Three Recent, Real Life Encounters with Broker Conflicts of Interest

As I have written previously, the world of commercial real estate brokerage is rife with conflicts of interest.  For selfish reasons, the big brokerage firms downplay or dismiss these conflicts or claim they can effectively deal with them simply by limiting the flow of information between brokers or brokerage teams within their shops.  In other words, they view this merely as an issue of confidentiality as opposed to competing financial interests.  Three recent, real life experiences we have encountered in the past two weeks expose a very different story however.

The Remote Market Experience. We were retained to work with a national client on a deal in another state.  For various reasons, we were asked to work with another broker in that state who happened to work for a large, national brokerage firm and who did listing work as well as tenant representation work.  We and the client asked our local co-broker to provide us with some recommendations for locations that fit the client’s needs and he produced a very limited list of three properties. When pushed for other alternatives, he claimed these were really the only ones worth pursuing.  After doing additional due diligence, we discovered that that broker’s firm was also the landlord’s listing agent on each of the three recommended buildings.

The lesson learned? While some large firms use their national reach and multiple offices as selling points for clients with national requirements, tenants need to make sure the local brokers in these various offices are truly looking out for their best interests and not the interests of the local landlords who provide them with more work and steadier revenue streams.  While our co-broker stood to make some money off of the tenant’s lease transaction, he had much more to gain over the long term if the tenant went to one of his landlord client’s buildings.

The Biased Broker. A new client contacted us recently.  They wanted our help because they feared they were not seeing all viable alternatives or getting objective advice from their existing broker.  As part of the background materials they initially sent to us, they included a letter from a broker that fiercely advocated why one site was far and away the best location for the company’s requirement. It clearly manipulated the economic data to justify why the tenant should take the offered deal and do it quickly. We told the client that this was typical and that the broker was simply trying to promote his listing over the other alternatives.  The client then informed us that that was exactly the problem.  The letter had not come from a third party listing agent trying to solicit them, it had come from their own tenant broker who, as it turned out, was also the listing agent for the identified property.  Shortly after assuming the assignment, we were contacted by a nearby landlord who had a glove fit property for the client’s requirement but who had been unsuccessful in getting the prior broker to show the property to the client.  He was thrilled that an objective broker was now engaged so his option could be vetted.

The lesson learned?  Find out in advance if your broker has any financial interest in any buildings that could be a viable alternative for your requirement.  If he does, will you be able to get truly objective advice from him?  Will you feel comfortable if his ultimate advice is to choose the alternative where he gains additional compensation?

The Hidden Conflict. I recently bumped into a broker who works for one of the nation’s largest brokerage firms.  He is a very competent professional who markets himself “primarily as a tenant representation broker.”  He admitted that, due to conflicts of interest, representing landlords in the marketplace makes it difficult for him to get some tenant assignments.  Because he prefers tenant work, he tries to avoid a lot of landlord listing work.  I asked him who he was partnering with now at his firm.  It turns out his partner happens to be one of the most successful landlord listing agents in his market.  I asked how the partnership worked and he said they split all of their commissions.  I then asked him what he and his partner do if one of his tenant clients is looking at one of his partner’s listed buildings.  He informed me that they each keep their tenant client’s information confidential in that case and act independently. I pressed him to see what happened to the commissions in such case.  He said they would be shared.

In sum, this broker stood to make 50% more on total commissions if his client chose to go to a building represented by his partner (because his “team” would now share both the listing agent and tenant agent commission shares).  I was shocked.  It’s hard to see how that financial outcome promotes objective advocacy.  I’m also curious as to whether the tenant client is aware that (1) his broker’s compensation could vary significantly depending on which building he chooses and (2) his broker has strong incentives to favor certain buildings over others in order to preserve his partner’s relationships with the landlord clients.

The lesson learned?  Not all “Tenant Representatives” are purely tenant brokers.  Many have entangled financial relationships with other brokers in their firms who do significant landlord listing work.  They create these partnerships so they can market themselves as “tenant brokers” for conflict purposes, while preserving the financial rewards and stable revenue opportunities that landlord assignments provide.  Be sure to include disclosure representations and warranties in your engagement letter with the broker that flesh out whether he has the potential to share, directly or indirectly through any other brokers in his firm, in any landlord commissions arising out of your lease. Again, if you know your broker will make more if you go to one building versus another, or that he has some indirect financial relationship with one landlord, will that destroy his objectivity or perhaps make you second guess his advice down the road?  In either case, would that devalue the service you are getting?

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

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