Wednesday, May 4, 2011

I'm a Deal Killer? Lawyers as Advisors

In the last few weeks I have read several items suggesting that the normal node of real estate lawyers, or transactional lawyers in general, is as a deal killer.  The most recent came today while reading the website of John T. Reed, a real estate writer whom I respect a great deal.  He is truly one of my favorite writers on real estate, current events and the military.  If you haven't been to his website. I encourage you to check it out.

I have never really thought of myself as a deal killer.  I see my job as advising clients on potential risks that might be out there so they can make an informed business decision on whether or not to go forward with a transaction.  Here's an example based in part on real life.  Client X is thinking about buying a property. A portion of the property is encumbered by a covenant with a right of reverter to the city if certain work is not completed and a certificate of completion filed with the city.  The work was done and a there was a certificate in the title company file, but it was never recorded.  My advice to the client in this case?

First, is the title company willing to insure over the right of reverter given that is has an unrecorded certificate of completion?  Yes.  Move to step 2.

Next, is the city, as part of the rezoning process, willing to drop its right of reverter? Client thinks so based on discussions with the city and its attorney.  Move to last step.

In the event the city does exercise its right of reverter (which in the client's analysis was a minimal risk), would the title insurance proceeds (assuming no fight over coverage) be sufficient to make them whole? Yes, the client thought so.

My job wasn't to kill the deal, which in fact closed. It was to give them a road map of possibilities and scenarios to allow the client to make an informed business judgment on whether to proceed. It wasn't an easy call, but it was an informed one.  And sometimes the deal dies.  Heck, I've heard of the murder defense called  "he needed killing," and you can compare that to some deals that have four legs and bark.  So don;t always assume your lawyer -- or the other guy's lawyer -- is someone out there trying to stop you from making money. We are out here to advise you of the risks and rewards of playing in the sandbox.


Dave said...

I find the "deal killer" comment almost always comes from brokers. Of course they only get paid if the deal closes, while we lawyers (hopefully) get paid regardless. I've never killed a deal, but have given clients reasons to from time to time. It's usually because I asked a question or pointed out a scenario they hadn't anticipated and they often greatly appreciate the advice.

Carge77 said...

You raise a great point. A true "advisor" isn't doing his job if he isn't pointing out potential traps, pitfalls, and problems.

As the man once said, "the sage anticipates difficulty and thus encounters none." You're not a deal killer, you're a professional who's job is to help the client understand the dangers of the situation they're entering!

One thing I think a lot of advisors miss, both on the legal side, and on the traditional CRE Advisory Firm side is the need for political due diligence...sooner or later you're going to want to DO something with that property, and if you need to get permits for that something, you really need to understand the politics of the neighborhood, ward, city and county.

Great post, as usual.

Seth Cargiuolo
Chief Knowledge Officer
The Saint Consulting Group
The Saint Report