National Association of REALTORS® Settlement - Will it Impact Commercial Real Estate Transactions?

Home sellers maintained that NAR’s long-established rules on broker commissions resulted in excessive fees. NAR has agreed to pay $418 million in damages and eliminate its rules on commissions, resulting in the end of the standard 6% commission for U.S. real estate agents.

The settlement prohibits offers of compensation on multiple listing services (MLS) and requires MLS participants working with buyers to enter into written agreements with their buyers. Previously, a buyer’s agent could look at the MLS and immediately know what compensation was being offered by the seller.

THESE REVISED POLICIES WILL GO INTO EFFECT ON AUGUST 17, 2024

The aftermath of the groundbreaking decision is expected to have profound implications on the residential real estate industry and how it conducts business. While it’s a residential-based settlement, the looming question among commercial brokers and commercial industry participants is whether it could have an impact on commercial real estate broker fees in the future.

There Are Differing Views

According to NAR, the settlement — like the Sitzer-Burnett lawsuit and copycat lawsuits — is focused on residential real estate transactions, leaving most commercial deals untouched. Sitzer-Burnett is a class-action lawsuit that was filed in Missouri federal court by a group of home sellers in the state against NAR and other defendants.

When asked specifically about the settlement’s potential implications on commercial real estate, a NAR spokesperson told CCIM Connections, “Our settlement agreement is focused on residential real estate transactions. As it always has been, it is important for all real estate professionals to effectively communicate the value and expertise they bring to any transaction."

Some commercial real estate experts say it will likely be business as usual for most commercial brokers because commercial transactions have always been done differently than residential deals. One of the biggest differences is that in many markets, commercial listings appear in commercial information exchanges (CIEs) rather than MLSs, and do not include an offer of compensation. Commercial sellers are always free to negotiate commissions with buyers’ or tenants' brokers.

“As a commercial real estate-focused education organization, The CCIM Institute's courses underscore how commercial-related fees are always negotiable,” noted D'Etta Casto-DeLeon, 2024 Global President of The CCIM Institute, in an article in The World Property Journal. “Buyers and sellers negotiate any fees with each of their commercial representatives that is appropriate for the transaction. Some of the likely adjustments happening in residential real estate will take a page from these commercial real estate practices.”

While some experts say the influence of the NAR settlement on commercial transactions will likely be very minimal, there could be a couple of exceptions, including condominium sales and residential agents who also do commercial deals that they find on an MLS. In tertiary or smaller markets, many commercial listings are on an MLS because there is not enough concentration of commercial data to support a CIE.

A Contrary Opinion

However, other commercial real estate experts say not so fast. While the settlement’s primary focus is on residential real estate commissions, the lawsuit’s implications could extend into commercial real estate dealings.

When established commission models in residential transactions come into question, it can increase awareness and trigger similar discussions in the commercial real estate sector. This means commercial real estate professionals may need to prepare for intensified scrutiny and reassess their commission structures.

Richard Juge, CCIM and President of RE/MAX Commercial Brokers Inc. in New Orleans, says the NAR settlement will definitely impact commercial real estate transactions. 

“I don't think the average commercial real estate person was paying much attention but then caught wind of this lawsuit out there,” 
he explains. “I don't think anybody expected for there to be a judgment like it was and the size it was.”

But once the announcement came out, Juge says commercial brokers started asking, “Does it affect us?” “My opinion is it is going to change the business overall,” he says. Juge also notes that commercial real estate has always been a separate business from residential, and the two are different. 

“It is sort of a big juxtaposition where, in some ways, you say, ‘OK, we better pay attention to the lawsuit.’ And then, in other ways, it is ‘We have always done business differently.’” Commissions are in commercial contracts, and historically, the actual fee and the rates, and so forth, have not been disclosed in the residential contracts. It always referred back to the MLS as being the way that commissions would be shared. 

“What I've heard from the outcome of the NAR lawsuit is that there were many people involved in the depositions and witnesses, who said they didn't know how much they were paying until they saw it at the closing table,” he notes. Whereas in commercial real estate, it’s more openly negotiated. Also, the creditworthiness of the tenants/users and buyers are different. 

But Wait, There’s More

That being said, “the gist of this lawsuit was about the lack of transparency, the lack of disclosure, the lack of understanding of who was getting paid what. So, all in all, isn't it good to be more transparent for the consumer?” Juge notes.

And that, Juge adds, also pertains to the commercial “consumer.” The idea is a first-time homebuyer might be naive to the process, so there are certain consumer protections in place, but “I think it is good for the whole real estate industry to have more disclosure,” he says.

Settlement Comes Down to Two Main Issues

First residential brokers using the MLS won't be able to publish cooperative fees in the MLS, and effectively, this must be discussed on the front end with the seller/client regarding if and how they will pay buyer brokers.

Second, buyer brokers will be mandated to use buyer broker forms, which will bring the commission conversation to the forefront.

Commercial practitioners have used buyer rep and tenant rep forms, but Juge says even for his company, the conversation of who is paying them, how they are getting paid, and how much they are getting paid is now front and center. “We will be using tenant representation forms and buyer representation forms going forward in all of our deals,” he says.

Juge also predicts that the days of dual agency are over. “It has been something that's been allowed in our business, which means I can represent the buyer, and I can represent the seller. I just need to be fair and honest and not pick a side, if you will,” he explains. 

If you use the legal industry as an example, attorneys can only represent one side of a deal. Juge goes on to say, “They’re on one side or the other, and I see that’s going to be more prevalent in our business where you're going to have to pick a side.”

Lesson for CCIMs

Juge cautions colleagues to get ahead of the changes that are coming on the horizon.

“I would definitely read up on what's going on because while we all hear it’s residential, in my opinion, it's absolutely going to affect the commercial side of the business as well,” Juge explains. 

“I don't think it's anything to fear. It's something to just be educated on and disclose, disclose, disclose. It is really all about transparency.” ■