I recently found out via Costar that a new assembly bill (Assembly Bill 1059) has been proposed that would ban dual agency for commercial properties in California. This can be really bad for owners of small commercial properties.
Dual agency occurs when a real estate broker represents both the buyer and seller, or both the landlord and tenant, in a commercial transaction. Even if two different agents from the same brokerage represent the buyer and seller, or landlord and tenant, separately, this can still be considered dual agency. As a property manager, I work for many individuals, families, or small groups of investors who own small to medium size commercial properties. Part of my responsibility to the owner is to lease any vacant units. Many of the commercial units in these properties are small. Because of that the lease amount is lower and the subsequent commission paid to a real estate broker representing the tenant would be minimal.
For example, suppose there is a 600 sf retail commercial space listed for lease at $1,500 per month. Suppose this space gets leased at that rate for 3 years. The total amount of rent paid over the term of the lease will be $54,000. If the commission charged to the owner is the standard 5%, the commission paid would be $2,700. The listing broker (the one representing the owner) and the broker representing the tenant would then split this commission and receive $1,350 each.
For the listing agent, this amount might be sufficient for the effort involved. But is it sufficient for the effort required by the tenant’s broker? Absolutely not. Because every tenant’s needs are different and because commercial properties vary so greatly in size, condition, location, quality, and other features, it is actually quite a challenge to align a tenant with the right commercial space. The broker representing the tenant has to research, preview and show the tenant a multitude of properties before finding the right one. This process could take 3, 6, 9 months, or even longer. And then the broker has to put in more time to negotiate the lease and assist in preparation of all the paperwork.
Because the effort is large and the compensation is small, most commercial brokers are not willing to represent a small commercial tenant. Hence, most of the calls coming into a broker that is listing a small commercial space will likely come directly from the prospective tenant. And most small commercial spaces are ultimately leased by the listing broker directly to the tenant.
If AB 1059 passes and the listing Broker of a small commercial space is not allowed to also act as the broker for a prospective tenant, given what I have described above, how will the property ever become leased? If no brokers are willing to represent small commercial tenants because the small compensation does not warrant it, and the listing broker cannot represent the tenant, then what happens? Imagine if the listing broker of a small commercial space receives a call from a prospective tenant wanting to see the property and must tell that prospect “I am sorry, but it is illegal for me to represent you.” It would make it very difficult for this space to get rented, and the ultimate loser becomes the property owner.
There may be situations related to commercial property sales, or leases of larger commercial spaces, where features of this legislation might serve the public well. But when it comes to small commercial properties, I think this bill will hurt property owners. Unless it is modified to more appropriately consider the needs and concerns of small commercial property owners, I will be asking my state representative to vote NO on this bill.
To read more about this proposed bill, check it out on Costar Info on AB 1059 from Costar