The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful.
When it comes to brokerage fees and equity deals, there is no real standard across the board. Typically, the smaller the property the higher the percentage a broker will take, but their particular fee will be determined by what they believe their worth is in the deal itself. When working with brokers on equity type deals and other unconventional fee structures, your relationship with the broker may come into play as well.
Richard Wilson: What’s the standard in the self storage industry for a brokerage fee and what’s the standard if they’re getting equity instead of a fee?
John Manes: I don’t know that there’s a standard. I think on a brokerage, like if you’re selling a property, the fee is anywhere from 1 to 5%, sometimes maybe 6, and how that typically works is the larger the property in dollars the smaller the fee, the smaller the property the larger the fee. And it really comes down to what the broker feels his worth is in getting the property sold. So if you’re going to bust your butt for a property that’s selling for a million dollars, you’re taking 5% which is $50,000, or you’re going to bust your butt to sell a $10 million property and you take 1% which is $100,000, you see the difference, right? It’s the same kind of energy and effort, but you’ve go to get paid. So I think the standard there varies based on the size of the property.
When it comes to helping them, it depends on, you know, how you syndicate your deal. Like for us, because we use $50,000 checks and not a VC capitalist type of company, and because we do mom and pop type of debt where we sign on the debt and we’re at risk on the debt, we take a bigger piece of the back end. Call it 30 or 40%. Where if you deal with a VC type of company, you’re going to get 10% or 20% of the back end. Well if I’m taking 30 or 40% of the back end, I’m going to give that broker 5 points of that or something just for bringing it to the table. So when it comes to that kind of stuff, we’re pretty generous because we want to get things done.
Richard: Right, right. So you’re giving a piece of the upside on the back end, not a big chunk of equity in the deal. It’s like if the deal goes well then you get a little bit of this upside because you brought the deal to the table that was off-market and probably got it at a slightly better cost basis or just otherwise wouldn’t have seen it, right?
John: Correct. Yep.
Richard: Okay, got it.