One of the unique aspects of commercial real estate investment is that it is a highly local business – meaning that one of the determining factors in the success of an investment is the market in which the property is located. In order to find the best deals in the best markets, it is critically important to work with an individual who is an expert in local market conditions.
In this article, we are going to discuss the role of the commercial real estate broker. We will describe what they do, why they are important, and how much they charge for their services. By the end, readers will have an enhanced understanding of the important role that a broker plays in a CRE investment.
At First National Realty Partners, we specialize in the purchase and management of retail centers with grocery store anchor tenants. If you are an accredited investor and would like to learn more about our current commercial real estate investment opportunities, click here.
What is a Commercial Real Estate Broker?
A commercial real estate broker is a real estate professional who is hired to represent their client’s interest in a commercial property purchase, sale, or lease transaction.
In a smaller transaction, there may just be one broker. In larger transactions, there may be an entire team of brokers specifically dedicated to advocating for their client’s best interest in a transaction.
The requirements to become a commercial real estate broker vary by state, but they typically include an education requirement, a significant number of hours that must be devoted to studying, and a certification exam. Once the exam is passed, an individual will then go to work for a commercial real estate brokerage or start their own firm.
What is the Role of a Broker?
As described in the definition, the primary role of a broker is to advocate for their client’s best interest in three types of transactions.
Acquisitions
On the “buy side” commercial real estate investors may hire an individual or brokerage firm to help them find one or more commercial properties to purchase. Typically, this process starts with a conversation between the broker and the investor to discuss the characteristics of the desired property. For example, the investor may say that they are looking for grocery store anchored retail centers of 50,000 SF or more, in Central Florida, with ample parking, and good visibility from the road.
Then, the broker will take this information and use their knowledge of the local market to identify properties that they think the investor will be interested in. These properties could be a mix of on-market and off-market opportunities, which are presented to the investor. It may take weeks or months to identify just the right property.
Once identified, the broker works with the investor to negotiate the contract and manage the logistics of the due diligence and closing processes. When the purchase is complete, the broker’s acquisition duties are complete.
Dispositions
When an existing property owner determines that they would like to sell their asset, one of the first things they typically do is hire a commercial real estate agent/broker to represent them in the sale. Often, they may take proposals from multiple brokers and choose the one that is the best fit for their needs.
Once a listing agreement is in place, the broker does a significant amount of work to create an Offering Memo and to market the property to their network of investors and contacts. When a buyer has been identified, they also work to negotiate the sales contract (representing the seller this time) and they collaborate with the buyer’s broker to manage the logistics of the closing.
Commercial Leasing
Brokers aren’t just involved in purchase and sale transactions. They may also be hired to represent a landlord or tenant in a leasing transaction.
On the landlord side, they may be hired to find a tenant for a vacant space and to negotiate the terms of the lease for either a new or existing property.
On the tenant side, they may be hired to find a new space that fits a tenant’s requirements. For example, if they are hired by a grocery company, they may need to find a space of a certain size with a certain amount of refrigerated space, loading docks, and storage space.
In both cases, they will negotiate the terms of the lease with their client’s best interest in mind. In other words, if the broker represents the landlord, they want to get the highest rental rate and/or longest term possible. If they represent the tenant, they typically work to get the lowest rate possible with the most flexibility for their client.
Financial Analysis
Brokers are responsible for a significant amount of financial analysis in a number of different scenarios.
In a purchase or sale transaction, one of the broker’s major responsibilities is to put together a marketing document known as an Offering Memo, which highlights all of the important aspects of the property and the real estate market in which it is located. One of the most important pieces of the Offering Memo is an operating proforma, which outlines the projected income and expenses for the property. Many purchase decisions are based upon these numbers.
To complete the proforma, the broker must perform a significant amount of financial analysis that includes reviewing market conditions, rent rolls, previous operating statements, and a number of critical assumptions. For this reason, the broker must be well versed in the methodology used to analyze and value commercial real estate transactions.
Demographic and Market Analysis
Another piece of the Offering Memo seeks to highlight the key aspects of the market in which the property is located. To complete this section, the broker must perform a significant amount of demographic and regional analysis to determine key pieces of information such as market population, growth rate, major industries, distance from major roadways, significant employers, and crime, age, and income statistics.
This information is also an input in the investment decision making process and is completed by the broker as part of the services they provide to their client(s). It should be noted that the detail provided and amount of work may vary depending on whether the broker is on the buy or sell side of the transaction.
