Negotiations more complicated in 90's.

One of the most significant changes that occurred during the first half of 1992 was the nature and tone of troubled real estate negotiations. In today's tightened credit and investment climate, increased due diligence and financial disclosure requirements have significantly complicated and delayed real estate decisions, often past the point of no return.

As a result, borrowers and lenders must now spend exorbitant amounts of time and money in the preparation of Decision Casebooks. These complex presentations are designed as arms-length forensic reports that provide the necessary documentation for decision approval on both sides of the table between borrowers and lenders, buyers and sellers, partners and shareholders, institutions and managers - even husbands and wives. These casebooks also provide cost-effective and necessary expert financial exhibits for project financing, litigation and bankruptcy matters.

The effective and timely preparation of a Decision Casebook combines three financial analyses. First is the forensic accounting evaluation of the "real numbers" and existing facts. Second is the standard asset evaluation, which considers current operations and estimates realistic projections for the future.

Finally, the credit analysis evaluates the overall deal in terms of forensic accounting and real estate, and analyzes the value of the borrowing entity and guarantors. Together, these analyses represent the fundamental business plan for the asset and provide the foundation for real estate income appraisals and well documented decisions.

In order to prepare an effective Decision Casebook, the following questions must be answered:

What are the forensic accounting issues?

Of paramount importance is a detailed account of how funds are being used. Both sides must believe they are receiving full disclosure of financial and real estate information before entering serious negotiations. This analysis is designed to portray the true operating levels of the assets, a necessary component when evaluating the opportunities to restructure or discount an old deal, provide new funds or entice new buyers to invest. The report also must include full disclosure of other facts that are relevant to the valuation and collectibility of the asset, including financial obligations and deals with other lenders.

What is the actual cash flow at ownership level?

Today's real estate negotiations no longer take place solely between willing buyers and willing sellers. New terminology such as bottom feeders, vulture funds and white knights is indicative of real estate acquisitions have changed. These astute investors focus on the interrelationship between real estate, accounting and credit issue when considering real estate investments, and recognize that actual income and expenses in the property appraisal may be quite different than those from the ownership perspective.

What other facts exist to effectively document decisions?

The evaluation of collateral potential in the borrowing entity and the guarantees is a major, required analysis of any real estate negotiation. The absence of this information often leads to wrong decisions that can cost borrowers their properties and personal assets, bankers their jobs and attorneys their clients. All parties must recognize the realistic recovery potential and litigation value of the borrowing entity and the guarantees before direct negotiations begin.

How much will litigation and bankruptcy cost in terms of time and money?

Litigation and bankruptcy can cost projects in excess of 20 percent to 50 percent in lost collateral value and collection time. Very often, these costs can be avoided through the advance preparation of a comprehensive Decision Casebook. Until recently, only major accounting firms were able to provide this type of presentation, which were typically extremely costly, required months of preparation, and were usually prepared by people lacking hands-on real estate expertise.

Recently, a number of highly specialized SWAT teams, combining forensic accountants, senior lending and credit professionals, and seasoned hands-on real estate experts have emerged to meet the overall cost and time constraints of the real estate and banking communities.

Most borrowers and lenders, however, are not aware of these cost-effective SWAT teams and, therefore, still lack this information prior to litigations and expensive discovery processes. Without timely access to this information, the intense time and review pressures of today's regulatory environment force lenders to "push the button" by default and commence litigation.

Clearly, when borrowers and lenders sit down to the table, there must be an effective exchange of information so both parties can negotiate and achieve satisfactory results. If not, the only options remaining are default decisions and a scenario that begins with no settlement and no sale and ends with litigation and foreclosure.

Borrowers must recognize that false promises to provide timely and adequate information create a major problem for lenders, who, in turn, respond to the lack of credibility by assuming litigation posture. Third party presenters of Decision Casebooks can often regain credibility during subsequent rounds of negotiations. It is important to note that incomplete or inadequate presentations never reach committee.

Negotiations involving troubled real estate, borrowers and guarantors can no longer be settled verbally or on the back of a napkin. With the increasing influence of regulatory authorities and scrutiny by third party credit and creditor's committees, decisions must have written Casebook evaluations supporting property-based appraisals.

Troubled real estate negotiations are now examined in a fishbowl rather than quietly under a rock. By providing written Decision Casebooks in advance, borrowers and lenders can see eyeto-eye and speak the same language. History has demonstrated that when these Casebooks are prepared in advance, and in a cost effective and timely manner, they have proven to be a win-win tool for all parties involved.

Real Estate Evaluation Services (REES) is a Rye, New York-based, national forensic accounting and real estate consulting firm with offices in Manhattan, Los Angeles, Philadelphia, Atlanta and San Francisco.