Have you ever referred a client to a trusted attorney? The attorney’s initial response is almost always the same: “Thank you very much, I appreciate the referral but I will need to run a conflict check before I can proceed.” Our legal system mandates that attorneys identify and disclose any conflicting interests they, or their law firm, may have between clients. Attorneys have a fiduciary relationship with their clients. They can find themselves in serious legal trouble by failing to research and disclose conflicts of interest.
Real estate agents also owe a fiduciary obligation to their clients. However, unlike the attorney example, their first reaction at the prospect of a new client is not to research a conflict check. They appreciate the referral, sometimes pay a referral fee, and move on to consummate the transaction and collect a commission. Often, there is no discussion surrounding the serious conflicting interests that occur when real estate brokerages represent both landlords and tenants
“Currently most commercial real estate firms, including the large national organizations, represent both landlords and tenants. They are referred to as dual-agency firms,” says Robert Chavez, founder and CEO of Guardian Commercial Realty. “While these firms actively market their services to tenants, the majority of their representation and upwards of 80 percent of their revenues come from landlord representation. This equates to billions of dollars annually. One has to wonder how a dual-agency firm can offer the highest standard of duty implied by law to both landlords and tenants — or sellers and buyers — when the interests of landlords and tenants are so diametrically opposed and such an enormous economic bias lies with the property owner.”
Smart Business learned more form Chavez about how tenants can find a real estate agent that will act with their best interests at heart.
Why the difference in behavior between the legal and brokerage communities regarding conflicts of interest?
Let’s start with the roots. Commercial real estate brokerage was founded in the late 1800s to facilitate property owners with the sale and leasing of buildings, property management, and other advisory services tailored to the property owner or landlord. The higher the lease rate or sales price, the higher the commission — so this relationship has worked very well for both the landlord and its broker over the years. Obviously the scenario does not bode so well for tenants and buyers.
How does this create a problem for tenants selecting a broker?
On one hand, dual agency firms pledge to property owners that they will negotiate and secure the highest rental rate or sales price with minimal concessions to a tenant or buyer. On the other hand, the same firm pledges to a tenant or buyer that it will negotiate the lowest possible rent or sales price and highest concession packages. This is just the tip of the iceberg, as there is much to negotiate with regard to mitigating risk, operating expenses, tax responsibilities, etc. Given the standard of care mandated by a fiduciary relationship, it is surprising that this scenario even exists.
Add to the mix that the nation’s largest dual agency firms are publicly traded. They are under tremendous pressure from Wall Street to show profits. When they do not, stock values generally plummet. Many of the agents also have retirement savings tied to the value of their companies stock. Now consider that much of the firms’ revenue come from commissions, and commissions are only paid once transactions culminate. This creates an environment where an agent can be pressured to conclude a transaction before negotiations have matured. Not exactly what the framers of fiduciary duty had in mind.
Do these dual agency firms acknowledge the conflict of interest?
The dual agency firms are certainly aware of this potential for conflict. One firm has even published in its annual report that ‘the failure or inability of the Firm to identify, disclose and resolve potential conflicts of interest in a significant situation could have a material adverse effect.’ Dual agency firms claim to compartmentalize their practice groups so as to act independently and avoid or minimize conflicts. Notwithstanding, their profits all flow to the same corporate entity for review and consideration by Wall Street.
So how does a commercial tenant or buyer of commercial real estate seeking expert assistance select a broker that will represent its best interests?
Real estate contracts are among the most expensive and long-term commitments most tenants will ever make. One mistake in this arena can cripple an organization for many years to come. Fortunately for the tenant or buyer, commercial brokerage firms known as ‘exclusive tenant brokerages’ have evolved. These firms distinguish themselves from their industry counterparts by electing not to lease, manage or own commercial real estate. True tenant brokerages only represent parties seeking to lease or purchase real estate for their own use. They develop specialty practices and focus their scope of services toward representing their clients’ best interest and never wear two hats.
Astute tenants take their diligence a step further and make certain to interview several tenant brokerages. They are boutique entities with many subtle and material differences. It is important to understand their area of expertise and know if the broker working on your account has the experience and time to professionally service your specific needs.
Robert Chavez is the founder and CEO of Guardian Commercial Realty. Reach him at Robert.Chavez@GuardianUSA.net or (310) 882-2060.