How Do Commercial Real Estate Commissions Work?
Turner Levison | October 4, 2020
Updated 10.5.2020: We revisited this article and dive deeper into how commissions work once received by the brokerage all the way to distribution calculations, splits and agent payments.
How Do Commercial Real Estate Commissions Work?
Commercial real estate transactions can seem as simple as buying a house, but once you peel back the layers of the onion, they can get complex. The process can quickly get complicated in order to accommodate all of the investors and protect every interest involved in the transaction.
Commissions agreements can be unique to each transaction, so, without efficient commercial real estate commission tracking software, it typically takes a dedicated resource to make sure all the beans are counted and the books are balanced with each new and unique transaction. But first, let’s see how all of this comes together.
What the Client Sees
The client sees an agent who is doing their job, taking the client’s needs and budget under consideration and finding properties to show. Generally, the client will have a general idea of what they’re looking for and what part of town they’d like to search.
A really great agent will often show what is available if there is a possibility of increasing the budget and will show a property which reflects an amazing discount during the process of finding a realistic building to suit the buyer’s needs. There’s plenty of technology out there for agents to see recent deal data and comparable deals done (comps), and just to name a few: RPR, CompStak and CoStar.
What the Landlord Sees
What the landlord tends to see is that their building takes some time to sell or lease. Experienced business people understand it takes time to find a good deal.
Very often, commissions are paid out once the tenant has been placed or the sales is complete. It’s much better to find one realistic buyer than to deal with ten prospective buyers who aren’t able to “get the deal done”. Likewise, in a lease, it is also important to find a tenant that’s going to be in business long enough to pay their rent each month for the duration of the deal!
What the Agent Does
Neither the buyer nor the landlord sees much of the actual process the agent goes through to find a property and conduct the deal. This includes creating presentations, scheduling viewings of the spaces, gathering comps and other relevant data for the client and more.
Typically, a good broker has some way to keep up with all their clients and the associated meetings and to-do’s for each. Some of the best brokers will turn to CRE technology to help them out, specifically CRM platforms(client relationship management) such as ReThink, Apto or ClientLook.
How Much Does a Commercial Real Estate Agent Make?
Due to anti-trust laws, there’s no set percentage that is required to be paid, but most agents earn anywhere from 4-8 percent, depending on the rate negotiated by the involved parties.
Prices are generally set from a formula that factors in square footage and price per square foot, and the commission is a percentage of the final sale price.
From that commission percentage, the money will be divided among however many agents were involved in the sale, and may even include a schedule of multiple payments. Therefore, calculating a typical commercial real estate commission has a huge range, but generally speaking, they’re a pretty healthy chunk of change.
It’s a dizzying amount of math and an extremely time-involved process. Historically, it’s also been a very opaque process as well (unless, of course, you’re using a platform like CommissionTrac).
How Do Commercial Real Estate Agents Get Paid?
Surprisingly, most agents don’t exactly know how they’re being paid, or have real clarity into the amount they think they’re supposed to receive and the number they see on the check.
It’s just as difficult for brokerages to provide that commission transparency to their agents since most commercial real estate brokerages use dozens of different spreadsheets and paper files which makes it virtually impossible both to explain and understand agent distributions.
Ideally, it would be as simple as logging into an agent dashboard where the agent is able to see their deal data and expected distribution like in the screenshot from the CommissionTrac agent commissions statement below:
And from the brokerage end, configuring the proper split plans and automatically calculating distributions based on specific agent and broker criterion.
If you struggle with providing your agents transparency into their distributions and split plans, or if you are an agent and you’d like your brokerage to have back-office transparency, then check out CommissionTrac and book a demo today.
How Do Commercial Real Estate Brokers Get Paid?
Brokers have a similar commission formula; in fact, The Broker List has a clear synopsis of the brokers’ payment process.
Additionally, especially in Commercial Real Estate Leases, many brokers have payments that are contingent on whether or not the tenant takes occupancy of the space. If a broker is only concerned about a sale, and not what the client actually needs, the odds are high that a client may change their minds about the lease and the broker could lose both the commission and any chance for future referrals (and commissions).
The Bottom Line
The bottom line is that a real estate agent, and especially one who works with commercial properties, puts in a lot of time and effort to assure both the seller and buyer are satisfied with the end purchase.
