the front-loaded average fee rates between 5% to 7%. On these industrial lease, a fee rate of 2% of the estimated lease amount is generally charged for each year after year 5.
For some property types, a broker fee in a lease transaction can be dependent on the type of property, especially where the fee is charged by square footage. Office and retail leases are typically charged per square foot. The amount paid to a broker per square foot generally increases in step with the term of the lease (i.e. $1 per square foot for a 1-year lease, etc.), up until rates start to plateau where the lease is for a length of 5 years or more. For unique commercial space, such as medical centers and high-end retail, the fee structure is also paid per square foot. The price per square foot for these property types generally ranges from $4 to $7 per square foot.
As can be seen, there is significant room for variation in the broker fee to a greater degree in lease transactions when compared to purchase and sale transactions. Further, when negotiating with the landlord, the split for the broker fee is typically 50/50 between the landlord and the tenant; however, some landlords agree to a 90/10 split with the tenant paying close to nothing.
It is always a good idea to do your research and seek advice when it comes to negotiating any fee in a transaction. It can end up saving you a significant amount of money. You’re often looking at thousands of dollars or hundreds of thousands of dollars allocated to a broker in a real estate transaction. If you are preparing for your commercial real estate transaction, or are in the middle of a real estate transaction, and are seeking legal counsel and/or advice on a proposed fee, contact the legal professionals at Dodson Legal Group at 844-4DODSON for a consultation.