In simple terms, commissions are paid based on the representation of the two parties in the lease transaction. The summary listed below is for general purposes only:
1. After a lease is signed, the landlord typically(owner of the property) pays a commission to the Listing Agent (or Landlord Rep) and the Tenant Rep.
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.
Of course there are other factors to consider:
One of the most common pitfalls a tenant encounters is touring properties without hiring a tenant representative.
If you plan on hiring a tenant rep, do so in advance of going on a property tour. They can tell you a lot of information about the market and going rents in a particular area.
If you plan on finding space on your own, make sure that any properties you have interest in are shown to you by the listing agent (or owner, if the property isn't formerly listed.)
The reason this is so important is that in most cases, all an agent has to do is to bring the tenant to a property and he/she is legally entitled to a portion of the leasing commission as the "procuring" broker. A tenant may never see the agent again, but since that agent showed them the property, that agent will be paid a commission. These situations can get even more complicated when, later on, a tenant hires a tenant rep different from the initial agent who showed them the property and a commission dispute ensues. It is best to set this up properly from the beginning.
How do agents get paid?
Commercial Real estate agents are typically paid a commission when a signed lease has been executed. The commission is paid by the Owner (or Landlord) of the building and is generally paid one-half upon lease execution and one-half upon tenant occupancy. The commission is most often calculated as a percentage of the lease value (or total consideration).
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)
To further complicate matters, the commission is first paid to the agent's Broker. The Broker then pays a portion of the commission to the agent, known as the split. Commission splits range anywhere from 50/50 (most common) to 90/10 in favor of the agent. If there is a tenant rep involved, the Broker would then pay half of the total commission to the tenant's rep and a split of the commission to the listing agent