Of Proms and Real Estate

Prom frenzy broke out in our house over the past month;  our sophomore got invited to the junior/senior prom, which in teenager context is a big deal.  Amid all the corsage, dance, who's going, who's driving, and are-you-sure-there's-no-booze-at-the-after-party, I found myself thinking about one thing over and over:  real estate due diligence.

Getting ready for the prom is, yes,  a lot like due diligence for real estate deals.  Sometimes disturbingly so.  Before the Big Day, each party works hard to make themselves look as attractive as possible, minimizing any flaws – but also, tries not to look too anxious about closing the deal.  We all have seen sellers, brokers and lenders anxiously working to make their candidate look as good as possible so that they can get to the equivalent of the prom:  signed & funded purchase and sale agreements.  As with proms, a lot of the kids (properties) have anxious parents (lenders) hanging around, and watching like a hawk:  Did you remember to brush your hair?  Did you remember to get the appraisal?   Did we get the bank to agree to change the interest rate and amend the LTV?   Are you SURE there's no liquor at that party? 

Then the real test occurs:  the night of Prom, which in real estate we call the “due diligence period.”    Both parties have cleared the first hurdle:  they looked good enough to each other to hazard a date.  But Prom night is the big test:  once the glamour of the girls’ pretty dresses and elaborate makeup and the boys’ tuxedo equivalents and sharp haircuts wear off, the couple actually spend some time together, and find out what they like about each other . . .  and what they don't like.  When the lights come up at the end of the last song, will they enter into that much longed-for special relationship?   Will the excitement of the original deal fizzle out, once the due diligence discloses more of the challenges facing the property and the deal?   (She has two left feet . . . the occupancy rate has gone down . . . there's a problem with the minimum number of parking spaces . . . that green tuxedo looks even worse than you thought.)     Of course, it matters who you date, too:  a little organization and professionalism always helps.  Otherwise, sometimes, your transaction over a good piece of property may suffer from bad execution, like the prom date who is pretty good looking and has a great personality . . . but shows up late, but missing the car keys, the corsage, the address of the dance hall, a comb and his right shoe.  

With money tight, financing just starting to be available and values uncertain, alas, the current commercial real estate market sometimes seems like that elemental dread of all high school students:   The Bad Prom Night.  The corsage wilts, the lender is getting calls from the FDIC, the music's horrific, a third of the closing conditions haven’t been met – and it seems like it will never end.  How should we respond to that kind of situation?   Bad closings and tough deals call for resourcefulness, from real estate pros and high school sweethearts alike.

A busted prom can lead teenagers either to become petulant and difficult (which often leads to the end of the relationship), or to respond with creativity (borrowing a dress, pooling their funds to hire a limo together).  The same thing is happening in real estate:  some players adversely affected by the downturn are burying their heads in the sand, or being unreasonable and difficult to anyone who must deal with them;  but others are finding ways to get what they need – if not necessarily everything they originally wanted at the top of the market – by creatively structuring deals where new equity comes in for a share (usually significant) of the upside in exchange for curing defaulted loans, or by selling some properties to save others, or even by arranging to give back properties to their lenders in exchange for releases of their guaranties. 

As the market shows some signs of returning life, or, at least looks as if it is bumping along the bottom with some deals succeeding,  players in our industry should remember to reward, with ongoing relationships, those who did the best they could with what they had despite poor economic conditions.  

Our daughter gave me a very odd look when I told her I was writing about how much my real estate law job is like Prom.  So I told her to buck up, and make sure I get a copy of her date's Phase I environmental report before they leave for the dance.  If she gives me lip, I might re-check his covenants and ask for his quarterly financials, too.