This often takes rolling up the sleeves and getting creative with the contract: adding tenant improvement allocations (TI), negotiation of “free rent” months and rent escalation by year are just a few of the tricks up broker’s sleeves.
While these tools can help get the client a good deal and satisfy the landlord’s needs, it can make commission calculation and accounting a really chaotic puzzle. It might be no surprise that some of the best agents are the ones causing the most headaches in the brokerage’s back office, as they are probably the ones willing to spend that extra hour negotiating to create the perfect deal for their client.
Once all the signatures are in place, “the deal is done”, and the agent marks it as “closed – won” in their pipeline, the puzzle is just getting started… How does the back office ensure the brokerage and agents get paid?
How Splits Work Within A Brokerage
Commercial real estate commissions can be significantly more complicated to track than fees earned when selling a house. Once you peel back the layers of the onion, commercial transactions, especially leasing commissions can get very complex very quickly with tiered split plans, which is the most common fee structure for commercial agents.
The process can quickly get frustrating and mistaken riddled if the process is being handled with Xcel spreadsheets that aren’t integrated and communicating with each other. Without transparency for all of the parties involved to see exactly how fees are generated and paid there begins to be a level of distrust and frustration grown between the agent and the brokerage company’s leadership.
Commission agreements can be unique to each transaction, so, without an efficient commercial real estate commission tracking software, it typically takes a dedicated resource to make sure all the beans are counted and the books are balanced with each new and unique transaction.
As the previous owner of a twenty person CRE brokerage business in Atlanta, I can tell you unequivocally, that nothing frustrated our agents more than when we, in a timely fashion, could not validate, to the penny, how we came up with their bi-monthly commission distributions. The lack of transparency to provide real time information on their personal earnings was always a concern to myself and my partners that it could possibly lead to some agents leaving over the frustration.
Who’s concerned about the transparency in a commercial lease transaction?
The Landlord Paying the Commission
Very often, commissions are paid out in multiple payments. One payment when the tenant has executed the lease agreement and a final payment is made when the tenant physically moves into the space. The complexity can occur if there is a long lead time before the tenant physically moves into the space and the procuring agents split plan resets before the final portion of fee is paid.
Additionally most landlords also rely on the brokerage firm to invoice them for the remaining portion of the commission, and if the brokerage firm isn’t using a sophisticated intuitive platform the second portion of the fee can, and does, slip through the cracks potentially never to be received.
The Agents Earning the Commission
Surprisingly, most agents don’t exactly know how their commission checks are truly calculated, or have real clarity and transparency into the amount they think they’re supposed to receive versus number they see on their check.
Basically there’s no set percentage that is required to be paid, but most commercial agents earn anywhere from 4-10 percent, depending on the size of the transaction, the rate negotiated by the involved parties, and whether they were the procuring cause of the deal or getting an override as the listing broker.
Prices are generally set from a formula that factors in square footage and price per square foot, and the commission is a percentage of the final sale price or total revenue generated from a lease transaction.
From that commission percentage, the money will be divided among however many agents were involved in the transaction, all who are likely on tiered split plans and it may even include recapturing some agent expenses and/or paying potential network or referral fees.
With these multiple factors being part of most commercial transactions calculating a typical commission provides significant potential for mistakes to occur without a platform created to handle the complexity. It’s a dizzying amount of math and an extremely time-involved process. Historically, it’s also been a very opaque process as well (unless, of course, you’re using a platform like CommissionTrac.)
The Leadership of the Brokerage Business Sharing the Commission
Without a commercial real estate centric platform It’s just as difficult for the brokerages leadership to fully understand if commissions are being paid and if expenses are being recaptured properly. The overwhelming majority of CRE brokerages still use dozens of different spreadsheets and paper files to determine agent payments which makes it virtually impossible both to explain and fully understand agent distributions.
When utilizing the Commissiontrac platform every agent, as well as, the principals has the ability to log into either a management or personal dashboard and see company or individual deal data and detailed payment history down to the penny.
Need A CRE Commission Tracking Solution?
There you have it: an overview of how commercial real estate commissions work.
Today we have the right technology tools in place to assist in managing the ever-changing marketplace and commission percentage formulas.
We created CommissionTrac with the mission to help brokerages avoid errors and save time. After all, an accurate and efficient accounting back office platform helps a brokerage successfully reach their goals.
If you are looking for a platform that effectively streamlines and automates your brokerage and increases the happiness of your agents, then give CommissionTrac a try today.