Yes, we’re going to talk about it.
Some of you may have heard the news in 2024 about a massive lawsuit settled by the National Association of Realtors, regarding commission fixing.
This settlement put in place new rules regarding residential real estate commissions. Commercial transactions were largely unaffected, because commercial operates in a different way.
However, the overall goal of that settlement was to provide greater transparency around the fees paid as commissions to real estate agents. Our goal in this article is to increase transparency around these fees, so you can make an informed decision.
But first, a disclosure, since we’re talking about commissions: the following is not meant to be legal or consulting advice. Each consumer should do their own research and consult with their attorney regarding any questions herein. All commissions are negotiable between the agent and client.
1. Commissions Are Negotiable
First off, commissions have always been negotiable. Real estate brokerage is regulated at the state level in every state in the US, and one underlying principle is that the commission amount paid is negotiable.
Just like the price of the real estate itself is negotiable, the fee paid to the real estate professional is likewise.
In commercial real estate, the commission percentage can be much more varied than residential, with ranges from 1-10%.
2. Expect to Pay More for Skilled, Experienced Agents
In commercial real estate, businesses and investors are often making large, expensive decisions about properties. Because real estate is a competitive, service-oriented business, it’s reasonable to expect someone who delivers a superior result to cost more.
You wouldn’t want to hire the cheapest attorney, but rather the most competent one that matches the skills you need.
Having a knowledgeable commercial agent with a track record of results can make a substantial difference for the client — which is why recommendations, reviews, and past results speak volumes when deciding who to hire and how much to pay them.
3. Agent Cooperation Is Different in Commercial
In most states throughout the US, you can be a ‘seller agent,’ a ‘buyer agent,’ or simply a ‘transaction licensee.’ The term ‘agency’ means you’re representing that party, with a fiduciary duty to keep their interest in mind. In many states, you can facilitate a transaction as a ‘dual agent,’ which means you must remain neutral and not disclose confidential information from one side to the other.
Some states, like Maryland, do not permit dual agency in the form of the same person representing both buyer and seller. Pennsylvania does permit dual agency with proper disclosure.
A listing agent can assist buyers in a purchase as a transaction licensee, without representing that client in a dual agency capacity. This is misunderstood by a lot of buyers, who assume they’re automatically represented if they go directly to the listing agent.
For many years, standard practice in residential real estate was a 6% fee, split 3% to the seller’s agent and 3% to the buyer’s agent. Now, the NAR settlement has put in place guardrails that give sellers the option to only pay their selling agent, and encourage buyer’s agents seeking compensation from the seller to negotiate that as part of the transaction.
For the most part, commercial real estate has been unaffected by the NAR settlement, because there’s much more variance on the commercial side, both in property pricing and in the depth of a commercial agent’s services.
You can co-op without compensating. For example: a seller has a $15,000,000 apartment complex they want to sell. They contact their selected company and agent, who spends many hours reviewing financial information, developing pro-forma income, and analyzing the property.
The agent recommends a pricing and marketing strategy and negotiates a fee for their services with the seller. The company and agent have a large database of qualified buyers for this type of property, and may work directly with the buyer, either as a transaction licensee or as a dual agent.
The seller agrees to pay them a fee for selling the property. If another agent brings in a buyer, that agent must have the buyer compensate them, or write their requested compensation into the purchase proposal. Often the seller only wants to pay their selected brokerage, leaving the buyer to compensate their own agent if they choose to hire one — this is more common in investment sales. We often structure listing fees with a two-tier structure, so if the owner wants to compensate a buyer’s agent, that’s built in up front, but they save money if we sell directly to the buyer.
4. The Higher the Property Price, Typically the Lower the Percentage
Due to antitrust laws, it’s illegal for brokers to have an agreement establishing a standard commercial real estate commission. Commission rates mainly depend on the price of the property.
A typical commercial real estate commission can vary from 4-6% on deals under $1 million. Above $1 million, the commission percentage tends to decrease — a property with a $10 million sale price could see a commission rate of 1-4%, given the size of the transaction.
In some instances the commission may be a flat fee, though that’s less common — some brokers and sellers prefer a predetermined amount received upon closing regardless of the property’s final sale price.
Special circumstances: If you’re selling a business along with your commercial real estate, expect a higher overall fee — a business with real estate is more complicated, the buyer pool is smaller, and the broker will often put in far more hours finding a qualified buyer and working through financial reviews. Sometimes for investment properties there’s a sliding scale, such as 2% up to $15MM, a higher percentage on value between $15MM-$16MM, and an even greater bonus above $16.5MM — aligning the owner and agent’s interests to seek the higher return together.
5. Commercial Lease Structure
Because it’s a specialized service, commercial brokers commonly handle leasing as well. Commission for a lease transaction is typically based on the value of the lease over the term.
For example, if a five-year lease has a monthly payment of $6,000, the lease commission would be based on the total payments over five years — in this case, $360,000 in lease value over the initial term.
In some cases the landlord may negotiate a reduced rate for longer lease terms. If the same property were leased for 10 years, the broker could agree to 4% for the first 5 years and 3% for the remaining 5. A broker can also negotiate to be paid a commission upon lease renewal, typically at a reduced rate.
Businesses that need to lease locations frequently hire a tenant representative broker, who may work on multiple locations for them in a region. Because tenant representation comes with a lot of work, tenant rep brokers are commonly paid a higher fee up front that decreases over time — for instance, 6% of first-year lease value, 5% the second year, and 4% the third year. The landlord often also pays their own listing broker to advertise the property and connect with other brokers, commonly closer to 3% on the listing side, for a total 9% fee in year one.
This varies widely by region — in some areas, no one would think to pay a tenant rep broker more than 3%, while in larger markets tenant rep brokers can get as much as 5-5.5% on the initial term. The leasing fee to both brokers is often paid 50% at lease signing and 50% when the tenant begins paying rent; a renewal fee is paid at the time of renewal or exercise of options.
6. Like Any Business, There Are Expenses
People often look at the total commission they’re paying and think it’s substantial. But for every property that closes, there are at least three others that won’t, and those costs are spread across the collective property risk pool for the broker.
There are ongoing costs for staff, software, platform fees, advertising, office space, mileage, and more. The portion of commission that agents pay to the brokerage is much higher in commercial than in residential, because of the more sophisticated tools and significant time put into larger, more complicated transactions.
Conclusion
We’ll say it again: all fees are negotiable between the parties involved. But like any professional service, there’s a threshold value that a competent advisor will accept for their work.
Similarly, we’re always happy to pay our accountant for services that save us time, money, and headaches. We trust you’ll likewise find a trustworthy CRE advisor who makes your commercial real estate experience easy, positive, and profitable.
Our company works with investors, developers, and businesses to provide solutions across the US. If we can assist you with your commercial real estate needs, please reach out to us.
