Fee Sharing is sometimes an a necessary tool that tenant representatives use to earn the business from their clients. It also helps to offset some of the clients expenses associated with leasing space. This approach tends to make sense when the tenant is a large national contract or has a significant amount of square footage that they are leasing.
There are special disclosure requirements that are required by the Texas Real Estate Commission that are necessary when a broker is offering their client a fee sharing option. In the Tenant Representation Contract or any advertisement the broker must inform the potential prospect that an offer to rebate a portion of the broker’s commission must disclose that the payment is subject to the consent of the party that the broker represents in the transaction. The broker must also disclose if the offer is subject to any contingency’s. Visit this link on Commission Rebates from TREC for more information.
It is important at the time that your broker negotiates the commission agreement with the landlord or the landlord’s broker that the commission agreement doesn’t preclude the tenant’s broker from any fee sharing arrangement. Many landlord’s standard commission agreements don’t allow fee sharing. This can be corrected in the negotiations but it could be a big issue if it is not included in the commission agreement one the lease is signed.
Any commission that is rebated must be given to the tenant representative’s principle. The rebated portion cannot be given to any other person or entity.
So when does it make good business sense to fee share with a client to gain their business? A good broker doesn’t want to give away their hard earned commission and there are many expenses that need to be considered. If you are working for one of the larger brokerage houses they can take up to fifty percent of your commission. So if you are representing a five thousand square foot office tenant on a three year term and you agree top fee share twenty five percent of the commission, you are doing all the work your client gets twenty five percent off the top, your firm gets fifty percent of the remainder and you earn a total of thirty five percent.
On the five thousand square foot example a tenant representative is going to a $8,268.75 commission if the overall rental rate is $35 on a three year lease term. The total commission paid is $23,625. Obviously the longer the term the more an individual agent will earn.
My rules for fee sharing that I like to use are:
- Fee share on five year or longer term
- Fee share with tenants that have multiple locations and you represent them those locations
- Rebait a portion of the commission if the lease is 3 years or longer and is above 10,000 square feet for office space or 20,000 square feet for industrial.
- The overall effective rental rate needs to justify fee sharing.
- The reputation and credit of the client being represented must be in good standing
It is helpful that I work for my own Dallas tenant representation firm and this gives me more flexibility to consider a commission rebate option for my clients because I don’t have the requirement to split the fee with the brokerage house. Many times I have used fee sharing to help my clients with data, cabling moving and other expenses associated with the activity of leasing office space.