A ten-year office lease priced year by year, with free rent, renewals and the term sensitivity an asset manager budgets from.
A leasing commission is calculated year by year: multiply each lease year's base rent by the commission rate for that year, then add the years up. On an illustrative 20,000 sq ft office lease at $40.00 per sq ft rising 3 per cent a year, a schedule of 6 per cent for years 1 to 5 and 3 per cent for years 6 to 10 costs the landlord $402,552, or $20.13 per sq ft. The common shortcut, 6 per cent of first-year rent times ten, gives $480,000 and overstates it by 19.2 per cent.
Worked in full in Real Estate Fund Management by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Leasing commissions sit below net operating income with tenant improvements and capital expenditure, so they never show up in a cap rate but they come straight out of the cash flow the investor receives. For an asset manager budgeting a lease-up or an expiry, the commission is one of the three numbers that decide whether a deal is worth signing, with the rent and the incentive package. This is how to get it right from the schedule in the listing agreement.
| Input | Value |
|---|---|
| Leased area | 20,000 sq ft |
| Starting base rent | $40.00 per sq ft |
| Annual escalation | 3% |
| Lease term | 10 years |
| Commission, years 1 to 5 | 6% |
| Commission, years 6 to 10 | 3% |
A declining schedule like this is a common structure in US office and industrial leasing, though the rates, the break year and the base they apply to are all negotiated in the listing agreement. Some markets quote a fixed amount per square foot per year of term instead; the method below handles either, because it works line by line.
Rent in year n = area × starting rent × (1 + escalation)n−1
In Excel, with the year in A2: =20000*40*(1+3%)^(A2-1), and the rate with =IF(A2<=5,6%,3%).
| Year | Base rent | Rate | Commission |
|---|---|---|---|
| 1 | 800,000 | 6% | 48,000 |
| 2 | 824,000 | 6% | 49,440 |
| 3 | 848,720 | 6% | 50,923 |
| 4 | 874,182 | 6% | 52,451 |
| 5 | 900,407 | 6% | 54,024 |
| 6 | 927,419 | 3% | 27,823 |
| 7 | 955,242 | 3% | 28,657 |
| 8 | 983,899 | 3% | 29,517 |
| 9 | 1,013,416 | 3% | 30,402 |
| 10 | 1,043,819 | 3% | 31,315 |
| Total | 9,171,103 | 4.39% | 402,552 |
Years 1 to 5 carry $4,247,309 of rent and $254,839 of commission; years 6 to 10 carry $4,923,795 of rent but only $147,714 of commission. The blended rate over the whole term is 4.39 per cent of aggregate base rent. In Excel the total is one formula: =SUMPRODUCT(B2:B11,C2:C11).
Commissions are usually paid up front, often half on signature and half on occupancy or rent commencement, even though they are earned over ten years. In a fund's cash flow the whole $402,552 lands in the leasing year, which is why a busy leasing year can show strong NOI and a weak distribution at the same time.
| Term (years) | Aggregate rent | Commission | Per sq ft | Per sq ft per year | Months of year-1 rent |
|---|---|---|---|---|---|
| 3 | 2,472,720 | 148,363 | 7.42 | 2.47 | 2.2 |
| 5 | 4,247,309 | 254,839 | 12.74 | 2.55 | 3.8 |
| 7 | 6,129,970 | 311,318 | 15.57 | 2.22 | 4.7 |
| 10 | 9,171,103 | 402,552 | 20.13 | 2.01 | 6.0 |
| 15 | 14,879,131 | 573,793 | 28.69 | 1.91 | 8.6 |
A longer lease costs more in total but less per year of income secured: $1.91 per sq ft per year at 15 years against $2.55 at five. Because the rate halves after year 5, every extra year beyond it is bought at half price. That is the arithmetic behind a landlord's preference for term, before counting the downtime, free rent and fit-out it avoids by not re-letting the space twice.
If the listing agreement pays on rent actually payable, a six-month rent-free period in year 1 removes $400,000 of rent from the base and $24,000 from the commission, which falls to $378,552. If it pays on aggregate base rent, the free months are commissioned in full. The wording matters more than the rate, and it is worth checking before the budget is set.
Renewals are usually commissioned at a reduced rate. At half the new-lease schedule, renewing this tenant would cost $201,276. A lease expiry budget should therefore carry both outcomes, the renewal commission and the full re-letting commission, weighted by the renewal probability, alongside the downtime and incentives of each branch. What a lease expiry costs in void and fees prices that whole expiry, with the commission as one line of it.
Rent schedule first, rate by year second, sum third: on this lease the answer is $402,552, $20.13 per sq ft and six months of first-year rent. Budget it in the year of signing, below NOI, with the renewal and re-letting branches priced separately. Real Estate Fund Management builds the asset budget from the rent roll up, driven by units and rates rather than last year plus a percentage, and the free workbooks for the book include that budget and its variance sheet.
The landlord, almost always. The total is usually split between the landlord's listing broker and the tenant's representative, often half each when both are involved. In the example, a $402,552 commission on a ten-year lease splits into $201,276 per broker. The tenant pays indirectly, because the landlord prices the commission into the rent and the concessions it is prepared to give.
It depends on the listing agreement. Many agreements calculate the commission on rent actually payable, so free months are excluded. In the example, six months of free rent in year one takes $24,000 off the commission, from $402,552 to $378,552. Read the commission clause before budgeting: if it says gross or aggregate base rent without deduction, the free months are paid on.
Commonly a reduced rate, often half the new-lease schedule, because there is no marketing and no search. On the example lease, half the schedule would be $201,276. Some agreements pay nothing on a renewal the tenant initiates directly, so the budget for a lease expiry should carry the renewal and re-letting commissions separately, weighted by the renewal probability.
This article is one calculation from Real Estate Fund Management. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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