Tenant Leasing Illustrated – March 2019 – Super Geezers and Brokerage Commissions

Here’s to not going gently into that good night.

I realize that by now we are all tired of the Super Bowl hype and the Super Bowl post mortems and, let’s face it, nobody really likes Tom Brady unless they are from New England or a Brazilian supermodel, but… I want to give old man Methuselah his due.

And Brady is not the only one defying father time.

This year’s NFL championship games featured two newbies (Jared Goff of Los Angeles and Patrick Mahomes of Kansas City) against two guys already drawing Social Security, “Tahmie” (as he is known in New England), age XLI, and Drew Brees of New Orleans, age XLII (what’s with the Super Bowl and Roman numerals??!!).

I can barely get out of bed without assistance and these guys survive 290-pound muscle bound behemoths coming at them with a full head of steam!

Brady and Brees were playing NFL football when Goff and Mahomes were literally in grade school. Rotary phones were the latest fad, players did not wear helmets, Roosevelt (Teddy) was President, fans rode their horse and buggies to games and commercial leases were less than twenty pages and written in English.

You can look it up.

Perhaps you can also guess that I have been rooting for the old fogies.

A Brady vs. Brees Super Bowl would have been incredible. Each quarterback would shuffle up to the line of scrimmage with their walkers, suck on their teeth for a bit, and then tell the opposing defense “Be quiet! I got shoes older than you!”

Alas, that was not meant to be. But Tahmie held up his end and Drew might have too if not for a blown interference call.

Did I mention that Vince Carter is still playing NBA basketball at XLII? Inspiration enough to (almost) make me get up to change the channel instead of using the remote!

One thing in commercial leasing that never gets old is a tenant’s need for the option to sublease all or a portion of its space.

Most tenants looking to free themselves of excess space will formally engage a competent commercial leasing broker.

The broker will need an exclusive arrangement in order to protect its position while the tenant will need to document the relationship.

We have focused in past newsletters on the elements of such brokerage agreements but our focus today is on the calculation of the commission due.

The amount of the commission will vary depending on the resulting arrangement.

The broker may find a suitable subtenant. Pretty straightforward.

Although less common, the broker might instead be able to arrange for an assignment of the entire lease.

In addition, the landlord may agree to (or exercise an existing right to) recapture the space for itself, either by sublease or assignment to itself or a designee or by termination of the lease.

Each of the foregoing may provide an acceptable solution to the tenant’s disposition needs but each will require a different focus in terms of the commission due.

Provide sufficient coverage against blitzing brokerage commissions by following these VI suggestions:

  • I. Define “rent”. Gross fixed rent should be the basis on which to calculate the commission for subleases, assignments and/or recaptures and you should specifically exclude escalations based on increases in taxes, operating expenses, labor and similar items, as well as charges for electricity.
  • II. Specify sublease calculation. Sublease commissions are relatively straightforward, calculating the commission by multiplying the rent for each year by fairly standard local rates and adding the products together. A typical example would be year one 5% of such year’s rent, year two 4%, years three through five 3.5%, years six through ten 2.5%, years eleven through twenty 2% and thereafter 1%.
  • Generally, any portion of the sublease term during which rent is abated will be averaged and deducted over the term of the sublease (although note that the amount of the commission would be reduced without such averaging and deduction to the extent rents are abated at the beginning of the term).
  • There is often no deduction for the amount of a sublandlord’s work allowance or the value of its work letter, but that is negotiable.
  • III. Specify compensation for assignment. For an assignment, the commission is usually calculated by applying the agreed upon rates to the rent under the lease for the portion of the term subject to the assignment, i.e., based on your rent savings. Any sums paid to you by the assignee (other than for personal property or leasehold improvements to the extent not exceeding its fair market value) are usually averaged over the portion of the term subject to the assignment and added to the rent and any sums that you pay to assignee are also so averaged and subtracted from the rent.
  • IV. Address recapture. Many brokerage agreements provide that in the event of a surrender, cancellation or buyout of the lease, or other recapture, the broker commission will be calculated as with an assignment, unless the recapture is structured as a sublease to the landlord or its designee in which case the commission will be calculated by applying the agreed rates to the rent payable by the landlord or its designee for the sublease. This is not really equitable unless the recapture is structured as a sublease so we try to reduce the amount on which the commission is calculated by any amounts payable to the landlord. If there is no prospective subtenant, you would pay a commission based on the saved rent less any buyout amount that you are required to pay your landlord. If there is a prospective subtenant, you would pay a commission based on the rent paid by the prospective subtenant (i.e., the rent saved less the delta paid to the landlord over and above the prospective subtenant’s rent).
  • V. Specify exclusions. Many tenants do not believe they need a broker to negotiate with their landlord, especially if the recapture terms are already included in the lease. Perhaps, but brokers expect exclusive arrangements covering all transactions and believe that they can add value even in a recapture situation, especially with respect to a surrender or buyout that is not addressed in the lease. Whether or not that is accurate in your situation, you need to raise any such exclusion up front so that all parties are clear that such recapture is not intended to trigger a commission.
  • VI. Request sharing. Many larger tenants require that their brokers split the commission but this also should be addressed up front. In some states, brokers cannot share commissions with non-brokers and as a result tenants sometimes form licensed brokerage entities. The common method to sidestep this requirement has been for the broker to forego the shared amount as a commission reduction and then have the landlord pass these sums along to the tenant as additional free rent. In New York, legislation provides that although a broker cannot share commissions with an unlicensed person providing broker services, nothing prohibits a broker from offering any part of a commission to the seller, buyer, landlord or tenant as an incentive for using the licensed services of that broker.

Comedian George Burns once said “You know you’re getting old when you stoop to tie your shoelaces and wonder what else you could do while you’re down there.” Maybe Tom and Drew wonder the same thing when stooping for the snap. Follow the VI suggestions above and you will not have to wonder what else you need to do to make sure that you are paying an equitable commission when disposing of extra space.