THE FIVE BIG

COMMERCIAL REAL ESTATE

MISCONCEPTIONS

We’ve all heard at one time or another,  “Stay away from commercial real estate, it takes too long to make any money.”  I  know, I heard it in my pre licensing course in 1977 and became very concerned since I was already employed by a commercial real estate developer and making some pretty good money.  Was I the exception or was there trouble ahead?  Probably neither.  I’ve found that many people both inside and outside the real estate industry misunderstand and view the commercial aspect of the industry as too complicated or too time consuming to pursue.  Another of the great fallacies is   “commercial  commissions are always 10%.”  Nothing can be further from the truth 

            Let’s begin by putting some of these misnomers aside: 

 1.  It takes forever to make any money in commercial real estate. 

 Money can be made in commercial real estate as quickly as any other aspect of real estate including residential.   If hired by a property owner you might be put on salary; if you were to start with a commercial brokerage you might be paid to do research or possibly trained as a leasing broker and immediately be given a client or a building to lease and start doing lease transactions immediately.  When one makes a comment about taking forever to make money in commercial real estate they’re usually thinking large property sales   Some of the areas you might work in if you were to chose to work in commercial real estate” 

(1)    Office Building Leasing

(2)    Retail Leasing

(3)    Industrial Leasing

(4)    Property Management

(5)    Commercial Land Sales

(6)    Residential tract land sales

(7)    Apartment Complex Sales

(8)    Office Building Sales

(9)    Retail Sales

(10)Industrial Sales

(11)Business Brokerage 

and more. 

2.      Ten (10%) is  the standard commission in commercial real estate.   

Ten percent is not the standard commission paid in a commercial real estate transaction.  There are times when you may handle a small, inexpensive piece of      property and a 10% commission is justified otherwise it just wouldn’t be worth your time unless you charge a higher commission.  Commissions vary from market to market, owner to owner and sometimes from property to property.  There are however generally accepted market standards. For instance in some markets the going rate for commissions on a full service office lease might be 4% of the gross, unless an outside broker is involved then it goes to 6%.  Retail could be paid on the basis of so many dollars per square foot while large chunks of industrial space may have such a low rental rate that in order to make a respectable commission the rate might be 6% of the net.  Also when leasing it is not uncommon for the broker/agent to be paid on future expansions and renewals if their prospective tenant should choose to stay in the building.  In sales the commissions are set by the market but once again they will probably range from 3% to about 6% under normal conditions.

                      3.  The real estate industry is really hurting right now. 

An overbuild or a weak market of one real estate product does not always  reflect the condition of the entire industry.   There are so many different aspects of commercial real estate that it’s    true, some of them may require a great deal of effort and time.  The advantage of working in the commercial real estate industry is the flexibility it affords an agent in a  down market, because there are so many different aspects or specialties.     overbuilding is one of the biggest culprits in a soft market, but an overbuild usually effects only one or two product types in the market,    rarely the entire market.  A soft economy usually means a slow down in leasing, properties change hands and some even go back to their lenders, the banks or insurance companies, new relationships are formed and new opportunities arise.

 If you’re a residential broker or salesman don’t shudder or shut down when your client asks you about commercial real estate. This is your client and there are certain aspects of commercial real estate that you already do and are better suited to handle than most commercial specialists.  Let’s discuss some of these so you’ll know when to work the deal and when you to refer it.

4.  Commercial Brokers, if an agent is working under the banner of a residential real estate firm, don’t make income or knowledge assumptions.    Recently an agent I had trained who is working with the commercial division of a residential company was told by a well meaning, experienced commercial agent that “she’ll never make much money unless she were to join an established commercial real estate firm.  She nodded in agreement politely, having made six figures of personal income her first year in the industry and is well on her way to doubling that in year two.   

The facts are that this particular agent works with a firm that has over 200 residential agents feeding her leads, granted mostly “mom and pop” deals but she keeps 85% -95% of her commissions.  An experienced broker, specializing in a particular area of commercial real estate, working with the many highly respected named firms, will work with the corporate elite, do larger deals and get a lot more notoriety but their commission splits could start as low as 45% and rarely do they achieve higher than 65%  and once they have paid referral fees to the agent or agents within their own companies who sent this elite client to them. They may sometimes take home as little as 20% of the entire commission, while the local press is raving about them doing one of the largest deals of the year. 

The fact is that many of the major commercial real estate firms have acknowledged the 100% residential real estate firms could pose a devastating problem to them if they start establishing their own commercial divisions and offer large commission splits to some of their well established big producers.

5. As a real estate agent I should work all kinds of transactions.   

If  it’s not in your area of expertise, refer it.    So often residential real estate agents, through their hard work and home selling expertise, mpress and establish a well deserved trust and bond with their clients, which is a great thing.  This leads to repeat business and referrals and this bond sometimes leads their business executive or entrepreneurial client to ask their agent about finding them a business or commercial investment property.  Usually the residential agent considers how best to handle this request and passes/refers it to a commercial specialist, for a referral fee, with a reminder to the commercial agent of how important this client is to them.  All too often, though, the residential agent figures out the potential commission that can be made on this transaction and allows their ego and greed to take over so they decide to work the transaction themselves.  Bad move. 

Recently I watched a situation unfold where a residential agent decided  to do a commercial office lease transaction herself, when she realized the commission to her would be around $65,000.  Her client of several, years, had bought a few homes through her and now his company had asked him to find a new office location, about 10,000 square feet of  office space, downtown. She had no problem find space, but had no  experience negotiating a commercial lease.  She had no idea that the typical commercial lease document has hidden in it about 10% to 20%, worth of lease concessions depending on the condition of the market..

Upon receiving the lease from the landlord’s representative she passed it on to her client with the recommendation that, “it appears to be a pretty standard lease to her, and it should be okay to sign it.”  They signed and the transaction was worth about $1,620,000 and paid her a  commission of about $65,000. 

Everyone was happy.  The problem with the transaction is that the agent’s greed and ego has just cost/lost a valuable client somewhere between $162,000 and $324,000 in this transaction because of her  lack of market knowledge.  The mistake may never be picked up, but if it is, she may have put her client’s position in jeopardy with his  company and has lost a valuable client and taken a hit to a good reputation.