Following the Money: A Tenant Advisor's Compensation
Ever wonder how and/or how much a tenant advisor is paid? It’s an obscure compensation model. In the interest of transparency, we thought it might be useful to provide a more detailed view.
Tenant advisors (in most cases) are not paid a salary. Their compensation is usually 100% commission-based. This is among the reasons why the industry lacks diversity, both racial and socio-economic…it’s nearly impossible for someone without a measure of financial support to get started. The path to compensation begins with being retained by a client. Yet being selected to advise a client is not easy. It is typically the culmination of a long period of marketing, knowledge sharing and relationship building. Developing a meaningful relationship may take several years (and probably should). Hence a lot of the activities in which a tenant advisor is engaged are non-compensatory…they’re speculative.
Once retained, there is a spectrum of outcomes that are determined by the complexity of the project, the scope of the services and the overall nature of the engagement. It is not uncommon for a lease project to span 12 – 18 months. During this period, the tenant advisor is actively serving the client but is also not compensated. Compensation occurs only after a transaction is completed.
So we’ve got a situation in which the tenant advisor has worked hard to build a good relationship for 18 months, convinced the client that she is the best advisor for the project, been retained and then worked on the transaction for 18 months. At this point, she is 36 months into the journey and has yet to receive any compensation. The typical commission structure calls for her to be paid ½ the fee on lease execution and ½ on lease commencement. Commencement is typically 6 – 12 months after lease execution.
Let’s look at a typical San Francisco lease as an example. The client is leasing 10,000 sf of space for a 5 year lease term. The total leasing commission is $150,000. Most tenant advisors work for firms that share in the fees. The firm provides administrative support, a network of resources, brand/marketing and other services to the advisor in exchange for a portion of the fee. A typical “split” is 50%. So upon lease execution, the firm would be paid $75,000, of which the tenant advisor would receive $37,500. The second ½ payment would come at commencement, maybe 9 months later. As you can imagine, tenant advisors need to store cash in order to pay themselves throughout the year. They also need to set aside funds for taxes which are not usually withheld from the payment (brokers pay quarterly taxes). There’s a lot of cash flow management necessary to make it work.
Tenant advisors have 2 basic ways to grow revenue. They can either do more transactions or they can do larger transactions. The volume approach usually relegates the advisor to smaller transactions which are completed more quickly; whereas larger transaction are usually more complex and time consuming. Interestingly, the 2 markets end up being mutually exclusive in the sense that working the small transaction, high volume approach precludes the advisor from relevance in the larger, more complex market where competition is stronger and clients are making hiring choices based, in part, on relevant large transaction experience. It’s thus a delicate balance to determine how to advance one’s career and grow the business.
We’ve written often about the importance of understanding how tenant advisors are paid, of aligning compensation to services. To be sure, it’s an unusual model, one in which all market participants would benefit from greater transparency and closer alignment of interests. Despite the challenges of the compensation model, the inherent risk, most tenant advisors serve their clients with integrity, upholding their fiduciary responsibilities. It’s always important to know how (and how much) your advisor is being compensated.