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brokers commissions

Who Pays Your Commercial Real Estate Broker?


Who Pays Your Commercial Real Estate Broker?

Every company, ESPECIALLY startups are on a budget. Nobody wants to pay for a service if they can avoid it.  So how does a broker that helps you find office space get paid? The good news – it’s not you.

The owner pays the commercial real estate brokerage fees in leasing transactions. There is a listing broker and a tenant broker involved in almost every transaction. Owners budget for brokerage commissions for new leases and renewals, and they issue commission checks directly to the brokers when your lease is signed.

In the Seattle office market, the tenant’s broker receives a commission of $1.00 per square foot per year of lease term and the landlord’s broker is paid half that amount, $0.50 per square foot per year.  If the tenant doesn’t have a broker the owner will increase their broker's (the listing broker) commission to $1.00 per square foot.  

Tenants unfamiliar with the leasing process assume they can capture savings by not using a broker and saving the owner the cost of the commission. They figure that by lowering the commissions paid by the owner by one-third they will get a better deal. Unfortunately, in most cases the opposite is true. 

A building’s value is derived by its income stream. Therefore, lower rental rates = lower building value. Owners will not lower your rate based on the savings they achieve by not paying your broker a commission.

You may be asking — “Okay, but can I get the savings in form of another concession, such as free rent?”

This is almost never the case. Without a broker negotiating on your behalf, you aren’t armed with the market data to negotiate the best rate and concessions. A good broker will have recent office space comps and proposals from your target building and its competing projects. They’ll also know what other companies are in the market that might be competing for your office space.

Finally, It’s very time consuming for a landlord and the listing broker to walk an unrepresented tenant through a lease negotiation and the success rate of executing a lease with an unrepresented tenant is low. Therefore, there’s no incentive to pass savings to them. Landlords put up with the added work and frustration because they know they'll get a better deal out of you...

In almost all cases without a tenant rep broker, either the tenant accepts too little and ends up getting a worse deal, or they over negotiate and the landlord doesn’t take them seriously.

Since the landlord pays the brokerage fee, why wouldn't you want an advocate on your side who understands market conditions, is familiar with the terms of recently completed leases, and can help you formulate a detailed negotiation strategy?