Commercial Real Estate Broker

Who is a commercial real estate broker?

A commercial real estate broker is a middle man between sellers and buyers of commercial real estate, who helps clients sell, lease or purchase commercial real estate. A commercial real estate broker has the freedom to work either as an independent agent, an employer of commercial real estate agents or as a member of a commercial real estate brokerage firm. The primary difference between a commercial real estate broker and a commercial real estate agent is that the former can work independently while the latter cannot i.e. a commercial real estate agent must be employed by a licensed broker.

 

What is commercial real estate?

A property is classified as commercial real estate when it is only used for the purpose of conducting business. Typically, commercial real estate is owned by an investor who collects rent from each business that operates from that property. Examples of commercial real estate include office space, strip malls, hotels, convenience stores, restaurants, gas stations etc.

 

commercial real estate broker

 

Qualifications required for becoming a commercial real estate broker

Educational requirements: The basic requirement for becoming a commercial real estate agent is a high school diploma (or an equivalent educational qualification). Most successful commercial real estate agents have an undergraduate or graduate degree in business, statistics, finance, economics or real estate (with special focus on sale or lease of commercial property).

Legal requirements: A commercial real estate broker is a real estate professional who has continued their education beyond the level of a commercial real estate agent. To be certified as a commercial real estate broker, an individual must obtain a state license in each state that they want to practice their profession in. To obtain the same, an individual must pass the commercial real estate broker exam (Note: A commercial real estate license is separate from a real estate agent license). The following steps must be under taken for an individual to be eligible to give the commercial real estate broker exam:

  • An individual must be employed with a firm for 1 to 3 years
  • Next, an individual is required to take 60-90 hours of state-approved licensing courses
  • After the completion of the state-approved licensing courses, the individual is eligible to take the exam. Individuals are often quizzed about the prevailing federal and state laws in the commercial real estate industry.

Those who pass the exam are certified as commercial real estate brokers. To continue holding the license, a commercial real estate broker must take relevant courses every 2 to 4 years. Popular courses include mortgage loan brokering, real estate appraisal and real estate law.

 

Income of a commercial real estate broker

The income of a commercial real estate broker is based on the commissions generated by sales. The listing agreement (a contract between the listing broker and the seller specifying details of the listing) states the broker’s commission. The brokerage commission for commercial real estate is negotiable and on average, is about 6% of the final sales price. If the property is being leased, and not sold, then the brokerage fee is decided on the basis of square footage and net rental income.

Usually, the commission is paid by the seller from the sales proceeds, unless the seller and buyer negotiate a split (Note: the seller often factors the commission to the asking price). The commission is paid once the deal is closed. The commission is split between the buying broker and the selling/listing broker. However, if the broker is not working independently, the commission is split four ways. First, the commission is split and credited with the buying broker and listing broker. Each broker then takes a broker fee/commission and pays the concerned agent their commission/ a flat fee per deal executed.

The commission is not only the primary source of income of for a commercial real estate broker but also helps cover the cost of doing business. Thus, the following expenses are taken into account while setting the brokerage commission:

  • Association fees
  • Licensing fees
  • Advertising and marketing costs
  • Multiple Listing Service (MLS) fees

Furthermore, a credible reputation, repeat business, a strong local economy and high- priced sales result in higher commissions for commercial real estate brokers (and vise-versa).

 

Advantages of hiring a commercial real estate broker

A commercial real estate broker can help prospective clients save time and money by carrying out the following functions:

  • Building a network in the target community: In each area that a commercial real estate broker intends to work, they create a network with important members of the concerned community. This ensures that they have a first mover’s advantage every time a property is up for sale or when a prospective buyer emerges in the community.
  • Understanding tax and zoning laws: Many individuals refrain from investing in commercial real estate because of the large number of complex rules and regulations governing the taxation and purchase of commercial property. This complexity is compounded by the fact that these rules and regulations vary across states, industries and zones. A commercial real estate broker must have excellent understanding of tax and zoning laws to complete the aforementioned formalities on their client’s behalf and thus, remove a barrier to investment in commercial real estate.
  • Evaluating business plans: A commercial real estate broker evaluates their clients business plans to determine their feasibility. They often use statistical analysis (such a break-even analysis) to determine the basic margin of safety on their client’s investment.
  • Negotiating with clients: Commercial real estate brokers have to be excellent negotiators and mediators because unlike residential real estate brokers, commercial real estate brokers have to deal with more than two parties while selling a property. These parties often have conflicting incentives, which a commercial real estate agent helps align through negotiations. Thus, a commercial real estate broker must have excellent communication and persuasion skills.
  • Conducting research: Often, the success of a client’s business depends on local conditions. A commercial real estate broker has to provide prospective buyers of commercial real estate with research regarding local demographics, businesses, environmental quality, property maintenance costs and the location of the property.
  • Analyzing lease payments: A commercial real estate broker researches and analyzes trends in the lease payments of commercial real estate in the area in which she/he is carrying out a deal. There are 4 types of commercial real estate leases:
  1. Single net lease: Under this lease, property tax is paid by the tenant.
  2. Double-net (NN) lease: Under this lease, property tax and insurance is paid by the tenant.
  3. Triple-net (NNN) lease: Under this lease, property tax, insurance and maintenance is paid by the tenant.
  4. Gross lease: Under this lease, property tax, insurance and maintenance is paid by the landlord. The tenant only pays rent.

Furthermore, larger tenants have longer leases which provide security to the landlord as a steady stream of rent income in ensured. However, lease rents can be adjusted in a more flexible manner under a shorter lease.

Thus, it is important to understand the prevailing trends in lease payments in an area, as different leases result in responsibilities being shared between the tenant and landlord in a different manner.

  • Making cold calls: To obtain statistical information and find new properties for sale, a commercial real estate broker must make daily cold calls to business managers and business owners.

 

Disadvantages of hiring a commercial real estate broker

Under some circumstances, a commercial real estate broker may show a client only those properties where the commission is high, advice the client to make a deal with rent higher than necessary or rush the client through the process to maximize the number deals that he/she can make. To counter such behavior, the client can enter a contract with the broker in which the latter is paid a flat fee as opposed to a commission.

 

Common Metrics Used by Commercial Real Estate Brokers

  • Gross rental yield: Gross rental yield expressed rental income as a percentage of the value of the property, before taxes and other expenses are deducted. It is calculated as follows:

Gross Rental Yield = (Annual Rental Income/Cost of Property) x 100

Commercial real estate results in an average yield of 7%-7.5% as opposed to residential real estate which results in an average yield of 4%–5%. This is a popular metric for comparing commercial real estate properties which are going to be rented/ leased out.

  • Capital Gain/Total Return on Investment: Capital gain refers to the profit made by selling a property. It is calculated as follows:

Total return on investment = {(Gain from Investment – Expense of Investment)/ Expense of Investment)} x 100.

This is a popular metric for comparing commercial real estate properties which are going to be sold. Investment in commercial real estate which provides scope for improvement and/or expansion is ideal for earning capital gains.

However, it is important to note that there exists an inverse relationship between gross rental yield and capital gain/total return on investment.

  

Learn More

Commercial brokers are important for a healthy property market. Find out more by clicking on the following links: