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Legislation Raises New Concern about Conflicts of Interest in Commercial Real Estate

Tenants Advised to Consider Whether their Broker Has their Back

May 3, 2017 | by Scott R. Wingrat, Gene S. Sachs

It’s an age-old maxim:  Brokers who represent both tenants and landlords are not totally objective.  Why?  Because in dual-agency arrangements, common with today’s giant traditional full service real estate firms, the broker has an obligation to bring tenants to their own listings or the other listing brokers’ buildings—and that may not be in the tenants’ best interests. 

It’s an age-old maxim:  Brokers who represent both tenants and landlords are not totally objective.  Why?  Because in dual-agency arrangements, common with today’s giant traditional full service real estate firms, the broker has an obligation to bring tenants to their own listings or the other listing brokers’ buildings—and that may not be in the tenants’ best interests.  Indeed, this may compromise the interests of space users and be a recipe for conflicts.

In 2015, a Watkins Research Group study revealed that most corporate tenants polled were very concerned about the potential of conflicts, and they said they’d prefer to work with a tenants-only service provider.* In December 2016, the California Supreme Court, in what is viewed as a landmark decision, ruled that in dual agency arrangements, the broker “owes the same fiduciary responsibilities to each party” and must be transparent in disclosing germane information. While this California legislation focuses on residential real estate, it has “far-reaching implications” for commercial brokerages as well as corporate tenants and occupiers here in the Washington, DC, Baltimore, and nationwide. DC Rep Chart

Protecting Interests with No Conflicts

In the legal industry, it's called common sense when one law firm represents the plaintiff, and another represents the defendant.  To ensure objectivity and accountability, each side hires its own advocate.  Otherwise, it would be called conflict of interest. As mentioned earlier, the potential for this same inherent conflict also exists in the real estate industry.

While the practice of brokers serving both landlords and tenants may be widely accepted, it can be tenuous. The fact is, when the tenants' needs and the brokers' incentives are incompatible, a conflict is inevitable. And today, companies are more sensitive to even the perception of impropriety.  More CFOs are now scrutinizing their companies’ real estate decisions, and they are conducting greater due diligence in examining their outsourcing relationships. 

They are also focusing on the bottom-line implications of such potential conflicts, which may be pervasive and very costly.  Today, on average, 85% of the revenue of full-service brokerage firms comes from representing landlords through leasing, property management, or investment sales.  In addition, publicly traded firms face tremendous pressures from Wall Street to generate revenue growth, further compromising the chance for unbiased service.

Exercising Caution

Tenant advisory firms differ from traditional commercial firms in two major ways: they solely represent the interests of their clients, and they provide long-term corporate services that are not just deal-oriented.  In addition to handling transactions, tenant advisory firms go "beyond the deal," focusing on start-to-finish corporate services like strategic planning, lease administration, lease audits, and project management.  While these offerings are typically lower on the priority lists of traditional brokers because they aren't as lucrative as are transaction-based services, they can be critical to corporate clients. 

As the market continues to consolidate, more space users are recognizing the value of having an exclusive advocate that has the expertise and value-added services to meet their requirements.

Challenging the Old School

Why has it taken this long for tenant representation firms to gain a foothold?  Landlord clients tend to provide greater revenue to listing brokers than tenants do, and many brokers prefer to work with traditional brokerages, motivated to make fast commissions for transactions and enhance their future listing opportunities.

Another deterrent to would-be tenant-only firms is tied to marketing considerations.  Brokers that represent landlords get valuable visibility since they can install their signs on their clients’ buildings to advertise the availability of space.  Tenant representatives typically don't enjoy this spotlight and resulting brand-name awareness.

So, what is our recommendation to tenants?  They should raise the issue of conflicts from the get-go, and they should be more diligent in selecting service providers that put their interests first.  Ask for references as well as a complimentary audit of your real estate needs.  Shop around.

Commenting on the recent California Supreme Court ruling, attorney Lee Stimmel said that dual-agency brokering is “an inherently impossible situation.”  In reality, at the end of the day, tenant advisory firms and traditional firms are not mutually exclusive. Despite differing philosophies, there is common ground for one to complement the other.  For example, tenant advisory firms don't provide services such as property management and investment sales (on behalf of Landlords or developers).. 

No one expects tenant advisory firms to replace traditional listing firms.  However, the advocacy approach will continue to be adopted as more tenants discover the benefits of this alternative to real estate as usual.  Moving forward, be sure to ask this key question:  “Does your broker really have your back?”

*In this survey, Cresa was rated number-one real estate firm for client advocacy.

About Cresa

Scott R. Wingrat is a Principal and founding member of Cresa Baltimore. Cresa is the world’s largest tenant-only commercial real estate firm. Gene Sachs is a Managing Principal of Cresa Washington DC and one of the founding members of the firm. In representing tenants exclusively—no landlords, no developers—Cresa provides unbiased, conflict-free advice. Integrated services cover every aspect of a real estate transaction from site selection and financing to project management and relocation services. Cresa offers clients customized solutions with more than 60 offices in 75 markets worldwide. For more information, visit www.cresa.com.