Who pays the commercial or industrial real estate broker's commission? If you answered "The seller, of course," you may not be completely correct.
The documents to a traditional real estate transaction call for the broker's commission to be deducted from the seller's proceeds. But what's the reality?
"Everyone knows that the tenant pays the commission over the term of his lease," said Michael Epsteen, a Santa Monica commercial broker who represents such retail chains as Kids Mart, Ross Stores and C&R Clothiers. "However, most tenants find it unacceptable to pay a broker for real estate services, even though they are charged for those costs anyway in their lease."
Epsteen has "earned the status" of being the retailers' exclusive broker in Southern California by helping his clients develop their business concept, locating sites, negotiating leases and acquiring legal resources. He is paid for all these services by the shopping center, which pays a commission to its own exclusive leasing broker. Epsteen then negotiates a commission split.
Some retailers that are not locally based select an exclusive broker and pay him themselves.
Steve Soboroff, another Santa Monica commercial broker, represents chains in this manner. "We act as the real estate department for our tenants," said Soboroff, who represents Best Products, Oshman Sporting Goods and Circuit City, among others. Some clients pay him a retainer, while others pay a fixed fee for each location.
"I'm more effective this way," said Soboroff. "I can get my clients locations because I don't have to ask the landlord for a commission. It also helps my credibility with the landlord. He knows I have a serious client because the client is paying me."
When Circuit City Stores (based in Richmond, Va.) decided to expand to the California market last year, real estate manager Ben Cummings believed the 78-store chain needed an exclusive broker.
"We were 3,000 miles away and have only two full-time people in our real estate department," Cummings said. "We knew we wanted to expand rapidly in Los Angeles, and it would be difficult if we didn't have someone who was a national retail specialist there who could give us about 50% of his time."
Cummings turned to Soboroff to negotiate 14 leased sites in the Los Angeles area. Circuit City paid Soboroff a fixed fee for each location.
"By paying the 'commission,' we got someone who is 100% interested in us and who can work for us without having to worry about how or if he's going to be paid," Cummings said.
In the typical transaction, when the seller pays the buyer's broker as well as his own, it's often unclear who represents whom.
"There's always been confusion as to who the buyer's broker represents when he's paid by the seller (through a listing broker)," said Los Angeles real estate attorney Steve Claman. "But when the buyer has his own agent and pays him directly with an express agreement to that effect, the relationship is clear."
Usually, the documents (just like exclusive listing agreements) specify that the buyer will work exclusively with a broker for a certain period and during that time, the broker will show him properties that meet his requirements.
Claman said that more sophisticated commercial and industrial real estate buyers are using buyer-broker documents more frequently so that both the buyer and the broker are protected.
"If the buyer establishes this arrangement, he truly has someone on his side--not someone with divided loyalty--and the broker knows he will be paid for his efforts if the deal closes," Claman said.
For industrial clients, who don't look for a number of new sites all at once, such as retailers, the concern for exclusive representation may be confidentiality.
"Frequently, the buyer doesn't want his identity revealed to the seller," Stuart Klabin, an industrial broker in Inglewood, explained. "The buyer may have a high profile. If the seller knew who he was, the seller might try to get a much higher price. In that case, we might use our own name as the buyer (for an undisclosed principal)."
This is an example of the type of service that Klabin provides if he is the buyer's exclusive representative and is compensated as such. Klabin added that these arrangements must provide full disclosure (who is paying the broker) to both parties and that the buyer's broker should never represent the seller as well.
Another reason an industrial buyer may want an exclusive broker is "technical expertise."
Klabin said, "Typically these buyers have property needs that are difficult to define. A myriad of building, safety and fire codes must be considered, and the broker must be thoroughly familiar with these requirements."