Leasing commissions (LC) are the fees a landlord pays brokers for procuring a signed tenant, calculated as a percentage of the total rent over the lease term. Rates commonly run 4% to 6% of aggregate lease value, often on a declining schedule, and the fee is typically split between the landlord's and tenant's brokers.
How Are Leasing Commissions Calculated?
Leasing commissions are calculated by applying a commission rate to the total base rent a tenant will pay over the lease term. The base formula is Commission equals total lease value multiplied by the commission rate. Total lease value is the sum of base rent across every year, before free rent and other concessions.
Per CBRE data cited across brokerage sources including Metrobi and Capstone Commercial, U.S. commercial lease commissions average about 4% to 6% of total lease value, with the rate varying by property type, market, and term. Longer terms often use a declining schedule that pays more on early years and less on later ones.
Commission input | Definition |
Total lease value | Sum of base rent over the full term, before concessions |
Commission rate | Percentage applied, often 4% to 6%, sometimes tiered by year |
Declining schedule | Higher rate on early years, lower on later years |
Broker split | Landlord and tenant brokers typically divide the fee, commonly 50/50 |
Renewal commission | Reduced rate on renewals, commonly 1% to 3% |
Many markets apply a sliding scale rather than a flat rate. Per Wikipedia and 3E Management, a common structure pays 6% of rent on years one through five, 3% on years six through ten, and 1.5% on any years beyond. The declining schedule front-loads broker earnings while lowering the landlord's cost on later years.
Why Leasing Commissions Matter
Leasing commissions matter because they are a real leasing cost that reduces net cash flow and must be modeled in underwriting alongside tenant improvement allowance. A commission is paid at signing, so it hits cash flow immediately even though the rent it is based on arrives over years. Ignoring LC overstates deal returns.
Commissions scale with lease size and term, so a large, long lease can generate a six-figure fee that materially affects a hold-period pro forma. Per adventuresincre and Realized, analysts treat leasing commissions and TI together as leasing costs because both are landlord outlays required to place a tenant, and both are recovered only through future rent.
The quotable point for an operator: a leasing commission is paid today on rent that arrives over years, so it is a front-loaded cost against a back-loaded income stream.
Example
A landlord signs a tenant to a 10-year lease on 5,000 square feet at $30 per square foot base rent, with no escalations for simplicity. Annual rent is $30 multiplied by 5,000, or $150,000. Total lease value is $150,000 multiplied by 10, which equals $1,500,000. Apply a declining schedule to find the commission.
Period | Rent in period | Rate | Commission |
Years 1 to 5 | $150,000 x 5 = $750,000 | 6% | $45,000 |
Years 6 to 10 | $150,000 x 5 = $750,000 | 3% | $22,500 |
Total | $1,500,000 | Blended | $67,500 |
The total commission is $45,000 plus $22,500, which equals $67,500. That is a blended rate of $67,500 divided by $1,500,000, or 4.5% of total lease value. If the landlord instead used a flat 6% rate, the commission would be $90,000, so the declining schedule saves $22,500. The fee is then typically split, so the listing broker and the tenant broker might each receive about $33,750.
Variations and Edge Cases
Leasing commissions are not a single fixed fee: the rate, the base it applies to, and the payment timing all vary by market and deal type. A renewal is priced differently from a new lease, and some deals cap or reduce the fee. The table covers the variants an operator should confirm in the listing agreement.
Variant | Treatment |
New lease | Full rate, commonly 4% to 6% of total lease value, often on a declining schedule |
Renewal or expansion | Reduced rate, commonly 1% to 3%, reflecting lower marketing effort |
Flat vs declining rate | Flat applies one percent to all years; declining front-loads the fee |
Broker split | Landlord pays the full fee and it is divided between listing and tenant brokers |
Payment timing | Often paid at signing, sometimes half at signing and half at occupancy |
The most common mistake is quoting a commission off gross rent that includes expense reimbursements rather than base rent, which inflates the fee. Confirm whether the rate applies to base rent or gross rent, and whether free-rent months are included in the total lease value the rate is applied to.
Leasing Commissions vs Tenant Improvement Allowance
Leasing commissions are often confused with tenant improvement allowance, and both are leasing costs a landlord pays to place a tenant, but they fund different things. Leasing commissions are broker fees paid as a percentage of lease value. Tenant improvement allowance is landlord capital contributed toward building out the space.
Both reduce a landlord's net cash flow and both are recovered only through future rent, so underwriters model them together as leasing costs. The difference is the recipient: commissions go to brokers for procuring the deal, while TI goes to construction of the leased space the tenant will occupy.
Frequently Asked Questions
What is the typical leasing commission rate?The typical leasing commission runs about 4% to 6% of total lease value, per CBRE data cited across brokerage sources. Long-term leases often use a declining schedule, such as 6% on the first five years, 3% on the next five, and 1.5% on any years beyond, which lowers the blended rate.
Who pays the leasing commission, the landlord or the tenant?The landlord typically pays the full leasing commission, which is then split between the listing broker who represents the landlord and the tenant's broker. The split is commonly 50/50, so each broker receives half of the total fee the landlord pays.
Are leasing commissions paid on lease renewals?Yes, leasing commissions are usually paid on renewals and expansions, but at a reduced rate. Renewal commissions commonly range from 1% to 3% of the renewal term's rent, reflecting the lower marketing effort required to retain an existing tenant versus signing a new one.
Related Terms
Base Rent
Tenant Improvement Allowance
Weighted Average Lease Term
Renewal Option
Net Operating Income