Ritchie: A treatise on real estate commissions

We lifers in the commercial real estate brokerage world have often looked upon our distant cousins in the residential world in a somewhat bemused fashion.

No disrespect intended, my late great mother was a major pioneer in the San Francisco mansion selling business, where until the 1970s it was literally called “bedroom brokerage” in that there really were not standalone residential real estate offices anywhere near the scale of today. In the even older times, the way you bought a house was finding the one former title company woman who worked in the back of the row of commercial real estate storefronts lined up along Sutter Street in downtown SF, also known as the Den of Thieves, similarly lined up along First Street here in downtown San Jose. The rules of engagement in real estate in the caveat emptor era were very different than today indeed.

But as a mansion price in our stratospheric Bay Area began to equal that of a 20-story office building — now the same price for 40— we marveled at how simplistic the setting of commissions are/were in residential deals versus the byzantine complexity in the commercial arena. Certainly, at the average to lower level of home pricing it seemed almost mechanical at the 6% that seemed to have been the 11th Commandment from somewhere in Moses’ iPad. Well, as we know by the blaring headlines, that last chunk of his tablet just lately hit the ground and shattered into a million pieces.

Granted, in the higher level and more sophisticated residential business, selling said mansions there has been for many years more fee negotiations, but really not as much as you think.

Au contraire, you need a Quran to truly understand the complexities of fees in commercial real estate brokerage. Sure, we all have somewhere in our desk the old “Standard Commissions and Fees For Services Rendered — All Commissions Negotiable,” and those do still hold for much of the daily bread and butter brokerage work, but beyond that it gets really complicated.

To start with, each sub market uses different methods. If you are leasing office space in San Francisco north of Market the commission is based on a “dollars per square foot per year” method. South of Market — all the way to Los Angeles including Silicon Valley — that same commercial lease commission is paid on the more familiar percentage of income structure. Both those amounts can vary wildly depending on market conditions. When tenants are scarce the flyers all scream “full commission to procuring broker,” meaning a simple 6% fee now costs the landlord 9%, listing broker gets 3% and tenant broker gets 6%. We don’t recall residential commissions in the worst of markets getting to 9%.

That is just about commissions for leasing. In the selling universe in commercial brokerage, it gets stranger still.

As we saw the rise of “capital markets team” empires and experts within the giant commercial brokerage firms, anything over, say $20 million, there is zero commission for the buyer’s broker. The theory on that is there are so many buyers known by the listing teams — sometimes up to eight brokers on one listing — they don’t need an outside broker’s assist. Or if one shows up, they better get paid by the buyer or have a PhD in arm twisting to get a slice from the selling side. And anywhere near 6% on high ticket deals is unthinkable, the biggest sales are in the 1-2% range, all in.

So the wailing from the residential industry about the new audacity of buyers having to pay fees is nothing new to us. We get them regularly. Our guess is that as things settle, we will all wonder how in the heck did the home selling business work on that shop worn 11th Commandment all those decades?

San José Spotlight columnist Mark Ritchie is the owner of commercial real estate brokerage firm Ritchie Commercial, and has spent his entire career in commercial real estate. His columns appear every second Wednesday of the month. Contact Mark at [email protected].