A Course to Better Times

By WILLIAM DEVINE
Reprinted from the California Real Estate Journal, 7/31/02

acancy rates are dangerously high. Interest rates are dangerously low. Capital is evaporating in ten-figure increments. This is an eerie market into which we have sailed, and it disorients lenders, landlords, lawyers, sublandlords, builders and brokers alike. As you try to steer a course to better times, these four coordinates can help you keep your bearings.

1. Far out hurts. Some projects are too strange to touch—e.g., the church-and dog track mixed-use project, the payment-upon-completion industrial park construction opportunity, the $30 million build-to-suit for the Internet start-up with no customers.

Some deals require too much interplanetary alignment to attempt—e.g., if you let the prospective subtenant move in his equipment this afternoon, then he will have the sublease guaranteed by a prince in Morocco on Monday, and will deliver the security deposit when he presents the letter of credit his largest customer will give him after they collect the loan they expect as part of their acquisition.

Some people have impossible demands—e.g., the company that must be licensed to do business in 46 states by Thursday, the buyer who wants you to delay recording your deed of trust until three days after close of escrow, the client who wants you to prepare a contract under which the other party cannot default.

Bizarre situations and off-beat characters amuse at a distance. Up close, by contrast, as their gears grind up your time and money and turn that retail deal into your little shop of horrors before your very eyes, they cause pain. The market is difficult, but you improve your chances of emerging from it intact if you eschew the far-out.

2. Being an artista also hurts. At the turn of the century, one could assume the I-only-work-50,000-sf-office-leases-at-$10/sf attitude and get away with it. In the post-New Economy, if one affects the pose of the artista, one joins the Spanish galleons on the ocean floor.

To survive, many of us need to expand the range of projects we work. Part of the trick, of course, is to expand that range without taking on tasks that dwell beyond the limits of your competence. You want to be out there swinging, in other words, but you do not want to miss.

Trying to assemble land for a San Francisco high-rise when you’ve only worked Central Valley warehouse deals for your whole career, for example, can injure your reputation, hammer your balance sheet and waste your time.

How can you distinguish between an opportunity for professional expansion and an invitation to embarrassment and expense? One question to ask is whether this new-to-you type of project appeals to you simply because it’s a payday. If so, beware. Activities pursued purely for money seldom enrich. If in fact the project entails work that you want to add to your repertoire, though, then the extra time you will need to devote to the project to acquit yourself well may be worth investing.

3. Do thy homework. A developer begins discussions with four families who are partners in two parcels of land. His architects and attorneys produce drawings and drafts of joint venture agreements. These cost him large sums of money, and he spends many hours developing rapport.

After months of meetings, phone calls and drafts of agreements and drawings, he and the families agree in principle on the project and its financing. Turns out, though, that one family does not have complete authority to sign for their portion of the partnership. They need a brother’s approval to commit their interest in the land to the project. The brother lives on the East Coast and before he consents, he renegotiates the deal’s pricing and costs the developer additional fees and three additional months of negotiating.

Two truths of a slow market: it makes you antsy for projects to work on, and it is a time when mistakes and surprises bear extra sting. Whether you are dealing with the planning department, the bank, a prospective joint venture partner or permanent lender, a tenant, the local baroness, or anyone else connected with a project, learn the whole story up front. Ask all the questions, especially who has authority to decide, who has the capital, and who owns the land.

4. One at a time. Perhaps the market’s downturn has compromised your finances, or brought your work flow to a standstill. If so, try not to pressure yourself to make up the whole deficit in one Herculean stroke. That’s a recipe for frustration and failure. Set aside thoughts of your deficit, the market’s woes, and making all 15 phone lines ring at once. Find a good project to work on, cultivate it, then find another. Focus on doing what you must to keep a good project in front of you, so you give yourself the opportunity to cut into your deficit with every move you make.