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Brokers look for 'half a loaf'.

Byline: Adam Pincus

The long-standing divide-and-conquer mentality that has been the norm in the New York City investment sales world is beginning to loosen -- well, at least a little.

With the recent uptick in building trades, commercial brokers say they've seen a rise, albeit slight, in co-brokering.

The practice -- in which agents partner on deals -- has long been avoided and was a nonissue for much of the downturn because there were so few transactions. But with the recent thaw in activity, coupled with the fact that it's still far harder to get deals done than it was during the boom, brokers say the practice has become more appealing.

Marco Lala, an associate vice president at investment brokerage Marcus & Millichap, said current market conditions are forcing brokers to work together under the premise that "half a loaf is better than no loaf."

"I think there probably has been an uptick in co-brokering," he said.

In July, for example, Rosewood Realty represented the buyer, while Besen & Associates represented the seller, in the co-brokered $2.5 million sale of 2885 Valentine Avenue in the Bronx. More recently, in October, Prudential Douglas Elliman represented the buyer at 449-455 Audubon Avenue in Upper Manhattan, while Besen again represented the seller.

But if the past is any indication, any uptick in co-brokered deals could also lead to conflicts and lawsuits among brokers. In March, broker Paolo Zampolli, with Paramount Realty Group, filed suit against Massey Knakal Realty Services claiming he was cut out as a co-broker on a deal at 31 Bond Street. A judge threw the case out in September.

And even while some say there's more co-brokering in the works, many investment sales brokers privately admit that they still avoid it because they don't want to cut their commissions.

"[Some brokers] are reluctant to share a listing, seeking instead to market the property directly and thus attempt to secure for themselves the entire sales commission rather than splitting it," Terrence Oved, a partner with the law firm Oved & Oved, said.

But co-brokering is not necessarily optional.

The state Department of State, which licenses brokers, says because agents have a fiduciary duty to their clients and must deal fairly with potential buyers, they must inform their client of all viable offers from other brokers.

The problem is that the concept of co-brokering is often murky because of the various permutations in how a sale can be consummated. For example, a broker can have a written exclusive with the seller, or just a verbal understanding in a nonexclusive arrangement. In addition, who pays the commission factors into the potential co-brokering conflicts. (Most brokers understand a co-brokered sale to be one in which the seller pays the entire commission, and that fee is then split between the brokers involved.)

Some experienced investment sales agents, speaking on the condition of anonymity, said brokers use various methods, such as badmouthing a competing offer, to steer a seller to the agent's own buyer -- thereby avoiding co-brokering a deal.

"The offer is an offer, but I have spun it [in a negative way]," one multifamily broker said, adding, "I know this all sounds pretty sneaky and scumbaggy. And that is why people look down on brokers."

Sometimes those practices are in violation of state licensing rules, sources said.

"For the most part, the controlling broker will do whatever he can to make sure [a competing broker's] deal doesn't get made," said the veteran multifamily broker.

Another investment sales broker, who also asked not to be named, gave a hypothetical example of a $1 million listing, in which the seller pays a 4 percent commission worth $40,000.

"You call me and you [can make an offer at the same price]," he said. "I can't say in good conscience that I could actually call up the seller and say, 'Hey, I have this other guy.' I might say, 'I have another guy, but go with my buyer.'"

A spokesperson for the Department of State, Gabe Roth, said the agency would likely take action in the case of the above scenario whether the listing was exclusive or not, because of an effort to prohibit the use of a buyer's broker.

"We would likely commence disciplinary proceedings against the offending broker due to untrustworthiness and incompetency," he said in an e-mail.

But there are no recent cases in New York City in which the state has ruled against a broker for violating co-brokering rules, a review of Department of State decisions shows. That may be at least partly because brokers say they are reluctant to file complaints even when violations occur.

The small universe of New York City investment sales brokers is far different from the residential real estate world, where commission rates are higher.

Brokers say the difference on the commercial side is that there is a limited supply of buyers. Most veteran brokers have built up a Rolodex and don't feel the need to share exclusive listings to attract a strong buyer. And many are reluctant to share nonexclusives, also known as pocket listings, with anyone but the most trusted colleagues, for fear the listing will be stolen.

"For the nonexclusive deals it is a gray area," Amit Doshi, executive director at Besen, said in an e-mail. "That's where we, as lead brokers, draw a line and work with brokers who we feel have a capacity, knowledge and are honorable [so] as not to circumvent us."

Another experienced broker at a firm with a midsize presence in Manhattan said his firm avoids co-brokering in order to steer clear of conflict between firms. And some of the major commercial firms require the buyer to pay the buyer's commission as a way to avoid conflicts.

But some view that payment arrangement as a conflict. Paul Massey, CEO at Massey Knakal, said about 25 to 35 percent of the firm's deals are co-brokered, a percent that has not changed much over the years.

Massey said his firm objects to having a buyer pay a separate commission to the buyer's broker because it can leave the seller feeling that there was money left on that table. That, he said, is because it indicates that the buyer had extra cash to pay a broker's fee.

Many sellers want co-brokered deals, he said, because it implies the deal was circulated widely to other brokers. "They want to expose themselves to buyers who might be new to the market. And because they want the highest price," Massey said.

But it is not always easy working with another brokerage to sell a property. And, there are other practical problems with co-brokering, such as sharing resources.

"One firm is likely to have a stronger or better [team], meaning one side will do the bulk of the work and one side will have to share its investor list," a third broker said. "So in that respect it is not very good."

In many instances, having a co-brokered deal costs the seller more because the overall gross commission is slightly higher when there are two brokers involved, moving from 3 to 4 percent of the deal, for instance. That, of course, creates an incentive to stick with one broker.

John Goldman, managing director of investment sales at Halstead Property, said he has not shied away from co-brokering, but he proceeds with caution. That's because about seven years ago, he told a buyer's broker about an exclusive deal, and once the exclusive expired, the competing broker got the seller to sign a contract with his own buyer.

"I was upset to the extent I believed I had been wronged," he said, "but mollified by the fact that the contract was never consummated because the buyer went broke, so the deal never closed."
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Author:Pincus, Adam
Publication:The Real Deal
Date:Jan 1, 2011
Words:1288
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