Brokerage

No-Fail Negotiating

These Tricks of the Trade Can Help Close Deals.

By Darrin L. Boyd, CCIM, SIOR, and David A. Moore, CCIM, SIOR |

The outcome of commercial real estate transactions often hinges on the negotiating skills of the participants. Contrary to popular opinion, the most eager and aggressive brokers don`t necessarily seal the most deals. Competent, polished negotiators achieve a careful balance among all parties to effectively close many successful transactions.

Pre-Negotiation Preparation Each transaction is unique; therefore, the steps used to prepare for one will be tailored to its specific situation. However, it is important to keep in mind the major difference between negotiating for clients and negotiating with other parties, such as potential tenants. Brokers usually know their clients` goals and motivations prior to entering into negotiations; however, the goals and motivations of other parties must be uncovered during the negotiation process.

In general, the first step to effective negotiating is knowing the client -- beyond the scope of the transaction at hand. For instance, what are the client`s short- and long-term goals? Does the outcome of the transaction have a major impact on the client`s business? Is there a time constraint affecting the client`s decision?

Brokers also should analyze the other party involved in the transaction. What is the other party`s objective? What does the other party stand to gain (or lose)? Who will be negotiating for the other side -- the ultimate decision maker or someone who must gain executive approval before making a decision? Learning as much as possible about the other party can help to determine the most successful negotiation strategy.

As well as learning a client`s needs and wants, discuss its range of expectations. Know what your client must have vs. what it would like to have. For example, discerning from a client that a $5 million price isn`t acceptable, but a price of $5.75 million is worth consideration is very important. Yet many times, brokers fail to ask enough questions to understand fully the parameters of a client`s situation or expectations.

Just as important as asking the right questions is listening to the client`s answers. Brokers can gain valuable information during even casual discussions with their clients.

Reading a client`s -- and the other party`s -- nonverbal communication is another important negotiation technique. Many times, understanding different personality types helps brokers tailor their negotiation strategies for more effective outcomes. (See sidebar.)

Before sitting down to the negotiating table, brokers should develop a basic strategy for handling the various outcomes. Specifically, anticipate possible objections the other party might raise and have an outline of responses ready. Also, prepare an outline of the deal for partners or team members. References and notes can help control the flow of the negotiations and prevent discussions from getting off track.

Finally, mental preparation for both positive and negative results is essential. How a negotiator responds to a negative outcome can influence the possibility of future talks. Skillfully handling a less-than-favorable outcome with a calm and tactful demeanor reflects well on a negotiator`s general reputation and may lead to future business with either party.

Situation-Specific Strategies There are as many different negotiating situations as there are commercial real estate transactions. However, two general guidelines apply to all types of negotiations.

First, after explaining the parameters of the deal, be quiet and listen. Although it can seem unnatural, this silence often prompts the other party to respond first or provide feedback. This tactic can be very effective in phone conversations and conference calls where the other party can`t draw upon any visual cues.

A second way to negotiate more effectively is to ask more questions. For example, when representing a landlord who is negotiating with a potential tenant, ask what other properties or buildings the tenant is considering. Also ask how the offer on the table stacks up with other buildings` offers. The tenant`s broker might not disclose the details, but his answers may offer clues as to which factors are deal-makers -- or deal-breakers.

The two most common transaction types that require a commercial real estate practitioner`s honed negotiation skills are leases and sales.

Lease Negotiations. While each lease negotiation is different, some rules of thumb apply regardless of whether the broker is representing the landlord or the tenant, or whether she is negotiating for a permanent lease or sublease.

Commercial real estate professionals first of all must ensure that the physical characteristics of the space -- the configuration, the lease term, the building amenities, and most of all, the price -- are reasonable to the client. If the client has objections, sort them out prior to entering into negotiations, or the deal is likely to fall through, even if the brokers are top-notch negotiators.

In addition, before beginning discussions, determine if the client has final deal-making approval or if there is an approval hierarchy. Failure to recognize this will lead to frustration and delays throughout the negotiation process. For instance, some companies have real estate departments that handle transactions, others require the chief executive officer`s signature on the lease. Ensure that all parties are informed of the transaction`s progress, including the individual whose signature is required on the dotted line, no matter how removed from the process he is.

Also, determine ways to speed up the negotiation process. Avoid lengthy requests for proposals and cumbersome written documents. Time wounds all deals -- especially lease deals -- as tenants typically have more options available in the local market.

Sales Negotiation Strategies. Sales negotiations differ from leases primarily in the additional risk associated with the transactions. A much longer term commitment is at stake, often 15 years to 25 years for a mortgage, and more money is involved upfront, usually at least a 20 percent to 30 percent down payment.

Knowing as much as possible about the seller`s or buyer`s motivations should be at the top of every broker`s agenda. Does the seller need to perform an Internal Revenue Code Section 1031 tax-deferred exchange due to capital gains issues? Does the buyer have the financial ability to successfully close the transaction in a timely manner? Is the buyer looking at purchasing and leasing options? Does the buyer have the time to consider purchasing land and constructing their own building? Only after these questions have been asked and answered should the parties start discussing the paramount issue in any sale -- the price.

Successfully representing buyers or sellers of commercial property typically doesn`t work without effectively managing the purchase and/or sale price expectations. Although market conditions can cause fluctuations in price, the groundwork should be laid well before the negotiations begin. In addition, any deferred maintenance or physical issues with the property and timing of the sale process are critical.

Choose the Right Setting Failure to bring the participants in a commercial real estate transaction together in an effective and efficient manner hinders the likelihood of a successful outcome. The correct mode of communication for negotiations often depends upon several factors, such as the geographic location of the property being negotiated, the size of the deal, the client`s expectations, and time constraints.

A neutral locale, such as a restaurant with a calm setting, often is a good choice. Following the discussions, inviting the participants to play a round of golf or attend a ballgame can foster a non-threatening, stress-free relationship thereafter.

While nothing typically can top face-to-face negotiation meetings, often this is not practical or possible. Due to time constraints, participants being in multiple locations or time zones, and other logistical factors, teleconferences and videoconferences are reasonable alternatives. These generally are preferred over less personal fax or e-mail exchanges. While electronic media move the process along and present the facts, they don`t have the same impact as personal interaction. Selecting and controlling the proper forum for discussions can be challenging, but it is critically important to success in negotiations.

Earning Client Trust Building client trust and loyalty is the lifeblood of the commercial real estate industry. By using solid negotiation tactics to achieve win-win deals, brokers can build good rapport and trust with clients and other parties. Brokers who know and analyze the individuals involved in their transactions, choose the right forum, and continually hone their negotiation skills without a doubt will close larger and more transactions.