"Kick backs" on acquisitions?

I realize this probably happens more than I think, while at the same time something people in the industry don't talk about out in the open.

A contact of mine in the business mentioned to me a few years back that he had completed an acquisition for his firm at the time, whereby his firm had supplied the 90% LP equity piece to a developer on a ground up development project. He told me that due to an existing relationship with the sponsor, he was given a piece of the acquisition fee from the development post closing, as well as a piece of the developers promote, in exchange for getting his firm to commit to the deal. However it was done, it certainly sounds to me like a definition of a "kick back".

He told me that he knows of similar situations occurring within the CRE/Acquisitions side of the business. Similarly, he claims that he has worked deals with brokers who bring him off market deals, similarly, the broker giving him a piece of the buyer-paid fee on the deal in exchange for him getting his firm to commit.

Just curious if others on the board have heard about this happening as well, obviously not looking for anyone to spill the beans or name names, but just curious in general if this type of stuff is par for the course in the business.

Comments (16)

Jan 27, 2016

Does it happen? Sure. As a matter of course? Not that I've seen. It's shady as fuck, actually. And I know for a fact that(in my state, at least) a broker giving out a piece of his fee like that is illegal.

Jan 27, 2016

I'm pretty sure it's illegal in every state. I've heard of shit like this going on with house flipper types but never with institutional grade players.

Jan 28, 2016

I have heard secondhand that for some building sales, i'm in nyc, brokers give envelopes with money. It is usually smaller shops or done between good friends.

Jan 28, 2016

Depends on how it was structured, may or may not be illegal. While it is definitely shady, some shops have internal people whose sole job it is is to find off market things in a plethora of ways.

However when I have heard of things like this going down it usually has to do with the current owner wanting to keep the sale of the property out of the public eye for as long as possible. Think companies that are struggling more than the public realizes and the executives are on the cusp of an incentive based bonus that the sale of company property would kill by tanking their stock price.

It happens more often than people think, doesn't mean it isn't shady though.

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Jan 28, 2016

Never liked the term Kick Back. It implies something shady or underhanded. There is nothing illegal in CA about a referral fee. But the definition of a referral fee is vague. The DRE, now BRE will have a problem if a referral fee is something equal to a commission earned by a non licensed agent. My max referral fees I ever paid was 10% of my gross commission. Some brokers pay out 33%, which to me is a commission.

Then the firm has their own P+P's as to how an Acq Mgr can or cannot receive referral fees. My friends at large banks that refer me clients have never asked for a referral fee. And I've never given them one.

Rexford Industrial on their website flat out says brokers will get compensation beyond their commission if deals are brought to Rexford. So, is it illegal or unethical if roles are reversed?

This is all case by case in my opinion.

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Jan 28, 2016

The situation mentioned in the OP is super shady, and presents a conflict of interest that would be a major problem in certain situations. For hypothetical discussion, let's say that your contact works for a PE fund that places LP equity with developers. I can't imagine any circumstance where the investors in such a fund would be OK with the fund's acquisition people sharing developers' acquisition fees. It would grossly skew the bias of the acquisition team toward closing deals with those developers, rather than closing the right deals. Plus it's probably illegal if you're investing outside investor capital.

(Let's not touch the not-shady-but-related concept of doing deals for AUM/deals' sake in this thread, because that's a way bigger and more nuanced discussion).

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Jan 28, 2016

Thanks for the feedback. I didn't want to use the term "kick back", but honestly couldn't think of another way of phrasing it. I know it has a negative connotation.

Slothrop, I 100% agree with your comment. And I would wager that if the individual working for the PE LP fund was a key decision maker (i.e. someone on the investment committee, C-level executive, etc), then it would be a MAJOR conflict of interest. That being said, most VP or Director level acquisitions folks don't have that type of authority. Sure, they are relied upon to source deals and present opportunities that fit the firm's criteria, but they don't have discretion to approve a deal unilaterally. At best, they would have "add incentive" to campaign for a deal that they would potentially be able to receive a "kick back" on, but their superiors would still need to approve it.

Not implying that their were kick backs involved, but I have personally seen situations where acquisition directors show a preference to pursue deals with specific brokers, and vice versa.

With respect to the BRE and their definition of referral fees, if the principal/acquisition VP holds a broker license, wouldn't that make the referral issue a moot point?

