Businesses and commercial real estate investors alike can benefit from the support of commercial agents to identify the best properties for purchase or lease.
CRE agents can serve as either a listing broker or buyer’s agent to provide helpful guidance for investors and tenants alike, but one common question that often comes up is, “How do commercial real estate agents get paid?”
In this article, we examine how a sales commission and lease commission are determined as well as how they can impact the overall cost of a commercial real estate transaction.
Whether you are a business owner looking to lease a commercial property or an investor looking to work with a CRE broker from a local brokerage firm to increase your deal flow, this blog post has something for you. Let’s begin.
How do commercial real estate agents get paid?
A commercial broker gets paid by receiving a commission on the commercial properties they sell or lease. The amount of an agent’s commission is usually based on a percentage of the final selling price or lease price.
It’s important to note that agents only receive commissions if and when a sales transaction takes place or a lease agreement is reached. If the agent doesn’t successfully help the buyer, seller, or tenant secure a property, the agent doesn’t get paid.
Who Gets Paid A Commission In Commercial Real Estate?
Commercial real estate commissions are almost always split between two agents:
- The Listing Agent, who lists and markets the property, corresponds with the buyer’s agent and answers questions on behalf of the seller, landlord, or owner.
- The Buyers Agent, who finds properties for their buyers and renters, shows the buyer properties, and corresponds with the Listing Agent to help finalize the transaction.
What Is The Average Commission On Commercial Real Estate?
Broker agreements establishing a standard commercial real estate commission are prohibited under antitrust laws in the United States. Therefore, the commission rate for commercial real estate agents is typically based on the property’s final sales price or lease price. The percentage or commission fees can also vary depending on the size of the transaction.
For instance, in transactions under $1 million, the commission may range from 4% to 8% of the final sale price. On larger transactions over $1 million, the commission percentage may decline. For example, a property selling for over $10 million may have a commission percentage between 1% and 3%.
While that may seem unfair, the higher the sales price, the higher the commission is paid, even with the lower percentage. As an illustration, let’s say that a property sells for $1 million dollars and the agents receive 8% of that transaction. In this instance, the dollar amount of 8% is $80,000. Now, let’s say a property sells for $10 million, and the agents receive a 1% commission on that transaction. In this instance, the dollar amount of 1% is $100,000. There’s obviously nuance to be explored here, but overall the larger the deal, the smaller the percentage, but commercial real estate professionals can still make more on larger deals with smaller commission percentages.
Does the agent keep 100% of their commission from a transaction?
Most commercial real estate agents don’t keep 100% of their commission from each transaction due to what’s called a brokerage split.
Commercial real estate agents work for a commercial real estate brokerage. The brokerage company comprises CRE professionals who provide support regarding marketing, legal, market intelligence, professional training (e.g., real estate classes, education courses, etc.), and more to the agents that work for them. Legislation can require the commission of a transaction to be paid to the brokerage, who then pays the agent. Different brokers can structure their agents’ commissions differently, often depending on the size of the brokerage.
For example, in a smaller brokerage, the brokerage may split the commission 50/50 with the agents. Then, as the agent gets more experience and brings in more business, they may transition that to a 60/40 split, which tends to be more common. In this instance, the broker would keep 40% of the commercial real estate commission, and the agent would receive 60% of it.
As an additional layer, some brokerages utilize a sliding scale with an annual reset. In these circumstances, the agent’s share of the commission may rise throughout the year as they hit specific revenue targets.
In larger firms working on larger deals, it’s entirely possible that a single transaction is supported not just by one agent but rather by a full team. In these instances, the commission percentages are typically split up by workload and seniority; the main agent on the deal may keep 40–50%, whereas the team manager may receive 20–30%, and the brokerage keeps the remainder. As you can see, the brokerage split can be structured one way at one brokerage and a completely different way at another brokerage.
All things considered, brokerage splits are a crucial component of the commercial real estate market since they assist in balancing the interests of brokers and agents and guarantee that both are appropriately rewarded for their labor.
Who pays commissions in commercial real estate transactions?
The party selling or leasing the property is normally responsible for paying the commission in commercial real estate transactions. This implies that the property owner will be liable for paying the commission to the real estate agent or agents who assisted in the transaction if a buyer is buying a business property. The buyer and seller may decide to divide the commission in some circumstances, but this is less typical in commercial real estate deals than it is in residential ones.
What is the standard commission for a commercial lease?
A commercial real estate agent’s normal commission on a lease transaction is between 6% and 10% of the lease value. Accordingly, the real estate agent who assisted in the deal should anticipate receiving a fee of between $6,000 and $10,000 if a property is leased for $100,000. Various variables, like the intricacy of the transaction and the amount of labor the agent put in to assist in making the sale happen, will affect the precise percentage that an agent will get. It is crucial to keep in mind that these are only broad principles and that real commissions may change based on the particulars of the transaction.
Can commercial real estate investors deduct a commercial real estate agent’s commission from their taxes?
The commission paid to a commercial real estate agent is often deductible by investors in commercial real estate. The IRS permits investors to write off all costs deemed “ordinary and essential” for running a business, including commissions paid to agents.
However, the particular guidelines for agent commission deductions might change based on the kind of property being bought and the investor’s overall tax condition. For instance, investors who buy rental properties could be allowed to completely deduct the agent’s commission as a business expenditure. Investors who buy real estate for their own use, however, might not be eligible for the same deductions.
The amount of agent commissions that may be subtracted is also capped. According to the IRS, investors can often only deduct the percentage of an agent’s compensation that is relevant to the sale of the property from their taxes. The investor may only deduct the percentage of the fee that is directly relevant to the sale of the property, for instance, 2% if an agent charges a 6% commission on the sale of the property.
Overall, it is crucial for commercial real estate investors to speak with a tax expert to learn the precise guidelines for claiming agent fees as a tax deduction and to make sure they are taking all permissible deductions.
As you’ve likely observed throughout this article, agent commissions can vary drastically depending on various factors, whether you’re buying or leasing a property. Therefore, it’s critical to understand an agent’s fee upfront, negotiate it if necessary, and ensure it’s clearly stated in the commission agreement before beginning any work. Real estate commissions paid to agents can significantly affect how much a deal ultimately costs. Depending on the particulars of the transaction, these commissions can range from 3% to 10% or more and are often based on a percentage of the sale or lease price. Commercial real estate brokers offer useful experience and counsel that might be worth the cost of their fees, so it’s crucial for businesses to be aware of these charges and how they’re calculated.
Investors may receive more deals when working with well-connected CRE agents, and businesses may improve their chances of discovering the ideal property with an ideal lease agreement by working with a qualified and experienced commercial real estate agent. In the end, it comes down to carefully weighing all of the relevant aspects, including the commission, and making an informed choice based on what is best for the company. This is the secret to negotiating the best possible bargain on a commercial property.