Defining a Real Estate Consulting Services Agreement
A real estate consulting services agreement is a contract between a consultant or consulting firm and an individual or business that pays to receive professional advice or services in relation to its real estate activities. This is related to, but distinct from, a real estate professional services agreement, which involves the provision of professional services by a realtor, appraiser, or other real estate professional.
The services a real estate consultant provides will vary depending on both the company it works for, and the nature of its relationship with that company. In this regard, the same real estate consultant may be subject to a retainer from a construction company like Turner Construction Company , or it may only be hired for a one-off consultation by a commercial real estate company like Equity Office.
A real estate consulting services agreement may cover a broad range of tasks, such as:
By hiring a talented real estate consultant, companies can benefit from better decision-making that results in increased value through more strategic investments and greater efficiencies. They can also avoid the common mistake of failing to consider all the implications associated with the property structure they choose.
It’s important to note that because real estate consultants offer guidance but not advice, a real estate consulting services agreement should contain a clear disclaimer. By doing so, the consultant ensures that it is not held liable for any decisions that the company makes based on those recommendations.
Essential Elements of Real Estate Consulting Agreements
With the understanding that each real estate consulting services agreement will require customizations for the circumstances involving the particular real estate project, as well as the needs and expectations of the contracting parties, there are certain components which are typically included.
These components include a description of the work to be done by the consultant, a specification of the fees to be charged, while specifying the payment terms and how those fees will be computed, the term, or duration of the contract (and how it may be terminated), and confidentiality provisions related to the disclosure of proprietary information.
Description of the Work to be Done. A real estate consulting services agreement typically will contain a detailed description of the work of the consultant, including its analysis, evaluation, recommendations and report preparation, as well as the scope of the consultant’s task. The consultant’s work is usually based on the premises that it will be without detail, such as plans, drawings, or specifications, to be provided by others, and that the consultant will be an independent contractor. Consulting Fee. The consulting fee, including the rate of compensation and how it is to be paid, as well as the frequency of payment (which can vary by the nature of the engagement) is another essential component. Sometimes the consulting agreement will provide for an upfront retainer to be held in escrow (or elsewhere), which may be based on estimated hours to be devoted to the consulting tasks, following which the consultant will be compensated based on an hourly, per diem or on a flat fee basis. Term. As mentioned above, the term ("how long" the consultant will be working for the client) must be defined, and, importantly, what is the nature and extent of the consultant’s obligations at the end of the term, as well as how the consulting relationship may be ended (for example, with or without cause) and under what circumstances, and the consequences (if any) for early termination. Any relevant indemnification or hold harmless provisions are generally included here. Confidentiality. A major responsibility of the consultant will be to keep confidential all of the client’s proprietary and confidential information (including the consultant’s own work product). There are many ways to define "confidential information", and the contracting parties must come to an agreement on this point. For example, the scope of confidentiality may encompass information related to costs, specific clients or partners, as well as general economic data and analysis, operational information, social, tax and modeling data, and financial projections.
The Functions of a Real Estate Consultant
A real estate consultant does not fit nicely into any one category. A consultant is a valuable team member that brings a number of critical resources to a property transaction or project. In many cases the consultant is the one that recognizes the possibilities which others overlook, and the value of these possibilities often exceeds the fee that the consultant charges. The work performed by a consultant is often so valuable that there is little question that the fee charged is fair. And when the consultant fee is reasonable, it will not be an impediment to or complicate the property transaction or project. Therefore, the role of the consultant and the manner in which their work is paid for should not be overlooked.
When You Should Use a Consulting Agreement
Employing a consulting services agreement provides a number of benefits to both the real estate consultant and the client. Clear and direct language incorporated in the consulting agreement describes the services to be performed, thereby eliminating potential misunderstandings and creating a strong working relationship. A consulting services agreement requires the client to provide information and other project materials to the consultant. This requirement obligates the client to be more organized and to plan out its needs. The consultant must consider every scenario raised in the consulting services agreement and will have a better understanding of the issues that have been anticipated and those that have not. Finally, the consulting services agreement creates a formal relationship between the consultant and the client under which the consultant must be cognizant of the services provided. Being mindful of the services reduces the potential for liability, and employing the consulting services agreement may give the client additional rights to seek damages for negligent acts committed by the consultant.
