Why Does It Take So Long To Get A Deal Done?

Print
Print Friendly

Does it bother anyone that even after business people agree on the fundamental terms of a deal, it often takes a pretty long time to get an executed agreement in hand? Or, is this only a feeling that long-time practitioners experience? If, in general, old timers hold that view whereas relatively new entrants into the field of document negotiation do not, that might itself be part of the answer.

Let’s start with an understanding of why the prior paragraph ends the way it does. Basically its premise is that those practitioners who have entered the “field” in the last 5, 10 or 15 years only know the situation wherein deals take seemingly forever. Thus, they don’t think anything is wrong. We’re not just talking about attorneys or paralegals or in-house document specialists. This theory would cover the actual deal-making business people as well. If almost everyone on the team thinks a deal usually takes 10 to 14 weeks, then a deal that takes 18 weeks (over four months) doesn’t seem beyond three sigma (meaning, in statistics, that it falls within the range that 99.73% of deals would fall if the median deal takes 12 weeks). Now, if your own experience was that deals of the same nature “used to take” only four to six weeks, you might be working extra hard to get the deal done, to get past the big stones in the road, instead of accepting that there is nothing wrong with four months.

Maybe Ruminations skipped over an underlying premise – the premise that it matters how long it takes to finish a deal. “Time kills deals.” Even when time doesn’t really kill a deal (and we’ll grant that’s the more common case), “time is money.” For example, until a lease is executed and delivered, the tenant (in the case of a retailer) isn’t making sales from the premises and the landlord isn’t collecting rent.

So, what has happened over the years? There isn’t a single answer and the list is probably endless. So, we’ll point out a few things and Ruminations readers can add their own. If you’re inclined to chime in, then go to “Leave a Comment” at the top of this piece to add your own take on this question.

Here’s a start – people are choosing to avoid one another. Yes, consistent with our increasingly “unconnected” society in general, rather than pick up the “horn” and discuss an issue, we exchange email messages. I send you a message by email and four hours later, you respond by asking me what I meant. Then, I explain my earlier email message and the next morning, you tell me “look in the LOI.” So, only 30 minutes later, I say, “I’ve looked at the LOI, but I don’t see where this is covered.” When you get back from your meeting or lunch, you send me a copy of the LOI and it isn’t the same one I’ve been working on. So, the next morning I send you the one I have and you email your client to ask, “What’s going on.” Your client responds pretty quickly by email, asking you how you got the one you have in your file. You don’t understand why you’ve been asked that, so you research your email files and reply that you got it from Sally ten days earlier by email. And, on and on. By the way, you can note that you haven’t even touched the edge of the issue I wanted to raise four or five days earlier and we’re no closer to finishing a deal than we were when I started the email game. None of this is to say that there aren’t many “smart” uses of email to save time and avoid confusion, but that’s not what is going on in 2012. For a longer Ruminations piece on this, click HERE.

Let’s take a vote on who believes that the base documents are getting shorter and more concise as time goes by and as we constantly rework them to make the “tight”? After all, revising and revising your “form” deal after deal should be an editing process in and of itself. Oh yeh! In reality, no one believes our starting documents are getter shorter and smarter; au contraire, the very opposite is true. There have to be a lot of reasons for it, beginning with “it is easier to add to a document, than to edit it.” We’re not just talking adding extraneous provision after extraneous provision (a discussion of which can be found by clicking HERE). By way of example, most lead-ins of “notwithstanding any to the contrary contained anywhere else in this document” are just a way to avoid reading the document so the salient provision can be correctly and completely written in the first place. [Please don’t send us examples where using that phraseology is appropriate and concise, let’s talk about all of the times it isn’t, and that’s most of the time when you find this in the “form” or “base” document.] One thing that happens is that, in a particular deal, a deficiency in a particular provision is quickly fixed with a “notwithstanding” band aid and then that formulation works its way into the form itself. After a fashion, a “simple” form of agreement begins to look like the Internal Revenue Code. You know what we mean – the exception to the exception’s exception. Now, some “innocent” newcomer gets a proposed agreement on that form and says (or should we say emails) “I don’t understand Section 3.2(a),” and gets an email response, effectively asking, “What don’t you understand about Section 3.2(a).” Now, we’re all exhausted, so we take a day or two off from working on the deal, and pretty soon, it’s been four months. All of this is without mentioning how easy it is to cut new clauses from everyone else’s documents and paste them into our own documents – over and over, bigger and bigger.

Another factor is that there has been a real drop-off in graciousness in our society. All right, it might seem that we’re going a little astray from retail real estate law, but someone has to say it. Have you ever gotten too much change and said to the cashier: “excuse me, but I think this change is wrong” Try it. Half the time, you’ll immediately hear, “you only gave me a ten, not a twenty.” What’s the reaction when you say, “no, you gave me too much.” Why do we have our answers ready before we hear the question? Real estate deals are far more like adoptions than they are like divorces. They are happy things – win-wins. If each party tries to figure out how to satisfy the other party’s reasonable needs without being unreasonably burdened, then you get to solutions in one step, not through an iterative process that takes days or weeks.

