Conflict? What Conflict?

We just received a Request for Proposal (“RFP”) from a tenant in anticipation of its upcoming lease transaction.  Like almost every RFP we receive, this one had several questions that focused on potential conflicts of interest.  Understandably, the company wanted to know if we had any business or financial arrangements with area landlords that could impair or jeopardize our absolute loyalty to them; it’s a reasonable question to ask.

While it is clear that many companies are sensitive to conflicts of interest, what is remarkable is how many of these companies allow themselves to be convinced that, in the end, these conflicts either don’t exist or don’t matter when it comes to real estate – and it’s getting worse.  In fact, some full service brokerage firms have become so emboldened by their ability talk their way out of the conflict that they are actually now raising the stakes and becoming landlords themselves.  It’s actually a natural progression; if they can convince their tenant clients that there is no conflict of interest when they also represent the landlord, surely the tenants won’t mind if the firm now decides it wants to be the landlord.  Given how many tenants work with these large brokerage firms, it presents a great opportunity for the firm to buy a low occupancy building on the cheap, fill it up with tenant clients and then sell it at a nice profit.  The rent streams of their tenant clients create instant value for the brokerage firm in their investment properties.

For full service brokerage firms, the inherent conflict created by landlord and tenant representations is actually essential to their entire business model.  They make the majority of their income representing landlords. Landlords hire them to list and manage their buildings, in large part, because they control lots of tenants who they will bring to their buildings. Without the tenant clients, these brokerage firms cannot get the landlord work.  That is why, although there are hundreds of “tenant only” brokerage firms around the world, there are no “landlord only” brokerage firms.  A brokerage firm with no tenants is of little value to landlords.  The absence of any “landlord only” brokerage firms is actually the single greatest evidence of the inherent conflict of interest in brokerage.  If thousands of tenants around the world see the need to use a “tenant only” brokerage firm due to the perceived conflict of interest, why aren’t there enough landlords who perceive the conflict to justify even just one “landlord only” firm?  While many tenants engage “tenant only” brokerage firms because they fear they would get the short end of the stick if a conflict arose, apparently not a single landlord fears it will be the loser in such a conflict. Tells you something doesn’t it?

Implicit in any argument against the dangers of conflicts of interest is a statement about the broker’s true value proposition.  To be sure, before you can analyze the impact of the conflict, you need to understand the true nature of the service the broker is really providing.  Arguably, there is no conflict of interest if the broker’s main value is merely as a space finder and provider of objective market data.  While it is true that, even in this limited role, a brokerage conflict can result in the broker  “steering” tenant clients to its landlord clients’ buildings, as long as these relationships are disclosed to the tenant (and they must be by law), the tenant can factor that information into its decision.

However, what if the tenant wants something more than just a space finder or provider of market data?  If the tenant wants a devoted advocate at the negotiating table who will get it the most aggressive economic deal possible, the broker and his firm cannot have divided loyalties and, therefore, cannot serve both the landlord and tenant.  The two clients have completely opposite objectives in a lease negotiation which cannot be reconciled.

  • One client wants the highest rent and smallest concessions and the other wants the opposite.
  • One client is seeking guidance as to how high the other one may be willing to go and the other is seeking the opposite.
  • One wants to limit or avoid competition for the deal and the other wants to maximize it.

In sum, when the tenant is looking for a true advocate, the broker (and his firm) cannot serve two masters.  No “Chinese Wall” is high enough to insulate a broker from the wrath of his landlord client if he were to extract from him the last dollar out of a tenant representation assignment.  It would be an economically irrational decision for any broker to make a tenant client happy every 10 years at the expense of an everyday landlord representation.

Even assuming that the conflicted broker could extricate himself from the loyalties owed to the landlord, if the conflict exists, can the tenant ever feel completely comfortable that the advice he is getting is truly objective? Will he always wonder?  If there is any doubt about the objectivity of the advice he is getting from his broker, hasn’t the tenant lost the true value of his advisor? If so, why take that risk?

Common sense tells most people that their advisors should not have conflicting loyalties at the negotiating table.  In many industries like law, accounting and consulting, there is zero tolerance for these conflicts and, in fact, the professionals self regulate to ensure their loyalties are never compromised.  For some reason, when it comes to real estate brokerage, tenants often allow themselves to be talked out of what their gut otherwise tells them.  Before casually brushing off a potential conflict, think about the role you intend for your broker.  If you want more than someone who will find you space, or get you a “market” deal, take a step back and go with your gut.

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

This entry was posted in Commentaries, Leases, Negotiating, Strategies. Bookmark the permalink.

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