Tales from the Trenches
Brokers Share Their War Stories of the Fast, Slow, Complex, and Unexpected.
It's inevitable that whenever you get a roomful of brokers together, you'll hear a variety of war stories from the trenches. One may be the story of a broker racing the clock to pull off a deal, another could be the tale of a broker who had to sit tight to painstakingly piece a deal together. Whatever the story, the message is clear: Each deal offers its own lesson. Learn how each of these pros juggled complications such as the need for creative financing, tight timetables, and community opposition to get to their closings and satisfy their clients.
Sorting Out the Issues
Well-honed negotiating skills helped swing one of James Dahlem's most complex deals. Dahlem is a CCIM with Dahlem Realty Company, Inc., in Louisville, Kentucky, which manages a small shopping center in the Original Highlands neighborhood, a historic district.
In 1990, Dahlem Realty decided to expand the center, having previously purchased adjacent land containing several houses more than 100 years old. The homes, now multifamily dwellings, were in such disrepair, says Dahlem, that the company worried about its liability and decided to demolish them.
But the neighborhood association learned of the plans and persuaded the city's board of aldermen to place a moratorium on their demolition. One board member persuaded Dahlem and the neighborhood group to work out a compromise.
Dahlem credits CCIM courses in negotiation and sales for giving him techniques to help ferret out the main concerns. "We wanted to get commercial zoning to expand," he says, as well as deal with the safety issues in the derelict structures. He explained to local residents the necessity of keeping the center up-to-date so that it wouldn't lose tenants—including the neighborhood's only grocery store and drug store. The neighborhood association wasn't necessarily against the expansion, he says; it simply wanted to preserve the homes.
Focusing on the primary issues, says Dahlem, allowed negotiations to proceed. After several more years of talks, both sides reached an agreement. Two of the three residential lots would be rezoned for commercial use, and the two houses on these lots would be moved to nearby lots. The zoning deal was approved in April, and the houses were scheduled to be moved in the fall.
After the homes are moved, a local architect will restore them to single-family use, with help from the city—a satisfying ending, Dahlem says.
Dash for the Deal
Clyta Polhemus, CCIM, and Brian Velthoen, CCIM, of Velthoen Associates Commercial Brokers in Modesto, California, used teamwork to coordinate a July 1996 deal. The participants were geographically scattered; creative financing was needed, and the proceedings had landed squarely in the public spotlight. The deal also had to close within a week.
Velthoen Associates had listed for sale or lease a 42,000-square-foot building in Riverbank, about 10 miles from Modesto. In 1996, the property was under contract to the county school board as the site of a new school. But the deal was moving very slowly through approvals and due diligence.
In the meantime, telecommunications company MCI contacted the Stanislaus County Economic Development Corporation (SCEDCO), about using the property for a telephone relay center. MCI asked if it could submit a lease proposal for the building. Velthoen agreed, but emphasized that the property was under contract.
MCI's interest brought with it economic stakes that could affect the entire county: the relay center would open up nearly 700 jobs in a high-unemployment area. But MCI also needed to be up and running by October, putting Velthoen Associates in a bind: What could the company do until the school board made a decision on the property? Moreover, the prospect of 700 new jobs had attracted public and media attention.
Once the county decided not to buy the property, "everyone thought that [the MCI plan] was a done deal," says Polhemus. "That wasn't the case." A week-long marathon ensued, in which Polhemus, Velthoen, and a well-coordinated lineup of supporting players pulled out all stops to make the deal happen.
Several issues complicated negotiations. On July 14, MCI said it wanted to begin renovation on July 17, giving Polhemus and Velthoen 32 hours to put an agreement together. To do that, they had to deal with MCI's broker in the Bay Area; MCI's corporate headquarters in Denver; the company's attorneys in Washington, D.C.; and the property owner, who lived in a Chicago suburb.
MCI also wanted the landlord to put up $800,000 in improvement money as well as include a one-acre parcel of land—that wasn't part of the project—for an additional 113 parking spaces. (The building originally included 226 parking spaces.)
The financing was complicated by the fact that the owner had acquired the property through an exchange, in which he had taken it on an all-inclusive with a silent assumption. "So the lender didn't know he was in ownership—and the loan had a call on it," says Polhemus. "So how do we get $800,000 in new capital, get the property refinanced, and know that this loan is in place before we commit to a lease?"
