How Commercial Real Estate Agents Get Paid on Leases
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If you’re considering pursuing a commercial real estate agent career, you may have some questions about how you’ll get paid on leases. Generally, the commission in this industry works differently than the commission in other industries because it includes not only the amount of rent that an agent can collect from the tenant but also the amount of rent that an agent can collect from the landlord. This article will cover these two parts of a commission and provide examples of how this works out in practice. Let’s learn how commercial real estate agents get paid on leases.
What is a Lease?
A lease is an agreement between a landlord and tenant to rent space for an agreed-upon amount of time. Typically, tenants pay a portion of the total cost of rent up front as a security deposit. The remainder, along with certain fees, is paid throughout each month of tenancy, usually every month, because it’s standard practice for landlords to require their tenants to have insurance (also known as coverage), it may be smart to go over your policy with your agent before signing your lease agreement.
Who Owns the Land?
When a commercial lease begins, landlords typically own all of it, including mineral rights. Over time, tenants can earn landlord status by paying for some of that land for perpetual access to minerals and any potential profits from them.
This is an example of reversed credit — where a business instead buys assets from a developer or another party — which is common in commercial real estate deals. Other ways to acquire landlord status include paying rent below market rate (known as prepaid rent) or investing in capital improvements such as landscaping and other improvements that increase property value.
In these cases, it may be possible to buy out certain landowners with surface leases or buy mineral rights outright.
Four Main Types of Commercial Leases
There are four main types of commercial leases, and each one comes with different terms. Understanding these terms is critical to ensuring that your business has a profitable lease that won’t put it at risk of losing its space in the future. The four types are:
- net leases
- gross leases
- triple net leases
- operating leases
Understanding what each type entails is important because they carry very different risks and benefits for both parties involved.
Four Main Types of Tenants
Depending on your niche, you might encounter a few different types of tenants. Some investors rent out properties for long-term gain. Some businesses hire commercial real estate agents to act as leasing managers—they lease several properties at once and usually want them in prime locations.
Then some companies need a central place to house their employees; they’re looking for more of a discount on pricing, making these spaces easier to fill than premium ones. Depending on what kind of commercial property you specialize in, some tenants will be more lucrative than others.
How Commercial Real Estate Agents Get Paid on Leases
Commercial real estate agents do not get paid on leases. Commission by their brokerage firms pays them. A commercial broker can earn a commission by representing either the landlord/owner or the tenant in a commercial lease (or both).
In this type of transaction, the commission is calculated similarly by taking a percentage of the total value of the lease over its term.
If different brokers represent the owner and tenant, the commission will most likely be split evenly between the two (unless otherwise specified in negotiation). Traditionally, the lessor pays the commission on a commercial lease in two installments. The first half of the commission is due at lease signing, and the second half is due once the tenant has moved in.
Their total compensation will include an upfront base salary and a percentage of every dollar they bring in through rental income or sales to new buyers (or both).
Depending on how much business they can drum up, an agent’s commission can be as high as eight percent of sales. So, if an agent brings in $500,000 for their firm, they will take home around $40,000 (after taxes) for their efforts.
If that same agent brings in $5 million in business over a year and his commission is only five percent, he will still earn around $250,000 from that one transaction alone.
What does the broker keep?
The money earned by each broker on the transaction is usually returned to the brokerage firm. The brokerage will keep a portion of the commission, while the agent will receive a percentage.
The designated commission largely determines the amount a broker receives splits at each brokerage firm.
Every brokerage firm is unique. Some have splits based on seniority, while others are set at a certain percentage of the total up to a certain dollar value and then increase after the broker reaches a certain production level, and so on.
Whether you are about to embark on your property search or are interested in becoming a broker, we hope that this blog post has given you a better understanding of the value of working with a broker and where your money is going after your transaction is completed.
Frequently Asked Questions
What is the role of a commercial real estate broker?
Commercial real estate brokers are industry experts who guide clients through the complex process of buying, selling, or leasing commercial property, from finding office space to focusing on the finer details of the transaction.
How much does a California real estate agent make?
A California real estate agent’s average salary is $99,575. The salary range, however, is wide, with the lowest-earning $24,970 and the highest-earning $123,700 per year.
Do real estate agents get paid by the hour?
No, real estate agents are not paid on an hourly basis. Agents, on the other hand, are paid on a commission basis. The amount of commission an agent earns will vary depending on various factors and will most likely be different for each agent.
What is the role of a commercial agent?
Commercial agents represent actors for TV commercials, industrials, and commercial print. Voice-over agents represent voice-over actors. Print agents represent print/stills advertising. This is not the same as fashion modeling, which has much stricter requirements (height, weight, etc.).
What is the purpose of an agency agreement?
The fundamentals of an agency agreement
The principal retains authority over the agent’s transactions; the agent typically earns a commission by selling the principal’s products. The principal, not the agent, bears the commercial risk and direct responsibility for customer transactions.
Is it possible for a limited company to act as a commercial agent?
It does not imply that the agent must be a sole trader; a limited company can be a commercial agent, and many of our clients do so. “Continuing authority” means that one-time transactions are not permitted.
In most leases, you must pay either a base rent or a triple net rental rate. In some cases, you can negotiate a special lease that includes an escalator clause in which base rent increases over time with inflation. Another option is a gross lease, in which you are responsible for all building expenses – including property taxes and maintenance.
Gross leases typically offer lower monthly rent payments because building expenses are rolled into one price. When negotiating with your landlord, it may be helpful to consult an experienced commercial real estate agent who knows how different leases work and what details each contains.
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