A Week’s Worth of Mistakes: # 4 - Lost Leverage

When we built our first office in the mid 90s, we knew nothing. About construction. About negotiation. And especially about leverage.

In any commercial space build-out there are usually three participants. The renter, the landlord and the general contractor.

The landlord will often press to have “his people” do the work. Doing so is death by a thousand cuts. Usually of your standards. Followed by your will to live. Rent rebates being no substitute for functioning air conditioning in the dog days of summer.

We had avoided this fate and had brought in our own GC. The work took six months, twenty percent longer than promised and cost twenty percent more. Typical in all regards. We know now.

Towards the end of the project things started to get tense, and disagreements between the GC and the landlord’s electrician had become hourly events.

There are twenty three steps between deciding you want an outlet in a room and being able to plug in a toaster that toasts. They are all required if the biggest issue you face each morning is to be bagel or muffin.

Our nascent business depended on technology. A million dollars worth, give or take. And having the right kind of power in the right kind of places was a fundamental assumption of our business plan. A poor assumption we discovered. In the end, we withheld payment from the GC, who placed a lien on the building for the landlord’s failure to comply with the contracted scope of work.

The landlord, rattled from arrogance for the first time in a year-long negotiation and construction process, came cap in hand to us and agreed to correct everything they had previously denied responsibility for. In return we agreed to settle with the GC.

We accepted the deal, signed the revised agreement, and went to the GC with the happy news.

Did I mention we signed the agreement? An act also known as giving away your leverage.

Because now, instead of sitting on the top of the pyramid of power in which the chain of non-compliance sat beneath us, we had unwittingly made ourselves the fulcrum. We were now responsible for settling with the GC. We were now responsible for getting the work finished.

The GC, rather than lifting the lien, decided that he now had issues with various other aspects of the scope of work, and demanded payment for areas we had assumed were settled.

Never assume. Particularly during construction.

The GC refused to complete the project or remove the lien until his issues were resolved. The landlord reminded us of the agreement requiring us to settle with the GC and have the lien removed. Our lawyer reminded us of the terms of the lease and the first day rent was due. Our newly hired staff reminded us their paychecks were due. And our clients. Actually, we didn’t have any clients. Because there was nowhere for them to be clients.

Between a rock and a hard place choose the rock. It hurts more. But is over faster. And time is your greatest asset.

We paid the GC, who finished the work and we opened our office.

The cost of signing the Agreement with the landlord before we had used our leverage with the GC? About $200,000.

You have leverage in every negotiation. Exercising it requires two things.

Recognizing what it is.

And understanding when to use it.

A Week’s Worth of Mistakes: # 3 - The Temptation of Price

I watch buyers of services haggle over prices almost every day. A fanatical fixation on fiscal fine tuning.  

The result of which is the buyer saves some money. The seller feels worth less. And the process is constantly measured by both to ensure the output is worth the price.

An exercise in defining the bare minimum.

In any negotiation, price is only one reference point. The other is value.

A focus that motivates both parties to work on creating more.

It is the difference between negotiating a price. And negotiating a deal.

A difference that recognizes that profit is only minimally affected by how well you save your money.

But massively affected by how well you use it.

Schmuck Insurance

This weekend I was introduced to the concept of Schmuck Insurance.

The teacher was a real estate developer who had learned about it the hard way at the end of last year.

The developer and his partners were finishing a new building in New York. They quickly found a prospective buyer for the first unit and negotiated the sale price.

At the last minute, sensing the unease in the financial and real estate markets, the buyer asked for Schmuck Insurance. A guarantee that if the next unit was sold at a discount that he would retroactively receive the same discount.

The developer and his partners said no. A month later they said yes. At which point the buyer walked.

He walked in part because the market had worsened in the meantime.

But mostly he walked because his concern that he might become a schmuck was replaced by his belief that he would now be a schmuck if he said yes.

During a negotiation, if I ask you to give me a piece of protection I see myself as smart and taking care of myself. An intellectual and emotional payment to my self esteem.

If you agree with my request, I see you as protecting my interests as well as my own. A partnership.

If, however, you say no at first and yes later, I believe something has changed which you’re not telling me.

Which makes you untrustworthy. And me a schmuck if I say yes.

The buyer came back recently and closed the deal for sixty percent of the original price.

