What the 2018 Super Bowl Champions Can Teach Us About Leasing Office Space

The pieces seemed perfectly lined up. Carson Wentz, the protégé, second-year viable-MVP candidate quarterback, a well assembled group of offensive tools, and a brilliant defense had perfectly coalesced around a young head coach who understood not only how to design a play but, maybe more importantly, how to inspire a team to play for something bigger than themselves. Facing an easy close-out schedule and holding a conference-leading record, it looked like all that stood between the Philadelphia Eagles and Super Bowl LII was two (potentially home!) playoff games.  The team that got there twice but never hoisted the Vince Lombardi Trophy was electric-sliding their way into Minnesota.  Fly, Eagles, Fly!

And then, in the third quarter of a late season game against the Los Angeles Rams, scrambling into the end zone on a touchdown that was ultimately called back, Philadelphia’s Future was crunched between a pair of Rams defenders and seemed to hesitate on his way back up.  Wentz came back in and played through another four snaps, but that was it.  Along with the hopes and dreams of Eagles Nation, Number Eleven retreated to the locker room, and it looked like Philadelphia’s pessimistic prophecy was simply coming to its typical fruition – this time in the form of a torn ACL.

Now, it would be revisionist history to suggest that Howie Roseman, the team’s General Manager, took this in stride, knowing he had a Super Bowl MVP on standby. It’s quite likely that Howie, along with Jeffrey Lurie, the team’s owner, and Head Coach Doug Pederson, were as stunned as the rest of the NFL world watching events unfold, and probably spent a reasonable period mourning the loss of their pedigreed specimen. But it would be equally unfair to assume that they had failed to foresee the need for a Plan B (or many Plan Bs).  In fact, they had proven themselves throughout the season to be masters in this regard, having already found working parts to successfully replace a Pro Bowl left tackle, as well as a featured running back and star middle linebacker.

In the world of professional sports, owners, managers and coaches understand that the best laid plans often go awry.  All teams will eventually contend with adversity, and champions plan for it. Roseman believed that having a true leader, one with gameday experience who was ready to take the reins, was a necessary piece of the puzzle, and that nobody on the roster met those requirements. So when former “Franchise QB” Nick Foles became available, Roseman convinced Lurie to take an enormous financial gamble and commit an unprecedented $12 million to fill a backup QB slot.  Lurie trusted Roseman and had always been a believer in Foles, and the rest as they say, is history.  The Underdogs became Top Dogs and the Plan B became the 2018 Super Bowl MVP.

A tenant negotiating for office space would be wise to follow the lessons of the World Champions. A negotiating tenant may have selected a favorite location, and negotiations may appear to be running smoothly.  A tenant can literally have, “all business terms agreed upon,” and may already have spent time and energy designing a perfect space in that location. But until a lease is signed, the tenant should do the work necessary to protect its next best option; its viable backup.  In the context of an office lease, a “torn ACL” takes the form of a last-minute requirement for unreasonable securitization or guarantees, insistence upon the right to substitute alternative space, or an offer literally being pulled at the eleventh hour.  Any of these situations can torpedo negotiations and, without a viable backup, can leave a tenant in an extremely vulnerable position. The result can be a less-than-ideal outcome, of course, but can also result in extreme financial hardship in the form of expensive holdover rents and potential consequential damages.

In the context of lease negotiation, Plan B takes the form of an acceptable alternative that has been developed to the point of deliverability. Plan B often requires parallel negotiations; essentially full negotiations with Plan B occurring alongside negotiations for the top choice. By creating and developing a viable alternative, a tenant accomplishes at least two things. First, a literal alternative. If negotiations break down, a viable alternative provides a tenant with another option for its move, with all time and information required to change courses without compromising the process. Second, maybe equally valuable, as leverage. The mere existence of a vetted alternative provides a tenant with leverage to negotiate aggressively any truly critical lease issues that arise during lease negotiation.

Like anything else, Plan A is usually preferred for a variety of reasons, so including and doing the work to develop a Plan B does not obviate a tenant’s need to minimize the risks associated with its favored location. Reasonable actions to minimize the risk of having a deal crater at the finish line include negotiating a robust letter of intent sufficiently addressing all crucial business terms and, where appropriate, establishing a fixed exclusive negotiation period during which the parties are obligated to negotiate a lease exclusively and in good faith based on the terms of a binding letter of intent.  These protections are even more critical today, in a tight real estate market with limited options for certain types of inventory.

Howie Roseman’s prescience in developing a Plan B helped lead the Eagles to the organization’s first ever Super Bowl Championship.  A tenant’s Plan B may not receive the same public recognition but, during an extremely tense negotiation period, it can be what keeps a tenant out of the cold, and in control of its destiny.

 

 

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You Would Never Agree to This– But, Yet You Just Did

For some reason, many tenants continue to put themselves in conflicted situations with their brokers that they would never allow or even consider in any other aspect of their life or business.  Is it because they see other tenants doing this which lets them believe it must be ok, or have clever marketing pitches from brokers convinced them that real estate is somehow different from everything else?  To shed more light on how brokerage conflicts of interest hurt tenants, let’s look at some similar examples outside of commercial brokerage and see if you’d ever agree to them.

Example 1. 

You have a major fire in your home that is covered by your insurance company, XYZ Insurers.  Harry Brown, an insurance adjuster contacts you and says he actually represents a lot of the insurance companies including XYZ and would be happy to represent you in your claim against XYZ.  Because XYZ paid him $75,000 in fees last year for work he did on their behalf, he tells you that he knows how they operate and can get you a good settlement.  His fee from you will probably only be about $5,000.

Why You’d Never Agree to This.  What are the odds that Harry will aggressively pursue your claim if it upsets XYZ, a much larger client?  Of the following three potential outcomes, what likelihood would you assign to each for your insurance settlement with Harry?

  1. He aggressively pursues your claim and gets you an extraordinary recovery that leaves you ecstatic but XYZ very upset.
  2. He recommends an average or “market” settlement where neither party is thrilled but neither is upset.
  3. He recommends a settlement that leaves you somewhat frustrated but XYZ thrilled.

It’s a zero-sum game. Whatever he gets for you is taken away from XYZ.  Given Harry’s larger relationship with XYZ Company, will you feel completely comfortable with his final recommendation when he tells you “Take the deal, it’s a good deal”?

Why It’s the Same with Brokerage.  The same issues apply in brokerage.  Most brokerage firms make the majority of their money representing landlords as leasing agents, building managers, mortgage brokers, project managers and investment sales agents. For most tenants, you only provide fee opportunities once every five or ten years.  The landlord provides a steady and diverse stream of major revenues for your brokerage firm. How would you rank the probability outcomes above if Harry were your real estate broker?

