Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
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COMMERCIAL INVESTMENT REAL ESTATE 36 September | October 2017 In a recent transaction, she represented the buyer of an 18,000- sf medical office building near Seattle. One of the elderly owners was involved, but some decisions fell to a real estate holdings trust, which was controlled by other family members. "They were very suspicious that we were taking advantage of the family in this deal, for no other reason than we did not offer full price," Bennett says. "They were emotionally invested." In other transactions, the factors that create challenges seem to be more straightforward. When identifying issues that generate conflicts, Ankur Patel, CCIM, vice president with Old Sec- ond National Bank in Chicago, mentions third-party appraisal or environmental reports with unexpected results; tenant lease clauses; and buyers' inability to qualify for financing. But these factors alone often don't derail deals. Brian Elrod, CCIM, associate broker with Coldwell Banker Commercial Upchurch Realty in Athens, Ga., sees a lack of effective com- munication as the source of many of these challenges. "It's possible for someone to be talking a lot but not really saying much," he says. "Brokers who merely parrot what their client says are not servicing their client; they're just repeating." Facing the Fear The first mistake that transaction parties make is failing to recognize that each commercial real estate deal has its own set of challenges. "Never trust your assumptions," says Joseph Larkin, CCIM, SIOR, CEO of First Realty in Denver. "Treat every transaction as new, even if you're negotiating with someone you've negotiated with before." Larkin, who also teaches CCIM Institute's Commercial Real Estate Negotiations course, recommends starting with a mnemonic device to develop open-ended questions: NUMERAL — needs, urgency, motivation, expectations, resources, authority, and loyalty. "Once all of the stakeholders' interests have been uncovered, we then construct a stakeholders' chart and plan the negotiations," Larkin explains. "A good transaction manager gets as much information as needed to solve the problem." He adds that the prisoner's dilemma — the choice of whether to cooperate or compete — can cause conflict. "To have a win-win transaction, you need to make the pie bigger with the sharing of information," Larkin says. And what of the calculations that illustrate value and opportu- nity, such as internal rate of return? Through its designation pro- gram, CCIM Institute equips commercial real estate professionals to analyze and interpret complex financial and market data. But when the fear is palpable, this probably isn't the best place to start. "While we often say commercial real estate is all about the numbers, there is always more than the numbers," says Edward Craine, CCIM, CEO of Smith-Craine Real Estate Financing in San Francisco. He often works with individual and small-group investors whose decisions may be affected by multiple nonanalytical fac- tors, including risk tolerance, desire for security, holding strategy, estate planning, or even pride and other emotions. Once a commercial real estate adviser has identified the needs and interests of the stakeholders, the pathway to empathy is open. Overcoming the Fear In a commercial real estate deal, empathy means "making every effort to truly understand the goals, objectives, interests, and perhaps even the passions of the parties to the transaction," according to Smith. So what tactics can commercial real estate advisers employ to increase empathy and move the transaction to a more ratio- nal place? Perhaps the best way to empathize with those involved in transactions is to become actively engaged in the buying and selling of commercial real estate. "We should all go through the buy side or the sell side our- selves to experience firsthand what our clients go through," says Linda Gerchick, CCIM, desig- nated broker with Gerchick Real Estate in Scott- sdale, Ariz. "As an active investor myself, I know the frustrations that can come." Now, Gerchick approaches every deal as if she were the buyer. In some cases, empathy may show advisers that their own biases could be hindering a deal. Patel suggests bringing in neutral third parties, such as CPAs, attorneys, or other consultants, who spe- cialize in an area that's presenting a challenge. Bennett used this tactic in her difficult medical office building deal. "We had the escrow company sit down with the family and explain every cost and why these costs were typical," she says. "The sellers came away feeling much better, and they were grateful to us for taking that extra step." Clear and effective communication also is key. "It's all about full disclosure, including the data," says Waters, who spent 26 years on the transaction side, including stints at CBRE and Cushman & Wakefield. "You're best served by an educated consumer, and full transparency provides both sides with the same information to interpret." After in-person negotiations, this could take the form of a follow-up email or a formal documentation of the process to create a paper trail. Context may contribute to effective communications as well. "It sounds crazy, but sometimes things change for the good when people talk to each other face-to-face, without text, email, or Skype," Elrod says. This idea isn't crazy. In a 2014 paper, researchers from the University of Chicago and Harvard Business School found that handshaking promotes more cooperation and influences negotia- "There is always more than the numbers."