Tenant rep brokers are usually paid a commission by the landlord. Commission structures are different depending on the type of transaction taking place but, usually, the commission paid out is split in half by the leasing agent (the landlord’s broker) and the tenant rep broker (your broker). In simple terms, commissions are paid based on the representation of the two parties in the lease transaction. A tenant rep will be paid when a lease is fully executed. All of the work a tenant rep performs prior to lease execution is speculative and in the hopes that a transaction will be completed. This is a part of the reason your tenant rep broker works hard for you. Below is an example of how the process works:
1. After a lease is signed, the landlord typically pays a commission to the leasing agent and the tenant rep. The tenant rep broker is generally paid one-half upon lease execution and one-half upon tenant occupancy.
2. Commission ranges vary and may depend on the value of the transaction (also called total consideration).
3. In terms of tenant rep situations, a tenant doesn’t typically pay a commission to their rep – it is paid by the owner at the time the lease is executed unless otherwise negotiated.
A tenant signs a 3-year lease for 2,000 square feet at $20 per SF per year.
Total Consideration = $120,000 (2,000 SF * $20/SF per year * 3 years)
Property Owner is paying a 6% commission (1/2 to Landlord Rep, 1/2 to Tenant Rep) —————————————————————————————————————————————
Total Commission = $7,200 ($120,000 * 0.06)
One of the most common pitfalls a tenant encounters is touring properties without hiring a tenant representative. The reason this is so important is that in most cases, all a tenant rep broker has to do is to bring the tenant to a property to be legally entitled to a portion of the leasing commission as the “procuring” broker. A tenant may never see the broker again, but since that agent showed them the property, that agent will be paid a commission. These situations can get even more complicated if, later on, a tenant hires a tenant rep different from the initial broker who showed them the property and a commission dispute ensues. It is best to set this up properly from the beginning.
To further complicate matters, the commission is first paid to your broker’s broker (known as the qualifying broker, principal, or brokerage owner). There can only be one qualifying broker at any given brokerage. All of the other brokers work under the qualifying broker and report to him or her. The qualifying broker then pays a portion of the commission to your broker, known as the split. Commission splits range anywhere from 50/50 (most common) to 90/10 in favor of your broker.
Please, please, please hire a broker. You won’t save any money if you don’t. The commission is already built into the price. We all cooperate. Your broker represents your best interest and is going to give you good advice. How do you know they represent you? Sign a contract that outlines your relationship. They should present you a Letter of Authorization. Do not assume anything, ask as many questions as you desire, and hire the tenant rep broker so you know they are in your corner.