Example 2.

You are considering buying a Toyota Camry from Bob’s Toyota and are working with John Smith, the salesperson.  You tell Bob that you’re also considering a Honda Civic from the dealer across the street.  John tells you “I used to work with that dealer and am very familiar with Hondas.  I’d be happy to evaluate both cars for you and help you decide.”

Why You’d Never Agree to This.  The fact is, John has quotas to make and he’s not outcome neutral here.  Even if he’s a great guy, human nature will make it difficult for him to be completely objective in his advice.  If you buy a Camry, he makes money.  If you buy a Honda, he makes nothing.  As a result, most people wouldn’t want to rely on John for this decision.  Further, how will John’s sales manager respond to John when you tell him “You know, I was strongly considering your Camry, but John convinced me that the Honda was a better value.”  That’s a conversation John would want to avoid at all costs.

Why It’s the Same with Brokerage.  As silly as this example may seem, this scenario is actually very common in commercial real estate.  If you’re looking at Buildings A, B and C and your brokerage firm also happens to be the listing agent for Building C, aren’t you in the same position as the above Toyota/Honda hypothetical?  If you end up at Building C, your brokerage firm makes two commissions as opposed to only one commission if you end up at Building A or B.  Your brokerage firm is not outcome neutral.  In addition, how uncomfortable will it be for your brokerage firm to explain that, based on their advice, you didn’t choose Building C? 

Example 3

You enter into a commercial contract to buy a small company from the mega conglomerate, ABC Company, and they breach the contract.  You suffer $100,000 in damages.  Attorney Jones calls you up and says “I understand you have a breach of contract claim with ABC Company, I’d be happy to represent you. Now, in the spirit of full disclosure, my partner, Sally Smith, did $1Million of business with ABC Company last year but don’t worry, I’ll keep her out of this completely and I’ll be your advocate. Also, because our firm obviously has a great relationship with ABC, the case will go very smoothly.”

Why You’d Never Agree to This.  Ok, are you convinced that by attorney Jones merely insulating his partner, Sally, from the case, there is no longer a conflict to worry about?  Does the $1Million a year in fees his firm stands to lose from ABC magically disappear from the equation when attorney Jones enters the courtroom to face ABC Company?  Probably not.  You see, the conflict here cannot be rectified merely by isolating one member of the firm from the case.  It’s not really a matter of preserving confidentiality. It’s the risk of jeopardizing a much larger economic relationship ($1M) that creates the real conflict and that will ultimately make it impossible for attorney Jones to be a zealous advocate for your case.

Why It’s the Same with Brokerage.  Again, the same holds true in brokerage.  Most brokerage firms who represent both landlords and tenants claim that there’s no problem representing both parties to a transaction because they create a “Chinese Wall” between the tenant and landlord brokerage teams.  By doing this they argue that the two brokerage teams can’t share confidential client information that could potentially benefit the other party. The problem is, confidentiality is a Red Herring.  The potential exchange of confidential information is not the problem.  In fact, by law, brokers are not allowed to share a client’s confidential information. The real problem, as with attorney Jones above, is that human nature makes it very difficult to act in a manner that is economically irrational; i.e., favoring a very small clients’ interests over a very large client’s interests.  Conflicts of interest that have material economic consequences to an individual will influence his or her behavior and ultimately, they will act in an economically rational manner.

Example 4 (and this one really happened).

You’ve decided to sell you mother in law’s home and, after getting recommendations for some of the best-known brokers in the neighborhood, you decide to interview two. The first broker comes in, assesses the house, and quickly recommends a listing price.  Immediately thereafter, she informs you that she just so happens to have a redeveloper client who she is sure will pay that price tomorrow thereby avoiding any closing risk or lengthy marketing period. “If you hire me today, I’ll have this sold for the asking price by tomorrow evening” she says. [Note: In real life, we selected the second broker who suggested a listing price that was $75,000 higher. After a bidding war, the property ultimately sold for $25,000 above that higher list price and $100,000 above the first broker’s suggested listing price.]

Why You’d Never Agree to This.  What is the risk here?  The first broker was attempting to represent both you and your potential buyer.  How comfortable would you feel about the recommended list price she gave you?  If she can really sell it tomorrow at that price, is it a good price for you or is it a great price for her other client?  Remember, if you sell to her other client, she gets two commissions AND she’ll get to relist the property for that redeveloper client once it’s been renovated. Further, if she can get that redeveloper client a quick purchase at a discounted price without having to get into a bidding war, she earns brownie points with that client and increases the possibility of future business. You, however, were a one-shot deal.

Why It’s the Same with Brokerage.  This also happens in commercial brokerage.  At some point in every lease transaction, the tenant will need to look its broker in the eye and ask, “Is this the best deal I can get from the landlord?”  If the brokerage firm is representing both sides, who is getting the great deal and how can you get comfortable with the recommendations you receive?  In sum, it’s just impossible to represent both sides to a transaction when the parties have completely opposite economic objectives and the advisors are not outcome neutral.

Conclusion

Every day people make rational decisions not to expose themselves to business situations that create obvious conflicts of interest.  In all of these cases, it’s just common sense that you don’t want an advisor representing you when they also represent the other party whose economic interests are completely adverse to yours.  This is especially troublesome when the other client is a much larger one with the promise of significant future business.  We also want our advisor to be objective which is very difficult when they are not outcome neutral.  Nevertheless, many tenants continue to believe that these problems don’t exist when hiring real estate brokers.  Unfortunately, they do.  In a world where conflicts of interest are getting more common and the financial entanglements with landlords are growing and getting deeper and more substantial, more and more tenants are starting to wake up and realize this is no different than the insurance adjuster, the car salesman, the lawyer or the residential realtor.

 

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Coworking Spaces and the Future of Philadelphia Real Estate

It seems like every week we’re hearing about another coworking company taking space in the region or a company branching out into this business line.

In addition to the most well-known WeWork, Regus, and MakeOffices and the regionally based Benjamin’s Desk (now merged with 1776 out of Washington, D.C.), newcomers to the coworking business will potentially include Life Time Work in Ardmore (adding this business line to its existing fitness and spa categories under the Life Time brand) and the proposed urban country club at 2400 Market. Where did this industry come from, what is driving its growth and what will its impact be on the future of corporate real estate?

There are lots of reasons, but one thing is for certain, it’s here and it doesn’t look like it’s going away any time soon.

What is Driving the Demand?

Coworking spaces provide companies with flexibility to grow and contract quickly with minimal commitments while also allowing them to preserve capital for their core businesses. They also free up executives’ time so they can focus on their primary business and not worry about real estate. Finally, they appeal to today’s Gen Y and Millennial workers who are just looking for something different than the isolated and anonymous office environment of their parents’ generation.

