Commercial FAQ

1. What exactly is commercial real estate?

Broadly defined, the term “commercial real estate” can be used to refer to any dealing with real property in a business context. It could involve leasing out office space, owning an apartment complex or selling real property along with and as part of the sale of a business. It might be industrial or agricultural property. It could even involve residential properties like apartment complexes or rental houses being held for business or income-producing purposes. It can even involve working with the government. Unless the property is a residence where the homeowner is living, you’re probably dealing with commercial real estate.


2. How does the commercial real estate (“CRE”) industry work?

Most owners of real estate hire real estate agents to lease their property on their behalf. The agent obtains a listing agreement, which calls for that agent to act on the owner’s behalf as a fiduciary in leasing the property. The agreements are performance based, meaning the agent earns a commission upon the signing of a lease. The commission is typically paid one-half upon lease execution and one-half upon tenant occupancy. O wners of real estate can lease their own properties without having to have a real estate license.

Texas real estate agents are required by law to have a salesperson’s license issued by the Texas Real Estate Commission. All agents must pass an exam in order to obtain a license.  The agent then “hangs” their license at an office with a designated Broker.  The Broker has additional licensing and educational requirements that they must meet in order to have agents that work for them.  The Broker is ultimately responsible for any acts committed by an agent whose license is “hung” in their office.  Most all states have continuing education requirements, meaning that each licensed agent and broker must obtain a certain number of educational credits (also called clock hours) in order to renew their license.

Commissions are paid to the Broker who then pays the agent responsible for the lease.  Agents typically work on “splits” with the house.  Agents are typically independent contractors who are then responsible for paying their own taxes.

In some cases, a tenant will retain an agent to find a space on the tenant’s behalf.  Most listing agreements require that the listing agent split the commission earned with the tenant’s representative.  In soft markets where vacancy rates are high and tenants are at a premium, the owner may pay the tenant’s representative a full commission.  In this case, the listing agent usually continues to receive a half commission, which results in a commission and a half being paid out by the owner.


3. What’s the difference between a leasing agent and a tenant rep?  The leasing agent has the listing on the property and represents the interests of the building owner.  A tenant representative or “rep” represents the interest of the tenant in a lease transaction.  Some agents work exclusively on listings, others will take on tenant representation engagements only, while others will work on both.


4. I have a contract to purchase a building.  What if the seller refuses to close?
If you have done everything required of you in the sales contract, you can go to court and seek “specific performance” – a judge’s order requiring the seller to transfer the property to you.

As an alternative, you can sue for monetary damages.  For example, if the contract has a purchase price of $500,000 and you can show its fair market value is $550,000, the judge may award you the $50,000 difference.


5. I have heard the term ‘build-out.’   What does it mean?
Every business has its own jargon and the commercial real estate business is no exception.  Many office and retail buildings start out with tenant spaces consisting of little more than four walls and a door.  The idea is that the spaces will be finished to meet the specific needs of each tenant.

The process of finishing this “shell” space is known as the “build-out.”  There can be extensive negotiations between the building owner (landlord) and the tenant over:

1. What improvements will be made?
2. Who will pay for these improvements?
3. Who will be in charge of getting the work done?
4. What will the tenant be permitted (or required) to remove at the end of the lease?

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