How about stubborn notions like getting a landlord’s (or a tenant’s) proposed lease or other document in pdf format because the parson who furnished it thinks it will be advantaged by making it difficult for you to embed your comments, in the form of additional or different text, into the lease or other document? Then you ask for a word processing file and you’re told, “That’s not our policy.” So, you say that you’ll just convert the document and warn that you might not find all the little errors and the formatting will be screwed up, and the response is: “uh?” What a way start off – zero on the graciousness scale and, if the message didn’t get through, a couple of extra days converting the document and fixing the formatting as best you can.

Here’s one more for now. After all, these blogs use up electrons and there may be a limited worldwide supply. In that case, we certainly must be reaching our quota. You know you need to negotiate an SNDA, so why do you start the process when the lease is in final draft? Is that to add another three weeks to get the deal done? Why not start with the “third party stuff” right away – order title work, get site plans rolling, get those environmental reports in hand, etc. The party with third-party reports – back title, surveys, sign criteria, REAs, and so forth should begin to gather them immediately and get them over to the other side. And the “other side” should look at the material right away and get the various items in the right teammate’s hands for early review. Here’s a leasing example – how can you review a proposed lease if you don’t have a site plan showing where the leased premises are to be located? Here’s another, how do you like finding out that another tenant has a troublesome exclusive use that it “probably” will waive for you, a process that will take a little negotiation and some time. Do you want to discover the “problem” when you’re ten weeks into your own lease and thinking you’ll be done in a week or two?

Here’s a shout out for solutions that will be so obviously correct that every one of us can begin to pare the process and Get the Deal Done (efficiently and effectively). Tell us what you think by adding your comment at right at the top of this piece.

Print

Comments

  1. Ira, I have been reading your posts for the last few months and very much enjoy and learn from them… Thank You! With regard to the ever-increasing time and length of documentation, I believe there are two (2) key reasons in addition to those that you shared. Firstly, the real estate business continues to grow with substantially more employees and competitive. Brokers enter the business given the significant high commission fees available and, in turn, need to prove superior ability and differentiation in the marketplace which is often the acid test to being hired by a prospective client. The documentation is one area illustrate added value with more detail and rigour, effectively, increasing the time to draft, review, comprehend and negotiate. Coupled with this, is my next reason for the increased time to get things completed in our business, and that is the increased institutionalization of corporate real estate. Owners that are personally invested and impacted by revenues and yields on properties are fewer. Large financial groups with deep pockets, far removed from the day-to-day deal negotiation play devil’s advocate on each deal with “no skin in the game”. These employees and those presenting offers are salaried workers whose job is to provide, not only the highest return for the landlord/owner, but also protect against legal exposures drafted into contracts and leases. Often this means three to four levels of documentation review and internal back and forth. To have each level review upon immediate receipt is just wishful, and I might add, “unreasonable” expectations. In recent years we have all experienced increased workload and more hours somewhat created by the amount of technology and mobility driving volume of work. The answer? More time required to handle workload, increased detail and institutionalization and bureaucracy.

  2. Great topic Ira – this has been the elusive question I have encountered during my many years of leasing practice. We can devote volumes on this topic However , here is some what I’ve observed.

    1. Deals are often taking too long in the pipeline before they even reach the attorneys. This, however, may vary with each company and their set-up. When I worked for a large retailer, we examined how long a deal was under discussion. The answer was many, many months to produce an LOI. Since the lawyers are the last stop on the conveyor belt, the more time spent during the deal formulation stage, the less time the attorney had to negotiate the lease – which is usually the most time consuming process – to meet store opening expectations. That said, the attorneys were allowed 90 days to do the deal, not an unreasonable amount of time given that the attorney is working on many deals at once.

    2. The lease forms that are generated out of either the landlord’s or tenant’s gate are not getting more balanced. They appear to be as one-sided as they always have been. Thus, the negotiation dance between the lawyers begins, despite the expectation of the business people on both sides to document the deal. The reasons for this are often driven by corporate culture in the legal department or the personality of the individual attorney

    3. Loss of personal contact and negotiating through the use of e-mails has been a disaster. It creates much lost time and confusion as the e-mail string increases. Another time waster is the continuous exchanges of redline drafts without personal discussion. Picking up the phone can cut through all of this. After one or two passes with the other side, an issue list, briefly describing each remaining issue, can be sent to the other side and an “all-hands” call with the clients should be set up. The efficacy of this is dependent upon each party’s bureaucratic setup for approval on an issue.

    4. The use of “locked” or pdf drafts, presumably to prevent unmarked changes by the other side, is a failure and totally unnecessary. When I run into a refusal to send me a password or an unlocked version, I simply scan the document, and them use my trusty converter to convert the pdf to a editable word processing document. And I always mark my changes. Even if I miss one, the other side always runs a comparison copy anyway and picks up all changes.

    5. Regarding SNDA’s – lenders are usually unwilling to look at them until the deal is in near final form, at a minimum. This is because issues that may be important to them have not yet been settled in the negotiation if you send them your mark-up too early.