Today business is changing at an increasingly rapid pace making things a lot less predictable when it comes to planning for the future. 10 years ago, who saw Amazon buying Whole Foods, General Motors committing to making only electric cars within 10 years or large law firms having to all but abandon their long-standing leverage model? On a more macro level, the Dot-Com bubble that burst in 2001 and the Great Recession of 2008 taught us that the world can dramatically change overnight, and corporate leaders would be wise to incorporate flexibility into their game plans.

Not only is it becoming harder to predict the future, but companies today are also under increasing pressure to achieve short term results. Wall Street and private equity investors want companies to achieve quarterly financial goals which makes operational flexibility imperative. Companies need to be able to adapt quickly to both opportunities and setbacks in order maximize income and minimize losses.

Unfortunately, real estate leases tend to be relatively long-term commitments and, therefore, don’t always provide the flexibility companies need or desire. One of the first things we ask our clients to do when kicking off a transaction is to provide expected head count estimates over the next three to five years, so they don’t take too much or too little space going forward. That used to be a much easier exercise than it is today.

Leases are not only a long-term commitment, they also require a lot of capital (which could otherwise be deployed in a company’s core business) and time to plan and execute. In today’s economy where we have more and more startups who are burning cash to get up and running, committing dollars to real estate isn’t always a priority.

Finally, there may be generational differences driving the need for these new co-working spaces. Lots of Baby Boomers voice a common concern about their children’s generation: they have no patience and want immediate gratification. If true, it’s not their fault. They are the beneficiaries and perhaps victims of today’s “on demand” world. Everything they want—be it music, movies, food or information– is available at the touch of a button (or voice command) whenever they want it. Not surprisingly then, when today’s entrepreneurs want to start or grow a business, they want space now—they don’t want to wait six months to negotiate a lease and build out new offices. Also, for them, “long term” means one to two years, not five to 10.

What Does the Future Hold?

Coworking spaces originally targeted very small businesses and entrepreneurs who otherwise were working out of their homes or in a local coffee shop. The idea was to build a community of people who could support each other. Rather than living a solitary existence, these small business owners could now network with other entrepreneurs every day, share ideas, provide each other resources and even share a beer over ping pong. That model, however, is changing and it will ultimately challenge landlords to rethink the product they are providing.

If you think about it, coworking businesses have been saviors to today’s landlords. In Center City alone, they have absorbed over 500,000 square feet of office space with workers who would otherwise never be able to get space in these buildings. Because most commercial landlords would not be interested in small businesses seeking short term leases, they have not viewed co-working firms as competitors. To the contrary, they have increased overall demand for class A and class B office space even as most of corporate America is consuming less space. A gift from heaven?

Not so fast. The problem is that coworking companies are now looking to attract larger enterprise businesses who, for the reasons discussed above, are looking for flexibility, reduced capital costs and turnkey solutions. These companies are taking entire floors or large suites in co-working spaces for longer terms of 18-24 months (as opposed to month to month or maybe six months). When they have a major project, and need to hire dozens of temporary workers for one or two years or simply want to put their toe in the water in a new geographic market, these coworking arrangements can be preferable to committing to a five-year lease term and the build out of new space. Coworking arrangements also allow companies to take on more space or shed excess space as headcounts fluctuate without having to get into the sublet business or undertake major real estate projects.

As more and more Fortune 500 and other larger companies start opting for coworking environments, coworking companies will compete more directly with the core business of their commercial landlords. Because competition is always good for the consumer, what will it mean?

We are already seeing more and more commercial office buildings in the Delaware Valley creating common amenity spaces for their tenants that mirror hip coworking environments including upscale gyms, outdoor terraces, fireplaces, pool tables and conference facilities.  It is likely that, going forward, landlords (and their lenders) may also have to re-examine their fixation on long term lease requirements and their resistance to expansion and contraction rights. These coworking spaces will not compete on price, they will compete based on flexibility and ease of execution. That’s good for tenants.

On the other hand, as coworking spaces start to compete more directly with commercial landlords for their bread and butter tenant prospects, landlords may either shrink their appetite for coworking tenants (thereby cutting off their life blood of desirable locations) or decide to get into the coworking game themselves. This is especially an option for large landlords who have millions of square feet of inventory spread across the country. Given the premiums that successful coworking locations are realizing, commercial landlords may decide they can in fact get up to speed on the operational and marketing skills necessary to effectively compete in this space.

Conclusion

The emergence of the coworking industry over the past five years has been a boon to commercial landlords by absorbing millions of square feet of vacancy with an entirely new class of tenant. However, change may be in the air for the real estate industry as these co-working companies start to evolve their business model and more directly compete with landlords for larger, better credit tenants. Landlords are being forced to rethink their business model which has been pretty much unchanged for the past 50 years. With the future hard to predict and a need to adapt quickly in the short term, tenants will need real estate solutions that are more flexible and that minimize capital and lead time. With coworking companies ready, willing and able to fill this need, it looks like real estate may be primed for the next big transformation.

This article was published in the Philadelphia Business Journal on November 14, 2017

 

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Don’t Put All Your Eggs in One Basket (Part 2 of 2)

Part 2: BATNA – Yours and Theirs

In our last blog we reviewed traditional negotiating techniques and concluded that they all suffered from the unfounded assumption that “you had to deal with the cards you are dealt”. However, none of them focus on changing the circumstances surrounding your negotiations.

If you had to pick a date when modern negotiating began, 1981 would be a good choice. That’s when Roger Fisher and William Uri, members of the Harvard Negotiation Project, published the best-selling book, Getting to Yes. In that groundbreaking work Fisher and Uri coined the term “best alternative to a negotiated agreement” or “BATNA”.

At this point, negotiation was about to change from theatrics to a science.

With BATNA, the initial focus of any negotiation was what the world would look like if negotiations failed. Before you negotiate your Deal A, you need to fully understand Deal B, your alternative. The thrust of their work was that to be an effective negotiator you had to understand leverage, not just negotiating techniques.

But the core of BATNA – leverage analysis – does not stop with an analysis of your alternatives. It’s equally important to realistically estimate your counterpart’s alternatives. If the other side doesn’t do Deal A with you, what does their Deal C with another party look like? The goal is to be able to understand the strength of your next best alternative in relation to their next best alternative.

Although an entirely new framework for business negotiations, BATNA was really a variation on the game theory developed by Nobel Laureate John Forbes Nash (the subject of the book and movie “A Beautiful Mind “). His theory, The Nash Equilibrium, was a highly mathematical process to analyze the strategic interaction of multiple decision-makers. The theory worked so well that it remains the cornerstone of the US nuclear arms policy, the so-called theory of Mutual Assured Destruction.