In every negotiation start by first defining your own worst case scenario. What’s your walk-away threshold. The deal which you’d be a fool to accept.

This is your Schmuck Insurance.

Which makes it simple to then do two things.

One. Make a worthwhile deal the first time around.

Two. Avoid being the schmuck.

Giving Happy Thanks

A young man woke up on the morning before Thanksgiving and discovered someone had left a parrot in a cage outside his front door.

He took the cage into the kitchen and placed it on the counter.

"Hey asshole," the parrot squawked. "Open the fucking cage and get me some fucking breakfast. I'm starving. And clean this shit-hole cage while you're at it. Smells like a fucking bird took a dump in here."

The young man was startled to say the least. But being a kind soul took pity on the bird who after all, he reasoned, must be traumatized by the sudden upheaval in his life. He decided to approach the problem with kindness and sympathy, as befitting the season.

Gently, he took the bird out of the cage and placed it softly on the counter. Then set about getting the bird's breakfast ready, before cleaning out his cage.

Throughout the bird maintained a running commentary. "Hey, dick-wad this stuff sucks. Haven't you got anything decent to eat in this cess-pit. Just my fucking luck to get dumped on the doorstep of some loser. Hey, hey, not like that. Don't you know anything about cleaning bird cages. Where'd you grow up under the train tracks? That where your momma dropped you. No wonder. One look at your face she probbaly died from embarassment."

Suddenly the young man grabbed the bird, opened the door of the freezer and flung the parrot inside. For a minute there was squawking and banging from within. Then suddenly, the room fell silent.

Overcome by remorse the young man opened the freezer door. To his surprise, the parrot walked out quietly and settled gently onto his outstretched arm.

Then, with bowed head, the parrot began to speak.

"I believe I may have offended you with my rude language and actions," the parrot said softly. "I'm filled with remorse for my inappropriate transgressions and I fully intend to correct my rude and unforgivable behavior. I'm grateful to you in the extreme for your kindness and thoughtfulness, and I intend to fully repay you with lifelong devotion and admiration."

The young man was stunned at the change in the bird's attitude. But before he could say anything, the parrot looked up at him. It was clear he had something else he wanted to say. The young man gave him what he hoped was an encouraging look. Whatever had caused this parrot's attitude to change so dramatically had clearly affected him deepely.

Hesitantly, the parrot cleared his throat. And then, with what was clearly a great effort, said very quietly, "may I ask what the turkey did?"

5 Benefits To Negotiating Flat Fees

The days of hourly legal fees are behind us.

This is not news to our clients. Nor to the lawyers and accountants we work with on their behalf, who have long understood our belief that flat fees create a win-win scenario.

In fact, we have been hiring lawyers and accountants on a flat fee basis for almost a decade.

Through experience we have learned there are 5 benefits to doing so:

1. Both sides have to take responsibility for defining the scope of work before the agreement is struck

2. The service provider is motivated to get the work done as efficiently as possible.

3. The service provider is motivated to do the work as well as possible so that the can get hired and recommended again

4. The buyer is motivated to support the process they agreed to so they don’t get hit with change of scope fees

5. Both parties learn from the process. About their own methods and each other. This leads either to a better process next time. Or a quick end to a the relationship.

Either side can undermine this structure.

But there is a cost to doing so in the loss of future opportunity to work together.

If that’s not a cost to you, you’re doing business with the wrong people.

6 Steps To Using The Commercial Real Estate Bubble To Your Advantage

I’ve been working on a novel for longer than I care to admit. Having finished it some time ago, I have finally started the re-write.

Every writer has a process that is natural to them. Mine, I have leaned, requires I first place the location of each chapter before my characters start to do anything. I read somewhere that character + location = plot. That is certainly true in my case. And a vivid location gives context and purpose to the people that come alive in my book.

The same applies in the real world. Finding an office space that supports and enhances the purpose of your business has a lot to do with the quality and originality of the work the company produces.

Commercial real estate is forecast to be the next great bubble to burst in the economy. Unlike residential loans, commercial real estate typically operates under five to seven year terms. The downward pressure on landlords through defaulting tenants and shrinking demand for office space reduces income to real estate owners, just as many mortgages are coming due for renegotiation.

