This Conflicted Commercial Broker Cost San Diego $200 Million

In this article, you'll learn:

• San Diego's $200 million loss due to a broker's conflict of interest in dual agency.
• Details of Jason Hughes' conflict-of-interest charge and its implications.
• Risks and costs associated with "as-is" lease agreements.
• The importance of True Tenant Representatives™ in protecting tenant interests.

As True Tenant Reps™, it is our fiduciary duty to work for the best interests for the commercial tenant. Part of this responsibility involves bringing awareness to the fact that conflicted brokers can’t guarantee the best deal because they work for firms that work overwhelmingly with landlords.

Tenants usually get the *ahem*, worse, end of the stick in this scenario as they lose out on seeing the best properties, terms, and prices for their CRE portfolio.

But what happens when the tenant is a government body and hundreds of millions of taxpayer dollars are at stake? Some swift legal action that represents a firm precedent against the ethics of conflicted brokers.

It’s also one of many cases brought against the practice of dual agencies in recent years that may represent a shift going forward as tenants analyze the cost of working with represents who don’t truly have their best interest. Read on to learn more. 

San Diego's Conflicted CRE Broker 

Jason Hughes, founder of well-known San Diego brokerage firm Hughes and Marino, pleaded guilty to a conflict-of-interest charge after accepting $9.4 million from the seller of two downtown buildings while advising the city on the purchase of those properties.

Hughes began his relationship with the city in 2013 under then-mayor, Bob Filner. He was designated as a special unpaid real estate adviser to the city of San Diego and worked closely with the Filner’s office. Hughes, utilized his role as a volunteer advisor to represent the city in the purchase of a 53-year-old tower at 101 Ash St. in a 2016, $128 million lease-to-own deal.

Here’s where things get, conflicted, to say the least.

In 2014, Hughes also started “working closely” with major landlord, Cisterra.

Hughes used his platform as a tenant advisor to the city to privately drive deals to Cisterra to their mutual benefit. Cut and dry conflict of interest.

Now, most CRE conflicts of interest aren’t necessarily this egregious. Hughes’ position of power and simultaneous involvement with both parties represents not only questionable ethics in private business dealings, but among taxpayer dollars. The city of San Diego essentially lost hundreds of millions of dollars while Hughes earned almost $10 million.

So, that’s how Hughes found himself on the end of criminal charges when most conflicted broker violations would be slapped with a fine, if anything.

The "As-Is" Leases

Not only did Hughes possibly pass up properties better suited for the city’s interests by partnering with Cisterra, but he also ensured that the landlord would milk the deal for every last drop by leading the city to assume the leases “as-is.” So there was no due diligence on behalf of the tenant or their representation.

Under the 2016, $128M lease-to-own deal negotiated by Hughes the city never conducted an assessment of the conditions of the properties. Yikes! Wonder what could go wrong.

In 2018, when the city began renovations of the tower at 101 Ash Street, they found it was completely unoccupiable due to extreme asbestos levels. Over $50 million was then invested to upgrading the property which has since remained uninhabitable for tenants.

Image Source, NBC 7 San Diego

“The city invested more than $200 million in the two properties, which were previously assessed at about $110 million combined. Much of that spending has been financed over years, so the eventual price tag will be much higher.”

Litigation followed, which uncovered Hughes’ private deals where he confessed to walking away with $9.4 million from the faulty leases. The district attorney found Hughes guilty of a misdemeanor in a plea deal. This is a rare case where a conflicted broker has been held legally responsible. He was forced to return the money earned from the deals and well as pay a small fine to the state.

The Critical Importance of Due Diligence

For corporate tenants, this case highlights the importance of transparency and the risks of working with conflicted brokers. Hughes’ bad deals should be a very real reminder of the importance of due diligence, unconflicted service, and avoiding signing for an “as-is” lease by any means necessary. 

It hits on the point that tenants (even if they are government bodies) are never safe if they work with a conflicted broker. Due diligence is critical, and in this case, could have saved the city of San Francisco upwards of $50 million in asbestos costs, not to mention the hundreds of millions spent on leases and the price tag of waging the legal battle.

In the Ash street deal, as well as any deal where the broker works for the interests of both tenant and landlord, the broker stands to gain because they work both sides of the deal, pocketing higher paydays.

The landlord also benefits because not only are tenants directed to their properties, but they are more likely to be off the hook for additional features and costs they would be had the tenant generated competition and sourced the market.

Since Hughes had allegiance to Cisterra, he directed the city to their properties without pitting them against multiple offers that could have driven down the cost of occupancy or have been a better fit for the city’s needs. 

Not only this, but a true tenant representative would have also implemented safeguards in the leasing process that could have prevented the shock discovery of asbestos. Any tenant representative knows to never accept a lease from a landlord “as-is.” Leases are written by the landlords’ teams, and are therefore outlined with an initial bias to the landlord. It is the tenant rep’s responsibility to engage in a back-and-forth negotiation until the final terms satisfy the interests of the tenant. In this case there was no analysis conducted.

Cut and dry: Tenants are usually at the disadvantage of conflicted CRE brokers. While not every conflicted broker case is a matter of public ethics and taxpayer dollars at stake, this one should serve as a powerful reminder.

It is also one of several cases that have been brought against dual agencies in the last year that represent an emerging legal fight against the practice. Major lawsuits have been levied against some of the country’s biggest brokerages firms including JLL and CBRE. These cases represent a stand for tenants’ rights that has curiously already been solidified in other countries like England where conflicted brokers are illegal due to their “inherently suspect” nature. Read more about How The Legal Fight Against Conflicted Brokers Affects Commercial Tenants.

At the end of the day, working with a tenant representative who exclusively represents commercial tenants is the only way to guarantee that their rights are fully protected. Doing so will also avoid budgetary and legal nightmares like the one above. Because no tenant is safe from the consequences of conflicted brokers.

True Tenant Representatives

These representatives work solely for the tenant, with no obligation to the landlord or any other party. This means they have no conflicts of interest, and their focus is entirely on securing the best possible deal for their client. A tenant representative will provide unbiased advice and expertise on market conditions, lease terms, and negotiations, ensuring that tenants have all the information they need to make informed decisions. By working with a tenant representative, tenants can rest assured that they are getting the best possible deal and that their interests are being fully represented.

At iOptimize Realty™, we are a team of True Tenant Reps™ who specialize in providing loyalty solely to the corporate tenant. We ensure that our clients receive unbiased and transparent advice throughout the leasing process. Because of this, we can negotiate the best lease terms for our clients, including rent rates, concessions, lease renewal options, and more. We also assist with site selection, lease analysis, and other tenant-related services. By working exclusively with commercial tenants, we help ensure that our clients' rights are protected and their interests are fully represented in every transaction. Read more about What Commercial Tenants Should Know About Conflicted Brokers. 

Reach out today to a True Tenant Rep.™