I have been involved in many contract negotiations. I am not a lawyer, but I am with them all the time, in this constructive confrontation. Here’s the way it typically works. If I want to get a three-percent fee, I would tell the other side that I absolutely must have four percent, recognizing that they are going to have to drag me down to three percent to feel like they “won.” The whole negotiation is based on a lie.
Most of the negotiations I work on are much more complicated than this. When we are engaged in a large building project, it involves lots of parties including contractors, architects, engineers, bankers, development partners, hotel companies, private equity ventures, landowners, landlords, and governments. We end up with these really complicated transactions.
My gift for this work is that once I have read all the agreements one time, I can remember them and how they all work together. I know that if I can change a provision in one place, it will affect another one, and those two in combination might actually take away what someone thought they had in another part of the agreement. I found I could make it so the other party got only what they thought they had if they performed exactly correctly; otherwise they got much less.
A New Approach
This had been wearing on me for a long time and, in 1992, I decided I didn’t want to do negotiations the standard way anymore. Part of this came from a bad experience I had had, where I really took advantage of someone — completely legally. But I didn’t like the result. The second part came from my faith — there was this dissonance between what I believed in that part of my life, and what I did in the rest of my life. I told our lawyers, “I think that there is a fair deal out there for everybody, and I want to actually make sure everybody gets what they bargain for. I am not going to say I want something when I don’t really want it, and I don’t want someone’s legitimate interests to be undermined.”
The lawyers told me I couldn’t do that. The board of directors expected me to put these projects together for our benefit, only protecting the interests of our company. They said they wouldn’t work with me unless I got permission from the board to amend the approach. In fact, the board didn’t realize all of the twisting and turning that went into a typical contract negotiation, and to their credit they just said, “Yes. Those are actually our values, too.” I do not think they realized how hard it is to do that sometimes.
The first negotiation I did after that was in on a project in the South with two real estate developers who were really struggling due to an economic downturn. They had lost some of their properties, others were embattled. They were locked in unpleasant confrontation with lots of bankers, lawyers, and partners. It was a very difficult time for them. I walked in and said, “Here is the way I want to do the deal. I want this to be a deal that is good for both of us, so I will look out for you and I want you to look out for me.” They looked at me skeptically and said, “Right, sure.”
Early in the negotiation I said, “If you turn to page 3, section 1.2.5, it says your development fee is 3 percent, but if you go over the development agreement here, it says that if you are ever in default for any reason, you can never recover your fee. I think that could deprive you of what you actually earned, so I would like to change this provision here or that provision there so that I cannot legally take away what was rightfully yours.”
They laughed uneasily, but of course agreed to the change. A little further in the negotiations, I pointed out another combination of provisions that could be bad for them. They looked at me as if to say, “Who are you? What is going on?” I reminded them that I wanted this deal to work out for both of us and would be most grateful if they could find something that might not be good for me. They did not do it, not right away anyway, but I really wanted to do this thing right. I was pumped, and so I never backed down. By the end, they also identified some provisions that would be better for our side.
The project ended up doing very, very well. In the end, we made a $20 million profit, and they got half and we got half. These two developers who were on the brink of bankruptcy at that point in time came out very well, and so did we. They told me later that the approach to the negotiation also changed them, and that they decided that they want to do business like that in the future. We developed a lifelong relationship.
It is important to get the contracts right. One of the reasons you do that is because you are not always the one there to implement it; you move on to another job or the relationship moves over to some other department. But there is more to this approach, because the contract can only cover the things that you anticipated at the time. There is a lot more to these business relationships than just the contract. There is also the spoken word, which must be anchored in a trust relationship. Markets can change and other conditions can evolve differently within the transaction. When you have been encouraging someone to move in a certain direction, you have to back up what you said, even when it might be uncomfortable to do so.
Here is another example of a project we were working on recently. We agreed to purchase a tract of reclaimed land in a prime location in the East. I wanted to build two golf courses, a nice hotel, and some residential there. I worked out a deal in principle with a developer, signed a contract, and he went off to work with the various municipalities. The deal got very tough for him. He found he had to build a middle school, a road, and all sorts of other things. His economics had been destroyed.
Backing or Bankruptcy
He thought I was going to back him up financially, but I was not obligated to do that, and it was going to cost a lot more money. I could have said to him, “I am really sorry that happened to you, but I want the deal that I had six months ago.” He had no one else to buy the land, and he was obligated to pay me back everything that I put in up to that point with interest. If I had taken a hard line, he would have been bankrupt.
Rather than do that, where he would have lost everything, I got out my computer negotiating model that showed all of my estimates and projected costs. I moved my chair around right next to him and took him through the model of what the changes meant to me and what it meant to him. I knew he didn’t invite this situation, and I suggested we figure out how it could work for both of us. It absolutely blew him away. I don’t know if this deal will work out well, but it has a good chance, and I made a friend.
Here is one more example: There was a man in the Southeast who wanted to do a $40-million renovation on a hotel. He was getting ready to sign personally on a cost-and-completion guarantee with us that had no limit. By pledging his personal assets in this way, I could have come after him and taken his house, his wife’s jewelry, the art on the walls, and everything, if he ran into a big problem. I was sitting with my lawyers on the last day before we were to sign the agreements and said, “We need to go back and change a provision here. If the contract says that I have the right to take his house, as a fiduciary for a pension fund, I have to do it if he gets in that position.”
So we discussed what a reasonable limit would be under this guarantee. At the closing table, I told the young developer that I was going to change the contract and limit his liability, because if I did not do this now, I would never be able to stop later. He broke down and cried when he realized what had happened. Is that bad business for me? No, I do not think so. It meant so much to him, it caused him to wake up in the morning and think better about the project, and how he could make it better. When he had little opportunities to take advantage of me, he didn’t.
I am not Santa Claus. I cannot just go in there and give away the company store. I represent pension funds, and I am a fiduciary. There are certain mistakes that banks or developers can make and just get scolded for, but if I fail to live up to my fiduciary responsibility, the government can put me in jail. I have to act prudently. I have to be really careful and protect our investors’ interests. Making the deal fair for all parties does not violate that fiduciary duty. In my opinion, when one views the business relationship holistically, equitable terms for all parties is a good business practice.
And there are some people you can’t work with. When you do what I have described, they think you are stupid or naive, and they seek to exploit it. You have to have your eyes open, and be prepared to walk away from some deals. There are so many ways that people can take advantage of you in business that personal integrity becomes a central issue.
But I must say that the vast majority of the business people that I deal with are actually quite honorable. They will reflect back what you show to them. If you act honorably to them they will act honorably to you. If you get the relationship going down the right path, where you are actively looking out for them, they will in fact actively look out for you. It may not happen right away, but it will happen. If you are in a contentious situation and are always trying to out smart the other guy, it is not healthy.
It is not always about you, and it is not always about right now.
Jack vanHartesvelt joined Kennedy Associates Real Estate Council Inc. in 1997, and oversees the company’s hotel investment, development, and asset management portfolio. He is its senior vice president and principal for acquisition. Prior to joining Kennedy, he was executive vice president of Westin Hotel Company, where he was in charge of all development-related activity in North and South America.