New York aims to clarify law on broker rebates

But will legislation increase cash payments and “cheapen the business”?

From left: Senator Lee Zeldin, Peter Hennessy and Paul Purcell
From left: Senator Lee Zeldin, Peter Hennessy and Paul Purcell

Residential and commercial brokers are barred from offering cash payments to buyers, sellers, landlords and tenants they represent, unless that person is an attorney or a licensed broker — or so the industry axiom goes. In fact, so-called rebates are perfectly legal. But in the face of widespread confusion, New York State is in the midst of enacting a law to bring clarity to a muddled part of the brokerage profession.

Veteran commercial brokers said that sophisticated tenants — typically large ones — were aware that brokers provided rebates, but generally only on sizable deals and often in the form of concessions, never as cash.

“The only way to give a client a discount on the commission would be to credit them in the form of additional tenant improvements or free rent,” said Peter Hennessy, president of the tri-state region for commercial firm Cassidy Turley, referring to his long-time impression of the relevant state law.

Paul Purcell, a partner at Rutenberg Realty and former chief executive officer of Douglas Elliman, echoed that understanding.

“I was taught that it was completely illegal to offer any kind of rebate,” Purcell said, speaking of residential deals.

So it was news to them and others interviewed by The Real Deal that it was both completely legal to provide a cash rebate, and that the state was in the middle of passing a law codifying that.

A bill that sailed past the Senate June 20 in the waning days of the 2013 session is now before the state Assembly’s Judiciary committee, and is likely to pass in the 2014 session.

The bill, introduced June 5 by Republican Long Island Senator Lee Zeldin, is an amendment to a section of the Real Property Law titled “splitting commissions.”

“Nothing shall prohibit a broker from offering any part of a fee, commission, or other compensation received by the broker to the seller, buyer, landlord or tenant as an incentive for using the licensed services of that broker,” a memorandum to the bill said.

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Yet two of the most influential brokerage associations in the state, the Real Estate Board of New York and the New York State Association of Realtors, said rebates have been legal for years.

“It’s been the position of the Department of State enforcement that [rebates are] permissible. I think they are just clarifying it, so from that perspective it’s really not news,” said Neil Garfinkel, a partner at law firm Abrams Garfinkel Margolis Bergson and counsel to REBNY.

NYSAR, like REBNY, supported the legislation as a clarification of existing law.

“Offering consumer rebates promotes healthy competition in the real estate industry and benefits the public. Buyers and sellers, landlords and tenants will have the option of choosing the broker offering the best or most attractive products and services that fit their needs,” NYSAR said in a statement last month.

Hennessy said he did not expect much to change if and when the law passes, although he said some brokerage firms might push back against a larger number of tenants looking for rebates.

One commercial broker, who asked to remain anonymous being critical of the profession, anticipated that brokers would keep this under wraps.

“The vast majority of brokers are not going to say a word. The brokers don’t want the tenants to know about that,” the industry source said.

The commission can already be reduced, so this might add another level of complexity to a residential deal, Purcell said.

“With all these little things, it becomes more confusing,” he added. “I think it allows people who aren’t good brokers to get business based on some kind of monetary exchange. I don’t know how to say it, [but] it sort of cheapens the business for me.”

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