    5. Lastly, and most important, is the experience and sophistication of the other side. As a general rule, deals go more quickly with experienced lawyers who, after visiting the same issues hundreds of times, can cut to the chase and reach a balanced compromise. Experienced lawyers on both sides know (or should know) what a balanced lease looks like.

  3. Max Burbach says:

    Joel and Ira, you couldn’t have said it better. I agree with all your comments. I might also add that email provides another function: creating a “paper” trail of communications both with your own client, and the other side. There has been many occasions when a client or the other side questioned where something came from, and i’ve had to dig through old emails to find the answer. And several times that has mattered–who said what, and when. There have also been some occasions when a phone conversation was remembered differently by the other side, and having an email memorialization of that would have been helpful.
    All that said, email is not a very good substitute for a live communicaion, and I have to often remind myself to just pick up the phone and call.

  4. Michael Brennan says:

    My two cents on process, chock full of analogies and metaphors:

    Before the Lease (a truly enforceable agreement) is signed, where the parties are joined for better or worse, for profit or loss, till expiration or earlier termination do they part, the deal is simply an attractive idea. The business negotiations are something of a courtship, and the post-LOI lease negotiations, an engagement. (Consequently, we all draw judgments on the integrity of parties who continue to flirt with others during the courtship and engagement). But at this point, no one really wants to close the door on a more permanent relationship.

    Business folks and their executives (varying by degree in their ardor) like the “idea” of the deal, and are willing to move forward, but the Lease establishes a permanent arrangement and investment. The more parties are involved, the more people have a stake in the outcome, and there is a tendency among many professions (lawyers being one) to carefully examine the assumptions behind the deal, details beyond the LOI, and the “parade of horribles” that could result from a miscalculation. These gate keepers are invaluable to a successful enterprise, but if overdone, can quickly be viewed as “deal breakers”, not deal makers, and counter-productive to long term success.

    Many times, the deal proceeds at a somewhat measured pace, often because the parties want to be sure there is no more attractive partner interested in what they have to offer, as a tenant or a landlord. This explains why a small, regional retailer or franchisee may want to expedite a lease for an “A” location, while the owner of a “B” location might push to complete a deal with a credit tenant, but the other side seems to grind its wheels. It’s all a dance until the Lease is signed, and to paraphrase The Turk in “The Godfather” – terminating a Lease is a big expense.

    For those most interested in quickly fnishing a deal (brokers come to mind), delay is nearly always a bad thing – but so are shotgun weddings. But more often, where “time kills the deal”, it’s not really because of the lease form, or the e-mails, or the silly “exception to the exception” type issues, it’s because one or both partners have just decided they can find a more attractive, willing and reliable partner somewhere else.

    He’s just not that into you.

  5. Ira, I would love to close a deal with you whether you were representing my client or the other side. You obviously “get” the gist of the Transaction Continuum.

    My career as an investment real estate broker taught me that the reason why most large real estate transactions take longer than 45-65 days to close is that most attorney’s (and sadly, too many brokers) don’t understand the Transaction Continuum and are reactive rather than proactive.

    I have closed multi-million dollar transactions in escrow-closing states as well as attorney-closing states. In escrow-closing states, the attorneys are comfortable with negotiating legal points after the principals and brokers have negotiated the deal points, and then withdrawing unless called back in. In attorney-closing states, attorneys who don’t specialize in real estate have an irritating proclivity for trying to take proprietary control over all negotiations and dismissing the broker altogether. If the attorney doesn’t understand the Transaction Continuum, he becomes reactionary (burning valuable time) rather than recognizing potential problems and heading them off before they become time-killers.

    When I closed escrows in attorney-closing states, my clients’ attorneys had all of the credibility chips on their side of the table at the beginning of the deal, but by the end of the deal I had moved the credibility chips to my side of the table and had taken full control of the transaction. I did this by telling my client what was going to happen two weeks before it happened, and showing the client (and his attorney) how to write contingencies so as to compress time frames. In my book, “The Brokerage of Investment Real Estate,” I show real estate brokers the Transaction Continuum and explain how to maintain control of the transaction in the face of attorney interference. In the chapter on financing, I lay out all of the potential financing calamities that can delay or kill a transaction and how to prevent them and avoid delays.

    For attorneys, the transaction typically begins when they are presented with the assignment to create, or react to, a purchase agreement. For a listing broker, the transaction started when the broker was doing his due diligence in preparation for his presentation to the seller. During that period, the broker has the opportunity to create a transaction road map in which (provided there is no concealment on the part of the seller) every twist and turn of the transaction is set before the first offer, and have the seller buy in to the plan. Then all you have to do is understand your client’s negotiation strengths in the market and follow the road map.

    Attorneys who are full time real estate practitioners are usually a dream for brokers to work with. Attorneys who don’t understand the Transaction Continuum should expect to be bulldozed by brokers who do.

    Some people MAKE things happen, some people WATCH things happen, other people WONDER what the hell just happened.

  6. Robert Wallace says:

    This article addresses one of my pet peeves — why it takes so long to get deals done anymore. Doesn’t cover all the issues (like unconfident principals and lawyers padding the time sheet), but definitely food for thought.

Leave a Reply