The consequence puts renters in good standing in powerful positions to negotiate more favorable terms. Lengthening the term of a commitment in exchange for lower rent and space improvements for instance creates both an economic and emotional win at a time when either are hard to come by.

If you rent from a landlord who owns multiple properties, and almost all of them do, exploring their other buildings, even if you still have two or more years to run under your current lease may create a win-win.

If you have less than two years left on your current lease, have your broker analyze every building in your target area.

In either case, here is a six step plan for improving your real estate situation:

1. Define the five best and five worst aspects of your current space situation. This should include things like expansion rights, sound, light and temperature quality, and convenience to transportation and restaurants. Issues that affect your staff’s daily experience and your company’s future growth.


2. Ask a real estate broker to give you a list of the other buildings your current landlord owns together with current occupancy rates and most recent deals


3. Ask your broker to analyze each building against your list of best and worst features - color code each improved feature as green, each equivalent feature as orange, each lesser feature as red


4. Any building that you evaluate as all or predominantly green with no red features is worthy of a serious negotiation with your landlord. This negotiation should include: base rent; term; escalation rates; loss factors ( an enormous issue in New York City where loss factors can often exceed 20-25%) landlord build-out allowance and number of months of free rent.


5. Compare the new deal to the cost and disruption of moving: moving costs; changes to printed collateral, websites, and information systems; technology infrastructure; and potential loss of business during any physical move.


6. Decide. If the comparison is close, go back and ask for one major concession that would make the deal a no brainer.

This economy has wrought a lot of destruction to small businesses. But it can also provide the foundation for sustained, long term growth.

Whether you choose to use it that way is just that.  A choice.

Irrelevant This

We don’t know what we don’t know.

Which makes building a better business difficult at the best of times.

But virtually impossible if we ignore what we do know.

Or convince ourselves that this time the facts won’t apply. That we should act based only on what we want to be true.

As a case in point, consider Roland Burris.

For those outside the U.S., Roland Burris is the junior senator from Illinois. Appointed to replace Barack Obama in the U.S. Senate by the former governor of Illinois, Rod Blagojevich, who was then impeached for trying to auction the seat to the highest bidder.

As his final official act, he appointed Mr Burris, a 72 year old black Chicago politician, to fill the seat. A move the leadership of his party in the Senate immediately decided they would reject.

It was, the Democrats said, inappropriate, unacceptable, illegal, unconstitutional. Mr Burris was told his claim was invalid. They denied him the seat. Then they turned him away at the door. Literally.

Here are two facts they ignored:

Fact 1: There was no legal basis for their position. None that withstood the simplest scrutiny.

Fact 2: Nor any political one. Denying a black candidate the opportunity to replace the only black senator is bad for electoral college counting.

And so, after two weeks of noise and bluster, Mr Burris became Senator Burris.

For eight months, a chilly detente has existed. The Democrats counting the days until his term ends in 2011. Mr Burris left isolated and unwanted, and fighting his own ethics charges without support from his party.

Until now. When the issue of health care reform approaches a final vote in the senate. And the debate about the public option becomes real.

For the record:

• 77% of America wants health care reform with some form of government  provided health care. The so-called public option.


• The Democrats need all 60 of their Senators to pass any kind of health care reform.


• Several are reluctant to support a public option.


• Mr Burris has declared, "I would not support a bill that does not have a public option. That position will not change."

Which leads us to two more facts the Democrats tried to exclude from their analysis:

Fact 3: Without Mr Burris’ support, the Democrats can’t pass health care reform.

Fact 4: Without health care reform, the Obama presidency slogan becomes, No, we can’t.

Imagine whatever vision of the future you want. Then put that aside and deal in facts.

Because dreams can come true. But only if you accept reality first.

Change. The End.

We sold our house on Tuesday. An end to a lot of timelines. Twenty five years in Chicago. Fifteen years in our home. Eighteen months on the market. Two months of negotiation.

I’ve done a lot of deals in the last few years. There weren’t any harder than this. We walked away a number of times. Initially on price - until our broker told us it was this or wait a year. And then increasingly on dignity.

Change is one thing. Capitulation on someone else’s terms is another.

If you are in a situation that you have decided must be changed, creating the conditions in which you can overcome your own fears is critical.

