Cliff Lee Deals Shows Patience Can Prevail

PHILADELPHIA-Welcome to the Philly 411, our monthly column on real estate happenings in the Metro area supplied with intel from David Jacobs, a director at Llenrock Group, a local commercial real estate investment-banking firm. You can also follow their blog here. Opinions are the author's own.

Philadelphia Phillies general manager Ruben Amaro Jr. is similar to a savvy real estate investor.  Despite some trophy assets in his “portfolio”, he does not get emotionally attached to them just because he likes looking at them. 

Last year, to the surprise of many, Amaro traded ace-pitcher Cliff Lee, who was coming off a postseason performance for the ages and had one full year remaining on his then under-market contract, when he was at his peak value.   If Amaro instead chose to keep Lee for that season, he may have only received one year of performance, only to watch Lee leave via free agency, and thus received nothing in return. 

This is similar to a real estate owner choosing not to sell in 2007 because cash flow was good and the building was at full occupancy. So why on earth would you consider selling your strong performing asset if the bounty you receive could not replace its performance? Fast forward to 2008-10 and you have your answer. That hypothetical owner now faces a tanking economy, bankrupt tenants, and is left with no ability to unload his once prized asset. Similarly, Lee could have gotten hurt (he actually did miss the first month of the 2010 baseball season with an injury) and Amaro could have ended up with nothing.

Conversely, the shrewd Amaro arguably sold at the right time, only to reacquire the same asset a short period of time later.  While anybody flush with cash can acquire a free agent, or a piece of real estate, not everybody can acquire it for a price that is far inferior to the market price.  This is where Amaro stands out as a negotiator and the savvy real estate investor parallel broadens.

Entering free agency for the first time, Cliff Lee had two offers on the table for more overall money and more overall years from both the New York Yankees and Texas Rangers. Since contracts in baseball are guaranteed, this is a big deal. So why on Earth would Lee, like so many commercial real estate sellers, not be looking for every last dollar in the offers they field?  Intangibles. In his short time with the Phillies in 2009, Lee obviously loved the clubhouse chemistry with his teammates, the laid-back nature of manager Charlie Manuel, and the hometown fans who chanted his name throughout each dominating outing in the playoffs. And apparently that was enough for Lee to leave a significant amount of money on the table.

We see in real estate transactions all the time that the highest bid is not always the winning bid.  In any LOI, it spells out not only the purchase price, but factors like due diligence time frame, closing time frame, contingencies for financing, the amount of the hard deposit, etc.  By shortening your closing time frame and perhaps by offering to close all cash, a buyer with an inferior offer dollars-wise can end up winning the bid if the seller values those intangibles highly enough.

Essentially, this is how Ruben Amaro won Cliff Lee’s services.  While Amaro’s 5-year, $120M offer didn’t have the highest total dollar value (the reported 7-year, $154M offer the Yankees presented Lee with), it did have the highest  annual dollar value, a team option for a 6^th year with a hefty $12.5M buyout should the Phillies decline to exercise that 6^th option year, and the “comfort of close”….i.e Lee would be in a familiar city with familiar faces playing for a team he loved.

While no real estate seller would be “in love” with a buyer, he certainly could take solace in the fact that the buyer could close all cash in 15 days.  Sometimes it is worth leaving some extra dollars on the table for the surety of closing, and closing quickly. Whether in baseball deals, or commercial real estate deals, a bird in the hand is almost always worth two in the bush.