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The Dirty Truth

Like most enterprises, commercial real estate has its own set of fables and paradoxes.

Many are little more than harmless misconceptions based on out-of-date information or ill-informed sources. Others, sadly, are much more problematic — even dangerous — to the health of tenants seeking fair and equitable representation in securing office space.

Chief among those is the primary misconception that a broker who represents a landlord can also properly represent a tenant. Such situations are referred to as “dual agency.” Please pay close attention: I am about to disclose the unspoken, dirty truth that large brokerage firms would prefer tenants not understand.

Most large brokerage firms make their money from representing landlords. Their fiduciary obligations are to the landlord. Their job is to fill vacant space and keep existing tenants in the building, with the goal to achieve the highest rent possible and give away as little as possible in the way of concessions. If they do a good job, they will keep the listing on the building, maybe get additional listings from the building owners — and even referrals to other landlords. I don’t blame them for that; it’s how the game is played. There are many brokers in the market who are exceptional at what they do for their landlord clients.

Landlords, however, are just half the equation. The other half is sitting on the other side of the table: the tenant. How can a broker whose fiduciary responsibility it is to drive the best bargain for the landlord also obtain the best deal for the tenant? The answer is intuitively obvious, yet it’s amazing how prevalent dual agency is in commercial real estate.

It is impossible to represent the best interests of more than one party in a transaction. One cannot serve two masters. Think about it: Would anyone in their right mind allow their attorney or his or her law firm to represent them in a lawsuit and represent the other side?

The concept of dual agency also ignores the specialized roles between representing landlords and tenants. Good landlord agents work with sophisticated building owners who understand and demand leasing reports, absorption studies and the like, and who need brokers to spend the bulk of their time and energy selling the specialized attributes of their buildings.

Tenant brokers, on the other hand, spend their time understanding the specific needs of their clients and filtering through all available space to help their clients determine the best overall deal regardless of who owns the building.

In reading “Leasing Notes” in the San Diego Daily Transcript on Tuesdays and Thursdays, it’s interesting how often we see the same brokers’ names representing both the tenant and landlord, or how often different brokers from the same company represent the landlord and tenant. Whose best interests did they have in mind — the tenant’s, the landlord’s or that of their brokerage company?

We recently had two top tenant representatives join our firm from a large brokerage. The reason they left was they had a problem with management’s demand that they show favoritism towards their company’s listings. No surprise, really. Keep in mind, the landlord broker’s goal is to fill space. If they do a good job, they will be rewarded beyond that specific deal — or so the theory goes.

Yet another misconception on the part of many tenants is the “direct deal,” in which a tenant does a deal with the landlord and is not represented by a tenant broker. A lot of tenants think — because they are told — that if they deal directly with the landlord, they will save money. What the landlord broker should also disclose is that in most cases, his or her commission will double if the tenant does not hire a broker to negotiate the deal. Tenants should consider it a bonus to the landlord broker for convincing he or she that they shouldn’t be educated or represented while making one of the largest financial commitments for the broker’s company. Ignorance is bliss, indeed!

Dual agency has become a major problem for commercial tenants seeking fair lease terms. Until state regulations are put in place to control the abuses brought about by this practice, tenants will need to seek out their own qualified representative when leasing space.

Jason Hughes is chairman, CEO, and owner of Hughes Marino, an award-winning commercial real estate company with offices across the nation. A pioneer in the field of tenant representation, Jason has exclusively represented tenants and buyers for more than 30 years. Contact Jason at 1-844-662-6635 or jason@hughesmarino.com to learn more.

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