Sarbanes-Oxley and Enron Fallout - Law Firms Begin Shying Away From Using Clients As Tenant Representatives
Before the demise of Enron and the passage of Sarbanes Oxley, many law firms habitually engaged clients
as their tenant representative(s). This practice has begun to fall into disfavor by many major law firms for several reasons:
1. Inappropriate referral fee - Post Enron, the delivery to a client of a lucrative, non-competed tenant representation assignment has created heightened anxiety in the legal community that such a reward could be perceived by purists as a
de facto referral fee which, of course, would be inappropriate. The anxiety has been easily eliminated in many firms by simply not using any clients as their tenant representatives.
2. Violation of Sarbanes-Oxley ("SO") - Many in the legal community believe that it is only a matter of time before a major law firm makes the headlines for inadvertently violating SO by virtue of engaging a client as its tenant
representative. Consider this example:
• A REIT (with many private individual shareholders for whom SO offers protection) engages a real estate service provider to lease and/or manage the REIT's real estate assets.
• The real estate service provider is engaged by the law firm as the law firm's tenant representative and the real estate service provider turns around and delivers the REIT's legal business to the same law firm.
Question: Shouldn't the REIT's shareholders' interest be the true determinant of which law firm is retained to protect the shareholders?
3. Lower level of accountability - It is axiomatic that whenever a principal uses a client as its service provider (regardless of the service) there is always a lesser result due to the lower level of accountability from a client. An
unrelated service provider can only rely on its proficiency to protect/maintain its position and anyone considering this objectively is, therefore, forced to conclude that using a client as a tenant representative will, perforce, yield
suboptimal results.
4. Disproportionate benefit among lawyers - A corrosive effect has begun to impact the lawyers who are not the beneficiaries of the aforementioned client relationship that has historically been rewarded with the lucrative tenant rep
assignment. As these other "non-benefiting" lawyers have become more sophisticated and aware of the lesser results referred to above and the fact that they are, therefore, the ones who are subsidizing the law firm's real estate costs to
support an unrelated client relationship, they have begun to factor this anomaly into their calculus when considering their futures. Indeed, law firms are becoming more unwilling to risk losing these ever more disgruntled "non-benefiting"
lawyers simply to subsidize some of their real estate partners.
5. Summary - For any or all of the above, law firms are moving further and further away from the historic, and sub optimal model of using clients as their tenant representatives. Hopefully this new trend will result in overall superior
real estate transactions for law firms and the avoidance of any real or perceived negative implications associated with law firms engaging their clients as their tenant representatives.
Eric C. Berson, Esq.
Mr. Berson is a former editor of the Stanford Law Review.
Good Relationship with Landlord Doesn't Always Get Tenants the Best Lease Deal
Smart companies value good relationships with clients, vendors, and suppliers. However, when tenants hesitate involving a tenant representative for fear of disturbing their relationship with a landlord, they often jeopardize their ability
to secure an even-handed lease with "fair market" pricing.
Typically, the more information tenants have, the better decisions they can make regarding their real estate needs. While business relationships are always important, companies should not let their relationships lead poor business
decisions. Tenants need to make decisions based on facts not emotions, and the only way for a tenant to get objective facts related to a real estate transaction is to have a well-informed advisor representing them exclusively.
As a tenant representative, we start from the position that lease negotiations are driven by the functional needs and financial objectives of the tenant, not the landlord. While we recognize that a landlord deserves a market rent and needs
reasonable protections in its lease, we help our clients evaluate options based on their corporate business plan, asking questions such as:
* Are you using space in the most efficient way possible?
* Would another location better serve your clients or be better for your employees?
* Have you put limits on variable costs in the lease?
* Considering business cycles, do you have enough long-term flexibility in the lease?
* And finally, given the prevailing rates and concessions in your market, is your landlord offering a competitive deal?
Having a tenant representative can give you maximum leverage with your landlord to sustain your company's success. And in the end, having a knowledgeable go-between during lease negotiations may actually protect a long-term relationship
with your landlord.
Law Firm Leases--2005
Source: CoStar Property
Other Office Leases--2005
Source: CoStar Property
Houston Market--Midyear 2005
Source: CoStar Property
Transforming the Cube Farm into the Office of the Future
If collaboration is the wave of the future in offices, there needs to be a new wireless environment
created where people are not tethered to paper. And Cisco Systems Inc., the worldwide leader in networking for the Internet, is demonstrating the office of the future at their headquarters in San Jose, Calif.
Cisco dedicated 10,000 square feet in one building to the new concept. As employees arrive, they enter a wireless environment. Everything is mobile. All tables are on wheels. All desks feature hydraulic height adjustments. All partitions
move. Even the phones are wireless. All paper mail is scanned and delivered by e-mail.
Depending on the task, employees choose suitable workspace, ranging from a plain table, to a desk with a flat-panel monitor, a private telephone room, a conference room with interactive whiteboards and video conferencing, the library, or
The Commons, a social gathering area for eating and greeting. No one has a fixed office or desk.
As part of the study, volunteers carry a radio identification tag that tracks their movements around the office to see where they spend their time.
Using traditional office layout, Cisco could fit 68 people into 10,000 square feet. Currently there are 120 people assigned to Building 14, and soon 200 will work there. But beyond cost savings, Cisco is interested in seeing how this kind
of flexible officing promotes collaboration and effectiveness. It may be the office of the future, and that will have a major impact on how companies utilize space.
"A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty."
Sir Winston Churchill
