CRE Brokers: How common is it for a broker to invest alongside the buyer, or have his commission rolled up as equity in the deal
I heard from a friend that this type of thing happens every so often and wanted to know:
How common is it in the CRE world?
What are the legal and ethical implications of this practice (ie, are there any rules in place expressly forbidding such a thing)?
What are the benefits and costs of this practice (tax implications, value aspect as if you are going into a deal as equity you are putting money to work without all the transaction fees and costs plus getting a magnification of return depending on how the deal is structured/leveraged).
Thanks.
I wouldn't say its common but it can happen. More than likely at smaller type brokerages where the commission rules are little less strict. The big brokerages won't let it fly because they won't be getting their piece of the commission split. You'd be using the firms resources to trade the asset so they'll need to be compensated for it.
Interesting.
Kramer, So in terms of ethics and legalities - it is 100% kosher/fine/legal, but rather is a business matter on the side of the brokerage house whether such practice is put into effect?
Sure, as long as everyone is aware of whats going on. This likely wouldn't be able to go down with a sales agent of a CRE firm but more so with the owner/broker of record.
There is nothing unkosher about it if everyone involved is aware and allows it. It's sometimes even marketed that way to capital sources. "Hey we're so high on this deal we're rolling our entire fee into it." Brokers can only do this if the sponsor/client allows or invites them to do so in the first place. Of course, it also has to be allowed by the brokerage. Smaller more entrepreneurial shops allow this (and even allow associates to co-invest). I doubt a giant like CBRE/CW would allow this.
When I had agents selling a piece of real estate for themselves, I, as the broker of record would collect a commission equal to what my cut would have been. The agent in a sense rolled up their commission into the deal and I kept my portion as broker.
The same could apply to equity in a deal with clients.
The larger shops would struggle with this.
Let's talk tax treament.
Are they paying income taxes on your fee equity rolled in?
Even though the agent hasn't yet realized any income since the money remains in escrow and is never wired to them?
I would suspect you will. You are essentially being paid in shares of the LLC. However, valuing that from the IRS's perspective would be interesting.
My firm (a large national shop) disallows this 100%.
EDIT: I was tricked on someone resurrecting a dead thread.
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