Negotiation Strategies Under a New President
- Apr 07, 2017
With promises of changing the status quo, our country has inaugurated a new president and the administration has hit the ground running. Does that mean there will be any changes in negotiation strategy for real estate transactions?
For some time, I have been seeing some changes in many transactions. There is less patience for compromise and a greater sense of “take it or leave it.” It comes up in many cases, from negotiations of letters of intent, to push back on revisions, to standard lease forms, and even in the attitude of local governmental agencies on code enforcement. The lawyers are often left with the task of holding a deal together or preventing a deal from going off the cliff when parties seem to be staking out positions.
In my view, real estate executives need to focus on three principal goals: put down deal terms in a letter of intent and term sheet; develop a working relationship with an understanding of the needs of your counter party; and set realistic expectations—do not ram through deals with false deadlines.
Getting things down in a term sheet is very important. Try not to use the escape of “to be determined in the final documentation.” For example, if an exclusivity or non-compete provision is critical to a deal, try and put the parameters of that in the term sheet. If rent bump ups and abatement and improvement allowances are important, put that in the term sheet. Exit strategies and devilry dates are key provisions. Most importantly, if there is a prior form of agreement that can be used—and that the parties previously negotiated—review it and see if it can serve as the basis for the new transaction. The battle of the forms is a real issue, and the drafter with the form will have significant leverage.
If the new president is anything, he is decisive, and he doesn’t sweat the small details. That is a business trait—and a good trait. Move the train forward as the team leader on a deal. Recognize and listen to concerns, address them with your counter party and give direction. Finally, keep the lines of communication open with your counter party and keep your executive team members apprised of concerns and potential issues as they arise. If brokers are involved, they should be used to your advantage for both market and counter party intelligence.
Cost is always a concern. Due diligence and legal can add up quickly. There is a direct relationship between speed of transaction and increased cost. Experienced deal executives will set a budget and monitor progress against the budget.
If anything has come out of the recent election, it is the uncertainty of value, and the need for greater time for contingencies before a deal goes “hard.” With executive orders flying out the Oval Office and the perceived goal to disrupt the status quo, the impact on absorption rates for core financial district buildings and tertiary suburban markets is a factor to consider. Executives should view trends in the sublease market as an indicator of market value generally. For example, given the policy of “America First,” are industrial sites a more valuable investment class? What about cannabis distribution and manufacturing? Will these policies be enacted and spur real estate growth in these areas? Some creativity in deal structure will be needed to give lenders and investors time to properly underwrite new transactions.
This is a time of uncertainty for investors in commercial real estate, and while current values are at the higher end of the spectrum, banking on those returns for future growth in core markets appears to present risk; searching for opportunities that are consistent with the current political environment may offer greater upside.