A method to 90's madness for sales brokers.
As a consequence, brokers have come to the insight that for the foreseeable future, substantial amounts of equity and debt financing are going to be provided by foreign sources and that most transactions are going to be completed by offshore investors. In our capacity as Strategic Investment Consultants, representing European investor groups in the United States since 1980, we would like to echo this.
There is no doubt that European investors still consider the United States their biggest target market because it is further along in the recovery cycle than European markets. The actual U.S. real estate climate however, and the abundance of inventory on the market, are making today's real estate decisions more strategic and more complex than ever before. Accordingly the largest sources of private capital provenance, like Europe and the handful of foreign banks, as well as entrepreneurial investors are only willing to discuss new transactions under utmost conservative investment and underwriting criteria.
All these problems make it also very tough for brokers to survive in this environment. Our firm knows very well that brokers are working harder than ever to convince the parties that the deal is right for them. Tough and long-lasting negotiations - in average three to eight times longer than in 1987- are effecting their efficiency considerably. And if circumstances are fortunate and a transaction is consummated, it is the Broker -of course- that gets his commission cut.
There is no quick fix, but until things are back to normal -and this will take quite a while -- there is a solution to this dilemma. A solution that represents a win - win for all parties involved in a transaction that is lead by a broker. In order to: circumvent this gridlock, attract foreign and domestic debt/equity sources and expedite the transaction process, brokers will have to integrate in their presentations an already standardized, accepted and credible flow of information pertaining.to the asset or the portfolio that is to be sold.
A. Acceptable Format For Real Estate Presentations
Unfortunately the standard thought of real estate presentations has remained in the 80's where the theory behind these presentations was that of a seller's market since appreciation, inflation and the overflow of debt created market prices that exceeded original funding. The motivation to sell was strong because of the anticipated profits and the easy-to-realize liquidity of the asset. The buyer had the due diligence responsibility and the seller provided only prospective operating projections. In addition, value calculations were aggressive. The world has changed. The only acceptable format for deal packages must include:
(l) Cash flow analyses and actual trends, supported by well-written deal histories and
(2) Business Plans. This applies not only to European Investor Groups but to domestic private and institutional investors as well
B. The Broker's Set Up
In this context, the classie broker's setup does more harm than good for both the seller and the broker. The broker often takes the responsibility for the package presentation and suffers the consequences and disappointments when the package fails to close the deal. Sellers and particularly buyers have become disenchanted with brokers who continue to operate in the same way they did in the 80's. "Using yesterday's setups for today's environment does not do the job."
C. The Broker's Credibility
A second change from the 80's is in the area of credibility, an area of major concern, especially, for European investors. In the old days, it was not unusual for the broker, who directly benefits from a successful sale, to be responsible for due diligence presentations and financial disclosures. This no longer exists.
Our firm's daily consulting practice as well as history and recent changes of the broker's regulations have proven to buyers that the seller's broker is not a credible, acceptable source of financial information because of the inherent conflict of interest. Consequently the broker has to acknowledge that the burden of due diligence has fallen on the seller - especially since we are in a buyer's market.
D) Inherent Weaknesses of The Broker's Set Up
In addition to the conflict of interest issues facing brokers, the standard setups are no longer acceptable due to their inherent weaknesses - such as:
* A lack of up-to-date real numbers
* No operating business plan or at least an outline of it
* No cash flow statements with full written descriptions on all items
* No supporting due diligence materials with detailed assumptions and facts within the presentation
The preparation of this material traditionally was undertaken by the Big 6 and some "boutique" consulting firms and took between two and four months. Therefore the time cost of the asset or portfolio, plus hourly professional fees during the asset preparation phase of these firms, often outweighed their benefits. Nowadays so- called "real estate swat teams" have gained full international- recognition for this very special asset preparation material.
Our firm, like many others including insurance companies and banks have used their services that have not only proven to eliminate unnecessary investment risks but have helped also to mitigate lender liabilities. Furthermore these services have demonstrated the ability to pay for themselves in direct and indirect deal cost savings, while averaging 40 percent below the fees charged by the Big 6 and some "boutique" consulting firms.
Most investors - foreign and domestic - are represented nowadays by investment advisory firms, like ours, who's job among many other items it is to protect their interest. Therefore and in order to transact appropriately in this buyer's environment, an acceptable financial presentation and a preliminary third party conceptional evaluation is an absolute must. Similar to the disclosure requirements of financial institutions most consulting firms are presently requiring a credible flow of information and full disclosure of specific asset or portfolio material. In an environment where more and more real estate decisions are made by non-real estate decision makers such as third party lender or investor committees, we expect this procedure to become eventually the standard norm for the whole industry.
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|Title Annotation:||Commercial Sales & Leasing; evaluation of commercial real estate market in New York, New York|
|Author:||Rosenberg, Wilhelm A.|
|Publication:||Real Estate Weekly|
|Date:||Mar 24, 1993|
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