You have to burn your ships. But you also have to make sure you’re not relying on third party, fourth-hand information to make decisions. Humility is a scarce and valuable resource in a negotiation and it evaporates quickly as we sense we are losing control. Add not being heard to the equation and it disappears entirely.

For a while on this occasion we let brokers and lawyers do all the talking. Then our broker did a very smart thing. She humanized us. She asked me to send her an email outlining our view of the deal. Then she passed that on to their broker. Who of course passed it on to the buyer. We got a response, and suddenly each of us was dealing with a human being.

In every future deal I do, I’m insisting on talking directly to the other side. No exceptions. I blogged about this a few weeks ago.

In the heat of an emotional battle, mostly with oneself, it's hard to take even the best advice. But one of the benefits of writing this blog is that it puts what I think down in black on white. It’s hard to ignore that.

Seventeen days ago, we received an email from the buyer's lawyer via ours. It accused us of being liars. I may be a lot of things but telling lies comes very, very hard. I can remember every untruth I’ve ever told. And they haunt me. Needless to say, the accusation went down very badly.

As far as I was concerned, that was it. They weren’t getting my house. My home. My lifeboat. Not those people. Not dead.

Lawyers don’t do deals. You do.

I went back and re-read my blog. Then I re-read the buyer’s email. Its tone did not match his lawyer’s. I see that a lot. Lawyers with big egos thrashing about to make an impression. Often it has the inverse effect to the one their client is hoping for. At best it’s boorish. At worst it’s deal ending. Most of them get paid regardless. I’d rather pay for results than bombastic letters.

Chris and I decided to heed my own advice. We invited the buyer and his family to come to the house so that we could show them round in person, take them through its eccentricities and explain the work we were doing to ensure we handed it over in the best possible condition.

This strategy was not universally supported. In fact we couldn’t find anyone who agreed with it. But we were convinced of two things. Transparency is a powerful lubricant. And the only behavior you can control is your own. If we acted honorably at least we had one foundation we could lean on.

It was a turning point. The instant we met we knew we had sold to the right people. They love our house as we do. And when I handed over the keys for the final time, the fear I felt was not for the future of our former home.

The last few days have been extraordinary emotional. Much more so than I had imagined. And the sense of loss is profound. Twenty-five years is more than half my life. And 650 West Hutchinson Street was the first home in which love was more than just a word to me.

Those are hard things to give up consciously in the belief that the future is better met elsewhere. And on one level, by leaving Chicago and my home behind, I feel I have betrayed places that have given me so much.

But the fact is life had become too easy. Too rhythmic. Too settled. And that is not a foundation for growth and exploration.

And so I step out into the storm and face the unknown. Grateful beyond words for the past I have lived. And hopeful for the possibilities that tomorrow will bring.

Change. Part 4.

When Cortés reached the new world he burned his ships to ensure his men harbored no second thoughts about their new life.

Apparently in 1504 fire was easier to find than a buyer in the real estate market 0f 2009.

Having failed to sell our Chicago home in each of the previous two years, we entered 2009 with twice as much real estate as we wanted and a shrinking economy. From an emotional standpoint, we also had a boat back to our old life. More than once we were tempted by familiarity and fear to jump in and start paddling back to the midwest.

Familiarity and fear are frauds. Say it three times. Pin it on every door you pass through. Tattoo it somewhere prominent. Less serious measures will leave you vulnerable to their siren call.

For as hard as we try to use our brains, we are animals. Ninety percent of our DNA we share with chimpanzees. And the remaining ten can’t do all the thinking all the time. So, much as we might wish to be smart, pragmatic, strategic and wise, chemistry 101 will often prevent it. Particularly when stress is added to the equation. Like that brought about by a once in a lifetime economic melt-down.

The fact is Cortés was way ahead of his time. He still is. Because he knew that when options are removed, we make the best of a situation. And the best is often great.

But given choices, we reflect, cogitate, rationalize, justify, and then often head back the way we came. It’s called human nature. And it has happened this way since before we stood and walked.

A lot of company owners acknowledge the emotional side of change with words. But then act as though someone else had said them.

Better business is built on a foundation of sensitivity to the emotions of everyone involved. Including your own. Sometimes you need to take physical steps to create the environment for progress. Like burning your ships.

