Looking for office space in the competitive Austin real estate market can be chaotic, to say the least.
Over AQUILA’s past 10 years, we’ve met with thousands of companies looking to solve their real estate needs; and whether they are looking to relocate, renew or even open their first office location, one of the first questions we always get is “how much will using a tenant representation broker cost me?”
The simple answer?
Really. We know this answer can be a shock in a world where we expect everything to have a price, so we decided to dive into the tenant representation process, a few of the benefits to using a tenant representation broker and how a tenant representation broker makes money even though you, the client, aren’t paying them directly out of pocket.
What is a Tenant Representation Broker?
The basic job of a tenant representation broker is to help you find a suitable space for your business, but a good broker’s value does not stop there.
A good tenant rep will add value throughout the entire leasing process, and will use their experience to secure the “perfect” deal for their client. Whether office, industrial or retail, a tenant rep will not only help you decide how much space you may require, but will use their market intelligence to find the optimal location based on your needs, and as importantly, negotiate the terms of the deal to protect your company and its assets.
Once the broker has compiled a list of potential properties that meet your criteria, they will then take you to tour the properties so you can assess them in person. The tenant rep will walk you through the space and answer any questions you may have about the leasing process.
When you find the right property, the broker will go to work negotiating with the landlord to get you the best terms possible for your lease. Leases are long-term commitments, so having the right tenant rep broker can make a big difference on your bottom line.
Out of Pocket Costs to Hire a Tenant Representation Broker
With all the services a tenant representation broker provides, surely it costs a lot to hire one, right? Typically, you (as the tenant) do not have to pay the tenant rep broker anything out of your own pocket.
Because landlords only benefit when a tenant is in their building, they are willing to cover the tenant broker’s fees as an encouragement for the broker to bring them potential tenants.
Landlords account for these expenses in their budgets, which ultimately is reflected in the rental rate. Landlords are used to paying both a tenant rep and their own broker in most deals. In essence, the landlord rewards the tenant rep broker for helping the building get a new tenant. But don’t worry, a tenant rep broker still works for you and has a fiduciary duty to represent your needs in everything they do.
Exceptions to This
Sometimes, when the landlord feels as though the tenant rep broker has pushed them to their limit in regards to concessions, with below market rates, above market TI, etc., the landlord will refuse to pay the tenant rep’s brokerage fee.
In these rare occasions, it will become the tenants responsibility to cover their broker’s fees in this case. It is important to note, however, that when this situation arises, the savings that the broker has achieved for the tenant typically far exceed the 4% that they will pay in brokerage fees.
What is the typical fee or commission a tenant representation broker makes on my lease?
Tenant representation brokers are paid a fee, often called a commission, by the landlord upon the completion of a transaction. This commission varies based on the type of space you’re leasing and the type of lease you’re working on (i.e. – new, renewal or expansion). This fee varies by market, but in Austin the below rates are typical.
For an office lease, the going market rate for tenant rep commissions is 4% of the total gross rent (which is calculated by adding base rent plus operating expenses) times the term of the lease.
For example, if the tenant will be paying a total of $100,000 per year over a ten-year period, the tenant rep broker will receive a commission of $40,000 paid by the landlord of the building.
This commission structure is normally the same for all office space transactions in Austin, whether they be new leases, renewals of existing leases, or expansions into a larger space.
In Austin, Industrial lease commissions are around 4%, but are paid on base rent rather than gross rent, meaning the operating expenses are not included in the commission calculations.
Like office leases, industrial commissions normally remain the same whether the transaction is a new lease, renewal, or expansion. However, in some situations a landlord may choose to only pay a 2% base rent commission if the transaction is a renewal.
Retail commissions usually follow the same structure as industrial and average around 4% of the total base rent. Retail landlords also occasionally choose to pay a 2% commission to the tenant rep broker if the transaction is a renewal.
If your tenant representation broker is helping you purchase a property rather than lease a property, fees are structured a little differently.
Brokerage fees for the purchase or sale of properties are typically 6% of the sale price; however, both the seller’s broker and the purchaser’s broker each get 3%.
Unlike in leasing where the fee is fixed, no matter the size of the transaction, in investment sales this 6% fee is typically reduced as the size of the sale increases. For more information on how investment broker fees, check out our blog post How Much Does it Cost to Use a Broker to Buy or Sell a Property?
Additional Costs to Watch For
Just because the tenant rep broker is not an out of pocket cost for the tenant does not mean the entire leasing process can always be done at no cost to the tenant. There are a few costs that need to be considered before the decision to find a new space is made.
Legal fees can sometimes become a substantial cost during the negotiation process. Since leases are legal documents, it is often a good idea to have an attorney look it over before agreeing to anything. If the lease is especially complicated, or is taking a long time to negotiate, the legal fees can accumulate quickly.
Construction/Build Out Costs
Tenant finish out costs are another expense to consider when deciding on a space and negotiating your lease. An ideal lease would cover these tenant improvements, but sometimes the tenant improvement allowance is not quite enough money to cover everything you may want to do to make a space your own.
Even costs like furniture and internet can be unexpectedly large, so planning for these costs by trying to negotiate the best lease possible and engaging a project manager early on in the process is recommended. Your tenant rep broker can assist you in estimating all of these costs to help you better understand how much you may have to come out of pocket prior to executing a lease.
Benefits of Using a Tenant Rep Broker
Since tenant rep fees are generally expected by the landlord and do not cost the tenant, there really is no reason not to use one in your search for a new space. However, if you still are not convinced, there are numerous reasons using a tenant rep is a good idea.
- Allow you to stay focused on what you do best: Unless your business is real estate, it is unlikely you will have as many resources and connections in the commercial real estate industry as an effective tenant rep broker. Tenant reps spend every day learning the market and gathering data to better assist their clients, so letting them handle the search process will allow you to maintain focus on your own business.
- Get the best deal: A tenant rep is also an asset when it comes time to negotiate your deal terms. They know what economic and non-economic deal points are common in the market and can use that knowledge to secure better lease terms for the tenant. In addition, the broker has the backing of the company they work for, giving you more negotiating power than if you tried to negotiate the lease on your own.
- Avoid the headache: Tenant representation brokers are skilled in the art of real estate and can save you from experiencing the headaches of what can sometimes be a complicated process. To put it another way, you might be able to file your taxes on your own, but why would you if you could hire an accountant for free?
For a more in-depth look at why you should hire a tenant representation broker to help you with your real estate needs, check out our blog: 7 Benefits of Hiring a Tenant Representation Broker.
Should You Hire a Tenant Rep Broker?
At the end of the day, a tenant representation broker is a great value: no out of pocket cost to you with the potential for tens (or even hundreds) of thousands of dollars in savings in return for their employment.
Our tenant reps pride themselves on being able to find the best spaces and negotiate the best deals for their clients, and we would love to help you in your search as well. If you have any further questions about tenant representation services or any of the other services offered by AQUILA, contact us today to schedule your consultation.
- How Much Does it Cost to Use a Broker to Buy or Sell a Property?
- Cost to Hire a Project Manager for an Office Build-Out or Renovation (Prices/Rates)
- 7 Benefits of Hiring a Tenant Representation Broker