In Hans Christian Andersen’s famous tale, The Emperor’s New Clothes, the Emperor agrees to pay two scheming tailors to make him a magnificent suit that will be the envy of the kingdom. The tailors claim to create a suit that can only be seen by smart, worldly people; anyone who claims they cannot see the beautiful suit is necessarily simple minded and unworthy. The people of the kingdom, upon seeing the Emperor parading naked down the streets, ignore what common sense tells them and instead praise the tailors’ craftsmanship. However, when a child, too young to appreciate the pretense, looks upon the Emperor, he cries out that “the Emperor is naked.”
Much like the citizens in Andersen’s tale, many people see that irreconcilable conflicts of interest pervade the real estate brokerage industry, yet they are often too intimidated to stand up and say that something is obviously wrong. If lots of other tenants are seemingly unfazed by the conflict, who are they to raise a fuss? Well, the Inspector General for the United States Postal Service, like the child in Andersen’s tale, seems to think something very wrong is going on and he’s not afraid to speak up.
In February, the Inspector General called into question the activities of CBRE, the largest brokerage company in the world, who had been retained by the Postal Service to act as its exclusive real estate broker in all sales, purchases, and leases of its facilities. It turns out that in a number of instances, CBRE was not only representing the Postal Service on property sales and leases, but was also representing the purchaser or landlord on the other side of these same transactions. The Office of the Inspector General thought that was a major problem and wasn’t shy about saying so. In their words, “When representing the Postal Service, it is important for CBRE to be focused on maximizing revenue when negotiating sales and leases of Postal Service properties, and reducing costs when negotiating leases of properties for the Postal Service to occupy. This focus is compromised when it is also representing the interests of the buyer, lessee or lessor.“ (Emphasis added).
Not surprisingly, CBRE found nothing wrong with representing both sides of the real estate transactions with the Postal Service. CBRE was very hurt by the fact that the Inspector General called into question their integrity and ethics. Their spokesperson, Robert McGrath, defended the practice of “dual agency” stating, “When consent [by the client to the conflict] is given, stringent controls are in place prohibiting and preventing sharing of confidential information between our U.S.P.S. team and any team representing a potential buyer.”
In effect Mr. McGrath tried to use the age old trick of making this conflict all about confidentiality. It’s not and never has been. There’s no need to create a “Chinese Wall” between the two CBRE teams as, by law, brokers cannot divulge confidential information obtained from their clients under any circumstances. The real issue here has little to do with keeping information confidential. It’s about human nature and the factual inability of a company to promise one client (the landlord) it will get them the highest rent on a lease while simultaneously promising its other client (the tenant) it will get them the lowest rent on that same lease. The Postal Service is putting its faith in CBRE to represent its best interests at all times and needs to know that CBRE’s allegiances are never compromised. The problem is, the party on the other side of the transaction has also hired CBRE to advance their interests and their interests just happen to be completely adverse to those of the Postal Service. Note from the quoted language above that the Inspector General wasn’t concerned about confidentiality or Chinese Walls; he simply didn’t want to have to wonder whose interests CBRE was putting first when CBRE was sitting at both sides of the negotiating table.
When CBRE was asked how it could maximize the sale value on a Postal Service property if it was also representing the buyer of that property, CBRE remarkably responded that the “properties have consistently been sold at or above the appraised value provided by third party appraisers.” Assuming that is in fact true, how would you feel now if you were the buyer client of CBRE? CBRE has just come out and said that with them as your advisor, you paid a price that was above fair market value. Do you feel good about the job CBRE did for you in representing your interests? The only way you could feel good about such a purchase is if you think the appraisal was low, in which case the Postal Service probably got a bad deal. It’s a zero sum game here. If the Postal Service got top dollar, the buyer paid top dollar and vice versa.
CBRE further claimed the fact that they represent both buyers and sellers “maximizes the exposure for properties in the marketplace.” Unfortunately, maximizing “exposure” (how many people learn about the property) and maximizing “competition” for the property (the vigor with which potential buyers actually pursue the property) are two different matters. A conflicted “dual agent” broker can actually chill competition in the market as other buyers refuse to participate in a process where the chips are stacked against them. Many buyers assume the buyer who is also represented by the seller’s broker has an inside track on things because the dual agency brokerage firm will make two commissions if their buyer client is successful in acquiring the property. As a result, other buyers may refuse to get aggressive in their bids if they even bid at all.
Given the pressure CBRE and other large, public real estate brokerage firms are under to grow revenues, it’s no wonder that they want to represent as many parties as possible in a transaction regardless of conflicts. And they spend a lot of time and money learning how to downplay or dismiss the significance of these business conflicts when pitching for new work. Frankly, almost no conflict is a barrier to them. In fact, as we have discussed here in other blogs, CBRE doesn’t even see a problem acting as the tenant broker when the tenant is leasing space in a building that is actually owned by CBRE. If you can dismiss the impact of that conflict, everything else is gravy.
As the townspeople in Mr. Andersen’s tale demonstrate, it’s sometimes very hard to stand up and declare that something is obviously wrong when so many people seem to be accepting of it. Conflicts of interest have been a part of commercial real estate brokerage for years and the conflicts are only getting deeper and more frequent. The good news is that people aren’t holding their tongues anymore and smart people are speaking up. There is some humor and irony to be found in all of this. While it’s not surprising that a young child would ultimately be the one to expose the Emperor, did anyone think that an agency of the Federal Government would be the one to lead the charge in attacking conflicts of interest?
For more information contact Glenn Blumenfeld