Broker Advocacy

What is a commercial real estate broker?

Historically brokers, whether stockbrokers, insurance brokers, commodity brokers or real estate brokers, were intermediaries who brought parties together to facilitate a business transaction. In this context, a broker was not an advocate for either side of a transaction, but rather one who just worked to help make a deal happen. In a number of industries, including most notably the commercial real estate field, the roles of brokers have evolved to take on more of an advocacy role as trusted advisors to one side or the other of a transaction.

With office leasing in particular, brokers are now typically identified as either landlord representatives or tenant representatives, and their perceived fiduciary responsibility is consequently either with the landlord or the tenant in a transaction.

Landlord Representatives / Leasing Agents

A building owner hires leasing agents to list and promote the building to prospective tenants. They field inquiries from tenant representation brokers and show the building to prospective tenants. Landlord representatives earn their commissions upon the successful leasing of space, so their objective is to lease as much space as possible on terms that are most favorable to the landlord. Clearly their loyalty lies with the landlord, and they advise and negotiate on the landlord’s behalf with that principle in mind. Landlord representatives will paint the building and space in a favorable light and will naturally try to maximize their principal’s financial return.

Tenant Representatives

A tenant representative is engaged by a tenant to identify alternative buildings and spaces, negotiate the economic terms of a lease, and overall quarterback the process on the tenant’s behalf. This is true whether the transaction involves a new lease and a new location, or modifications to or renewal of an existing lease. Like landlord representatives, the tenant representative is compensated by the chosen landlord when the lease is completed. Unlike a landlord representative, however, the tenant representative has no loyalty to a particular building or landlord since the tenant representative will be paid its commission wherever the lease is completed.

CONFLICTS OF INTEREST

Commercial office leasing is rife with potential conflicts of interest. These come in various forms, and each is discussed below.

DUAL REPRESENTATION

Dual representation is rare in office leasing. This would be a situation where an individual broker is representing both the landlord and the tenant. Real estate brokerage law requires disclosure of the dual representation to both parties in such cases, but the practice is not prohibited. The obvious conflict exists because the broker cannot be a fiduciary and advocate for both parties the in same transaction. In such cases, both landlord and tenant are effectively without an advocate on their side of the table.

Representation by Separate Brokers Within the Same Firm

This is a much more common occurrence, prevalent in large “full service” brokerage firms. While these firms will argue that their operations are separate and neither client has undue influence on the potential transaction, the reality is that brokers do share information. Recent high level court cases have brought the issue to light, as tenants assert their interests were not properly represented and the conflict resulted in significant economic loss.

In real estate firms who derive a significant part of their revenues from relationships with large institutional building owners, those relationships cannot be ignored in the normal course of business. The recent firing of Cushman & Wakefield by Brookfield Asset Management over an unwillingness to relocate C&W’s Manhattan office, as reported by Bloomberg and others, is a textbook example of a large institutional investor’s exercise of its financial muscle to influence business relationships.

In the ten largest metropolitan office markets throughout the United States, over 26% of the largest office buildings are represented by one of the five largest commercial real estate firms. Each of these firms has a substantial tenant representation practice in the same market. The potential for pressure from the institutional owners is significant.

Leasing Commissions

As pointed out above, compensation for both brokers in a lease transaction comes from the landlord. While most commission rates are well established and set by the local market, there are often landlords who will offer tenant representatives “bonus” commissions in an effort to influence the tenant representative. This is a clear conflict, as the tenant rep will earn more by steering its client toward the building offering bonus commissions. An obvious breach of fiduciary duty, such situations do in fact occur.

IMPLICATIONS

As always, the principle of Caveat Emptor applies. The consumer/buyer, in this case the tenant, needs to be aware of and work to mitigate or eliminate the inherent conflicts in the brokerage relationship. The simplest means are as follows:

• Do NOT rely on a broker representing a building to look after your interests. That broker’s clear allegiance will be to the landlord.

• For a renewal or restructuring of an existing lease, do NOT engage as your representative a broker from the same firm that is representing the landlord.

• For a potential relocation, be aware of which candidate buildings are represented by the firm that is also representing you. Consider utilizing as your tenant representative a brokerage firm that represents only tenants and does not offer leasing services to building owners.

• Insist on full disclosure of the amount of commission to be earned in each location under consideration and understand the potential impact of “bonus” commissions paid to your representative.