Commercial brokers seeing commissions with incentives

But opinion is divided on whether fees are fair in down market

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From left: Grubb & Ellis’ Vincent Carrega and Capin & Associates’ Timour Shafran

When Timour Shafran negotiated the sale of a Midtown building in August, the landlord threw out an interesting, if not entirely new, carrot. If Shafran, a vice president of investment sales at Capin & Associates, and his team secured a certain price, their commission would be bumped up almost two full percentage points — potentially tens of thousands of dollars.

“Unfortunately, I got the lower number,” Shafran said. “But I killed myself trying to make it to the bigger fee.”

Welcome to “incentive-based fees,” an increasingly common practice that is dividing the brokerage community in New York. The process is as simple as it is time-tested: Contracts, whether oral or written, are negotiated to include commission increases that are triggered when the broker achieves a certain price for the seller.

Each deal is, of course, structured differently, but typically the fee bump comes in the form of a percentage-based increase, anywhere from 3 to 10 percent, according to a number of brokers. The increase will almost always just apply to the difference between the original price and the target threshold, and not the total price of the sale, and typically applies to the overall price, not price per square foot.

Vincent Carrega, executive vice president of investment at Grubb & Ellis, said he has clearly seen an increase in the number of incentive-based deals since the recession set in.

“Out of the last four deals we did, three were incentive-based, and on the fourth we actually proposed it but the client said for us to just do it straight,” he said. “So the answer is, yes, it is very prevalent.”

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Part of the increase in these so-called incentive-based fee structures correlates with the market turmoil over the last few years. Sellers don’t want to take a loss in a bad market, so they’re pushing brokers hard to get higher prices. But some brokers fear that this bonus-based commission structure could subvert the traditional commission system by allowing owners to set lower base commissions than the market standards.

Sellers who employ incentive-based deals run the gamut, from larger institutional investors and REITs to smaller boutique landlords. But the extra fees are rare in sales of properties below $25 million, brokers said.

Just recently, Carrega said he was approached by St. Vincent’s Hospital about the sale of one of its Manhattan buildings. The hospital was initially in contract to sell 555 Sixth Avenue to Taconic Investment Partners, which Carrega called a “stalking-horse buyer,” for $48 million. Carrega thought that evaluation was $15 million under market; he got St. Vincent’s $67.3 million through an auction and he took a larger-than-normal percentage on the difference. The winning bid came from an investment fund affiliated with Stonehenge Partners.

Brokers like Carrega and Shafran welcome the incentives, arguing that it pushes brokers to put their skills and reputation on the line, effectively saying, “I can get you X and then align the achievement with increased compensation.”

Others are far less enthusiastic about the process, and some say they haven’t seen an increase in these incentive deals.

“It is hard to hit those incentives,” said Brian Ezratty, vice chairman of Eastern Consolidated, adding that the process allows landlords, in some instances, to cut commissions. “Sure, in the 2006 and 2007 deals it was easy to hit those incentive numbers, but today it is a lot harder.”

Regardless, Ezratty has noticed a slight uptick in incentive-based fees — for better or for worse.