SAN FRANCISCO—Even as the economy slowly recovers, Bay Areabusinesses are still in a cost-cutting mode. As companies scrutinize thebottom-line, they typically pay specialattention to commercial real estate, which continues to be theirsecond greatest expense, after labor costs. That is according toMike Michaels, a managing principal at Cresa SanJose. In this environment, with millions of dollars at stake, hesays, many companies today aren't satisfied with business as usual.“They're looking 'outsidethe box' to save money, reduce risk, and addvalue.”

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Michaels tells GlobeSt.com that “When companies need a realestate service provider, conventional wisdom suggests they seekfirms that will put their interests first. And, since theclient-broker relationship is all about trust, conventional wisdomalso suggests that companies insist on accountability,transparency, and full disclosure. But conventional wisdom doesn'talways prevail.”

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GlobeSt.com: Which brokerage firms are best equippedto service the real estate portfolios of companiestoday?

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Mike Michaels: To answer thatquestion, it may be helpful to look at the two basic businessmodels from which to choose: traditional or “dual agency”firms that represent both tenants and landlords, and firms thatexclusively represent tenants.

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In the case of dual agency firms, brokers have an allegiance—anda fiduciary responsibility—to the landlord, not the tenant, andthey are expected to bring tenants to the landlord's buildings. Butof course, landlords and tenants have different agendas, aslandlords try to secure the highest rates and yield the fewestconcessions, while tenants seek the lowest rates and the mostconcessions. When the goals of landlords (and their brokers) areincompatible with the needs of the tenant, conflicts of interestmay be inevitable.

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The largest publically traded commercial realestate firms derive about three-quarters of their revenuefrom owners and investors and only one-quarter from tenants. So,traditional brokers typically try to maximize the terms of eachtransaction and fortify long-term relationships with landlords,knowing they may only deal with the tenant every five or sevenyears, or when leases expire.

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GlobeSt.com: So, what about a tenant repfirm?

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Michaels: In contrast, tenant repfirms are positioned to ensure objectivity and accountabilitythroughout the transaction and beyond. They can push the landlordfor better terms and not worry about compromising thelandlord-client relationship. In fact, by focusing on goingbeyond the transaction itself and providing ongoing corporateservices, these firms often serve as an extension of the company'sreal estate department. Throughout the relationship, tenantrep firms serve just one master—the tenant.

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GlobeSt.com: It seems like common sense that it'snot possible to fairly represent two masters at the same time, butit sounds like dual agency approach is still commonpractice.

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Michaels: The roots of dual agency rundeep:

  • Commercial real estate brokerage was founded in the late 1800sto facilitate property owners in the sale and leasing of buildingsand property management.
  • These firms started to market their services not only tolandlords but also to tenants; many relationships formed withlandlords years ago have remained intact without criticalexamination.
  • Within the last few decades, tenant-only firms emerged ascompanies began to recognize the need for exclusive representation.While tenant rep firms continue to gain market share, manytraditional firms are well-entrenched.

However, despite the deep roots of traditional firms, thepotential for conflicts, whether overt or covert, is still aconcern.

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GlobeSt.com: Can you provide our readers with a fewexamples of conflicts involving deals that may not be visible totenants?

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Michaels: Landlords may offerincentives and rewards to brokers who bring tenants to a particularbuilding; they may also offer brokers additional listings in otherbuildings. In so doing, a broker may lose objectivity. In addition,listing brokers may be compromised if landlords want to keeptenants in their building or in another one of their listings evenif the office isn't in the tenant's best interest.

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Some firms representing landlords have a separate division thatsupposedly represents tenants; other firms say they integratetenant representation within the larger group of landlord brokers.Either way, traditional firms still have a vested interest inputting landlord listings first.

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Overall, dual agency brokers have always been beholden tolandlords, either because the landlords are clients of their firmsor they want to get future listings from these landlords.

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GlobeSt.com: So, what is the conflict checklist.What can you do to prevent conflicts?

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Michaels: Raise the issue of potentialconflicts from the get-go; Ask for an account of all thebrokerage firm's relationships, listings, and asset/propertymanagement work with landlords; Ask for full disclosure frombrokers, including the amount of fees or commissions landlords arepaying them. Expect to be informed if the broker is offered bonusesor discounts; Be sure that your interests are protected in yourlease in such matters as expansion, contraction, and terminationrights as well as non-disturbance clauses in the event of newownership; and carefully consider the bottom-line budgetimplications of your prospective firm and determine your greatestopportunities for savings.

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Companies are advised to research the track record andrecommendations of prospective commercial real estate firms. Theyshould also consider the value of integrated services such astransaction management and project management.

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GlobeSt.com: What advice would you say is mostimportant at the end of the day to overcome theobstacle?

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Michaels: At the end of the day, it'sclear that traditional real estate firms and tenant rep firms willcontinue to compete against each other on the same playingfield—and competition in the marketplace is always good. Atthe same time, both sides should continue to respect each other andcooperate in a collegial manner.

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What's most important is the need for companies to ask the rightquestions, weigh the options, and select the firm that's right forthem. And it's important that they perform their due diligenceknowing that we work in a post-Sarbanes-Oxley world, where eventhe appearance of conflicts is not acceptable.

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We aren't suggesting that anyone should question the integrityof professionals on either side of this debate. Rather, it may bewise to question the business model…as well as the wisdom ofconducting business as usual.

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Natalie Dolce

Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.