Who Pays a Tenant Rep Broker?

Most tenants never write a check to their broker. When a landlord hires a listing broker to lease a building, the agreement between them sets a commission that the landlord pays when a lease is signed. Where the tenant has its own broker, that commission is typically shared between the two brokers or the landlord pays the tenant's broker a separate fee. Either way, the money comes from the landlord as a cost of filling the space.

This is the custom in ordinary office, industrial and retail leasing across the United States. It is a custom, not a law, and the exact arrangement is set by contract in each deal. That is why the rest of this guide matters.

The sequence in a typical direct lease looks like this.

1. The owner signs a listing agreement with a broker to market the space. That agreement sets the commission the owner will pay and usually anticipates that a tenant may have its own broker.
2. You sign a representation agreement with a tenant rep. It states that the broker represents you and explains how the broker expects to be paid.
3. Early in the process, your broker registers with the landlord or listing broker as your representative and confirms the commission in writing.
4. The landlord and tenant negotiate and sign the lease.
5. The landlord pays the commission according to its agreement with the brokers, commonly in installments tied to lease signing and to the tenant taking occupancy or starting to pay rent.

The commission is normally calculated from the value of the lease, which depends on the rent, the size of the space and the length of the term. We do not quote rates here because they vary by market, property type and deal, and any figure would mislead as many readers as it helped.

This is the fair question, and it deserves a direct answer. A landlord's leasing costs, including commissions, construction contributions and free rent, are part of what the rent has to cover. In that broad sense tenants fund everything a landlord spends.

The practical question is different: would you pay less rent if you had no broker? Usually not. The owner's listing agreement typically fixes the total commission in advance. If no tenant broker is involved, the listing broker often keeps a larger share instead of the saving being passed to the tenant. A landlord is also unlikely to offer a discount to a tenant who has not asked for one and has nobody benchmarking the offer.

So the commission is generally a cost that exists either way. What changes is whether part of it pays for someone working on your side of the negotiation.

An unrepresented tenant can ask a landlord to reduce the rent to reflect the commission saved. Some landlords will consider it. Weigh any reduction against what skilled negotiation would be expected to gain on rent, free rent, construction money and lease rights.

The landlord-pays model is common, not universal. These are the situations in which the answer can change.

• Purchases. When you buy a building, the brokerage fee is commonly paid from the sale proceeds by the seller, but buyer representation can be structured in other ways, and the arrangement should be set out in a buyer representation agreement.
• Subleases. The sublandlord, who is another tenant trying to shed space, is often the party paying a commission. The amount offered may be lower than on a direct lease, and sometimes none is offered, which can leave a gap to discuss with your broker.
• Very small or short deals. On a short-term or small lease the commission may be modest relative to the work. Some brokers set a minimum fee, which the tenant may be asked to cover in part.
• Landlords that do not pay outside brokers. A minority of owners decline to pay a tenant's broker, or pay less than the customary amount. Your agreement should say what happens then.
• Renewals and expansions. Whether and how much a landlord pays on a renewal depends on the original commission agreements and on what is negotiated at the time. Do not assume it matches a new lease.
• Consulting and advisory work. Portfolio reviews, lease audits, strategy studies and similar projects that do not end in a transaction are usually billed to the client as a fee.
• Coworking and flexible space. Operators often pay referral fees on their own terms, which differ from conventional leasing commissions.

Another fair question. A fee based on lease value is larger when the lease is bigger or longer, which could in principle tempt a broker to steer a client toward more space, a longer term or a move instead of a renewal.

The honest answer is that the incentive exists and that a good tenant rep manages it openly. There are sensible checks.

• Ask the broker to explain how they are paid in each scenario you are considering, including renewing, subleasing and doing nothing.
• Ask whether the fee differs between buildings on your shortlist. If it does, you should know.
• Look at how the broker earns repeat business. Firms that depend on referrals and returning clients have a strong reason to give advice that holds up.
• Notice whether the broker ever recommends the smaller option. Advice that always points toward the larger deal deserves a second look.

A broker who is uncomfortable with these questions has told you something useful.

Because the arrangement is contractual, the right time to understand it is before you sign a representation agreement, not when a lease is on the table. Ask each of these and expect clear answers.

• ✓Who do you expect to pay your fee in this transaction?
• ✓Is there any circumstance in which our company would owe you money?
• ✓What happens if the landlord or sublandlord offers no commission, or less than usual?
• ✓How does your fee work if we renew where we are?
• ✓Will you disclose the commission offered on each building we consider?
• ✓Does your firm receive any other payment connected to our deal, such as referral fees from vendors?
• ✓Is all of this written into the representation agreement?

These are questions we expect to be asked at Tenant Advisory Group, and the answers belong in the written representation agreement so that you know who is expected to pay in each scenario before any landlord is contacted. Have your attorney review that agreement, as you would any contract.