Velthoen, who has been in business in the community for about 20 years, got several local banks working on financing possibilities. The brokers contacted SCEDCO to investigate the possibility of public funding. They worked with the city of Riverbank to negotiate fire, parking, and other site permits. The owner flew in from Illinois on a Monday, and everyone sat down for a week of negotiations.
"On the second day, we realized that it all hinged on the financing," says Polhemus. "Either we had financing—and we knew what those terms were so we could work them into the formula—or we didn't have a deal."
Velthoen used planEASe software to compile a complete loan package with the owner in just four hours. "We did a sensitivity analysis," says Velthoen. "We knew what the result was, so we had to figure how to better price it to meet the objectives of all the players in the transaction. Sometimes that can take two or three days to do unless you have the right software to make it happen—so you need to invest in the technology to be able to produce that answer with certainty. That's what we were able to do in four hours." Polhemus adds that one of the banks' loan officers told her that Velthoen's ability to break down the components and do the financial analysis allowed the lenders to better recognize the individual components and speed up decisions on the financing process.
Because of its tight schedule, MCI needed to begin training operators, so Velthoen and Polhemus also negotiated with the owners of five vacant acres adjoining the property where MCI could set up recruiting and training trailers.
The upshot? A local bank agreed to the financing, and by 8 p.m. on Friday night, all parties had signed a letter of intent.
Both brokers credit the strong support they received at every step of the way. "This was really a team approach—there's no one individual hero in this transaction," says Velthoen.
Knock on Wood
In 1993, Todd Clarke, CCIM, of Lewinger Hamilton, Inc., in Albuquerque, New Mexico, was working with a client who was moving from California, had $300,000 to invest from a 1031 exchange, and was looking for an apartment building—preferably one with light leverage. Clarke, who was working with John Henderson III, CCIM, keeps a database of properties (See "Success Strategies," CIREJ, July/August 1997) and found a variety of possibilities, including a 226-unit building in Albuquerque's Uptown central business district. The building was listed for $3.5 million, but was on the verge of foreclosure—and a $300,000 down payment could save the seller.
This wasn't the light leverage the buyer was looking for, but he was impressed enough by Clarke and Henderson's analysis to make an offer. Clarke and Henderson had developed an efficient inspection list that allows contractors to mark the condition of fixtures in each unit and estimate any repair costs. The numbers are fed into Clarke's computer system so the buyer can see aggregate repair costs and then decide how to proceed with the deal. In this case, the list contained 34 items, including termite inspection. The buyer had dealt with termites in California, where climate conditions favor the pests. On the other hand, says Clarke, they're almost unheard of in New Mexico because of the state's dry weather. The buyer decided against the inspection. "It was one of the few things he decided not to have done," Clarke says.
A few weeks before closing, the quick-moving deal hit a snag: 18 parking spaces sat on a piece of land that everyone thought was being conveyed with the property. But the seller didn't actually own the strip. The city had given him a quit-claim deed, but it hadn't really owned it either—the state highway department did. The property sits about 40 feet from a freeway, and normally, says Clarke, when freeway construction is done, leftover land goes to the city. "This was a rare exception," he says. The highway department had kept the right to the piece of land in case it decided to widen the road for a ramp to the freeway someday.
Without the parking spaces, the building would have had a significant code violation, so Clarke and Henderson got the state to deed it to the city, and the city gave them a lease with unlimited duration unless the city needed the spaces. "It's not one of those things you think you'd hit in a normal deal," Clarke says.
After that, the deal proceeded smoothly. On the last day of the client's exchange, Clarke and Henderson arranged for him to sign the papers in a formal closing.
As they sat at the closing table, they got a call from the building's property manager with the dreaded words, "We have a problem." A workman who was renovating a unit noticed a wall "looked funny." He pulled off a sheet of drywall—with very little effort—and discovered why: the wall was infested with termites.
They had one afternoon to find a remedy. Henderson became "an instant termite expert," says Clarke, and they got three removal bids ranging from $8,500 to $35,000. They discussed the options with the buyer, settled on one, and by 4 p.m., had negotiated for the lender to cover the cost.