Jan 28, 2016

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With respect to the BRE and their definition of referral fees, if the principal/acquisition VP holds a broker license, wouldn't that make the referral issue a moot point?

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On the surface I think it would be a moot point, assuming all else was above board. I think it would be necessary to look at each deal individually with regard to referral fees and what is or is not ethical.

Jan 29, 2016
egold70:

That being said, most VP or Director level acquisitions folks don't have that type of authority. Sure, they are relied upon to source deals and present opportunities that fit the firm's criteria, but they don't have discretion to approve a deal unilaterally. At best, they would have "add incentive" to campaign for a deal that they would potentially be able to receive a "kick back" on, but their superiors would still need to approve it.

That's a fair point, but generally speaking, my opinion is that if you aren't comfortable explaining something to your investors, you probably shouldn't be doing it, and that would extend to anything your subordinates do as well.

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Best Response
Jan 29, 2016

I always use my Grandmother as an example. If I can't explain something in such a way that she understands it, then I don't understand it. And if I can't explain it to her without her smacking me for doing something stupid, then I probably shouldn't do it. The first portion applied in school and when preparing for big presentations, the second half is any time I think about doing something even remotely shady. If it would make Grandma mad, then I should probably not.....

This is unless of course you don't like your grandma, in which case what the hell is wrong with you!

Jan 29, 2016

This is kinda like asking if a junior guy at a PE fund could get a kickback for acquiring a middle-market manufacturing business. Seems like he'd be fired if the principals found out.

Or if a trader at a bulge-bracket bank decided to buy a big block of shitty derivatives because the seller met him in an alley with some cash.

Seems too short-sighted, too much to lose. You'd stand to make a lot more over time (more than your bullshit little kickbacks) if you played your cards right over the years and kept your reputation clean.

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Jan 29, 2016

Seems legit lol

Jan 30, 2016

If an executive of Company C knows that executive at Company A wants to acquire another company and exec at Company C finds Company B for acquisition, shouldn't the guy at Company C get something for that? Finder's fee?

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Feb 24, 2016

Rekindling this thread, a little bit of a different situation though. Is it customary for a firm to pay a "advisory fee" on institutional acquisition deals($20M-$100M)? For instance, a firm wants to purchase Property A and agrees to pay say 1.5% to the "bird-dog" or someone finding the deal. On the contrary the seller typically pays a commission to brokers, which creates a dual agency in a sense.

I want to know if this is typical or sketchy by any chance? Also if this is legit would the "bird-dog" not being licensed in the state of the acquisition put the "bird-dog" at a liability legally of receiving the agreed fee?

Feb 25, 2016

I have heard of this happening. Typically these bird-doggers are independent brokers/former acq people who are on their own and simply spend their days digging for deals and then calling their rolodex of buyers until they find someone willing to cover their fee and pay the asking price for the property.

Generally, I have found that on the institutional quality deals, the owners are themselves institutions, and more often than not, will not agree to sell a property off-market. Either they have a strict fiduciary obligation to hire a broker and mass market the deal for the best price possible, or they choose to go this route even if not expressly obligated to. Given how hot the market has been, they would be nuts not to hire CBRE or JLL or Eastdil Secured to create a bidding war for their asset, no?

However, in the case of a true off market deal, if I were to find an owner of a nice $75MM office property in a primary market and that owner was willing to transact at a specific price, then it would be unlikely that said owner would pay my fee and I would need the buyer to agree to cover. My experience has been that sellers in this scenario only pay broker fees if they are actively listing the property for sale.

So there would not necessarily be a dual agency. Seller is "repping" themselves, and the bird dogger is "repping" the buyer, even if they aren't acting in a broker capacity in the true sense of the word.

As far as being licensed, it all depends. Some buyers might use this against the bird dogger. I have heard stories about buyers signing fee agreements, but later on using the non-licensed rationale as leverage to squeeze the fee down. You better trust your buyer really well, otherwise you will be spending money in legal fees chasing down the buyer for the fee.

I have friends who "broker" deals in various states, they draft their agreements as "consulting fees" rather than "brokerage fees". Again, it's a fine line. In some cases, if the buyer is willing to pay the fee off the settlement statement, you can fly under the radar when it comes to your local department of RE finding out.

Feb 25, 2016
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