By Al Barbarino
The words of Sam Zell seemed to echo off the walls at a REBNY seminar last week (Thursday), where a group of real estate lawyers and high-level brokers advised a room full of industry professionals and fellow brokers on the importance of term sheets.
At the NYU Schack Institute of Real Estate’s 17th Annual REIT Symposium last month, the billionaire investor and chairman of Equity Group Investments spoke of the difference between “transactionalists” and “conceptionalists.”
A pure transactionalist might skip over the fine print, motivated only by closing deals, failing to look ahead to identify and sort through any misunderstandings that could result from a hastily executed deal.
“The real estate industry as a whole has a very serious limitation,” Zell said. “Real estate guys are the best transactionalists there are in the world. I would put a real estate guy up against some corporate (guy) in two seconds and he would just turn him upside down.”
But, he added, “We have a tremendous shortage of conceptionalists… the reason we have such vicious cycles in our industry is because it’s driven by transactionalists.”
The REBNY event included panelists Chris M. Smith, a partner at Shearman & Sterling LLP; Mitchell Konsker, vice chairman, NY tristate region, at Jones Lang LaSalle; David W. Levinson, chairman and CEO of L&L Holidng Company, LLC; Jonathan Mechanic, a partner at real estate law firm Fried Frank; and moderator Michael R. Laginestra, vice chairman at CBRE.
In many ways, the panelists made a strong case for the conceptionalist over the transactionalist.
Upon entry, each broker was handed a sample term sheet for two 25,000 s/f floors of a hypothetical address on West 34th Street. The terms put forth in the seven-page document mapped out everything from lease terms, rents and renewal options, to cash allowances, taxes, electricity costs and other miscellaneous building specifications and conditions.
An exhaustive list of terms can seem daunting to a novice, especially to someone who’s preoccupied with closing deals – a strict “transactionalist” who might be less astute at “looking around the corner,” as Zell put it.
They are also not considered to be legally binding agreements. So is all of this necessary?
Absolutely, panelists at the REBNY event said. And given the complexity of today’s deals, they are more important than ever, as lawyers, architects and engineers play a bigger role than ever in negotiating terms.
“Bring as many professionals to the table as possible,” Konsker advised.
“Don’t presume that you don’t have to protect yourself when signing the lease,” Smith added. “The time when the tenant has leverage is at the signing of the term sheet and the lease.”
After that, the leverage shifts over to the owner, panelists said.
The sheet lays the groundwork for a lease, a “roadmap,” according to Mechanic, that provides a template for an ongoing dialogue and a “word-of-mouth” agreement between the tenant and the landlord, precluding the possibility of a misunderstanding.
In theory, it’s simple. A broker should focus on how the terms can be set to support and help advance the tenant’s business. But “sometimes people lose sight of that,” a problem and common mistake that often leads tenants and brokers to unnecessarily meddle into the landlord’s business, Levinson said.
There will always be a natural tension between the landlord and the tenant. Sealing deals is great, but term sheets are one of the best ways to iron out those tensions before they cause deals – and relationships – to fall apart.
*This article appeared in the May 30, 2012 print edition of Real Estate Weekly
