Business Plan

1. The Project or Mission Statement

As I will be explaining in further detail in the second part of this assignment, my short and medium term goals include working for a commercial/industrial brokerage firm. There are many companies I can choose from and my decision will depend on the cultural fit as well as professional growth opportunities. After speaking with a few firms, I am starting to understand how the pay structure works. Many firms don’t want junior brokers to be working on full commission. They provide junior with a base salary and pay them a fraction of the commission. Senior brokers are then paid the full commission, with is typically shared with the agency 50%/50%. This split can increase depending on the amount of Gross Commission you generate, but for our study, we will assume the split remains at 50%/50%. As a future junior broker, I am interested in understanding the break-even analysis of salary/commission and commission only.

After I have understood more thoroughly the pay structure differences, I would like to understand more clearly what are the keys to success as a broker? In this section, I am interested in understanding how a developer thinks when acquiring a property. This is important because they will be my prospective clients. What are the valuation metrics developers look at, and how can I identify a good property for an investment or redevelopment?

These are all very important questions I must ask myself before immersing myself in the brokerage business. Understanding the pay structure will allow me to make an educated decision when I am ready to make the switch from salary + commission to commission only. Finally, understanding how developers think is essential to becoming a successful real estate broker.

1. Understanding the Pay Structure Behind Real Estate Brokerage

As a preliminary study, I will be considering the differences between salary + commission and only commission. To begin, I have been looking for a junior brokerage job at one of the big brokerage shops. I have contacted a few brokerage firms to ask about future opportunities and they provided me with their pay structure for junior brokers. Two of the firms I reached out to disclosed their pay structure. The first firm provided $35,000 yearly base salary plus 10% of the Gross Commission I would generate. The second firm provided $40,000 yearly base salary plus 10% of the Gross Commission. Basing my criteria solely on potential income, the second firm is preferable, but this decision is much more complex. Cultural fit and potential mentors are extremely important in brokerage. I would be willing to sacrifice salary for a good mentor, meaning my decision to work for one of these firms is not obvious. After a few years, I can switch my pay structure from salary plus commission to commission only. At this point, I will be making 50% of the total Gross Commission I generate. This is where the question arises, what is my break-even Gross Commission between salary + commission and only commission? Another question I need to understand is how can I generate commission as a commercial/industrial broker? Signing leases generates commission based off the value of the net lease and selling properties generates commission based off the sale price. To make this analysis clear, I will do the break-even based solely off Gross Commission, after which I will figure out what I need to do to accomplish the projections. [pic 1][pic 2]

The above analysis shows the difference between a base salary and zero salary. The commission share changes from 10% to 50% in both scenarios. Above you can see that the break-even Gross Commission varies from $87,500-$100,000. That means that if I can generate more than $87,500-$100,000 of Gross Commission, I would be making more money by taking the full commission pay structure. The question that I need to understand is how does a broker generate commission? Commercial brokers can generate commission by leasing out commercial spaces. Based solely off my conversations with professional brokers, my understanding is that the commission earned is on average 4% of the net value of the lease. The net value of the lease is calculated by taking the net yearly rent per square foot, multiplied by the term of the lease. Obviously the longer the term, the more commission you will generate. The following analysis will show how many commercial spaces I need to rent out to generate $87,500-$100,000 of Gross Commission. Assuming I will be tasked to fill a large office building, with an average square footage per office of 2,000 square feet, charging $14 net/psf, with an average term of 5 years, how many spaces do I need to fill out?[pic 3]

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