We bought 650 West Hutchinson Street on December 1, 1994. Put another way, George W Bush had barely taken the oath of office as the Governor of Texas. No one had heard of Monica Lewinsky. And Barack Obama - in his second year teaching law at the University of Chicago - was three years away from holding his first elected office. The day we moved into the house, we weren’t married, didn’t own a single dog, and had never hired a single person.

Through all that our home had been our ship.

But as Winter turned to Spring this year still we couldn’t cut it lose. And our broker - a sales genius - told us that it might be another year before we’d see an offer. The alternative - and on many days the temptation - was to head back. Familiarity and fear might be frauds. But their short term narcotic effect is powerful.

It was with relief and some surprise that we received a call in mid May. With it came the chance to begin to focus fully on the way forward. Someone had fallen in love with our house.

We started to negotiate. The match was lit. The fat lady was about to sing.

There’s a reason fat ladies with loud voices don’t hold lit matches.

Change. Part 3.

Negotiations are living beings. They change shape in ways that are imperceptible when you live with them every day. Step back and see them as a stranger would and the loss of perspective is obvious.

When, in the spring of 2008, we got a second offer to buy our house, we were focused on three things. What they wanted to do with it. What they wanted to pay for it. How long we could stay. The third factor became so important to us that the deal looked as though it would fall apart because the buyer wanted to move more quickly than we did.

As we learned, worrying about irrelevant truths is very expensive.

In our ideal world, we wanted to spend one last summer in Chicago with our dogs and then move East. There was a trip to Italy to celebrate my in-law’s 50th Anniversary. Twenty four years of living in Chicago to say goodbye to. And an unknown future we wanted to delay.

At some threshold change scares all of us. And the known is a powerful magnet that distorts the blinding obvious even further. As we entered the crucial stage of the negotiation, we could no longer see the true shape of the deal or where it was likely to lead us.

Find a buyer who loves the house. Done. Get a great price. Done. Move East. Hold on, could we talk about that please? You see, we’ve got this trip to Italy, and we need to say goodbye to our friends. And summer is so great in Chicago.

You already know it’s going to end badly. It’s so obvious.

As it turned out, the bill for structuring the deal so that we could spend those extra ten weeks in Chicago was $450,000. I hope we enjoyed those ten weeks. I hope they gave us a lot of comfort about the change we were about to confront. Truthfully, they’re a bit hazy. Surprising, since they cost us $45,000 each.

If I tell you we spent three of them in Europe, and that for all of them we were also paying rent on a house on the east coast, and you’ll wonder how we dare sell our advice to anyone else.

The best lessons are the ones we learn ourselves. And in this case, we paid the price so you don’t have to.

By focusing on the least important issue and making it the most important, we lost sight of our priorities. Sell the house. We didn’t see the changing economy and crashing real estate market ahead. But we didn’t need to. We just needed to be committed to a decision we had already made. To move.

Once we lost sight of that we lost. The buyer wanted to get in quickly. Instead of using that to negotiate a clean contract, we substituted a delayed closing for a sale contingency on his place. Instead of riding his excitement about living in our home during the summer, we dissipated that energy and gave him time to think about his own sale price.

Ultimately, we all lost. After being told by everyone he could sell in a week, he refused to lower his asking price to get a sale. And six months later, neither of us had sold anything. We eventually all agreed in November that this wasn’t going to happen and we cancelled the contract.

Last I heard, he’s still waiting. And despite the fact he did finally lower the price, he’s now one of a dozen apartments up for sale in his building. On a monthly basis, his apartment probably costs him triple the carrying costs of our house. Lose lose.

We finally moved east in late August. It was a quicker adjustment than we had thought possible, and Chicago seemed a long way away. Except for the house we owned.

By the time we reached Christmas, the housing market had fallen twenty percent. That, our broker thought, was not yet the bottom.

As it turned out, she was right.

Change. Part 2.

Chicago is an incredible city. Calm and stunningly beautiful. A rare combination.

In summer, Lake Michigan stretches as far as the eye can see, a cooling influence on hot, hazy days. In winter, I have seen steam rise from its frozen surface, the ice warmer than the ambient air that surrounds it. A reminder of the power of context.

I’ve lived here for more than half my life. I love London. It’s where I grew up. But Chicago defined me in a different way. I was once described as a Midwestern boy with an English accent. There’s some truth to that.

When, in the summer of 2007 we decided to take our house off the market and stay in Chicago, we did so because the present was much clearer to us than the future.

