How would you feel if you found out that the attorney who represented you in a major legal battle was actually working for, or at least paid by, the other side? How about if you found out that your doctor prescribed that you take an exam, like an MRI, not because you needed it, but because he owned the MRI Center and knew the insurance company would pay him a lot of money for that exam? Or, if the doctor prescribed medication for you, not because it would cure you of your ailments, but only because he really worked for the pharmaceutical company that produced that medication? How about if the captain of your favorite football team was paid by the opposing team in last week's big game, and that's why they lost? Get the picture?

Then, why is it that so many intelligent and highly successful business professionals enter into real estate projects without considering the probabilities that the relationships in which they engage may pose serious conflicts-of-interest, the types that could sneak up on them, and could have long lasting effects on them, the success of their real estate projects, and their companies?

Most savvy executives concluded years ago that their companies required their own team of experts when embarking on large projects, like real estate and others. So, they began to engage


Andrew B. Zezas, SIOR
Relationship Manager,
Strategist, President & CEO
(908) 245-5999 x11
andrew.zezas@realstrat.com
real estate service providers, like brokers, architects, engineers, construction contractors, and others, to guide them in planning and executing their projects. When interviewing real estate brokers, the brightest executives learned to ask about whether those brokers represented landlords and, if so, how that representation could cause conflicts-of-interest and impede their companies' ability to complete their projects. While this approach is an intelligent one, too many executives stop there and leave their companies open to myriad other potential conflicts.

In studying the issue of potential conflicts-of-interest, it became apparent that dangers exist in almost every component of a real estate project. We've all read the news story or watched the television show where a building contractor paid-off a local government official to look the other way about construction violations. And, most of us have seen the weekly cops and robbers show where the villain is a crooked real estate developer or broker.

Certainly, such events take place, and in such an instance, a good attorney will go a long way in protecting your company. But, what I'm referring to are the less overt, less noticeable, more frequent instances of potential conflicts-of-interest that occur, often without detection.

How a Conflict-of-Interest Cost A Company $5 Million

While negotiating a lease for a new 100,000 square foot headquarters, a New Jersey based financial services company engaged a major internationally recognized architectural services firm to design the interiors in one of three buildings it was considering. The architectural services firm had the right pedigree, more than sufficient experience, available resources, and in fact, had been involved in the design of one of the buildings under consideration by the financial services company.

Given slow local market demand at the time, all three buildings under consideration were new and substantially vacant. As a result, the financial services company was successful in positioning the landlords of all three properties to provide significant concessions and below market financial terms. As the architects continued their design due diligence for all three buildings, it became apparent that one building in particular clearly offered greater functionality and superior operational flexibility over the other two, and would better support the financial services company's business requirements. Accordingly, the financial services company took a more focused negotiating posture with the landlord of the superior building, and secured even more favorable business terms.

As the financial services company wrapped-up its negotiations, it received a disturbing phone call from the landlord of the building that had become their preferred relocation choice. Offering no explanation, the landlord informed the financial services company that his firm would no longer negotiate with them, that he would not honor the terms they'd negotiated up to that point, and that the deal was off. For two weeks, the landlord would not return calls. The financial services company was eventually able to confirm that the landlord's building was still available, was still on the market, and that he'd not yet secured another tenant. They were baffled over the landlord's actions, to say the least!

After some creative investigative work, the financial services firm uncovered details of a conversation between their own architect and the landlord. It seems that the architect, who had worked for that landlord in designing the building in question, may have been interested in doing more work for the landlord, and had "mistakenly" informed the landlord that not only was his building more appropriate for the financial services company than the other two, but that those buildings would not likely be considered viable because of their inability to provide space in sufficient quantities and type....and, the architect told this to the landlord even BEFORE HE INFORMED HIS OWN CLIENT!

Realizing that they had few alternatives left, and despite the obvious ethics and possible legal violations of their architect, the financial services company eventually succeeded in bringing the landlord back to the negotiating table and completed its transaction, albeit with an annual rental increase of $500,000 (10 years x $500,000) above the previously negotiated terms. That blatant conflict-of-interest that existed at the architectural firm cost the financial services company $5 million!

Events like this don't occur everyday, but when the stakes are high, so are the risks, and such events happen more often than we like to think.

In considering this important, risky, and potentially costly issue, we've determined that when engaging real estate service providers, like brokers and advisors, a company could be negatively impacted by at least 12 separate and distinct possible conflicts-of-interest.

It is very important to remember that in order to truly protect the interests of their companies, executives must evaluate two levels of potential service provider conflicts, including those that may occur:

1) At the level of the individual people who will provide services, and just as importantly;

2) At the level of the company's for which those people work, including other individuals who work there, and how those relationships could create potential conflicts-of-interest.


Three Steps to Reduce the Risk of Conflicts-of-Interest

Step 1. The real challenge, and the single most important step is to identify the types of conflicts that could occur in your project.

Step 2. Essential to protecting your company is the selection of service professionals with a lower propensity for conflicts-of-interest, based on the services they provide, the type of relationships they maintain, and more.

Step 3. The third most important step to protect your company is to ensure that the service providers you engage have a strong policy against conflicts-of-interest, as well as, a realistic in-place mechanism for identifying, disclosing, and resolving conflicts in a timely and cost-effective fashion, while protecting the best interests of their clients.

Read The CFO's Guide to Hiring the "Right" Real Estate Service Provider. Click here to order your copy.

Given the need to engage professionals who have experience, expertise, relationships, resources, and more, securing a real estate broker, advisor, or other professional who offers no possibility of conflicts-of-interest will be next to impossible. But, it is the responsibility of corporate executives to search out and identify probable conflicts-of-interest, to assess the likelihood of those conflicts affecting their project and their company, and to minimize the possibilities of those conflicts arising. Furthermore, engaging only those service providers who provide a transparent means of identifying, disclosing, and resolving conflicts, will serve the best interests of the company, its projects, and all of those involved.

Andrew B. Zezas, SIOR, is Relationship Manager, Strategist, and President & CEO of Real Estate Strategies Corporation, Publisher of "Business, Profits and Strategy", a monthly online publication read by thousands of business, financial, and real estate executives nationally, and, is the author of two new real estate books, The CFO's Guide to Understanding Corporate Real Estate Transactions and The CFO's Guide to Hiring the "Right" Real Estate Service Provider, both of which will are available at www.TheCFOsGuide.com.

Mr. Zezas is well-known for his ease and informative style of public speaking, and has given informal talks, formal presentations, and has lead training and educational programs for business, professional, government, and trade associations, throughout the US and Canada, including the American Management Association (AMA), the U.S. Postal Service, RealComm, Building Owners and Managers Association (BOMA), Society of Industrial and Office Realtors (SIOR), and others. Andrew is founder and National Chairman of the SIOR Tenant Representation Specialty Practice Board, a group of over 300 tenant representation focused commercial real estate professionals from around the world. He is a licensed real estate broker in New Jersey, New York, Connecticut, Pennsylvania, and Florida, and is a licensed real estate instructor in Texas and Indiana. He can be reached at 908 245 5999 or via email.

Real Estate Strategies Corporation, located in Kenilworth, New Jersey, and serving its clients throughout the country, helps companies create and execute Business DRIVEN Real Estate Solutions...and Opportunities, faster and with less risk. Visit www.RealStrat.com.

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