Market Insight: Guest Articles Ethics in Brokerage: Where is Eliot Spitzer? by Dan Mihalovich

It’s not just time to level the playing field. It’s time to DEFINE the playing field. Most office leasing brokers never give you (the tenant) the straight scoop.

Pity the unsuspecting CEO, CFO, COO, Managing Partner, HR Director or Office Manager trying to get some work done. Office leasing brokers relentlessly telephone, spam, drop in, self-promote, puff, hoot n’ holler—anything to get your attention, to get to “the pitch.” After all, they are on a mission. If they are a “landlord broker,” they call on you to lease space in one of their company’s listings. If they profess to be a “tenant broker,” they want to represent you. Simple, isn’t it? Factually, no.

If you’re not prepared for an insider’s explanation, this would be a good time to go back to your Business Times or Fortune magazine. Otherwise, after surviving (and thriving on) 24 years of office leasing brokerage in the City, I’d like to share some insights with you and help you decipher the often cryptic and misleading messages you’ve been receiving from the brokerage community.

Living Up to Standards we Expect from Lawyers

Why do you hold your lawyer to a higher standard of ethics than your office leasing broker? Why? When you retain counsel, before they take your case or the first dollar, THEY make a thorough self-determination as to whether or not they have a conflict of interest representing you—and THEY disclose it to YOU. Your lawyer cannot ethically take on a case which would place them—or you—in a compromised, conflicted predicament. In the office leasing industry, this litmus test is rarely utilized by either broker or tenant. The phenomenon is baffling, considering the magnitude of importance and financial commitment level at stake as tenants enter into leases.

The State Bar maintains a stringent set of rules governing the activities of lawyers. Can you imagine that an office leasing broker could uphold the following rules of marketing:

Advertising and Solicitation (Rule 100—for Lawyers):

A communication or a solicitation (as defined herein) shall not:

  1. Contain any untrue statement; or
  2. Contain any matter, or present or arrange any matter in a manner or format which is false, deceptive, or which tends to confuse, deceive, or mislead the public; or
  3. Omit to state any fact necessary to make the statements made, in the light of circumstances under which they are made, not misleading to the public; or
  4. Fail to indicate clearly, expressly, or by context, that it is a communication or solicitation, as the case may be; or
  5. Be transmitted in any manner which involves intrusion, coercion, duress, compulsion, intimidation, threats, or vexatious or harassing conduct.
  6. State that a member is a “certified specialist” unless the member holds a current certificate as a specialist issued by the Board of Legal Specialization, or any other entity accredited by the State Bar to designate specialists pursuant to standards adopted by the Board of Governors, and states the complete name of the entity which granted certification.

When a Broker Calls

In the San Francisco marketplace, there reside approximately 300 office leasing brokers. This community of brokers comprise, in largest part, a body of brokers who represent 103 million square feet of office inventory…these are “Landlord Brokers” (whom, as you’ll read below, also profess to be Tenant Brokers). The balance of the brokerage community represent tenants, only…these are called “Tenant Brokers.” This still sounds simple, but it’s not. Why not?

The central issue of concern for a tenant should be to surround itself with outside, completely objective advisors—whether they are a real estate broker, architect, contractor, or real estate lawyer. The commercial real estate industry does not compel itself to disclose to unsuspecting “buyers” —tenants—that they work for a company rife with conflict. For example:

  • A broker calls you to inquire about your lease expiration date and the size of your tenancy (because they represent a building owner and want to expose you to their listing). That broker is a Landlord Broker, are they not? Why, then, do they pursue a line of questioning to inquire about representing your company…as a Tenant Broker? Are they not under contract with that building owner, as their agent, charged with the responsibility to procure tenants for that listing? Did they not pledge their time and expertise to that building owner? How can that broker objectively represent your interests, as a tenant?

