Attorneys need good numbers to win - legal advice on real estate negotiations

Real Estate Weekly, July 22, 1992 by Daniel Forbes

In today's real estate environment decisions must be based on real numbers and well documented information. We have all seen many situations where unnecessary legal actions were initiated solely as a result of poor communications and inadequate information. When this happens, both sides are losers. In the litigation arena, having good numbers in advance is not only good business practice, but also serves to minimize litigations and disappointments between law firms and clients.

The attorney's role in troubled real estate negotiations is that of a quarterback. Information and objectives must be clearly defined for the attorney prior to the development and implementation of action strategies such as litigation and bankruptcy. Too often, these options are selected without the benefit of objectively prepared financial analysis and complete disclosure information. In these cases, decisions often do more harm than good, and leave clients surprised and dissatisfied.

The Casebook

In the past, only major accounting firms prepared and presented this information in casebook format. Unfortunately, the fees were often too high for most clients, response time was slow and participating staff members were often unqualified to deal with real estate matters.

As a result, many debtors and creditors attempted to prepare casebook presentations internally without the benefit of industry experts. The results have proven disastrous for all sides: many debtors lost their properties and assets; line credit officers lost their jobs; and attorneys lost clients and became litigation adversaries.

The old days of providing boxes of information to the other party have gone the way of the 110 percent leverage. Documents and financial analysis must be organized and presented in a logical format which is easily transmitted to third parties without the benefit of a live presentation. In other words, the casebook presentation must stand on its own.

The Changing

Decision Makers

In today's regulated and micro-managed environment, most decisions are made by multiple parties acting in credit and creditor committees and government regulators. Bankruptcy judges - one of today's most important decision makers - require good information and well documented legal cases from both the financial and legal perspective. Inadequate financial presentations have damaged the best cases by failing to support the financial arguments interwoven into the foundation of the legal arguments.

Case presentations must recognize that most decision makers lack hands-on industry experience, as well as grounding in accounting and finance. Therefore, casebook presentations must be supported by easily understood financial and document exhibits. The old school theory of giving piles of information to creditors who will "figure it out on their own" no longer works. This type of presentation will never reach committee. instead, the creditor will proceed to a default decision to litigate.

Confidence and Credibility:

The Cornerstones

of Successful Negotiations

In 90 percent of litigations, lack of confidence and credibility in the debtor is cited as the fundamental cause of action in lawsuits. When numerous, well documented requests for adequate information fall on deaf ears, creditors have little choice but to pursue the discovery process and the use of receivers.

A number of creditors have recently started using SWAT teams of real estate and accounting experts to assemble existing materials into a creditor's casebook to minimize unnecessary litigation. These experts independently provide the creditor with the information necessary to make an informed decision without assuming the conflict of interest issues inherent to in-house preparation.

In today's environment, debtors have just a single chance to gain the creditor's confidence and credibility. If the first presentation fails to accomplish this task, the lender will never again trust the source. Once a lender loses confidence in the debtor's ability to comply with timetables and requests for information, litigation will commence. There are no second chances. Sloppy and incomplete financial presentations and inadequate disclosure will also lead to litigation, so adequate information will be forthcoming in the discovery process.

Who Is Responsible?

While most responsibility falls upon the debtor, the creditor must do everything possible to evaluate available information, including retaining outside attorneys, accounting and real estate experts. As a result of increasing regulatory and political issues, many creditors use outside experts to assemble and evaluate information and prepare financial exhibits that provide insight into the success or failure of the litigation. Prudent and timely analysis of financial exhibits is a requirement of effective litigation strategy.

Professional Expertise

Depending on the scope of financial exhibits and current negotiation and litigation postures, preliminary evaluations can be completed in less than four to five partner days, without any staff assistance. This method has proven cost-effective for developers, investors and their attorneys, as well as major insurance companies, banks, regulatory agencies and foreign investors.