Collect Fees on State Real Estate Transactions

A portion of a built-in real estate agent s commission should be collected by the state in the form of fee income or reduction in sales price or lease payment.


Background
During fiscal 1992, the state spent $18.9 million on the purchase of land and buildings, $239.6 million on the purchase of highway right-of-way and $105.3 million in payments for leased office space, land and service buildings (such as warehouses and labs). 1 Unlike the average person buying or selling a home, the state generally does not contract with a real estate broker to assist in its real estate transactions, but instead represents itself without collecting an agent s commission.

In real estate transactions, an agent s commission is normally built into the sale or lease price. When a commission has been calculated into the final bid, the state as its own agent could collect a portion of this commission in the form of fee income or through a reduction in sales price or lease payments.

Leasing Real Estate
The state is subject to competitive bidding laws with respect to the leasing of real estate. In the case of state agencies, once a lease bid specification has been reviewed by the General Services Commission (GSC), it is sent to interested building owners, who then bid for the state s business. Once an agreement is reached and a lease is signed with the state, the building owner is responsible for paying any commissions to the agent or agents involved in the transaction.

Owners generally include a commission of 6 percent as an expense item when calculating the rates for a new lease contract. 2 This fee is often split 4 percent to the tenant s agent and 2 percent to the owner s listing agent. Renewal fees for leases are frequently 3 percent and are split 2 percent to the tenant s agent and 1 percent to the owner s listing ag ent. The commission is paid based upon the gross rental due over the term of the lease, either in an up-front cash payment, or in specified payments made over the term of the lease. If property is leased to the state (where no commission is paid to the sta te) and a commission is factored into the lease price, the owner or the owner s agent can make a larger profit from the transaction than from a transaction with the private sector. 3

The problem with the current system is that the state is representing itself and doing the work that an agent or real estate broker would do without getting paid for that role, and all potential brokerage fees are being paid to the owner or to the owner s agent.

Real Estate Purchases
The state is also subject to competitive bidding procedures for the purchase of land and buildings. A fter bids are received from sellers, the state secures an outside appraisal before making an offer to purchase. In real estate appraisals, it is generally assumed that the fair market value includes normal closing costs (based upon comparable sales in the market), which include a real estate commission. 4 Therefore, the appraisals as well as the bids usually contain the additional commission charge.

As is often the case in lease transactions, sales commissions are included in the selling price and are paid by the owner (seller). 5 Generally, commissions on real estate transactions include approximately a 6-percent fee for sales up to $1 million and a 4-percent fee for sales over $1 million. 6 These fees are split if two agents are involved, with two-thirds of the fee going to the buyer s agent and one-third to the seller s agent. When a commission is calculated into the asking price, as is often the case, the owner or the owner s agent simply makes a higher profit. The result is that many building and property owners make a larger profit from transactions with the State of Texas than in transactions with other entities.


Recommendations
A. The state should be specifically authorized by statute to collect its share of real estate commissions when entering into real estate contracts for the purchase, sale or lease of real property, when commissions are included in the price. Commissions collected by the state should be deposited to the fund from which the p urchase or lease payment is made.

The Performance Review found that the state is not required to contract with an independent agent or broker to collect a real estate commission, since the state is exempt from the real estate licensing act. According to Article 6573a Vernon s Annotated Civil Statutes, the provisions of the real estate licensing act do not apply to a public official in the conduct of his official duties. 7 The Texas Real Estate Commission has ruled that the term public official includes public officials and state employees when they are entering into real estate transactions on behalf of the state. 8

B. The Comptroller s office should work with state agencies and institutions of higher education to establish the least burdensome method/program to identify and collect the state s share of real estate commissions.

Methods of collection include reducing the final price paid by the amount of the commission, requiring an up-front lump sum payment or in the case of leases, requiring specified payments over the term of the lease.


Implications
When real estate commissions are included in the price of real estate purchased, the recommendation would generate revenue to the state in the form of fee income or reduce the prices paid. When brokerage commissions are not included in the fair market price of real estate, the recommendation would not save the state money. Additionally, the price of real estate purchased and leased could be increased by the state s commission, offsetting any savings the state might realize from this recommendation.

If the state collects its share of commissions on the purchase and lease of real estate, the amount of fees paid to involved real estate brokers, agents or property owners may be reduced.


Fiscal Impact
Accord ing to GSC, the state spends approximately $100 million per year in lease payments for space of state agencies subject to GSC leasing guidelines. This figure excludes lease payments made by institutions of higher education, quasi-governmental agencies (e.g ., Lower Colorado River Authority), and other agencies not subject to GSC guidelines.

In fiscal 1993, the GSC estimates the state will bid for an additional 1.8 million square feet of space at an estimated cost of $ .75 per square foot per month, for total lease payments of $16.2 million. 9 Using fiscal 1993 as a baseline and assuming commissions are built into these leases, the state might collect at least a 2-percent commission on the annual dollar amount of the leases. Given this, the state is estimated to recover about $324,000 in lease commissions annually. Since the average lease term is 66 months, the gain to the state would increase by $324,000 each year (up to five years), as commissions are collected on previous leases, and on new and renewed leases.

Building and property purchase estimates are compiled from agency requests required for the Capital Improvement Plan. 10 In the 1994-95 biennium alone, the state is projected to spend $12.7 million on building and property purchases. Assuming commissions are built into the purchase price of this property, and that the state might collect at least a 2-percent commission on a ll purchase transactions, the state could collect an average of about $125,000 for fiscal years 1994-95, based on current projections of property purchases.

The estimated gain of $449,000, however, could be partly offset by increases in property prices and rents to counter the 2-percent commission. The overall fiscal impact thus would not be great, but the state s business management would be improved.

Fiscal Gain to All Dedicated Change
Year Accounts or Funds in FTEs

1994 $75,000 0
1995 75,000 0
1996 75,000 0
1997 75,000 0
1998 75,000 0



Endnotes
1 Comptroller of Public Accounts, Annual Cash Report Volume II, Revenues and Expenditures of State Funds for the Year Ended August 31, 1992, Part 1 (Austin, Texas, 1992), pp. 73-75.
2 Interview with John Hodges, Director, Facilities Construction and Space Management Division, General Services Commission, Austin, Texas, December 7, 1992.
3 Ibid.
4 Interview with John Hodges, Director, Facilities Construction and Space Management Division, General Services Commission, Austin, Texas, October 21, 1992.
5 Interview with Tommy W. Baker, real estate broker, Austin, Texas, July 29, 1992.
6 Ibid.
7 Vernon s Ann. Civ. Stat. Article 6573a.
8 Interview with Mark Moseley, General Counsel, Texas Real Estate Commission, Austin, Texas, October 7, 1992.
9 Interview with Norman Donaldson, Leasing Department, General Services Commission, December 9, 1992.
10 Senate Bill 3, Article 16, Acts of the 72nd Legislature, First Called Session, 1991.