Brookfield Properties Corp. has shaken up the downtown Toronto leasing world by upping the amount it pays brokers for bringing in tenants, a move that has some landlords screaming foul.

The real estate giant, which has extensive holdings across Canada and throughout the United States, is changing the commission structure in a way that pushes brokers to get higher rents from tenants.

"I just don't understand why they are doing this now," said the senior executive of another major landlord in downtown Toronto. "How does increasing the fees of brokers do anything to solve your leasing problems? This just costs everyone more. It's like selling houses. Are you going to start increasing commissions of real estate agents because houses are not selling?"

The move by Brookfield, which so far is confined to Toronto's downtown core, comes at a time when most real estate commentators expect the leasing market to slow substantially in the coming months.

Brookfield has 9.1-million square feet of office space in Toronto and is now developing the 2.6-million square foot Bay-Adelaide Centre in the Financial District. The Bay-Adelaide Centre, which had constructed halted by another developer 15 years ago amid a falling real estate market, is about 75% pre-leased. It has secured two major law firms and an accounting firm as tenants.

Tom Farley, president of Brookfield's Canadian commercial operations, said commission structures have not changed since 1994 in the city and do not act as an incentive to lock up tenants long term.

The current practice is brokers gets $1 per square foot per year on every lease for the first five years of a lease and then 60¢ per year for the second five years. "Our objective is to attract tenants and to have higher rents and longer terms," said Mr. Farley. "The way it is today, the longer the term, the commission actually declines."

But there is a second half to Brookfield's compensation that is also angering some. It pays a premium when rents get to a higher level. Brokers get 3% of the tenant's net rent multiplied by the number of years of a lease.

"Rents have to be over $34 per square foot [before the premium] makes any difference," said Mr. Farley. Downtown Toronto office space rents range from $35 to $45 per square foot per year.

The move is a return to a commission practice that was around during the last real estate boom in the late 1980s. Brokers were paid based on gross rents, which includes taxes and other operating costs, but when the market crashed and rents fell fees switched to a formula based on square footage leased as opposed to the actual rent.

Mr. Farley was making no apologies for upping fees. "We look at Brookfield and its portfolio as the highest profile assets in the country and we try and take a leadership in the way we manage all of our operations," he said.

Another executive, who asked not to be named, said he thinks the move is a smart one because "it's making sure everybody is paying attention to Brookfield's portfolio."

For downtown Toronto brokers, they can't help but be pleased by the raise. While most had been making more money as the economy grew, the increase has come from the volume of business.

"It's a strategic decision that they have made and we welcome it," said Paul Morse, senior managing director of office leasing at Cushman & Wakefield LePage. "Ultimately though the tenant is going to make the decision on what they want [and not the broker]."

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Peter Bhandari
Sales Representative
Royal LePage Credit Valley Real Estate
http://www.PeterBhandari.com

Email: pb@royallepage.ca
Direct: 416-827-2340
Office: 905-793-5000 x 478