  1. Understanding your BATNA

The first step in using BATNA negotiations is to understand what your world looks like if you don’t do your preferred deal. That involves determining the cost to you – in terms of both rent and top line revenue impact – of doing a lease in your preferred building versus settling for your second-choice building. If the cost differential to you is relatively small, you may choose to take a tough stand with your preferred building. However, if your second-choice building is materially more expensive, your strategy may be markedly different.

  1. Understanding the BATNA of the landlords.

The traditional process that most brokers follow for tenants does a pretty good job of dealing with the first step of a BATNA discussed above.  Almost all brokers get proposals from multiple buildings and many even put the economics terms in a comparative financial model. A few even discuss with the client what the business impact would be of choosing one location versus another.

But that’s only looking at the tenant’s BATNA. That’s only half of the process. The other key is understanding each landlord’s BATNA. This part of the analysis puts the full-service brokerage shops in an awkward position since landlords are also their clients. But without a full and honest discussion of the landlord’s BATNA you will never know how much money you may be leaving on the table.

How would your negotiations with your preferred building change if you learned that the landlord had a loan that was maturing shortly and that without leasing up the space that you’re considering, it would be unlikely that the landlord could successfully refinance? What if your preferred building were part of a private equity fund that was maturing so it was likely that the building would be sold in the near future?  Wouldn’t it be useful to know what the value of the property was with your lease in place versus selling the property with the vacancy? It’s difficult for full-service broker to have complete and unbiased discussions with you about the BATNA of the owners of the buildings you’re considering, since those owners are often clients of their firms.   But without understanding the BATNA of the landlords you will never know how much money you may be leaving on the table.

Conclusion.

The underpinning of BATNA is that effective negotiations is not a matter of theatrics and but a process of understanding the relative leverage of the parties. Once that premise is accepted, then preparing for negotiation is less a matter of practicing the “good cop/bad cop” routine and more a matter of (1) developing and optimizing your alternatives and (2) understanding the alternatives available to the other parties with whom you are negotiating. It’s simple: the party with better alternatives in a negotiation wins.

All the traditional negotiating techniques in the world won’t help you as much as an understanding of your BATNA in the BATNA of the owners of the buildings you are considering.

Part of this wisdom is embodied in the English proverb “don’t put all your eggs in one basket”. Every farmhand knows that if you have all your eggs in one basket and stumble on the way back from the henhouse, then you’re having oatmeal for breakfast. That’s why it’s important for you to have truly viable alternatives in your real estate search and understand the full business implications of those alternatives.

If we were to update that English proverb to reflect the modern negotiating strategy of BATNA, we might revise it to say, “don’t put all your eggs in one basket, and understand the baskets of the other guy”.

When you’re doing your next real estate deal, don’t negotiate until you have created multiple alternative deals and understand the BATNA of your preferred outcome. That simply a matter of not putting all your eggs in one basket.

But don’t just focus on your world. You must understand your preferred building’s BATNA if you choose not to make a deal with that building. What does your preferred landlord’s basket look like if they stumble in making a deal with you? If they might be having oatmeal for breakfast, maybe you have the leverage to push harder.

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Don’t Put All Your Eggs in One Basket (Part 1 of 2)

Part 1: The Limits of Traditional Negotiating Techniques

Have you ever read a book about negotiating? Maybe you’ve read a lot of them. Did you try the techniques that the authors espoused? How well did they work for you?

When you think about it, if someone had discovered a technique to control the free will of the person on the other side of the negotiating table, how likely do you think it is that they would write that secret down in a book and sell it for $24.95?

All the traditional negotiating techniques that we have read about and used often seem more like a dance than a science. Eventually they are going to get you to a point somewhere within a narrow range of perceived possible outcomes. Using one technique or another may get you a little more or a little less, but none of them are going to change the landscape.

Before dusting off that book on negotiating you read a while back, let me give you a “Readers Digest” version of the nine most common negotiating gambits:

  1. Extreme Initial Position. This technique tries to anchor the preliminary discussions so that bargaining begins from an extreme position instead of a rational offer. The best counter to this approach is not to ignore the offer but to rationally address the reasons the offer is not worthy of serious discussion and to ask detailed and probing questions to weaken the factual basis behind the extreme opening position.
  1. Take it or leave it. This strategy involves making a firm and unyielding offer. This technique rarely works unless one party has a great negotiating leverage (in which case it’s more of a strategy on how not to negotiate than how to negotiate). It also suffers from denying your opponent participation in the bargaining process, which is often a key emotional need to reach agreement. 
  1. Limited Authority. Frequently used, this maneuver involves representing that you have no authority to go any further and must seek approval from others. The goal is to bind your opponent without binding yourself. With a skilled opponent, this approach usually just protracts negotiations since it’s easy for two to play the same game and to defer further discussions until the parties can check with their clients, superiors, investors, lenders or whomever else they claim to report to. 
  1. Nibble, Nibble. This is a variation of the Limited Authority technique. After apparently agreeing to terms, the negotiator gets back to their opponent with the distressing news that they need to make several minor changes to the agreement in order to get their client on board. This technique relies on the opponent being emotionally invested in the “almost final” agreement and not wanting to open things up. It’s easily countered by demanding reciprocity on the “small changes”. 
  1. Decreasing Offers. This move starts with a fairly realistic offer that is conditioned upon resolving negotiations by a set time. If full agreement is not reached by the deadline, the offer is withdrawn or reduced. This is a high-risk strategy since your opponent may in fact not be able to meet the deadline and then your bluff will be known. It’s also a difficult strategy to defend if your opponent asks you to detail the harm suffered if the deadline is missed. 
  1. Table pounding. This is an isolated technique and not an overall strategy. The risk is that your opponent reciprocates and the stakes of the negotiation have been needlessly escalated. It’s an effective technique if used very sparingly, and in a controlled manner. Just remember that when Nikita Khrushchev pounded a shoe on the podium of the United Nations in 1960, he was still wearing his two shoes.
  1. Brer Rabbit. To jog your memory, Br’er rabbit was the character in the children’s fable that when caught by the Fox offered to suffer any terrible fate as long as he wasn’t thrown in the briar patch. Of course, the Fox, having the upper hand in these negotiations, did exactly that; whereupon Br’er Rabbit made his escape. For Disney’s take on this technique see: https://www.youtube.com/watch?v=v9oWq9zIXTY The technique relies upon your opponent having the upper hand and being susceptible to reverse psychology. So, hypothetically, if Option 3 is your real objective, you offer to accept Option 1 or Option 2 as long as you don’t have to risk Option 3. A great technique, but rarely do the stars align in a negotiation so you can use it.
  1. Good cop bad cop. A technique learned by everyone who ever watched a police drama. Because it is so widely known and easy to identify, the method should have limited effectiveness, but it’s surprising how hardwired the brain is to please the “good cop” and avoid the “bad cop”. It is still the standard interrogation technique of detectives, but works best when you can detain the party in a poorly lit room for hours on end – not often the case in business negotiations.
  1. Village Idiot. Sometimes the smart thing to do is to play dumb. Peter Falk gave a lesson on this technique in every episode of the television series Columbo. It’s less of a negotiating technique than a discovery technique, but it should be in everybody’s toolkit. Don’t assume you understand what makes your opponent tick. If you play inept, and allow your opponent to explain his world and how it works, you will be better equipped to reach your negotiating goals. Of course, a sophisticated opponent will recognize this technique and resist the human tendency to want to help, and worse may feed you misrepresentations that backup their negotiating position. Obviously only reliable in a television script.

