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?”
In this article, we’ll explain:
- How tenant rep brokerage commissions are structured
- Who typically pays the commissions
- What you should expect to pay out of pocket for your tenant rep broker
- Additional costs related to the site selection process
What is the typical fee or commission a tenant representation broker makes on my lease?
Typically, your tenant representative will receive 4% of your total gross rent (or base rent plus operating expenses) over the life of your lease.
For example, if you are signing a 5 year lease for 5,000 sf and your rental rate is $30 per square foot, those three figures would be multiplied to find the total amount that the tenant would pay to the landlord over the lease period (5 x 5,000 x 30 = $750,000). Then that total amount the landlord receives is multiplied by 4% to find the tenant rep’s commission (750,000 x 0.04 = $30,000).
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.
What factors can affect commission percentages?
While 4% is the standard commission rate in Austin, Texas, this rate can vary across markets.
Things that can affect the standard commission rates include:
- Market Conditions: For example, in a slower market you may see larger percentages to incentive brokers to bring tenant to a certain property.
- Product Type: Sometimes different product type (office, retail or industrial) can command a different commission rates.
- Deal Type: In some markets, you may see renewals or expansions receiving different commission rates.
- Purchase Transactions: While the landlord (or seller) will still pay a 6% brokerage fee, this will typically be split up differently, with the buying and selling broker each receiving 3% commissions.
Who pays the tenant rep commissions?
Typically these commissions are paid by the landlord, not you.
Because the landlords only benefit is 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.
Usually the landlord plans to pay a total of 6% commision, with 4% going to the tenant rep, and the other 2% going to the landlord’s representative.
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.
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The Direct Deal Myth
Sometimes the landlord broker will go to the tenant and try to negotiate their lease on a direct basis without a tenant rep broker.
Some tenants think this might be a good idea because it could allow them to receive a better rate from the landlord since they don’t have to pay a tenant rep fee. But in reality, a landlord is typically contractually obligated to pay their landlord broker a higher fee in the event that there is no tenant rep broker. So the savings a tenant thinks they might be getting by not using a tenant rep actually is going to the landlord rep.
Additionally, without the leverage that a tenant rep broker helps you bring to negotiations, you are likely to end up with far less favorable deal terms when you negotiate directly with the landlord.
Exceptions to This
Sometimes, if 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.
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.
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 upfront 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