Typical Issues and Solutions
Engagement Under Amended Rules
For new engagements, or those that are under the standard AICPA contract terms, this is no big deal you just check a box. But if the prior agreement is either an old form of the AICPA contract or that of another organization, you may not be covered. In general, if you use an old "check the box" method to accept the existing terms of a contract with little or no discussion but that doesn’t hold up to scrutiny by your state licensing board or the courts.
The best approach is to have your existing clients sign the amended contract or modified versions that are designed to make the same changes based on the new standard.
Incomplete Disclosures
The condition in question is that whether, when required disclosure statements have been provided, they have been adequately written without complicated legalese or cooking terminology. The standards require that the disclosures in your engagement letter include information about the services you are going to be performing as well as their specific limitations.
Your best approach is to incorporate a mastery of your business operations with an analysis of at least a couple of your competitors to ensure that the verbiage to describe the scope of your services are clearly and concisely stated.
Internal Controls
Let me say from the outset that even the most expert practitioner or business model can’t bend the rules so don’t even try it! That said, there are several solutions to this issue. The most helpful is to have clear and concise descriptions of the responsibilities of each party in the engagement letter. Their input is invaluable but it shouldn’t be confused with your responsibility to provide quality service. The second set of solutions are either providing excessive communication or too little communication , which can be effectively addressed by the creation and implementation of a well calibrated communication plan.
A third solution is to have a transparent process for clarifying conflicting requests either in person or in writing after the work is complete.
Poor Record retention
I know we’re going on an on about the need to maintain your work papers, but we can’t stress enough how important it is to do so. Need proof? We cringe every time we witness litigation brought against a colleague who failed to do so. I crumble, because I know how much effort it takes to restore an injured reputation.
The easiest way to address this issue is to set a system in place during the engagement to ensure that you have maintained all of the relevant documentation that could be used to defend your firm. Set that system up as part of your standard operating procedures so it becomes ritual over time.
Non-conformance to the professional standards
There are two approaches that are vital to ensuring your approaches are in full conformity with standards. The first is to have the independence standards clearly outlined in your engagement letter as part of your contract terms. This is vital to helping your clients understand that certain conflict of interest situations will require them to have a full understanding of the separation necessary between certain activities of the family business and personal family affairs.
The second is to set up a rigorous review process where the consultant, manager and peer review is fully implemented. Be sure to make this a conscious effort for each engagement so that it becomes habitual for you and all those who work with you. Don’t overlook the need to fully document the efforts of others or practice and be willing to spend extra time to internally corroborate the details surrounding your findings.
Writing Your Own Real Estate Consulting Agreement
If you or your organization has the experience and sophistication to draft your own real estate consulting services agreement, you’ll want to include at least the following information:
- Names of the Parties to the Agreement – Be sure to use the correct legal names of the parties. If you are contracting with an entity, make sure you use the correct legal name of the entity.
- Recitals – A brief description of the purpose for the agreement and a reference to the management agreement, including the property address.
- Scope of Services- A short paragraph that summarizes the scope of services.
- Compensation for Services- This is one of the most important provisions in an agreement. It should include all compensation to be paid, including those services that are subject to a separate fee, such as those compensable under the management agreement. To the extent that any compensation will be contingent on the sale or refinancing of the existing mortgage (or other secured debt), be sure that this is set out clearly. If there are any management fees that will be payable to the consultant, be sure to include them, along with the weekly or monthly figure for any due retainer. When and how compensation is to be paid and when it is due should also be clearly set out.
- Term- The period of time in which the agreement will be in force and effect, if applicable, and the initial term stated as number of months. If the term is for fewer than 12 months, the agreement’s expiration date should appear in the introductory paragraph rather than in the termination section, since the latter paragraph might not be read until a later date. Pay close attention to the renewal or extension of the term of the agreement. Be sure to set out the exact procedure for extending the agreement, so neither party can forget exactly what was previously agreed to as far as a review by either party of the performance completed during the specified term. Be sure to state whether the agreement can be renewed or extended on the same terms and conditions, or subject to renegotiation, and the procedures for such renegotiation.