All of these traditional negotiating techniques suffer from a fundamental flaw: The techniques assume that the negotiator is limited to dealing with a given set of circumstances. 

But what if you could change the circumstances surrounding your negotiation? In other words, why deal with the cards you are dealt when you can change the cards you hold?

We will examine the new science of negotiating and how to change the cards that you hold in Part 2 of this blog.

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Why a Broker Isn’t Good Enough

“The beginning of wisdom is the definition of terms.”
― Socrates

A lot can be learned from reading a dictionary. It reveals the origins of words and uncovers the true essence of what things are. This is especially true when the word defines a person’s profession such as “doctor”, “lawyer” or “broker”. Though professions evolve over time due to changes in technology, custom and practice, at their core, these professions essentially remain the same. Certainly there have been tremendous medical advances over the past 500 years; however, a doctor is still someone who treats sick people. The legal industry is much different than it was 200 years ago but lawyers still advocate for their clients at the negotiating table or in the court room applying the rules of law. But what about a broker?

Webster’s, defines a broker as “one who works with opposing sides in order to bring about an agreement.” They list, among others, as synonyms “mediator”, “conciliator” and “intermediator”.

Historically, brokers put deals together between two or more parties. They matched together people who wanted to sell something with people who wanted to buy something. To facilitate deals, brokers often helped the parties determine a fair price based on similar deals being transacted whether it be corn, soybeans, minerals or real estate. Brokers were not advocates for either party—they couldn’t be because they had both seller and buyer clients. Brokers were merely intermediaries and facilitators trying to make a deal happen.

Unfortunately, unlike with medicine or law, not a lot has changed over the years with regard to real estate brokerage. Notwithstanding what many full service brokerage firms say in their marketing materials, ultimately many brokers still view themselves as primarily as intermediaries who bring landlords and tenants together—their value is space finding. It’s right there in their engagement letters.

The tenant engagement letters required by most large brokerage firms say that, following the expiration or termination of the engagement, if the tenant ends up doing a deal with any building the broker showed or otherwise identified to the tenant during the term of the engagement, the broker will be owed a fee. There is no requirement that the broker negotiate actual deal terms, structure a deal or shepherd the deal to closing– the mere introduction of the property to the tenant entitles them to a full fee. In sum, their job was simply to find the tenant a building.

There is other, more compelling evidence that most brokers still view their role as a deal facilitator and not as an advocate for tenants. Whereas lawyers can never represent opposing parties without an express written waiver from all of their affected clients, brokers take positions that are directly adverse to their clients all the time. They regularly represent landlords and tenants in the same market and even the same transaction. In fact, they will even be the landlord in a transaction with one of their tenant clients and negotiate aggressively against them.

How can a broker reconcile these direct and irreconcilable conflicts of interests? Simply put, there can be no real conflict of interest if they see themselves primarily as match makers facilitating a deal between a willing buyer and a willing seller—just like the old days.

However, whereas it might have sufficed 100 years ago for a broker to be a mere facilitator in a world where buyers and sellers (or landlords and tenants) had relatively equal knowledge and leverage, that’s not the case today. Now real estate is dominated by large REITs, insurance companies and private equity funds. These landlords have large staffs of experts and professionals who work in real estate all day, every day whereas tenants only need space maybe once every five or ten years. It’s a rare event so they don’t have on staff the expertise to compete with the landlord’s army of professionals. As a result, when the time comes for a tenant to do their lease, they need a dedicated advocate, not a neutral intermediary.

Sometimes to understand why things are the way they are, you need only look at a dictionary. How a profession is defined often reveals the essence of what that person does and what they believe their true service and value is. The traditional roles of professionals don’t really change much over time and old habits die hard; especially when the traditional roles worked so well for the professional. While clever marketing materials can spin wonderful tales, the engagement letters they are required to sign and the conduct of brokerage firms tell tenants the real story. In the end, a broker is not enough. Just ask Socrates.

For more information contact Glenn Blumenfeld http://www.tactix.com/team.php#Glenn

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What Can the Highest Grossing Movies of All Time Tell Us About the Philadelphia Real Estate Market?

Can you name the five highest grossing films of all time?

Looking at domestic box office receipts, the top five are:

1   Star Wars: The Force Awakens 937 2015
2   Avatar 761 2009
3   Titanic 659 1997
4   Jurassic World 652 2015
5   Marvel’s The Avengers 623 2012

Does anything look strange to you about this list? The oldest movie on the list is Titanic which was released in 1997. Didn’t anyone make good movies before 1997? Was Marvels’ The Avengers – fifth on the above list – really a bigger hit than Gone with the Wind (1939), The Godfather (1972) or Jaws (1975)?

The list of the top five domestic grossing movies is a good illustration of a problem that has been recognized by economists for years:  The problem of Nominal vs. Real Values.

In economics, nominal values are simply a raw, unadjusted numbers. On the other hand, a real value has been adjusted to account for an extrinsic factor so you can get a true apples-to-apples comparison. The most common type of adjustment is for inflation, but economists also sometimes adjust for the size of the population base.

When Gone With the Wind premiered in Atlanta in 1939 the average ticket price was a little less than a dollar. The total U.S. population was about 131 million. In 1997, the movie Titanic opened during a time when the average ticket price was around $4.60, and the US population was about 273 million.

Here’s what the list of top movies would look like if we took the nominal values and adjusted them for inflation:

1   Gone With The Wind 1,747 199 1939
2   Star Wars 1,541 461 1977
3   The Sound of Music 1,232 159 1965
4   E.T. The Extra-Terrestrial 1,227 435 1982
5   Titanic 1,172 659 1997

Only Titanic survived adjustment for inflation.

