IRVINE, CA—The desire to protect tenants from disadvantages due to lack of transparency is what spurred Jason Hughes, president and CEO of Hughes Marino, to push for the disclosure bill SB 1171. As GlobeSt.com reported last week, the bill, first proposed by Hughes and sponsored by State Senator Ben Hueso, was signed by Governor Jerry Brown on August 15. Effective January 1, 2015, commercial real estate salespersons and brokers will need to provide, in writing, their exact proposed agency role in the future transaction. In addition, this disclosure will need to be signed by the potential client prior to moving forward with any representation. GlobeSt.com spoke with Hughes about the importance of this bill, how it got passed and how other commercial real estate executives can be successful in getting important legislation to the forefront.
GlobeSt.com: How did the broker disclosure bill come about, and what was your role in getting it passed into law?
Hughes: I have been really bothered by this issue for the last two decades and assumed I could never do anything about it. In our industry, a lot of brokers do not disclose their position in deals. They’re representing a landlord and decide not to tell the tenant they have a conflict of interest. So, the tenant thinks the broker is taking care of them, but they are being taken advantage of by them. They’re getting a horrible deal, they’re not getting protected, and it’s not good economics because they’re totally unaware. I’m flabbergasted that this is not allowed in residential, but is allowed in commercial. The argument from commercial was that commercial tenants are more sophisticated, but the vast majority of commercial tenants out there don’t even think to ask if the broker has any conflicts of interest. These commercial tenants are the same people buying houses.
What am I supposed to do if a broker is representing both sides, and the tenant is getting a horrible deal because they don’t know? I can’t be the broker police. So, I started looking into this with general counsel. I tried to understand the law and presented changes to Senator Ben Hueso. He agreed with me, and he and his staff did their own research on it. We carried it to the floor to see if we could change it into law. This is something I’ve been working on for nearly two years. I flew up to Sacramento and testified in front of the Senate Judiciary Committee, talked to all different lobby and political groups up there and garnered enough support that the bill passed almost unanimously. In fact, it was signed three days after they put it on the Governor’s desk.
GlobeSt.com: What is the crux of this issue for you?
Hughes: It’s all about transparency to the consumer. If anybody contests it, they’re hiding something. They like it being the old boys’ network—I’ll scratch your back and you scratch mine, all to the detriment of the tenants. When you think about the brokerage industry, it was set up 100 years ago to support landlords. The world of commercial brokerage was to support landlords because they have the money, but the tenants drive it—they pay rents. It all starts and stops with the tenant, but meanwhile, all these decades the field has been tilted in favor of landlords.
Disclosure is this big, giant conflict because few people were honest and forthright as to what the situation was with their agency. There was an absolute slam down by the appellate court. This was wrong, and the buck stops with the corporate broker’s license—the overseeing broker’s license of the company. Brokers now have to disclose that they represent landlords, too, and are a dual agent.
GlobeSt.com: How might a situation play out in favor of the landlord and not the tenant?
Hughes: The definition of a dual agent is that there’s a conflict of interest because they can’t disclose confidential information to either party. If they’re representing the landlord and know the last deal was $2 per square foot, but the proposal is $2.25 per square foot, they can’t tell the tenant where they can make that better deal because it’s confidential. The broker is in a conflicted role, and the landlord doesn’t care, but the tenant is severely handicapped. Are they getting a good deal? The broker can’t say—so there’s tremendous impact if you’re a tenant. The landlords know what they’re doing, but the tenant is the one who needs professional advice and can’t get it from the broker.
GlobeSt.com: How should over CRE professionals deal with getting important legislation to the forefront?
Hughes: I think you need to start with something that truly helps the mass public; it can’t be a self-serving thing you carve off for yourself. It has to benefit a large percentage of people. This is not an easy task. It was very expensive for me to make it happen and to work two years to do it. But if there’s a good idea, and you feel the need to shepherd it through the system, then by all means do it. This new law makes things more burdensome for full-service agents, but those who are not very forthright will face legal consequences.