It's time to talk about money in Commercial Real Estate - how you get paid and the options out there.
I've been complaining a lot lately, here and here, but you really shouldn't let my antagonistic boss and growing disillusionment with commercial real estate brokerage dissuade you if you are considering brokerage as a career. CRE might not be the most high brow form of high finance, but the lower impediments to entry, emphasis on personality, and lower complexity that set it "below" consulting and banking can be a godsend to charming bastards with horrible GPAs and a non-business major like myself.
So, I figured while I take some online finance courses and study for the GMAT to get out of the industry, I should get back to helping those looking to break in. If you're interested, make sure you check out my 6 Tips for Networking and 5 Things That Determine Your Success in the industry, but I know this is WSO so here's the inevitable money thread.
real estate broker salary - Draw, No Draw, or Salary + Bonus
Salary + Bonus is pretty self explanatory and should be rather familiar to regular WSO readers. This option is mostly found at the analyst and associate levels of equity and debt firms, as well as REITs and REPE shops. It is not very common, however, in brokerage and it is honestly just not how the industry works. Oddly enough, this is how I started, and it was presented as a "benefit" but the numbers were embarrassingly low and I regret it. Being "salary" is not a highly looked upon thing at shops like CBRE, Jones Lang LaSalle, Colliers International, Cushman & Wakefield, and the like. You don't get respect unless you "eat what you kill."
A lot of the above places start you out with no draw. They hand you a phone and a computer and tell you to set up meetings for your boss. This is obviously very difficult for young people breaking in as you're not going to be making any money for a while yet you still have to get to work, eat, and live. Like most things in life, having rich parents helps, because you're going to be living with them. A lot of people break into commercial real estate brokerage later in life because of this, as they either have a nest egg saved up that will get them through the rough first year or two or they have a husband or wife who can pay the monthly bills while they aim for the big kills.
If you get lucky, you'll find a shop that offers you a draw. This is a double edged sword - on one hand, you can actually break in and get yourself started because you have a paycheck every two weeks, but on the other, a draw is nothing more than a loan. At the same time, if I didn't have a draw, there is no way I could pay my student loans, so it definitely has its benefits. Until you beat your draw for the year, you won't be seeing any of your commissions. It's somewhat disheartening to be handed a check for $25,000 with your name on it, only to realize that you're handing it to your company as a loan payment that you'll never see.
Your annual compensation on a draw can be very hit or miss. You could beat your draw in January, for instance, as a big deal closes, and then you still get a weekly paycheck on top of getting all of your commissions that you earn. Or, you could be rushing around come November to make sure you hit the number you have to, something significantly more stressful. Even in shops that offer a draw, however, the goal is to eventually get off of it.
Whether you get salary + bonus, or a draw, or not, is dependent on your market, your company, and your specific branch. There are no league tables or lockstep routes and even the companies in my particular market operate much differently.
Broker Comp - On Percentages
As long as you aren't salary + bonus, and we're going to assume you're not from here on out, your compensation comes down to percentages. This is usually a percentage of the aggregate rent or the asset sale price, however in larger markets with higher numbers these are often capped or have flat fees.
The standard (and I say that with reluctance, because it is not particularly legal for a market to have a "standard" but they definitely exist in an unspoken sense) in my market for office properties is 4% for a tenant representative over the first five years and 2% for a landlord representative over the first five. If the deal is for ten years, however, that drops to 2% and 1% respectively over the second half of the term. Renewals are also usually half, although expansions pay market price. All commissions are paid by the landlord upon lease signing, either all at once or over two separate payments. Sales commissions are lower here, usually 1% or 2%. Some landlords contest these or simply don't pay. Contested commissions usually result in negotiations. Unpaid commissions always result in lawsuits.