What if we were to further adjust for population? That would give us a number which would be the average inflation-adjusted dollar spent per person for each movie. Here are the top five:

Real Value

($ Millions)

Year USA  Population ($ Millions) Per Capita Spend
Gone with the Wind $1,748 1939 130.9 $13.35
Snow White $943 1937 128.9 $7.32
Star Wars $1,541 1977 220.2 $7.00
The Ten Commandments $1,133 1956 168.9 $6.71
The Sound of Music $1,232 1965 194.3 $6.34

Gone With the Wind has gone from being absent on the first list, to being in the runaway blockbuster movie of all time on the third list with a per capita spent of almost twice that of the runner-up.

So what does this tell us about real estate in Philadelphia? For the first time in history, Philadelphia’s new crop of class A+ buildings are commanding rental rates over $40 (on a gross basis which includes first year operating costs and taxes). Is this a sign that Philadelphia is about to lose its reputation as being a real estate bargain compared with other Northeastern cities? Are Philadelphia rents out of control?

No.

Rental rates, like many numbers, that are brandished about are too often expressed as nominal values, not real values. What if we inflation-adjusted Philadelphia’s historic rents? Let’s go back 20 years to 1997 when the movie Titanic was released. When we first saw Leonardo DiCaprio and Kate Winslet standing, arms outstretched, on the bow of the Titanic the consumer price index was 160.5. In 2016 the CPI was 239.5. That means a $40 rent today, adjusted to 1997 dollars, would be only $26.21. That’s significantly less than the gross rent the top buildings in Philadelphia were getting in 1997.

So although nominal rents have been increasing, the real rent in Philadelphia has been falling even as stock of buildings in Philadelphia get newer and better. Sounds like the perfect plot for a blockbuster.

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Landlordholm Syndrome

Most people are familiar with the term “Stockholm Syndrome” which refers to psychological symptoms that sometimes occur in victims of a hostage situation.  The term originated in Stockholm, Sweden in the summer of 1973 when gunmen took four bank employees hostage and held them in a vault for over five days.  Surprisingly, when the hostages were finally freed, it became evident that they had developed an empathetic and emotional attachment to their captors.  While all common sense would tell them that the hostage takers did not have their best interests at heart and the legal authorities did, the victims came out sympathizing with the former and demonizing the latter.

Since 1973, this phenomenon of forming paradoxical attachments has been associated with numerous adversarial situations including kidnappings and personal crimes. One of the most famous victims of Stockholm Syndrome was Patty Hearst in 1974.  She not only formed an emotional attachment to her kidnappers, she ultimately joined their movement.

The fundamental characteristics of Stockholm Syndrome are:

  1. The victim develops a surprisingly adverse reaction to those who are trying to help them—the police.
  2. The victim develops a fondness, empathy and sense of trust towards his or her captors who put them in danger.
  3. The captors develop a fondness towards their victims.

While not every hostage or kidnapping victim experiences Stockholm Syndrome, there do appear to be some common factors in those who develop it.  Among these factors are:

  1. The victim and the captor are exposed to each other over an extended period of time.
  2. The victim and the captor are in close proximity to each other—when they are separated into different rooms, the phenomenon does not seem to occur.
  3. The captors show kindness to the victim. Again, the phenomenon does not occur when the captors show aggression, violence or anger towards the victims.

What does all of this have to do with real estate? We’re getting to that.

First—and this is very important– let us preface the balance of our discussion by saying that we in no way compare landlords to kidnappers, robbers or terrorists.  Overwhelmingly landlords are good people who are just running a business and trying to make a profit.  They develop long standing relationships with their tenants and, over the years, these relationships often develop into strong and meaningful friendships.  We certainly have developed similar bonds with our landlords and count many of them as good, personal friends.  Leases are long term partnerships between two businesses and the best ones end up with personal connections.

However, notwithstanding these friendships and personal connections, it’s important for tenants to understand that their financial interests are directly adverse to the landlord’s interests when it comes time to renew their lease (or enter into a new lease).  Landlords make more money when they obtain higher rents and dish out smaller cash concessions.  Tenants make out better when rent is lower and cash concessions are maximized.  It’s a zero-sum game.

Given the foregoing realities, common sense tells us that the best way for a tenant to ensure that it gets the best lease deal is to separate its personal feelings towards the landlord from the business relationship and compete its requirement in the open market.  Competition always generates better deal terms.  Despite this obvious truism, some tenants still fall victim to what we call “Landlordholm Syndrome”.

Like with hostage victims, tenants, after spending years in a landlord’s building, often develop paradoxical feelings.  Whereas the hostage victim believes the police are the bad guys and the hostage taker is the good guy, tenants sometimes allow themselves to believe that their landlord is looking out for their economic well being and that potential tenant brokers are the bad guys trying to damage their wonderful relationship. While a rational observer would understand that hiring a dedicated tenant broker to compete the lease requirement in the open market would be in the tenant’s best interests, the tenant suffering from Landlordholm Syndrome sometimes sees the broker as obstructionist or muddying the waters.  Thus, these tenants insist on doing a “friendly” deal with their landlord without engaging a broker and without creating any competition for their requirement.

Conclusion

Tenants shouldn’t make the mistake of confusing a landlord’s kindness and friendship for altruism.  Landlords ultimately must answer to their shareholders and investors so they have a duty to maximize their profits.  Because they are striving for completely opposite outcomes in the lease negotiations than tenants, it is unrealistic to believe that a “friendly,” non-competed lease renewal is going to achieve the best economic result for the tenant.  Before falling victim to Landlordholm Syndrome, tenants should take a step back and reassess who is really fighting for their best interests.

For more information contact Glenn Blumenfeld http://www.tactix.com/team.php#Glenn

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Six Keys to Ensuring Great Space

You’ve just signed a new lease or agreed to renew your existing one.  As you’ll be occupying this space for the foreseeable future, you want to make sure it not only supports your business operations, but also helps brand your firm and reinforce your corporate culture.   Today, space is not just a place where your employees come to work; it’s a tangible representation of who you are and, as a result, it will impact employee morale and retention and either be an asset or liability in helping you attract new talent.  Just as important, because real estate can represent one of a company’s largest line item expenditures, companies today are more judicious than ever about efficiently consuming space.  That means every foot of space must be justified.

With office space design becoming more important to companies, those charged with the execution of the office move (or renovation) need to approach the task with great care.  Tactix just executed our own transformative move to new space so we thought we’d share some thoughts and ideas with you that can help you with your next deal.

