One of the first questions companies often have when considering a tenant representative is simple:

“How much is this going to cost us?”

For many Chicago office tenants, the answer is surprising.

In a typical office lease transaction, the landlord pays the tenant representative’s commission, even though the tenant rep represents the tenant—not the landlord.

Understanding how this works can help companies make a more informed decision about whether to use a tenant representative when renewing, relocating, expanding, or downsizing their office.

How Tenant Rep Fees Typically Work in Chicago

Consider a company looking to lease 5,000 square feet of office space for five years.

The company engages a tenant representative to help evaluate its options. The tenant rep may assist with:

• Determining the company’s space requirements
• Identifying available properties
• Touring and comparing buildings
• Soliciting competing proposals
• Analyzing the true financial cost of each alternative
• Negotiating rent and operating expenses
• Negotiating free rent
• Negotiating the tenant improvement allowance
• Evaluating renewal versus relocation
• Negotiating expansion, contraction and termination rights
• Coordinating the transaction through lease execution

If the company ultimately signs a lease, the landlord will typically pay a negotiated brokerage commission associated with the transaction.

The tenant doesn’t normally write a separate check to its broker at closing.

How Much Could the Commission Be?

For a simple illustration, assume the tenant representative’s commission is $1.00 per square foot per year of the lease term.

For a 5,000-square-foot, five-year lease:

5,000 SF × 5 years × $1.00 = $25,000

The tenant representative would receive a $25,000 commission, typically paid by the landlord.

This is only an illustration. There is no universal commission rate. Brokerage fees are negotiable and can vary by transaction, building, landlord and market conditions.

The important point for a tenant is understanding who pays the fee and how the compensation arrangement works before engaging a broker.

If the Landlord Pays the Broker, Does the Broker Really Represent Me?

Yes—provided you have engaged the broker as your tenant representative.

This is one of the most misunderstood aspects of commercial real estate.

Who pays the commission and who the broker represents are two different questions.

The landlord’s leasing broker represents the landlord’s interests.

The tenant representative represents the tenant’s interests.

That distinction matters because the two parties are negotiating against each other on some of the most important financial terms of the lease.

The landlord generally wants to maximize the economic value and protections of the lease.

The tenant generally wants to minimize occupancy costs, maximize concessions and maintain as much flexibility as possible.

Why Would the Landlord Pay My Broker?

Because brokerage commissions are a normal cost of leasing commercial office space.

Landlords compete for tenants and typically anticipate brokerage costs when pursuing new leases and renewals.

Think about everything else a landlord may spend to secure a tenant:

• Free rent
• Tenant improvement dollars
• Moving allowances
• Furniture allowances
• Building improvements
• Architectural services
• Brokerage commissions

These are all components of the economics required to complete a lease.

Paying a commission to the tenant’s broker is therefore not unusual. It’s part of the cost of attracting and completing transactions with tenants in the market.

Can I Save the Commission by Going Directly to the Landlord?

This is where the discussion becomes much more interesting.

A tenant may reasonably think:

“If the landlord doesn’t have to pay my broker $25,000, shouldn’t I be able to negotiate a $25,000 better deal?”

It sounds logical.

But that’s not necessarily what happens.

Going directly to the landlord does not automatically mean the landlord gives the tenant the money it otherwise might have spent on a tenant-representation commission.

The landlord’s objective is to negotiate the best transaction it can.

If a tenant approaches the building without representation, the landlord may simply have a transaction with lower brokerage costs.

That doesn’t necessarily mean the tenant receives those savings.

The Bigger Question: What Is the Lease Worth?

Consider the economics of our hypothetical 5,000-square-foot office lease.

Over five years, the tenant could be committing to hundreds of thousands of dollars—or potentially more than $1 million—in occupancy costs.

Now compare that commitment with a $25,000 brokerage commission.

A relatively small improvement in the economics of the lease can potentially exceed the entire commission.

Value can come from negotiating:

• Lower base rent
• Additional months of free rent
• A larger tenant improvement allowance
• Caps on controllable operating expenses
• Better renewal options
• Expansion or contraction rights
• Reduced security deposit requirements
• More favorable assignment and sublease provisions
• Early termination rights
• Protection against unexpected capital expenditures

The question for the tenant therefore shouldn’t simply be:

“How much is the broker making?”

A better question is:

“Will experienced representation create more value for our company than the cost associated with that representation?”

What About Lease Renewals?

Tenant representation can be just as important during a renewal.

In fact, renewals can create a false sense of simplicity.

A company may think:

“We’re staying in the same space. Why do we need a broker?”

But the landlord already knows something important:

Moving is expensive and disruptive.

If the tenant hasn’t investigated alternatives, the landlord may have considerably more negotiating leverage.

An effective renewal strategy often involves testing the market before negotiating the final renewal.

That can mean identifying legitimate alternatives, understanding current rents and concessions, and determining what competing landlords would offer to win the tenant.

The objective isn’t necessarily to move.

The objective is to make sure staying represents a competitive market transaction.

Is Tenant Representation Really “Free”?

We don’t think that’s the best way to describe it.

Commercial brokerage services have a cost. Someone ultimately pays for those services.

In most traditional Chicago office leasing transactions, the landlord pays the tenant representative’s negotiated commission.

That’s different from saying the service has no economic cost.

A sophisticated tenant should understand the compensation arrangement before engaging a broker and should ask questions if anything is unclear.

Transparency matters.

What Should a Company Ask Before Hiring a Tenant Rep?

Before engaging a tenant representative, ask:

Who do you represent?

Does the brokerage exclusively represent tenants, or does the company also represent landlords?

How will you be compensated?

Understand how the brokerage fee will be calculated and who is expected to pay it.

What happens if the landlord doesn’t pay the commission?

The engagement agreement should clearly explain the tenant’s obligations, if any.

How will you create negotiating leverage?

Finding available office space is relatively easy. Creating competition among landlords and translating that competition into better economics is where an experienced tenant representative can provide significant value.

Who will actually handle our transaction?

Make sure you know whether the senior broker who wins the assignment will remain directly involved throughout the negotiation.

The Bottom Line

For most Chicago companies leasing office space, hiring a tenant representative does not mean writing an additional check for brokerage services.

The landlord typically pays the negotiated tenant-representation commission.

But that shouldn’t be the primary reason to hire a tenant rep.

The more important issue is the size of the financial commitment being negotiated.

A 5,000-square-foot lease for five years represents a significant business obligation. Rent, operating expenses, construction costs, concessions and lease flexibility can have financial consequences long after the lease is signed.

The objective of tenant representation is therefore not simply to find office space.

It’s to create competition, establish negotiating leverage and help the tenant obtain the best overall transaction available in the market.

Tom Koelzer & Dave Ven Horst

Tenant Advisors | Chicago Office Tenant Representation

Tenant Advisors has exclusively represented office tenants since 2004.

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