Practical Solutions: Part 4

Of all the things they don’t teach lawyers in law school, the number one lesson I never received was how to manage legal cost.   I have been an acquisitions manager, asset manager, broker, developer and real estate attorney in my 30+ years in commercial real estate and in all of those roles I struggled with containing legal fees.  I have worked on deals and negotiations of all sizes and of varying degrees of complexity, and I learned a few important lessons along the way that I would like to share with you…

Lesson #4:  Why are my legal fees so high?  

Litigators have a far harder time managing cost due to the nature of litigation itself but transactional attorneys have a distinct advantage in managing legal cost due to the finite and often predicable course of documenting and negotiating a deal.  This is especially true in the context of real estate transactions and yet we real estate lawyers (myself included) routinely resist the clarion call to fix our fees for a given deal based on the understandable fear that we can’t control how “fair” the initial draft of documents will be (if we are not drafting them, of course) and how “hard” the other side will negotiate.  The good news is that there are numerous tools a sophisticated broker and principal can use to manage legal cost and gain the additional advantage of a faster negotiation between attorneys.

Fundamentally, the total legal cost of a transaction is a combination of two factors: “Deal Complexity” and what I call “Negotiation Intensity.”  The more complex the deal and the more that deal is negotiated between lawyers, the higher the overall legal cost for both parties.  This is true whether the negotiation takes place by phone or by exchanging multiple drafts of the documents, although as will be discussed in Part 3 there can be a distinct cost advantage in my view to spending quality time on the phone.

Deal complexity is one of those factors that lawyers usually have little control over.  The good news is that most business terms I come across in a real estate deal have already been documented numerous times before in some fashion and the level of true customization needed to conform the initial drafts to the LOI isn’t usually significant.  This is even true in highly complex transactions such as securitized loans and joint venture agreements.  However, the sheer volume of documentation needed in today’s complex real estate transaction will end up driving up costs in any event.  While it is true that crafting simplified deals does save legal dollars, I would weight Negotiation Intensity as a far more influential factor in the overall legal cost of the deal.

Note there is no mention of hourly rate.  As any experienced lawyer will tell you, hourly rate is virtually meaningless.  The only thing that matters is the total legal bill.  In fact, when you exclude “routine” real estate transactions (such as extensions or smaller transactions that can be adequately addressed by “standard” forms and perhaps a short addendum), most of the larger clients that I’ve worked with over the years gravitate toward hiring the higher-priced more experienced lawyer because they know that they are likely to get far more efficiency in moving through the deal.

In the next installment of this series, I will explore the components of Negotiation Intensity and introduce the concept of “Deal Intelligence.”  As I have said in previous posts, it is the personalities of the lawyers, the business people and even the brokers that are far more important in terms of driving a transaction to a fast and successful conclusion than the documents themselves.  That is particularly true in the context of understanding and managing legal cost.

I’ve found that getting deals done is mostly about using common sense, creativity and people management skills and much less about actual lawyering skill. Finding that critical path toward a successful closing is the ultimate goal but that path is not always well marked.

Stay tuned for Part 5 of this “Practical Solutions” series, The Critical Role of negotiation Intensity