  1. Find the Right Design Firm. There are lots of great design firms in the region who have executed wonderful work environments for their clients. How do you pick the one that’s right for you?Some people feel that each design firm has its own style and that when they walk into a space, they can tell which firm designed it.  While design firm ideally take direction from their clients and then reflect the client’s vision into the space, clearly some firms have consistent components, materials or features in their work.To see if your style meshes with the design firms, visit one or two spaces they have recently worked on which they think is most representative of what you have described to them (i.e., open plan, cutting edge design, traditional etc.).   If they haven’t done something like what you want, they may not be the right firm for you.Most likely your broker will introduce you to several potential design firms and will propose that you invite them in to make presentations.  Use the interview process to test the creativity, flexibility and listening skills of the various design firms you are considering.  Most design firm pitches cover the basics: how they help you develop a space program, how they will facilitate the “visioning” process to define the aesthetic for your space, and how they document these ideas into actual plans.  Because they are all have the technical abilities to do the work, the presentations often sound the same and blend together by the end of the day of interviews.  After all, it’s not what they do that sets them apart (the steps they take are virtually the same), it’s how they do what they do.  As a result, try them out during the interview process by making it a working session.  Have them solve a problem in your existing design or come up with an idea to improve your current space.
  1. Give Your Design Team Direction. A good design firm will create exactly the look and feel you are looking for if you can clearly articulate your vision.In our case, we are a boutique brokerage firm who clients come to because we are NOT a big, institutional firm where they may feel anonymous.  They like that we’re smaller and have a more personal approach.  We wanted our space to reflect that distinction so we told our design team to create space where clients will feel like they are in our home among friends.  However, we told them that, in our case, we wanted “home” to feel like a Soho loft.  They nailed it.While this approach works great for those who know exactly what they want, what do you do if you don’t really know?  As more and more of our clients are telling us with regards to the rapidly changing landscape of space design and workplace layouts, “I don’t know what I don’t know.”  In these instances, start taking note of spaces you have seen (i.e., clients, peers, vendors or even in magazine photos) and like or don’t like. Share them with your designers.  Understand what message you want your space to convey to people and try to articulate that.The more direction you can provide them, the better the chance your space will meet your expectations and reflect your unique objectives. 
  1. Build a Representative Team of Stakeholders. Clients often ask us, “How many people should be on my real estate committee and who should I get input from in vetting our design?” It’s important to remember that change is very hard for people, especially in today’s world where the trend is to reduce people’s individual work space and often make their personal space less private.  It’s one thing to move to a new building or location and disrupt commuting, parking or eating/shopping patterns, it’s another to dramatically change someone’s personal work space.  Ultimately, you want space that helps people work better.  To ensure this happens, seek input from different departments and worker categories in the company.Law firms should seek input from their administrators on how secretaries/administrative assistants work.  Should they become shared resources available to a general population of attorneys or remain dedicated to a defined team of bosses?  How much surface area do they need for their work?  How much filing space do they need nearby and do they need a printer within arm’s reach?  Without understanding how people work, you can’t plan space to make them more efficient and that will cause problems.In assembling your team, remember, if you are asking for people’s input, you need to be prepared to listen to their suggestions and incorporate some of what they suggest.  That means you want to keep your team (or the group of people interviewed by your designers) relatively small.  You can’t accept everybody’s wish list and eventually you need to make decisions.
  1. Insist on Clarity from Your Design Team. Moving into your new space shouldn’t be a surprise. If you don’t fully understand what your space is going to look like, ask for more clarity.  While you will typically see test fits of your space (one-dimensional partition plans), pricing notes which reflect quality of materials and even sample boards showing color palates, fabrics and finishes, it’s often hard to visualize what the space will look like.  Given how important the space is to your business and how much money you will be spending to construct the space, you’re entitled to fully understand what you’re getting.Today, design firms have cutting edge technology which can enable you to take a virtual, three-dimensional tour through your space before it’s built.  In our case, we had our design team prepare artists renderings of what our space would look like as well as photos of similar spaces we could expect our space to look like.  The result:  no surprises. We got exactly what we were expecting on the design.The furniture can cause some unique issues.  If you can go to the showroom (more likely for larger tenants given the cost involved), you can actually touch and feel the exact product you will be purchasing.  In fact, in some instances, we have had furniture vendors set up mock offices in our client’s existing space featuring the new furniture systems and configurations so they could test drive the package before committing to it.  In our case, we sometimes needed to pick furniture based on photos or brochures and hope for the best.  Luckily for us, our designer knew our taste and we ended up loving what we got.  If you are picky, insist on seeing the actual product you are buying.
  1. Establish a Budget and Stick to It. Anyone can design beautiful space if money is no object. The real talent is designing great space within a fixed budget.  Figure out how much money you are prepared to spend on your “all in” move and work backwards from that number.  You’ll need to consider how much cash your landlord is providing you under your lease for Tenant Improvement dollars and make sure you cover all related project costs including: furniture, information technology, audio visual, moving, artwork, design and project management fees and even the landlord’s “supervisory fees”, if any.Once you determine how much money you can afford to spend on “bricks and sticks” construction, make sure your design firm buys into this budget and commits to work within it.  Create a process whereby you have interim checks on pricing as the design progresses so that you can spot problems before it’s too late.  When we got our initial pricing back based on our schematic drawings, it was clear that we had exceeded our established budget by a good amount.  Because we caught the problem early and had time, we were able to work with our designer to come up with wonderful value engineering alternatives that got us the aesthetic we all wanted at a fraction of the originally quoted cost.  By identifying the pricing issue early on, we were also able to keep with our schedule.
  1. Make it Fun. The process of taking on a major construction project and move can be extremely stressful. This is especially true when the person running the transaction already has a full-time job at the company like CFO, COO, head of procurement or managing partner. On the positive side, there are not many endeavors that can impact a company and its employees so positively as new space. You only get the opportunity to re-imagine your offices once every 10-15 years in many cases.  Embrace the opportunity and take advantage of it.One key to keeping it fun and positive is to create a team environment with your designers, project manager and contractors.  While many people dread the weekly progress meetings at the job site, we looked forward to them.  We had great channels of communication and had a lot of fun working together.  Our contractor and designers still come over to check on us months after we moved in because they felt like valued members of our team and took immense pride in what we all built together.  As a result, when problems arose- which they ultimately will- our team members jumped in and fixed things.Understand that problems will arise during the process.  Most are fixable. While perfection is a laudable goal, even Vince Lombardi knew it was not realistic.  As he told his players during a famous pep talk: “Gentlemen, we will chase perfection, and we will chase it relentlessly, knowing all the while we can never attain it. But along the way, we shall catch excellence.”  And ending up with excellent space is not a bad outcome.