- Termination – Prompt termination of the agreement is essential. So be sure to include the exact procedure to follow if either party wants to terminate the agreement, along with what happens if they do terminate. Two of the most common approaches are:
- Indemnification – In some cases, this clause may require you to indemnify the consultant for damages or losses incurred because of your acts or negligence or the acts or negligence of others (including employees, contracted persons or agents) during your control of the property. In addition to protecting the consultant, this clause serves to protect and indemnify persons or entities who have business contracts with the consultant and/or third parties for any actions or omissions of the consultant or its employees, agents or subcontractors in regard to the contract.
- Miscellaneous Provisions – There are certain additional provisions that may be necessary, depending on your specific situation, including matters such as:
Due to the importance of the provision described above, you shouldn’t consider drafting your own agreement unless you are ultimately comfortable with FICRA and all its nuances. And in no case should you attempt to draft a "one-size-fits-all" form that you intend to use over and over to bind a family of companies or affiliates. In most cases, it is well worth the investment of engaging someone with experience in drafting agreements of this nature to draft the document on your behalf. Even if you have some experience and are familiar with FICRA and the other standard industry forms and agreements that are used in the provision of consulting services, you will always be better served by engaging someone with the knowledge and background to prepare the agreement to meet both the requirements you have and the purpose your are trying to achieve.
Legalities and Disclosure
The legal considerations associated with real estate consulting services agreements can be far-reaching, touching on both transactional and regulatory matters. Depending on the nature of the consulting services, various laws and regulations may be applicable at the federal, state and local levels. It is important for both consultants and clients to understand these implications when entering into an agreement.
At the federal level, real estate consulting services agreements may be subject to the Foreign Agents Registration Act (FARA), the FCPA, the Truth in Lending Act (TILA), Regulation Z, the Bank Secrecy Act (BSA) and the Real Estate Settlement Procedures Act (RESPA)’s "Section 8" referral fee prohibitions and your state’s applicable anti-kickback laws and rules. Certain of these laws, such as FARA, may require the consultant to register and file a variety of detailed and potentially sensitive disclosures with the State Department. FCPA compliance will be a particular concern for any client that is a foreign issuer under the Securities and Exchange Commission’s (SEC) jurisdiction, and will impact both parties to the agreement.
State and local laws impose a variety of requirements on the provision of professional consulting services. For example, real estate consulting services supplied to a residential property owner must only be offered or provided by a licensed real estate broker or salesperson in many states. Duties imposed on real estate professionals, in some states, extend to the referral of real estate professionals, which would make some referral fee arrangements legally questionable. Other states may regulate business and professional consulting activities.
For real estate consulting services arrangements that cross jurisdictional boundaries, compliance with multiple or potentially conflicting federal and state requirements can be a daunting task. For example , requirements related to the use of TILA-reserved fees are inconsistent with RESPA’s Section 8 restrictions, while standard PCB clauses commonly used in Finland conflict with ISO standard PCB language. Many states have their own laws or adopted international norms to govern common areas of dispute, such as indemnification or non-competition provisions.
The consultant, too, is subject to numerous reporting obligations in many jurisdictions. For example, under the FCPA, consultants should be aware of restrictions concerning indirect payments or gifts made to foreign officials or their family members. Under TILA and regulation Z, a payment from a client to a consultant may be considered a point and/or transaction fee, which could trigger certain disclosure and rate reduction obligations. Similarly, the BSA establishes recordkeeping and reporting requirements with respect to the payment of commissions and things of value to persons (including consultants) outside the business entity.
Real estate professionals, consultants and business development officers leads and referrals, and their exchange, compensation and any legal restrictions on use, must also be meticulously documented in order to comply with both RESPA’s Section 8 prohibitions and your state’s license law. While RESPA is applicable only to transactions involving federally related mortgage loans, most state real estate regulators have tied licensing requirements to this federal law and its implementing regulation, resulting in the applicability of RESPA’s Section 8 prohibitions in many states.
In addition to strictly complying with all legal requirements, the parties to a real estate consulting services agreement should endeavor to understand the scope of and any risks related to the principal basing his or her decision to rely on the advice and counsel of one of the parties, or both, on the other’s actions.