Commercial Brokers vs. Residential Brokers
The focus of this article is commercial brokers, who focus on the purchase, sale, and lease of commercial properties. However, they are not the only type of broker. There is an entirely separate group of individuals, residential brokers/realtors, who focus on the purchase, sale, and lease of residential properties.
Clearly, the key difference between these two types of brokers is the type of property they specialize in, but it isn’t the only one. The other notable difference is the licensing requirements. Although they vary by state, a commercial broker license is generally more onerous and time consuming to obtain when compared to a residential real estate broker license.
CRE Brokers vs. CRE Agents
Even within the group of individuals who specialize in commercial real estate, there is another important distinction between brokers and agents.
Agents are individuals who are licensed to buy, sell, or rent commercial real estate within the states in which they are licensed. Often, individual agents work for a commercial real estate brokerage firm. For example, CBRE is a major firm who employs many commercial real estate agents.
A Commercial Real Estate Broker is an agent who has completed additional study and licensing requirements that allow them to own and operate their own commercial real estate business and hire commercial real estate agents. In doing so, they take on additional risk and responsibility, which is why they must go through additional training and licensing.
Types of Commercial Brokers
In general, there are three types of commercial real estate brokers, buy side brokers, sell-side brokers, and leasing brokers.
Buy-Side Brokers
Typically, a buy-side broker works for investors and companies looking to purchase real estate. For example, a large corporation like McDonald’s may have an in-house real estate department – with licensed brokers – whose job it is to find and purchase new locations for McDonalds restaurants. Or, a buy-side broker could be independently employed or employed by a brokerage firm and could be contracted to represent a company or investor who is looking to purchase a new property according to their client’s needs.
Sell-Side Brokers
A sell-side broker, sometimes called the listing broker, is hired by an owner to market and sell a property. Again, they could work in house for a large corporation that has their own dedicated real estate department or for a brokerage and retained by a client.
The sell-side broker must put a lot of work into preparing and marketing the property, which includes things like getting professional pictures, cleaning up the landscaping, and preparing an Offering Memo for potential buyers.
Often, both the buy side and sell side brokers will work together to facilitate a transaction on behalf of their client(s). On rare occasions, they may be the same person.
How Do Commercial Real Estate Brokers Get Paid?
In the commercial real estate industry, CRE Brokers work on commission and are typically compensated based on the sales price of the property or the total amount of the lease. Although each broker negotiates their own commission, it is typically in the range of 4% – 6% of the property sale price or lease amount. The commission is typically paid by the seller or lessor of the property and is split between the brokers involved in the transactions.
For example, assume that an owner wants to sell a property for $10,000,000 and they hire a sell-side broker to manage the transaction. Ultimately, they are able to find a buyer for the list price, so they pay a commission of 6% or $600,000. If there is a broker representing the buyer, the commission amount will be split 50/50 between the two or $300,000 each.
How To Find a Commercial Real Estate Broker
Hiring a commercial real estate broker is a consequential decision for any company or investor. The most common way to find one is through an internet search, networking with other real estate professionals, or from a recommendation by a trusted colleague.
Once a number of candidates have been identified, they should be further screened for things like years of experience/how long they have held their real estate license and their expertise in specific property types. For example, a broker that specializes in representing office space may not be a good fit to sell retail space.
Once a broker is decided upon, some legal paperwork is completed – like a listing agreement – that outlines the terms of the partnership. For example, it may state the length of the exclusivity period, the compensation to be received by the broker, or the activities that will be completed by the broker on behalf of the client.
Once the legal paperwork is completed, it is the commercial real estate broker’s job description to perform according to the terms of the legal paperwork.
Investing Through a Real Estate Syndication
Finding and hiring a broker can be a very complex and time consuming task, but it can have a significant impact on the success of an investment. For example, if an inexperienced broker is hired to sell a property, they may not be able to get the best price for it, which can result in lower overall returns.
This is just one reason why working with a compelling alternative to invest through a real estate syndication, typically run by a private equity firm. In such a scenario, the syndication leader (the private equity firm) does all of the hard work of finding and financing an asset while also handling (or outsourcing) all property management tasks and hiring of a broker. All the investor has to do is provide capital and collect their dividends, which may be an attractive option for some.
Interested In Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you are an Accredited Real Estate Investor and want to learn more about our investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information.
