Commercial broker games

As real estate’s top governing bodies turn a blind eye, many say brokers and firms using “tie-ins” to manipulate bids are getting an unfair pass

Sep.September 01, 2018 09:00 AM

On top of lease escalations and the distinctions between rentable and usable square footage, real estate brokers preparing for the state’s licensing exam have also been told to study regulations prohibiting some of the industry’s more underhanded practices.

In particular, the curriculum for the exam has long instructed test-takers to review “tie-in arrangements” — a type of quid pro quo in brokerage that amounts to cronyism, and one that many insiders say is commonplace in the highest echelons of their field.

A tie-in happens when a seller or broker requires a buyer to pay for another service as a condition to winning a deal, which experts say is unethical at best and potentially illegal in some cases.

But when the New York Department of State overhauled its curriculum, which goes into effect Sept. 1, references to such scenarios could no longer be found. The big question is how harmful are they?

“[Tie-ins] are a restraint of trade,” said Kristen Bacorn, who teaches courses on the broker exam at the New York Real Estate Institute. “I tell my students that restraint of trade means that consumers don’t have a choice — and if someone is making the use of a certain product or service a condition of a sale, then that removes choice.”

In commercial brokerage, tie-ins happen most often when a listing agent manipulates the sales process to favor a preferred buyer who agrees to compensate the broker with more business elsewhere. The buyer may promise to hire the broker to sell other properties or promise to hire the broker’s firm to perform other services, like securing debt or handling leasing at the building.

That kind of backdoor dealing and gaming the system in exchange for future payoffs can have a toxic effect on the brokerage ecosystem, according to industry players and outside observers. Those familiar with the practice say it creates a kind of club where the merits of a bid take a backseat to relationships and chummy circles that transact with each other frequently are unfairly favored.

More than a dozen insiders told The Real Deal that many prominent firms — from full-service brokerage shops to more specialized leasing and debt advisory firms — have built entire business models on tie-in arrangements, with some calling it the “playbook” for the most successful players in the business.

Simon Ziff, president of Ackman-Ziff Real Estate Group, said requiring this kind of quid pro quo to win business is one of the most unethical moves in commercial real estate.

“I have heard of stories of selling agents requiring either financing, leasing or management fees to be stapled in order for a buyer to win a deal,” he said. “While buyers of properties we sell may use us for financing, it should be because we are the team they choose to use rather than are forced to use.”

Standard dealing?

Many say the practice is commonplace and that for some brokers and firms, it’s baked into their daily operations.

But TRD was unable to find any legal claims made in court records or with government agencies, and opinions differ on how institutionalized ties-in really are. Though most of the people interviewed for this story acknowledged that they have been an ongoing issue, some say they happen less often than they used to, while others say they’re becoming more rampant.

“The biggest players are the biggest abusers,” one source said on the condition of anonymity given his professional relationships with some of those brokers.

In some cases, according to several insiders, a listing agent on an office property might whisper the price that needs to be paid to win the auction, or to curtail a second round of bids if the “tied-in” bidder comes out on top in the first round.

And when it comes to accepting the highest and best offer, investment sales and leasing brokers say, the price paid isn’t always the determining factor. A broker could convince a seller to accept a lower bid, explaining that the buyer offers some other competitive edge — like a higher likelihood of closing the deal.

Clients, meanwhile, often ask their brokers to recommend other professionals, and many full-service brokerages will encourage employees to suggest colleagues in other divisions in those cases. But to avoid the appearance of a potential conflicts of interest, sources say, brokers are often instructed to give at least three names when asked for a recommendation.

Eric Anton, a veteran investment sales broker at Marcus & Millichap, said there should always be a degree of fiduciary responsibility in commercial brokerage.

“I like to think that when you’re hired exclusively to represent a client, your job is to get the highest price on their terms — without consideration for add-on fees,” he said. “I don’t think about who will hire me next year.”

Lax enforcement

Even though tie-ins raise several ethical and legal questions, New York real estate’s top governing bodies appear to deal with them infrequently, and insiders say regulation has been scarce.

The Real Estate Board of New York’s code of ethics requires commercial brokers to “follow the highest moral and ethical standards of courtesy, integrity, proficiency, professionalism and honesty.” But the trade group’s manual doesn’t have any regulations on tie-ins, and nobody at REBNY was available to comment on the matter. 

