Leasing Commission - Renewal

Role in Commercial Mortgages and Underwriting

For commercial mortgage lenders, renewal commissions are a critical component of Property Cash Flow Analysis. Lenders view these commissions as a "below-the-line" expense or a capital expenditure that must be accounted for when determining the Net Cash Flow (NCF) of a property. Because lease renewals are necessary to maintain a building's occupancy and income stream, lenders must ensure the borrower has sufficient liquidity to pay these fees without impacting the ability to service the debt.

Key considerations for lenders include:

• TILC Reserves: Lenders often require borrowers to fund a "Tenant Improvement and Leasing Commission" (TILC) reserve account. This ensures that funds are set aside specifically to pay for renewal commissions and any required suite renovations when leases expire.
• Debt Service Coverage Ratio (DSCR): When calculating the DSCR, lenders may subtract a "standardized" or "normalized" leasing commission cost from the income to account for the periodic cost of renewing tenants over the life of the loan.
• Loan Sizing: If a property has a large number of upcoming lease expirations, a lender may reduce the loan amount to mitigate the risk of high commission costs occurring shortly after closing.

Typical Structure and Calculation

Leasing commissions for renewals are generally structured differently than those for new tenants. Because the broker does not have to source a new tenant from the open market, the Leasing Commission - Renewal is typically lower than the commission for a new lease.

• Percentage of Gross Rent: The fee is most commonly calculated as a percentage of the total base rent over the new lease term. For example, if a tenant renews for five years, the broker may receive 2% to 3% of the total rent for those five years, whereas a new lease might command 4% to 6%.
• Flat Fee: In some instances, especially with smaller retail or office footprints, a renewal may be handled via a pre-negotiated flat fee.
• Procuring vs. Listing Agent: In a renewal, there is often only one broker involved (the landlord’s agent), which reduces the total commission payout compared to a new lease where both a landlord's representative and a tenant's representative must be paid.

Importance for Property Owners

Retaining an existing tenant through a Leasing Commission - Renewal is generally considered much more cost-effective for a property owner than seeking a new tenant. Renewals typically involve lower commission rates and significantly lower Tenant Improvement (TI) costs, as the tenant is already established in the space. From a mortgage perspective, a high renewal rate indicates tenant "stickiness," which reduces the risk of vacancy and provides a more stable income profile for the collateral securing the loan.