Brokers Who Straddle Fence

Few mental challenges are as frustrating as playing chess against yourself. No matter how clever your strategy, your opponent always knows exactly what you’re up to.

For years, commercial real estate brokers have welcomed a challenge that looks a lot like playing chess against themselves. Brokers often represent both landlord and tenant in lease negotiations, or both buyer and seller in a sale.

This practice of representing both sides, known in real estate parlance as “dual agency,” is no secret. It is a long-standing practice, dating back at least to the 1930s. It is done openly and with all parties agreeing to it.

Announcements from commercial real estate brokerages often declare, matter-of-factly and with implicit pride, that a certain broker represented both sides in a deal.

As widespread and accepted as this practice is, however, it still raises questions--even for those who believe in it.

The most obvious question is, does representing both sides constitute a conflict of interest?

The answer, according to industry experts, is yes, no and maybe.

A spokesman for the California Department of Real Estate, Dan Garrett, says there is no prohibition against an agent representing both sides in a transaction.

But according to Jim Travers, founder of Travers Realty Corp., a Los Angeles brokerage that represents tenants only, “the idea that one broker can represent both sides in a transaction is the biggest fallacy going.”

“There’s a tremendous built-in conflict of interest having one broker represent both the buyer and seller or the landlord and the tenant,” said Travers, who said he would not represent a landlord even in the unlikely event that one tried to hire him.

Travers’ brokerage is one of the relatively few in the industry that confine themselves to representing tenants. Many brokers represent landlords in some deals, tenants in others, and both sides in certain cases.

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For many of those brokers, the answer to the conflict-of-interest question isn’t always clear-cut.

Bob Safai, a principal of Santa Monica-based Madison Partners, said commercial brokers in some cases clearly can and do represent only one side in a transaction. But in other cases they function more like a “conduit” or a point of contact between two parties who want to make a deal.

Safai cited the different roles he played in twice acting as broker in the sale of a building at 429 Santa Monica Blvd. in Santa Monica.

In the first sale, in which he represented the seller, he had a clear-cut obligation to obtain the highest possible price for the property, he said.

“When a broker has a listing, he has a written document and has a legal, fiduciary duty to represent only one party in the transaction,” Safai said.

He explained that the first sale was a “market transaction,” one in which the seller offers the property publicly to the market and hires a broker to find a buyer.

But the second sale of the same building was an “off-market” transaction in which the property had not been offered publicly to the market and Safai did not have a listing.

From his knowledge of the market, Safai surmised that the owner might be willing to sell and the buyer might be willing to buy, so he got an offer from the buyer and presented it to the seller, creating a deal where none had existed.

“In effect, I represented the transaction, because I represented both the buyer and the seller to come together to make a deal,” he said. In such cases, Safai said, the broker acts more as a go-between than an advocate for either side.

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According to Safai, such off-market transactions are increasing rapidly as the pace of deals picks up. Brokers are being creative in seeing the potential for deals and putting them together, he said, and buyers and sellers do not necessarily want someone to negotiate for them, because they consider themselves sophisticated investors who can negotiate on their own.

Often, he said, they rely more on brokers to iron out the details, arrange financing, or suggest how to structure a deal to accomplish what the buyer and seller have agreed to in principle.

“In this market, especially in the investment arena, the buyers and sellers are so sophisticated that oftentimes the role you’re playing is representing the transaction by being a conduit for the two parties to get together,” Safai said. “When you have two ready, willing and able parties at a table, wanting to make a deal, it becomes more a question of using your skills to put the deal together than representing one side or the other.”

Typical commissions for commercial real estate sales and leases run to a maximum of about 6%. In general, however, larger transactions pay smaller percentages. A broker does not necessarily receive the entire 6% commission, however. In addition to a possible split with another agent, he or she also must split the commission with the brokerage, usually at a 50-50 rate.

Brokers sometimes contrast the dual role they are permitted to play with the absolute prohibition against dual agency that lawyers must abide by. They say the difference is that legal matters are considered adversarial, while real estate deals are often considered cooperative.

This view is reflected in industry terminology, which refers to the landlord’s broker as the listing broker and the tenant’s broker as the “cooperating broker,” notes Jim Center, a senior vice president with Grubb & Ellis Co.

Center said there is no single answer to the question of whether dual representation presents a conflict of interest.

Sophisticated buyers, sellers, landlords and tenants are often content to let one broker handle the deal because they feel they are savvy market players.

“Some buyers don’t want to hire a broker to represent them, because they would rather deal directly with the seller or the seller’s agent,” he said.

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On the other hand, Center said, some in the industry believe each side in every deal should have its own broker.

“Some people would like to see the industry operate more like the legal profession to eliminate the potential conflicts of interest. It’s been talked about for years,” he said.

According to attorney Gary Glick of Cox, Castle & Nicholson, the apparent conflict in dual agency has more to do with the economics of a deal than other terms.

Although it is difficult to represent both sides equally, Glick said, there are many experienced brokers who can and do walk that fine line because they are aware of their legal and ethical responsibilities to divulge all pertinent information about a property’s history, general condition and certain disclosures required by law, such as whether it is polluted or contaminated.

However, he said any broker would be hard-pressed to represent both sides in financial negotiations.

“In terms of economics, it’s nearly impossible for someone not to favor one side or the other,” Glick said. “It’s just human nature.”

Glick suggested dual agency is especially hard for brokers who have long-standing relationships with landlords or tenants and expect to continue those relationships.

“Human nature would tell you that if a broker has a 10-year relationship with a landlord and they expect to continue that relationship, the ability for them to be truly unbiased and completely fair to both sides would be compromised, even if they didn’t intend it to be,” Glick said.

His belief that many supposed tenant brokers really retain a “landlord mind-set” is one reason that Vincent Sheehan, president of Wertheim Sheehan Inc. in New York, switched to the brokerage business after 10 years as a lawyer representing tenants. Sheehan, whose firm represents tenants and buyers only, suggested that the role of tenant representative is often misunderstood.

“The tenant rep isn’t there to try to beat the landlord into submission,” Sheehan said. “The tenant rep is really there to supply the tenant with information related to a number of different properties so that the tenant can compare one space with another, as opposed to listening to a landlord’s broker who is trying to sell a particular space.”

While many brokers believe they can represent either side, Sheehan said, representing a landlord one day and a tenant the next is bound to create conflicts.

“I don’t think it’s a legal conflict of interest by any means, but I think it is very difficult to switch back and forth,” he said.

Considering how long brokers have practiced dual agency, industry experts see no reason for change.

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But at least two schools of thought have emerged. One is that dual agency may become even more accepted as the industry’s players become still more sophisticated and rely on brokers as sources of information rather than advocates in a negotiation. On the other hand, as Center pointed out, many brokers today are attempting to establish exclusive relationships with tenants in the same way some brokers have long maintained exclusive relationships with landlords.

“It’s really an issue of control,” Center said. “Brokers know that he who has an exclusive relationship with either the landlord or the tenant controls at least one side of the deal.”

And as long as a broker controls at least a part of the deal, he or she can be assured of earning at least part of the commission.