Why leasing fees are paid at the beginning of a lease!

Do you ever wonder why leasing fees are paid at the front end of a lease?  Do your clients ever ask to pay you the leasing fee over time?  Good leasing efforts should be rewarded with good leasing fees, because it does offer the landlord a better investment...and better investments cost more money.  

I am sharing this actual email (names removed) response to a client wanting to pay a portion of the leasing fee every year as long as the tenant remains in the space and paying rent.  I think it applies to most every situation when the client wants to change the rules when the game is already finished (leases signed, money exchanged, keys handed over, etc.).  Feel free to use this response as you see fit!

Hello Mr. XXX,

I appreciate your concern for paying a full leasing commission on a X year lease at the front end of a lease because neither of us know if the tenant will be around for the full term and live up to their obligations.  Many people own commercial real estate as an investment, much like purchasing stock or bonds.  We then hope our stock or bond price increases and/or gives us dividend payments. The stock brokers, be it someone with a fancy river front office or a discount online broker, don't offer guarantees on future stock/bond performance. If the investment you decide to purchase doesn't live up to expectations, that is part of the risk of investing and brokers don't refund fees based on poor performance. Signing a lease is much like purchasing any investment in that you hope the tenant will provide some predictable cash flow. Part of procuring that tenant and having that investment choice is the leasing fee, which should be factored into the investment decision.

Having said that, longer leases offer the landlord some assurances and some security that the tenant will be around a little longer than a short term situation to pay the lease, but it does not guarantee it. A longer lease hopefully provides more predictable cash flow for a longer period of time, and it should help decrease vacancy and reduce re-tenanting cost. For this more stable investment, part of the extra cost is an increased leasing fee.

I already dropped an invoice in the mailbox today to you, and I did send a Thank You card to the broker that brought us the tenant to your building.  As for the leasing fee, I will be sending Y at Z his full fee by weeks end from my account, because I am appreciative of his efforts and he is expecting payment as agreed upon per the contract.  If you feel you would like to pay different than as stated in the contract, I am happy to sit with you and discuss. I am available on Friday at 2PM if you would like.

XXX, I appreciate doing business with you, and I hope you understand my thoughts and efforts.

All the best,

Jay Story, CCIM