When it came time to make that decision, leaving looked like loss. Of the known, the comfortable, the easy. Without an anchor against which to pull yourself forward, it’s easy to hold the future at arm’s length. Some people add a long pole to that equation, pushing hard against the unknown.

The truth, of course, is that the future is coming regardless. And the decisions we make today for ease and lowered stress charge high interest rates. There’s no thirty year fixed option on the price of reality. It’s a balloon note which always come due when you’re least able to pay.

We passed a long, lazy summer, relieved that we could stop worrying about what came next. Faced with a difficult decision, I have come to realize this is how many people operate. The pot gets stirred, the debate engaged, the alternatives analyzed and then, with careful justification, the status quo maintained.

If it walks like a decision and talks like a decision, it must be a decision. Except of course, it isn’t. It’s rationalized fear and the support of inertia. And neither business nor life are well served by their influence.

Seven months later, we realized our original instinct to shake things up had been right, and in January of 2008 we re-listed the house. I started to commute to Manhattan each week, a practice that got old by the second trip.

We were thrilled and fully engaged in self congratulation when we received an offer on the house in late March. For more than we had turned down a year earlier.

The buyer by all accounts had money, taste and style. He shared values that are important to us. He owned a dog, was a supporter of PAWS Chicago and, importantly, was in love with our house.

We did the deal quickly. There was only one issue. He wanted to close sooner than we had a place to move to. And though he had a condo to sell, we were told by everyone involved he could do so at any time. His building was prestigious. His apartment stunning. His views of Lake Michigan mesmerizing. It was our need to delay the closing by sixty days that was the problem.

As good negotiators, we found a compromise, the contract was signed, and we went about preparing for our move.

The trick to a negotiation is keeping your eye on all the possibilities. Not just the outcomes you want.

Sometimes, as we were to soon to be reminded, the best lessons are the most expensive.

Knowledge IS Power

I’ve mentioned in previous posts a series of classes I took a couple of years ago at the University of Chicago GSB.

Last week I came across my notes for a series of lectures on the art of negotiation by Professor George Wu.  Those classes changed my entire view of negotiation, and I’ve been spreading his gospel ever since.

His is a deep and highly analytical approach. But the foundation of it rests on a simple philosophy.

We think we know more than we know.

A powerful statement he backed up with facts.

Take a group of 100 people. 50 are risk-takers and 50 are risk averse. If you ask them individually to predict what percentage of the group would accept a 50-50 bet, the answers typically will be:

• Risk-takers 73%


• Risk-averse 37%

The real answer of course is 50%. But each group over-values the only piece of evidence they have at their disposal - their own pre-disposition.

If we take this to an empirical situation, the pattern continues.

Which causes more deaths in the U.S. each year?

• Stomach cancer


• Motor vehicles

In six different groups, the answer was always motor vehicle. The average differential was 80:20. People think death is 4 times more likely to occur in a motor vehicle than from stomach cancer.

The actual answer, of course, is stomach cancer. By more than 2:1.

But the reason the vast majority of people are so badly wrong in their analysis is because they over-value the information they have readily available. In this case media coverage. On average in any given year. there is typically 139 times more media coverage of motor vehicle deaths than stomach cancer deaths.

In other words we believe what we hear, and then ascribe huge weight to that information.

In any negotiation, the key is to find out the true range of possible outcomes. That means putting aside or minimizing information that is readily available to us or that fits what we want to believe - a mistake that almost every business owner makes. Telling ourselves a story that fits our version of the facts is comforting and easier. It’s also a lie. To ourselves.

Instead, try this:

• Put yourself fully in the other person’s situation and understanding the facts as they experience them. Not as you want them to.


• Challenge your own view of the ‘facts’ with more skepticism than the other participant will bring to the table.


• Negotiate based on the full range of outcomes that is available. 70 percent of participants leaving a negotiation believe they got the better outcome. A mathematical impossibility. And proof that at least one side believed there was less to gain than was actually available.


• Negotiate towards an outcome, not a position. Positions are intractable, fixed points. Successful negotiations require flexibility and possibility, underpinned by a strong understanding of the value of your next best alternative.

All of this requires objectivity.

Hard to come by in the day to day maelstrom. But worth it’s weight in gold in a negotiation.