  • Another broker from the same [Landlord Broker] company calls to introduce their Tenant Broker services, since the caller genuinely only represents tenants. Is there not a conflict? When one (or all) of their company’s landlord-clients signed them on to list their space, didn’t the company commit that they would commit all of their company’s resources—including all of their experienced brokers—to bring business to that landlord? Isn’t it in the best interests of the caller’s company to bring tenants to the caller’s listings? If not, shouldn’t you ask “why not?” If you engage that “tenant broker” and you commence negotiations at a listing managed by the caller’s company, how is it possible that the caller could possibly drive as hard a bargain for you as an equally skilled Tenant Broker from a non-conflicted commercial real estate firm?

    When negotiations get rough, and your caller—now representing you—goes a bit “too far” pressing for concessions for you…isn’t it likely that the caller’s Senior Management will bring him/her into a meeting to defend their other client—the landlord—the party who engaged the caller’s firm…Why were you subjected to this mess?

    In this case, the Tenant Broker’s exuberance to gain concessions for the tenant could cause the broker’s company to lose the listing for the building—or jeopardize the company’s chances to secure a new listing. Landlord Brokers are constantly on the hunt for new listings; they can ill afford to employ Tenant Brokers who push their landlord clients very far.

  • A Tenant Broker calls, highly skilled and impressive as ever. They impress you with the notion that their firm represents more tenants than any other in the City. In fact, so they say, their firm “controls” 30% of the tenants currently in the market for space. They should have better knowledge of where deals can be struck, then, shouldn’t they? Perhaps, but they may also be privy to (a) information about your industry-specific competitors and potentially share information about you—without disclosing this to you; (b) information about several other clients whose requirements are remarkably similar to yours, meaning that you will literally compete against the Tenant Broker’s other clients for the same space—without disclosing this to you; and (c) credit reports on all of their clients, placing them in the unenviable position of having to recommend that a landlord sign a lease with another client instead of with you.

    Shouldn’t Tenant Brokers voluntarily disclose whether or not they represent one of your competitors—and agree not to pursue your competitors unless you [reasonably] agree?

    Shouldn’t Tenant Brokers disclose how much business they are engaged to close, and where your requirement fits into their list of priorities? Isn’t it a conflict of interest if that seasoned caller really doesn’t have the time to give your project what it deserves, but instead plans to shuffle you off to a junior partner, or simply do a half-assed job because they can get away with it? After all, a huge fee is at stake!

    If a Tenant Broker has a large tenant client who decides to jettison a huge amount of space on a sublease basis—couldn’t that Tenant Broker find himself/herself in a conflict [just like a Landlord Broker] when you decide to pursue your tenancy in that sublease space? Shouldn’t the Tenant Broker disclose that possibility?

  • Each quarter, we present a report about the small handful of Landlord Brokers whom collectively control about 50% of the City’s vacant space. Strange as it may seem, as Tenant Brokers, we find ourselves competing most often with these firms to represent you—tenants! If all brokers were equally qualified to advocate for your interests, by definition, Landlord Brokers could not possibly command and as aggressively assert your objectives as Tenant Brokers. We believe this is clear. But the Industry will not do your homework for you. The Industry continues to cloud the most basic of questions about conflict of interest. The Industry does not operate at the same ethical level of the legal industry. Why not? Who is minding the hen house? It looks to be the wolves. Buyer, beware.

On Brokers Resumes…

Every day, it seems, we can pick up the newspaper and learn that one of our politicians, school district administrators or the head of a corporation somewhere falsified information on their resume—somehow inflating or distorting the truth. When your lawyer or dentist or surgeon passes you a resume, though, you don’t question it—do you? You hold those professionals to a higher standard than you do for, say, your real estate broker. Why?

When you interview a Landlord Broker or Tenant Broker to represent your interests (again, we must ask, why would you consider having a Landlord Broker represent you, a tenant?), 99% of the time you’ll be presented with an extensive and impressive list of companies represented by the broker’s entire company. Isn’t this dishonest? After all, are you not trying to assess the viability and experience of the very people standing in front of you pitching your business? Shouldn’t the brokers disclose (a) which assignments did they work on? (b) what, exactly, was their role on each assignment? (c) were they simply in the room at the time the transaction was negotiated by a more senior broker from their company? (d) Most disconcerting—that brokers frequently list the names of tenants on their resumes, recalling transactions in which the broker represented the landlord in the transaction!