“I don’t think there’s been much enforcement,” said Ziff, who said it may take a tough legal official like the state attorney general to really tackle the issue.

A spokesperson for New York’s acting Attorney General Barbara Underwood said the AG’s office sometimes comes across tie-in attempts in condominium and co-op fillings.

“Occasionally, we see offering plans in which the sponsor attempts to dictate the title company to be used by the purchaser or to infer that a given company should be selected because of a bulk or discount rate,” she wrote in an email. “It is our general practice to require sponsors to remove this language.”

A spokesperson for the DOS said the department can revoke a broker’s license, or suspend it for an indefinite amount of time, if that person is found guilty of fraudulent or dishonest practices. In lieu of that, the department could levy a fine of up to $1,000.

The DOS spokesperson told TRD by email that the department was not aware of any recent complaints regarding tie-ins.

Asked about the recent change in the licensing curriculum, she said the department periodically reviews the material together with the New York State Board of Real Estate — a group of 15 appointees who write the state rules governing commercial and residential brokers. The state officials “wanted to provide a broader topic area,” the DOS spokesperson noted. And while tie-ins are no longer mentioned specifically, the department expects them to be addressed in the curriculum’s section on antitrust laws.

But while tie-ins are getting less attention specifically, there’s always the possibility that brokers and buyers engaging in the practice could be violating state criminal laws.

“I think it’s commercial bribery,” said Ronald Sernau, partner and co-head of the real estate department at the law firm Proskauer Rose. “I think it’s a crime. I think it’s a felony in New York.”

He pointed to two state statutes regarding commercial bribery that not only make it a crime for a broker to accept one of these quid pro quos, but also make it a crime for the buyer to offer one.

One makes it illegal for anyone to offer employees, agents or fiduciaries compensation in order to influence their  conduct in relation to their employers’ affairs. The other makes it illegal for anyone to accept a bribe. Both are Class E felonies carrying a sentence of up to four years in prison.

The one caveat is the level of consent. If the seller knowingly agrees to the arrangement, there’s no crime. “That probably solves the problem,” Sernau noted.

“Trading favors”

The practice of negotiating future business from a bidder in exchange for an inside track on a deal goes by several names. Some industry players refer to it bluntly as “trading favors” or “stapling” (as in stapling another service to a deal). When it comes to advertising a firm’s other lines of business, brokers often use the corporate-speak phrase “cross-selling.”

And some say the more services a firm offers, the higher the potential for conflicts of interest.

Ira Zlotowitz, president of the commercial debt brokerage Eastern Union Funding, said that’s one reason his firm focuses exclusively on negotiating mortgages and has resisted the idea of getting into property sales. He called it a major conflict of interest when brokers are more concerned with referring business than they are with being faithful to their clients.

“Whose interest do you have in mind?” he said. “It’s a terrible thing for the borrower.”

Tie-ins also create a system where the same brokers are continually transacting with the same buyers and sellers — making it more difficult for others to win new business. Some industry players argue that it has persisted in the commercial brokerage business largely because it hasn’t caused enough backlash or calls for more regulation.

But it’s also true that many of those who would criticize the system also stand to gain from it. A buyer who loses out on a property because a competitor cut a side deal with the listing broker can’t risk blowing the whistle for fear of losing out the next time around.

“Buyers depend on deal flow as much as the brokers,” one source said on the condition of anonymity.

And while specific arrangements are rarely broadcast to all the parties in the bidding process, buyers, sellers and brokers are generally aware of the way the game is played. The investor who wins an auction by promising to list his next property with the sales agent knows full well what to expect when the time comes, sources said.

Proskauer’s Sernau said that when it comes to these kinds of potential conflicts, whether they cross the line into unethical or illegal territory is largely a matter of how explicit the offer is.

He likened it to someone taking a client out to lunch: It may be considered a conflict of interest, technically, but it’s unlikely to materially sway the client’s decision, and most find it innocuous.

New York real estate, after all, is a business where the same parties deal with each other on a recurring basis. “It is a small town, and relationships are important,” Sernau said. “That’s the grease that makes the world go ’round.”

But he added that those relationships need to steer clear of cronyism.

“It’s important for us in the real estate business that we have a good system that works,” Sernau noted. “Who wants to live in a corrupt system?”

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