Commercial real estate commissions
How a leasing commission is struck, where it belongs in a model, and the shortcut that makes it five times too small.
The rate applies to the term, not to a year
A commercial leasing commission is a percentage of the gross rent a lease will collect over its full term. That single sentence is the whole of the arithmetic, and it is also the thing most often got wrong, because the rate looks like an annual rate and the rent is quoted annually, so multiplying the two feels finished.
It is not finished. A five-year lease collects five years of rent, and the commission is struck on all of it.
Example: 8,000 SF at $28, five years, 5%
Sample inputs
- Suite
- 8,000 SF
- Market rent
- $28.00 / SF NNN
- Lease term
- 63 months, free rent included
- Free rent
- 3 months
- Downtime
- 3 months
- Commission
- 5%
The lease collects $1,120,000 of gross rent across its sixty paying months, the 63-month term less its three free ones. Five percent of that is $56,000.
Take five percent of one year’s rent instead ($224,000) and you get $11,200. That is not a rounding error. It is exactly five times too small, because the term is exactly five years, and it gets worse as leases get longer.
The error also has a direction. It only ever understates, so a model carrying it always looks better than the deal is.
Why the shortcut survives review
The shortcut produces a plausible number. The model still balances, the total looks like a commission, and nothing on the page flags a problem.
It also gets worse as leases get longer. The shortcut books one year of a commission that is earned over the whole term, so on a five-year lease it records a fifth of the cost, and on a ten-year lease a tenth.
Where the cost belongs
| Question | Answer |
|---|---|
| Above or below NOI? | Below. It is a cost of signing a lease, not of operating the building. |
| Operating expense? | No, same side of the line as tenant improvements and capital expenditure. |
| Who pays it? | The landlord, in almost every case, including the tenant broker's share. |
| Booked when? | Usually on execution. DealWise books it in the month the lease starts, as one cost. |
| Does it reduce NOI? | No. Putting it above the line understates NOI, and a cap rate multiplies that error into the value. |
The last row is the one that costs money. NOI is what a cap rate is applied to, so a commission wrongly treated as an operating expense does not reduce value by the commission. It reduces value by the commission divided by the cap rate.
The numbers, side by side
| Amount | |
|---|---|
| Gross rent over the term | $1,120,000 |
| Commission at 5% | $56,000 |
| One year of rent at 5% | $11,200 |
Run your own with the lease commission calculator, or the purchase commission calculator for the sale side. Both are free and need no account.
Splits, briefly and without a number
One commission is usually divided twice: between the listing broker and the broker who procured the tenant, and then between each broker and their brokerage.
Both divisions are contract terms. The listing agreement sets the first, the brokerage’s own policy the second. They vary by market, by asset class, by firm and by deal. Any figure quoted to you as the standard split is worth checking against the agreement in front of you, which is why there is no number on this page.
In a deal, not a spreadsheet
The commission is derived from the lease, not typed beside it.
Set the term, the rate and the market rent on a suite, and DealWise books the commission in the cash flow in the month the lease starts, with the TI, after the downtime and alongside the free rent, so the re-letting costs are in the return rather than in a note. Free plan, no credit card.
Frequently asked questions
How is a commercial leasing commission calculated?
As a percentage of the gross rent the lease will collect over its full term, not over one year. On an 8,000 SF suite at $28/SF with a 60-month term, the lease collects $1,120,000 and a 5% commission is $56,000. Taking 5% of one year's rent gives $11,200: five times too small, and the gap grows with the term.
Who pays the leasing commission?
The landlord, in almost every commercial leasing deal, including the portion that reaches the tenant's broker. That is why a tenant representative can be free to the tenant, and it is also why the commission belongs in the landlord's underwriting rather than the tenant's.
What is a commission split?
The division of one commission between the broker who listed the space and the broker who brought the tenant, and then again between each broker and their brokerage. The shares are set by the listing agreement and the brokerage's own policy. They are a contract term, not a market constant, so any figure quoted as standard should be checked against the agreement in front of you.
Is a leasing commission an operating expense?
No. It is a cost of getting a lease signed rather than a cost of operating the building, so it sits below the NOI line alongside tenant improvements and capital expenditure. Putting it above the line understates NOI, and because a cap rate is applied to NOI, that error is multiplied into the value.
When is the commission paid, and when should it be modelled?
Usually on execution, or split between execution and rent commencement. DealWise books it in the cash flow as one cost in the month the lease starts, with the tenant improvements, so re-letting a space shows up as the cash it takes in the month it takes it. If the lease splits the payment, that schedule is in the lease agreement, not the model.
Related
Lease commission calculator
Term, rate and rent in; the commission out. No account.
Purchase commission calculator
Sale-side commissions, buyer and broker fees.
Tenant improvement allowance
The other cost of signing a lease, and how it amortizes.
Net effective rent
What the rent is once concessions and costs are counted.