References are seldom checked. You’ll feel much more comfortable with your decision-making thereafter. There’s a LOT of money and liability at stake in negotiating your office lease. You have one opportunity to do it right. Buyer, beware. Ask the right questions and know what you’re buying. The commercial real estate industry won’t make it easy for you.

Just for Laughs…

This is a real letter, a “whopper,” one of our competitor’s broker-solicitation messages sent to one of our clients. Bear in mind that this solicitation comes from a Tenant Broker “specialist” working for a Landlord Broker company. To make our point(s), we’ve deciphered the message and provided the translation [inside their message]. See if you can follow along (we’ve changed the names to protect the guilty parties). Here is the text of the broker’s letter:

“We thought it was too early to think about our lease. Within three months [from when?], Tenant Broker [Landlord Broker, actually] negotiated $731,240 worth of rent savings [how they calculated “savings,” though, is a complete mystery. This is totally misleading.] over the last 18 months of our existing lease term [but we didn’t say that we’re a 100,000 square foot tenant and they didn’t really save us that much, on a per square foot basis]. And Tenant Broker [Landlord Broker, actually] secured $426,680 in Landlord-funded tenant improvements!” [Who made this statement? No one’s name is associated with the quote.]

Mr. Tenant:

Our records show that your firm’s office lease on xxx,000 square feet on ABC Street expires in the next few years. I’m hoping to visit with you regarding this lease expiration. You now have an opportunity in San Francisco to:

  • Improve profitability by minimizing occupancy costs [this suggestion is inconsistent with the broker’s later assertion that market rates are rising at nearly 20% per year, but the thought is appreciated.]
  • Increase efficiencies & effectiveness of revenue-generating staff
  • Enhance recruitment & retention of key partners

This is a no cost proposition—landlords pay our fee. [The fact that landlords pay broker fees obviously does NOT mean there is no cost. The broker, here, is attempting to lure a client into believing that there is no risk in hiring his/her services. Clearly, there IS risk, especially if this is not the most capable, experienced and objective broker available to represent the tenant. The broker is also misleading the tenant into a belief that the broker’s fees are “free” to the tenant. Landlords only agree to pay tenant-broker fees because such payment is included as an amortized expense in the resulting lease. It is true that, as a rule, landlords budget to pay tenant-brokers’ fees—but for this solicitous broker to imply that there is no cost is inaccurate and misleading.] By way of background, we’ve been hired as the trusted real estate advisor to respected tenants such as A, B, C, D, E, F, and G [none of which the soliciting broker represented; all of which were represented by other brokers working at the Landlord Broker company].

Whether you’d prefer to stay in your current location or relocate, it is always beneficial for tenants to stimulate competition by negotiating simultaneously with more than one landlord. As tenant advisors [actually, our company is one of the largest Landlord Broker companies in the City and we control more listings than any single landlord in town], we can provide you with the insider market information [perhaps this is code language, to suggest that this broker can source secret information that no one else could possibly provide] you need to make the best possible real estate decision.

Given your upcoming lease expiration, now is the best time to take advantage of the tenant-favorable office leasing market—before this window of opportunity closes. The office leasing market in San Francisco is changing quickly—rents are rising at almost 20% annually! [This claim is factually incorrect and misleading, but if the broker’s letter stimulates fear in the reader and elicits a return call, the broker figures that it’s worth a try.]

I would like to discuss how we might help you secure your next lease, and as a result increase your profitability over the next several years. [It is implied, if not subtly promised, that if you hire this broker, your business will run more profitably—even though “rents are rising at almost 20% annually!”]

About the Author

Dan Mihalovich is Principal of Mihalovich Partners. He can be reached at 415-434-2820, or

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