Commercial real estate brokers often are at the mercy of the markets and their parent company.
In the good years, brokers do well but they have to share the spoils with their corporate parent. In bad years, commissions are lean. And when they leave or retire, brokers usually don't have an ownership stake in the business they helped build.
A California-based commercial real estate brokerage called Lee & Associates has a business model that is a departure from the traditional organization. It recently added Naples-Fort Myers as its 45th office when it attracted a group of brokers who formerly were affiliated with Grubb & Ellis.
At its essence, Lee & Associates is a firm that's owned by its leading agents, or about 400 shareholders. Each office retains its profits and distributes them to the office's shareholders, who are usually the office principals who meet high sales levels. That means agents potentially could earn 85% of the commission volume they generate, much higher than the 50% to 60% at other firms, says Richard Clarke, a principal in the Naples-Fort Myers office.
Each office president votes on the parent company's annual budget, which provides for back-office functions such as technical support and marketing. “We spend less than 1% of total revenue on corporate overhead,” says Edward Indvik, CEO of Lee & Associates. “We outsource everything.”
In addition, office shareholders also have the right to invest in venture funds established to provide capital for new offices of Lee & Associates. A new venture fund is created to launch each new office and, in exchange for providing startup capital, it receives future royalties from that office. These royalties are paid out to investors in the venture fund much like dividends are paid out to shareholders of a public company.
The shares of the venture funds are offered in a private placement to shareholders of each existing office. The fund investors can also trade the shares at a later date, which would change in value depending on the success of the office.
This structure has several benefits, Indvik says. Brokers will be more motivated because they have an ownership stake in their own office and will benefit from the success of other offices. In addition, brokers will also build a stream of income from royalties that will continue into retirement.
Lee & Associates, which has its roots in brokering industrial property in Southern California, has grown from 22 offices with 300 agents six years ago to 45 offices with 675 agents today. Although Indvik declines to reveal specific financial performance, he says the firm handles about $5 billion of commercial real estate transactions annually.
The firm has been expanding eastward in recent years and has added offices in cities such as New York City, Indianapolis and Atlanta. Lee & Associates plans to grow in Florida and is seeking groups of agents. “I can see us having six offices in Florida,” says Indvik. “It's a top 10 marketplace.”