AFE — November/December 2013
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What Happens When Interests Conflict In The Selection Of A Real Estate Service Provider?
Fred Waldman

Attorneys, accountants, and other fiduciary advisors routinely check for conflicts of interest prior to accepting client engagements. These professionals and their clients find even the perception of a conflict unacceptable. Surprisingly, many global real estate providers routinely ignore agency conflicts, creating financial and regulatory disadvantages for their clients.

Successful commercial real estate firms are focused on creating and maximizing recurring revenue streams from targeted clients' sources. An unfavorable business dynamic is created for occupiers requiring tenant representation services due to conflicted providers earning significantly larger fees from property owners compared to the fees earned representing their occupier (space user) clients.

This disparity compromises objectivity and fiduciary responsibility at dual agency firms, limits a full investigation of the market and frequently creates conflict during lease negotiations. The conflict echoes throughout the lease term in regard to lease audits, expense pass-throughs, interpretation of clauses, and eventually representation in renewing or restructuring the lease.

The representation of both building owners and space users is an inherent conflict of interest that puts the occupier at a severe disadvantage. Since the 1980s, a handful of CRE firms have dedicated their resources to the representation of tenants only for these very reasons. Recent industry consolidations have left the informed user with even fewer alternatives. The non-conflicted provider's single objective is to successfully and diligently represent its client in achieving defined business and financial terms.

Non-conflicted firms approach service delivery in the belief that:

• Fiduciary responsibility to the occupier is never in doubt. Fees are never earned for contract services provided to investors or property owners.

• Market comparables and surveys are thorough and objective. Non-conflicted firms have no landlord agencies or relationships, and are never obligated or motivated to include specific landlord owned properties in surveys or keep landlords informed of active prospects.

• Free of owner influence, non-conflicted firms can aggressively identify and exploit a landlord/owner's weaknesses (financing, balance sheet, building utilization, market positioning) without any real or perceived repercussions.

• Engaging a non-conflicted firm will allow the client to satisfy all applicable Sarbanes- Oxley (SOX) and EU Directive requirements for their real estate procurement process.

A non-conflicted firm reduces a client's risk and offers full transparency in all aspects of the transaction -- negotiations, analytics, documentation and fee disclosures -- making a non-conflicted provider the safest and most viable choice.

The aim of a conflicted provider boils down to increasing landlord revenues by maximizing rents to the fullest extent possible and managing properties to the benefit of the owner while ensuring prospective tenants "see" their principals' properties. "Seeing every deal" has become their standard industry catch phrase.

As a result, these hidden objectives often trump the conflicted provider's obligation to the occupier and will result in the following conflicts:

• Renewals create a dilemma as taking occupancy out of an investor/client's building can severely damage that relationship.

• The dual agent may have incentive to bring a client's occupancy need to landlordrepresented properties in order to preserve or win facility, project leasing, or advisory assignments.

• Dual agents may not provide adequate exposure to available subleases where they compete with landlord-represented (direct) available spaces and in fact, may be an impediment to developing positive negotiating leverage.

The mix of tenant, investor and landlord services bundled by these providers can also lead to financial or regulatory scrutiny. The non-conflicted firm is committed to maintaining the highest standards of fiduciary care through each and every phase of the engagement.

The example below illustrates the disparity in fees that creates the fundamental dilemma conflicted firms operate under: the earnings multiple received from recurring landlord fees versus the commission earned through tenant representation.

Non-conflicted representation offers a clear distinction and measurable results for occupiers by providing the following benefits:

• The full market range of available opportunities is always open to the occupier without conflict. A non-conflicted firm is able to research, develop and pursue with tenacity the broadest range of market alternatives for any real estate requirement, anywhere. This translates into the most complete due-diligence effort possible for the occupier's real estate transactions.

• A non-conflicted approach avoids any disparity in fees that is a fundamental dilemma for conflicted firms: the earnings multiple received from recurring landlord fees (see above chart) versus the commissions /fees earned through tenant representation.

. A non-conflicted firm's analysis and advice is provided in a clear, comprehensive and logical reporting format outlined in a full document record of each transaction and project, including market data, recommendations, decision processes, landlord offers and counters, lease documents, and related supporting information. This means that the end deliverable will be a full, traceable and transparent record of each project that will be made available for later audit or review.

The $125,000 is not aligned.

Only in this way can the user or occupier of commercial space be assured of achieving consistency of purpose in the marketplace. Real estate is a long-term investment and it makes the greatest sense to engage the market armed with the full facts - and backed by an advisory firm without hidden agendas or teams of brokerage professionals representing clients on both sides of the transaction.

Fred Waldman is a Vice President and Todd Mintz is an Executive Vice President in UGL Equis' Corporate Services Group in Chicago.