Conclusion

We’ve lived through the same move process that we counsel our clients about every day.  In the process, we learned a great deal and reaffirmed a lot of what we thought we knew.  While there were certainly hiccups along the way, we got exactly what we wanted.  By sharing our experiences with you, we hope that you will not only end up with exactly the space you want, but you will also enjoy the ride.

For more information contact Glenn Blumenfeld http://www.tactix.com/team.php#Glenn

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Dual Agency Brokerage Under Attack in California

Mary Smith, a salesperson at ABC Brokerage Company, is the listing agent for space in a building owned by Big Owner. In the marketing flyer for the space, Mary states that the space is 20,500 sf even though she knows it is not that large.  XYZ Company, a tenant, hires Bob Jones, also an agent at ABC Brokerage Company, to represent it in its search for space.  After a lease is signed for the subject premises, it turns out that, unbeknownst to Bob Jones and the XYZ Company, the space is only 16,000sf.  Does XYZ Company have a claim against its brokerage firm, ABC Brokerage Company, based on the actions of its agent, Mary Smith?  It might depend on what state you are in.

A recent California Supreme Court case held that, in a dual agency situation (i.e., where the same brokerage firm represents both the seller and buyer or landlord and tenant in the same transaction), the agents of the brokerage firm owe fiduciary responsibilities to both of the firm’s clients in the transaction and not just to the client they are specifically representing.  The case, Horiike v. Coldwell Banker, involved the purchase and sale of a mansion in Malibu.  However, the holding has important precedential value for commercial real estate transactions in California as well.

In Horiike, the home seller’s agent, Chris Cortazzo of Coldwell Banker, failed to warn the buyer that the square footage of a home identified in a sales brochure was incorrect.  The buyer purchased the home based on the erroneous information.  At the trial, the buyer sued both Mr. Cortazzo and Coldwell Banker.  The trail court threw out the suit against Mr. Cortazzo because it determined that Mr. Cortazzo was exclusively representing the seller and, therefore, had no fiduciary duty to the buyer to warn him of the inaccuracy in the sales flyer.  The court then instructed the jury that, to find Coldwell Banker liable to the buyer, it would have to determine that the agent at Coldwell Banker representing the interests of the buyer in the transaction acted wrongly.  Because the buyer’s agent, Chizuka Namba, also of Coldwell Banker, was not aware that the square footage reference in the brochure was incorrect (and the buyer did not even name Ms. Namba in the suit), the jury found in favor of the defendant.  The buyer appealed the case.

The California Court of Appeals reversed the lower court’s findings and held that Mr. Cortazzo, as a salesperson working under Coldwell Banker’s license, owed a duty to the buyer “equivalent” to the duty owed to him by Coldwell Banker.  The obligations and fiduciary responsibilities of the individual sales agents of the Coldwell Banker were found to be derivative of the obligations and responsibilities of the firm they worked for and under whose license and direction they operated.  Thus, because the buyer was a client of Coldwell Banker, all of its agents had the same fiduciary responsibility to that client regardless of who they were representing in that transaction.  This responsibility included the requirement that Mr. Cortazzo “disclose known facts materially affecting the value or desirability of the property to both parties.”  This duty to warn was expressly contained in the “Disclosure and Consent to Representation of More Than One Buyer or Seller” which the parties signed as required under California law because Coldwell Banker was representing both the buyer and seller in the transaction.

Coldwell Banker felt it was entitled to retain the two significant commissions it made on this transaction even though (1) the buyer had relied to his detriment on the firm’s misleading marketing brochure and (2) the firm’s employee (Mr. Cortazzo) knew the square footage was overstated. It argued, in effect, that the home buyer did not truly hire Coldwell Banker; he only hired the broker at Coldwell Banker who was working with him.  Thus, it was Coldwell Banker’s position that the only person at the company who was obligated to protect the buyer was Ms. Namba, the agent working for him, even though its other agent, Mr. Cortazzo, knew the sales brochure he had prepared was inaccurate.  The holding in the Horiike case is largely dependent on the statutorily required disclosure form that all of the  parties were required to sign under California law because Coldwell Banker was acting as a dual agent in the transaction.

Needless to say, this case is causing considerable distress in the brokerage community for firms who typically act as dual agents in the market.  If in fact a landlord broker has a fiduciary duty to warn a tenant about problems with a given property or the creditworthiness of the landlord, it could be difficult for him to aggressively market the building and advance the landlord’s interests.  Likewise, would a tenant broker whose firm also represents the landlord be required to inform the landlord that the tenant is having financial difficulties?

The Horiike case is specific to California.  What would the outcome of the case be in Pennsylvania?

Pennsylvania contemplates two types of dual agency situations. The first, involving a “dual agent” is where the very same agent represents both the landlord and tenant (or buyer and seller) in the transaction. The second, involving a “designated agent”, is where, though the same brokerage firm represents both parties to a transaction, the firm designates different agents within the firm to represent the interests of each party.

Section 35.314 of the Pennsylvania Code (Duties of Dual Agent) addresses the first scenario.  In this instance, the dual agent in Pennsylvania may take “no action that is adverse or detrimental to either party’s interests in the transaction.”  Because any negotiation is a zero sum game where a dollar earned by one party is a dollar taken from the other party, a dual agent would be hard pressed to do anything in a transaction other than introduce the parties and then let them hash out their own deal. Clearly he could not advocate for the financial interests of one client without necessarily being adverse to the interests of the other client.

Section 35.315 of the Pennsylvania Code (Duties of a Designated Agent) deals with the second scenario where the brokerage firm designates one agent to represent one party (i.e., the seller or landlord) and another of its agents to represent the other party (i.e., buyer or tenant).  Subsection 35.315(e)(1) states that each designated agent owes: “Loyalty to the principal with whom the designated agent is acting by working in that principal’s best interests.”  Thus, if the Horiike case were tried in Pennsylvania, it is likely that Coldwell Banker would have prevailed because Mr. Cortazzo would be statutorily required to act solely in the best interests of the seller.  He would have no fiduciary duty to the buyer and arguably, by informing the buyer of the incorrect square footage, would be breaching his fiduciary obligation to act in the seller’s best interests.  Thus, unlike in California, where all the brokers in your firm have duties to protect your interests, in Pennsylvania, only the agent working for you has your back.

Conclusion

In Philadelphia where two or three firms dominate the landlord listings, dual agency scenarios have become more and more common leading to more frequent opportunities for conflicting loyalties within a firm.  In these instances, the tenant needs to understand that it isn’t hiring a brokerage firm; it is only really hiring the agent working on its deal.  In fact, there may be situations where some of the agents at the tenant’s brokerage firm could be obligated to act against the tenant’s interests.

For more information contact Glenn Blumenfeld http://www.tactix.com/team.php#Glenn

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