As I said, though, and as I'm sure others will attest to here, this is incredibly market-dependent. It would not be unusual for a NYC deal to be capped at a specific flat fee on a sale or be a lot closer to 0.5% of the aggregate rent. Still, whether it's a flat fee or not, we are talking potentially enormous numbers here. Even in my market, I have seen people make high 6 and low 7 figure commissions on one deal. In commercial real estate brokerage, you have the potential to hit the lottery every day, and people will not believe the numbers the market leaders make.
commercial real estate commission splits
However, another benefit these "rainmakers" and "hitters" have is that they inevitably have negotiated splits that you will not be given starting out. The first split is with your company. This can be 40/60 them, 50/50, 60/40 you, 70/30 you at higher levels, or even change dependent on your dealflow and if you hit certain benchmarks. A 50/50 split with the company is the most standard starting out, however, so immediately cut your commission in half. You should also plan on almost cutting it in a third or in half again (depending on how much you make) because the government sees it before it is deposited in your account too.
Another split that you may have to deal with depends on whether or not you're on a team or you're working "for" someone. As a younger broker, there are definite advantages and disadvantages to teamwork, but it weighs one way or another dependent on broker to broker splits. On one hand, sharing with a more established guy is going to get you access to much larger deals. They're going to be infinitely better at sourcing than you and if you can get a 50/50 split or even a 40/60 split with a higher up, where you do the cold calling and bitch work and they do the higher level lease abstraction and presentations and networking, it's a good deal and you'll make money accordingly.
If you get something like 25% of it though, or worse, you're going to be frustrated. My office also enforces specialties heavily, so if I pull an industrial listing as an office broker, they want me to pass it off to an industrial guy. For sourcing, I get a guaranteed 20% of the deal. Other places don't necessarily work this way though, and some places with worse office cultures have a lot of locked doors and locked drawers so that people in the same office don't take their clients. The goal is to get to a point when you can solo big deals easily or be on a two person team with another big hitter and you can carry each other.
commercial real estate sales commission - Case Study
As a younger broker, it's important to remember how quickly this turns against you. Consider signing a nice $4,000,000 aggregate lease over a ten year term as a tenant rep. In my market, that's a sweet deal, and you're going to make 4% on the first five years (we'll just say the first two million to make it easy) and 2% on the second five. So there's a nice $120,000 fee, on only one deal! Life is good.
Well, you're a younger broker, so you're actually on a team with a 40/60 split against you. Your check dwindles to $48,000. Then you have to split it with your company, which is 50/50, bringing it to $24,000. Then tax is applied, which we'll pretend is 30%, and it becomes $16,800.
Is getting a $16,800 payday pretty sweet considering some people only make double that in their first job out of college? Sure, but it's a far cry from $120,000. Oh and as a younger broker, it doesn't cover your $35,000 draw, so all you get is the knowledge that you're closer to paying off your company loan. That $4,000,000 deal, or whatever the respective number is in your market, is not common either, nor is the 14 months it took you to close it quick. Plan on getting a lot of $4,000 fees at first that shrink from there.
The Path To Riches Is...Slow
Much like fraternities will tell you "no we don't haze" during rush (classic) you're going to hear stories when you interview and get hired that "for a couple years you're going to make less than all your friends but then you're going to make so much more." Reality is a bit different, however, and the path to riches is fraught with the danger of unpaid bills, a constant debt cycle, or without a draw, the potential for months without a paycheck - especially during the summer.
Perhaps most frustrating, for me at least, is that your income received is not proportionate to the amount of effort you put into it. This isn't Boiler Room where as long as you smile and dial the numbers are going to work in your favor. No, this is calling hundreds of companies per week, getting clients, taking them on tours, negotiating RFP's and leases, only for them to chose a different building or decide that they're going to stay where they are after all. Read my very real story about my $250,000 payday that just slipped away for reference.
Can you make a fortune as a Commercial Real Estate broker? You better believe it, and you can make it without any progression if you're good and lucky, but in the end, you make serious money in this business the same way you do in any business - rising to the top of a known firm or opening your own shop, putting in years of work to establish yourself, and busting your ass while hoping for a bit of luck. Most of the top guys reinvest their winnings into their own properties just to give themselves a monthly income through the lulls.
Even in commercial real estate brokerage, arguably the most "money for nothing" role in finance, where you can theoretically hit the jackpot on any given day, things tend to stay the course.
Learn more about how to become a commercial real estate broker with the video below.
Read More Abou Commercial Real Estate on WSO
- Day In The Life: Commercial Real Estate Broker
- 5 Things That Determine Your Success As A Commercial Real Estate Broker
- Wells Fargo Commercial Real Estate
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