But it wasn't a done deal yet. The buyer's attorney wanted a document from the lender confirming it would pay for the extermination. The lender—in Washington, D.C.—needed to fax the document in time for the transaction to be recorded at the county clerk's office before it closed at 5 p.m. As everyone raced the clock, the closer from the title company hurried to the clerk's office and was standing by, waiting to record the document. When the buyer approved the document, he'd call the closer and tell him to record the deal.
At 4:45, as the document's cover page rolled out of Clarke's fax machine, the power went out—for the entire business district. "So it wasn't like I could walk next door and get the fax," says Clarke.
He quickly arranged to have the fax sent to another title company outside the affected area. The receptionist there read it over the phone to the client, the client approved the language, and phoned his approval to the closer, who had kept the clerk's office open. The transaction was recorded at 5:15 p.m. on the day of the buyer's exchange deadline.
Clarke sells a couple thousand apartment units every year. "And now I check them all for termites," he says. "They do exist in Albuquerque."
"Quarterbacking" Pays Off
In the mid 1980s, Robert A. Rosenberg, CCIM, of Inve$tnet, Inc., in Sacramento, California, was working to create a site for a hotel that catered to business travelers in the city's South Natomas section.
The area looked promising—it was a developing business park area, located between downtown and the airport and at the intersection of two major interstates. Because the city had adopted a land-use plan that put new hotel construction at the edges of town, Rosenberg had to demonstrate the worth of putting the hotel in South Natomas; not only would the hotel be beneficial to the businesses in the immediate area, but it also would lessen traffic in and out of the area.
At the same time, he had to convince the seller that the city would consent to the change, as well as work with the hotel chain's complicated corporate structure, and educate a sizable, active homeowners association on why the hotel would benefit the community.
Rosenberg puts all this in the realm of "quarterbacking: translating, pulling all pieces together, getting people on the same page with the same understanding." And it began to pay off: the issues were resolved; the deal went to contract. Then Rosenberg learned that the Federal Emergency Management Association had issued new flood maps of the area—and the proposed site now was in a flood plain, changing building criteria for new construction.
Rosenberg had to negotiate a repurchase agreement in case the hotel couldn't be built. Things got complicated, though, when the chain also insisted that the developer put up a letter of credit. The developer balked, and Rosenberg started networking. He called on the chain's chief legal counsel—whom he had met informally—to reconsider the letter of credit, and the chain did.
The hotel was built at last and, says Rosenberg, has been one of the better-performing hotels in the region.
Of all the major issues in the project, the most relevant lesson, Rosenberg says, is that brokers "should know how city government process works-know what the limits are." Also, he says, it's essential to study trends on what's happening in other cities—in this case, knowing the increased number of hotels locating in business parks—and apply them to what's happening in the community you're looking at—and in South Natomas, it was the strategic location. "Don't focus on past," he says. "Focus on where you're going."
A Tough Trade
Dennis Crull, CCIM, tells the tale of a 1991 equity exchange deal that involved multiple properties, multiple states, and, he says, "considerable due diligence."
In late 1991, Crull, of Timberline Investment Company in Blue Springs, Missouri, was representing a church client with a variety of properties to sell. At a marketing meeting, he met Stephen England, a broker at Investment Property Exchange in Kearney, Nebraska. England was representing a couple who owned a 1,600-acre farm near Mitchell, Nebraska, who were looking for a way to retire from farming, pay off the balance of their farm loan, and finance their retirement. The farm was valued at $650,000; $345,000 remained on its federal land bank loan.
Crull and England compiled a preliminary exchange proposal: the church would take the farm, and the couple would receive 48 properties—including rental properties, acreage, and vacant land—as well as $98,600 in cash.
Crull says he's a strong believer in counseling clients, to be sure, he says, "not only of what they want, but what they need." He put together cash-flow analyses comparing the benefits of ownership of the properties with ownership of the farm, including scenarios in which the church refinanced the loan or paid off all debts and participated in the operation of the farm as well as leasing it out.
The inspection process entailed a four-state tour in which England's client and Crull inspected and approved the properties, which were scattered throughout Iowa, Missouri, Arkansas, and Oklahoma. The inspections were successful, and the deal closed in March 1992.
Crull says the deal emphasizes the use of an equity exchange. "There are lots of people out there with equity rather than cash," he says, and a straight exchange provides them the tax benefits of an exchange without the uncertainty of a delayed exchange.