Brokers Writing Rule Book for Commercial Realty : Ethics: Intense competition spurs efforts to establish a code of conduct and a means for settling disputes.
So many commercial real estate brokers are chasing deals in Orange County--about 1,500, more than ever before--that some brokers are quietly writing the county’s first formal ethics code to ensure that everyone plays by the same rules.
Unlike brokers in the larger Los Angeles market, Orange County’s commercial brokers have never had an official ethics code to which everyone subscribes.
“There are people out there who are not playing by the rules,” said John Bodenburg of Lee & Associates, one of the brokers writing the code.
The code may also include an arbitration program for settling disputes outside the courts, brokers said. (In arbitration, both parties in a dispute agree to submit to the decision of a third party, usually a less cumbersome and expensive process than a trial.)
Los Angeles brokers have such a program, while their Orange County counterparts do not.
Several big lawsuits between brokers were settled only recently. Some brokers said the time and money expended may help convince local brokerages that an ethics code and arbitration program are necessary.
While the number of brokers in the county has risen dramatically in the 1980s as the market for office, factory and store space flourished, that market is slowing perceptibly, and competition is getting even tougher.
Once a somewhat genteel industry, leasing and selling commercial real estate has become a rough, competitive business where hundreds of thousands of dollars in commissions can be at stake.
There were these examples in the last few years:
* Lee & Associates won $400,000 after suing giant Coldwell Banker for not sharing a big commission from a lease deal on which both brokers worked.
* Lee & Associates sued Dallas developer Trammell Crow Co. and the Fluor Corp. for $64 million, alleging that Fluor shut Lee out of a commission on the $340-million sale to Trammell Crow of Fluor’s Irvine headquarters. The case is pending.
* Daum Commercial Industrial sued Scher-Voit for $1 million in what Daum called “pirating” away 50 of Daum’s employees and some of its business. Protesting its innocence, Scher-Voit nevertheless settled--for a sum said to be $500,000--and promised not to do it again.
Edward C. Broffman, a Los Angeles attorney who represented Lee & Associates against Coldwell Banker, said: “Leases these days are often very sophisticated, long-term deals that for all practical purposes are like a sale, and they generate substantial commissions.”
Brokers said there has also been at least one big recent deal in which a brokerage got a far smaller commission than expected.
“The competition’s fierce out there,” one broker said. “This is the inevitable result.”
While most situations present clear ethical choices, following long-established industry standards, some gray areas remain, brokers say. One of the most ambiguous occurs when another brokerage cuts itself in on a deal.
“If it’s late in a deal, and the client wants to bring in another broker, or the broker weasels his way in, what are the rules on that?” asked Scott Perley of Cushman & Wakefield of California Inc., another broker involved in drafting the code. “We’d like to make it clear when you can get in on the middle of a deal.”
It was Daum Commercial Industrial’s managers, brokers said, who began pushing for an ethics code about a year ago. William R. Beck, a Daum vice president in Irvine, put together the eight brokerage managers who are writing the code. It is now, said Bodenburg, president of Lee & Associate’s Newport Beach office, “in about its 15th rewrite.”
Also represented in the group are the county’s two biggest brokers--Coldwell Banker and Grubb & Ellis--and several smaller brokerages.
For a big industry dealing with such large sums, Orange County brokers involved in certain disputes have had, until now, surprisingly little formal guidance on ethics.
In Los Angeles, the American Industrial Real Estate Assn. has a lengthy, detailed ethics code. All brokerages that subscribe to the group’s multiple listings for commercial real estate must also conform to its code. Most big brokerages in Los Angeles subscribe to the service, which lists all commercial buildings for sale or lease in that county.
In Orange County, the same service is provided by a private company, the Smith Guide, which does not require adherence to an ethics code. Another professional association--the Society of Industrial & Office Realtors--has a code but has only a relative handful of members nationally, so stringent are its requirements for membership. And residential brokers have their own ethics code, but commercial brokers say the residential code is often vague on the commercial business.
That leaves this small group of brokers trying to write a code acceptable to the two dozen or so largest brokerages in the county. They also want the county’s biggest landlords to deal only with brokers who subscribe to the code, so they will have to convince the property owners as well.
It could be months before a final draft is written, and many more months before the local brokerages have seen and accepted it, group members said.
Eventually, they said, pressure from property owners and other brokers will ensure that most brokers conform to the code. And if an arbitration program becomes a sticking point, it could be dropped.
The group said it is not trying to subtly discourage other brokers from doing business in the county.
“There’s nothing unusual about the code that would keep people from doing business,” said Perley, a vice president at Cushman & Wakefield’s Newport beach office. “But it would establish some rules.
“People get hungry, and sometimes it interferes with their ethics.”
