Ethics in U.S. Business and the Commercial Real Estate Market

Stan Mullin, FRICS, argues for a higher standard than compliance with the law.


© Tom McNemar

What comes to mind when you hear mention of Ivan Boesky, Mike Milken, Long Term Capital Management, Allen Sanford and Goldman Sachs?

At one end of the spectrum is a view of amoral greed resulting in economic decimation for millions of people around the globe. And there are many who think these people and firms are a group of smart folks who, at a bare minimum, may have complied with the letter of the law but certainly did not conform to the values of right and wrong commonly understood by most.

The subject of morality in business typically evokes either boredom or relativistic debate.

But now, what we in business are willing to do to make a profit has had an integral and public impact on individual wealth, corporate earnings and public sentiment. Ivan Boesky and Mike Milken served time in prison — as Allen Sanford will — and LTCM failed in 1998 and was liquidated in 2000, nearly taking the world banking system with it.

With roughly eight percent of the U.S. population expected to lose their homes permanently during the current deleveraging of the U.S. debt markets, many Americans blame a lack of disclosure and transparency, un-regulated markets and a lack of concern for the customer.

To put it simply, many Americans view business leaders as moral eunuchs.

Warren Buffett and Charlie Munger, two of the most successful investors of the last few decades, have never been reluctant to voice their disdain for the greed they see as prevalent in the financial markets, where compensation is common even if the investment is not profitable..

Other than for those taking positions for their own account, on Wall Street the typical path to wealth is to sell products of varied types — and the earnings you and your firm earn, for the most-part, are paid up front, not at the reversion of the investment. The incentive is to make the trade or sale, rather than seek growth in the value of the investment.

One of the values delineated in the RICS Rules of Conduct is integrity: “Members shall at all times act with integrity and avoid conflicts of interest and any actions or situations that are inconsistent with their professional obligations.”

The U.S. National Association of Realtors “Code of Ethics and Standards of Practice” is a 7,470 word document that outlines the critical importance of: disclosure of material facts and any conflicts of- interest, protecting and advancing the client’s interest, honesty, cooperation with others in the real estate industry, compliance with the law, accurate representation of the facts, among other topics.

Do we as members of the commercial real estate industry have a moral obligation to operate our businesses in a way that meets or exceeds the ethical standards set out by our industry trade associations?

We do.

Absent treating others in business as we would like to be treated ourselves, the result would be a fractured, contentious business environment that would detract from the time we should be spending working with our clients to protect their interests.

What are some of the ethical dilemmas we may find ourselves in? Here are some scenarios and questions to consider:

1. Have you been offered money or gifts in exchange for business? If so, did you accept them? Did you ask for your client’s approval before making your decision? Did you disclose the offer and your agreement to provide that business to that third party service provider? Did you document the disclosure to and consent from your client in writing? Even with the disclosure and consent, was the choice to use the third party service provider in the best interests of that project and all concerned? Would any party involved in that project have merit to make a claim against you or your firm?
2. Have you ever done anything that would impede the judgment of your client or anyone involved in your assignment? Going out for drinks in a business setting is a common practice but would that impact the risk, economic result or reputation of you, your client or your firm?
3. Is there any nepotism or favoritism involved in your decision making? I was talking to a CMBS special servicer recently and he had run into several occasions where he had nominated a receiver to the court with jurisdiction over a commercial property, only to find that the presiding judge substituted someone of the judge’s personal preference — but not any more qualified to do the work. A judge no less!
4. Are you taking on assignments for which you are not an expert but purport to be? I was a defendant in a dual agency trial about fifteen years ago. The lawyer who represented my firm and each of the named agents was a transaction lawyer with little trial experience. As you may expect, we lost the case. I know of many cases where financial advisors have given tax or legal advice to their clients instead of directing them to accountants and lawyers. The advisors likely fear that if they introduce their clients to experts in other fields then they risk losing those clients.
5. Do you disclose that when you are providing professional advice that you may be receiving economic gain, other than the compensation your client knows about, if your client takes your advice? I know of cases where a broker recommended that a client should acquire property in which the broker was a partner, and did not make that disclosure. Nor did he obtain the client’s written consent. In many states, if a wronged party in a case like this one sues, he can win a return of actual damages (the price paid for the property), which is typically covered in an errors and omissions policy, and punitive damages, which are typically many times higher than the actual damage award and which are typically not covered by E&O insurance because the act was fraudulent.
6. Does your client know what he is buying, whether real property, equities, bonds or other assets? I know of a case with a Tenant-In-Common purchase, where though the title company insured the $800,000 purchase price, they only reported $700,000 to the county as the actual property value. The sales agent involved said that, as with all property sales, the seller paid commissions. What the sales agent did not disclose was that $100,000 of the purchase price was fees, made up of transaction commission and fees paid to the TIC sponsor and to the broker-dealers who found the buyer and raised the capital for the sponsor. The real estate agent also did not disclose that the TIC sponsor successfully appealed to the title company to have the basis price of the property listed as the price, net of any fees, which reduced the future property tax payments by the investor. I wonder about the ethics of a title insurance company that would do this.

Integrity in our work can and usually does have a direct positive economic impact on our clients — and on us. Reputation is priceless and should be the focus for all of the work that we perform. •