The Ultimate Cost of Free Services
When it comes to determining conflicts of interest, how the real estate agents in a lease transaction are paid is critical. In Europe, Asia, and Australia, it’s industry standard for corporate real estate advisors to be paid directly by their client, the space user. This is the opposite of what occurs in the United States and Canada, where leasing commissions are paid by landlords and then split between the landlord’s agent and the tenant’s agent. We aren’t going to address how fees are paid across the pond in the U.S. and Canada in this article – we will save that topic for the future.
Let’s explore the inherent conflict between landlords and tenants and some things happening in Australia today that tenants need to be aware of. With the Perth office vacancy rates around 22% and Brisbane at 17%, the current market has created an environment in which informed tenants can secure commercial premises at 30-50% less than the current face rents being advertised. Many landlords or real estate agents (who typically receive their fee from landlords), are now providing a ‘free’ service by assisting tenants to secure a tenancy, supposedly at no extra cost.
This apparently free service is usually not in the best interests of the tenant as these agents are more than likely seeking a fee from the landlord, either directly or through some other form. If an agent is securing fees in this fashion, they are actually legally obligated to work in the best interests of the landlord and not in those of the tenant. In representing to act for a tenant, many agents have this conflict of interest as they predominantly derive their fees from the landlord. When appointing a real estate representative, you are the principal (client) and as such should be entitled to the undivided loyalty of your tenant representative. At least that’s our ethos at ACORPP.
Usually in the world of real estate agency, there is an understanding that where conflicts of interest arise, the parties will put measures in place to minimize the risk and potential impacts. However, in a case between the U.S. Postal Service and CBRE (their sole contractor providing real estate management services), some concerns were raised. Reading between the lines on a report by the Office of the Inspector General in April 2015, the Postal Service discovered that its representative was not acting entirely in accordance with their expectations.
Before taking it apart, one must acknowledge that things are done differently in the U.S. but there were some very interesting findings that have relevance for almost all real estate agencies. Not only were CBRE collecting fees from the Postal Service, it was also taking fees from landlords and in most parts of the world, we call this ‘double dipping’. There were also cases where CBRE acted and collected fees for both sides of the same transaction which is widely referred to as ‘dual agency’.
Dual agency calls into question the integrity of the real estate agency, which is a good reason why having your own independent tenant representative is a must. Although there are laws governing situations in which dual agency arises, if the tenant wants a dedicated advocate to negotiate the best deal for them, they are better off appointing the services of an independent representative who operates solely as a tenant representative with no divided loyalties or hidden agendas.
Most tenants are largely unaware of how the fee structure in commercial property actually works, in that landlord paid fees are usually no more than a commission, which is increased by the level of rent and terms achieved. Therefore, the higher the rent arranged for the tenant, the more the agent will get paid. This is why the corporate tenant needs a representative who has access to market information, is an expert negotiator and has transactional experience equal to (or better than) that of the professional representation of the landlord.
In most cases, agents will only show spaces where they are sure to secure a fee, usually facilitated through conjunctional property leasing or by only showing spaces that they have for lease. For those who are not in the commercial property trade, a conjunctional agreement occurs when the agent holding the exclusive agency agreement allows another agent the opportunity to lease/sell the property, with both then sharing the commission. If there’s no fee available to them, don’t be surprised if it’s not on your viewing list.
Here are 6 great questions you can ask to find out whose side they are really on:
- Who owns the business, is it a subsidiary of a full service real estate agency?
- Does their business normally receive fees from landlords either through leasing, selling or property management?
- Do they only represent tenants in leasing transactions?
- Are they only paid/retained by the tenant?
- Do they have any potential, perceived or actual conflicts of interest?
- Will they be searching the whole market when identifying all options for you to consider?
Unfortunately, many tenants who utilize the seemingly ‘free’ service often end up paying something upwards of 10-20% more than if they had secured the services of an independent tenant advisory service. They also experience less flexibility and transparency with the conditions of the contract they eventually sign.
In the case of the U.S. Postal Service, the Inspector General recommended terminating the management contract with CBRE and re-tendering it. In the interim, the Inspector General recommended that the Postal Service needed to address the conflict of interest concerns in their contract, specifically preventing CBRE from double dipping on fees and implementing restrictions against dual agency. In California, a court case is also making news concerning dual agency. ITRA Global have written more about this case here.
The next time you are being offered ‘free’ service, particularly in leasing matters, consider how you might ultimately be paying for it in other ways. So, take our advice and hire an independent operator who will dedicate themselves to ensuring that your best interests are being served.
For more information about this topic please contact Beth Wade, ITRA Global Executive Director, at 706.654.3201 or email email@example.com.
ITRA Global is an organization of real estate professionals specializing in representing commercial tenants and buyers in the leasing, acquisition and disposition of office, industrial and retail facilities. With coverage in major markets around the world, ITRA Global is one of the largest organizations dedicated to representing tenants and occupiers of commercial real estate. Clients benefit by having an experienced professional as their trusted advisor, providing conflict-free representation with total objectivity. To learn more about conflict-free representation and ITRA Global locations, please visit the ITRA Global web site.
* Note: Portions reprinted with permission of ACORPP and Lisa Seun, based on Canonical Reference to ACORPP’s article ACORPP Market Voice – The Ultimate Cost of Free Services