Why Trust is Critical for Commercial Real Estate Capital Transactions
The most common capital events in commercial real estate are the sale of a property, a recapitalization, or development financing. On average, these capital events see millions of dollars trade hands, whether the money is going “into the property” to pay for construction or to be held as reserves, or “cash out” into the hands of an investor or seller.
On paper, real estate capital events are all about the numbers. The salient points revolve around the property’s current value, the property’s potential future value, and the “capital stack” - an accounting of all the sources of funds for the capital event (equity, loans, etc).
However, beyond all the possible numbers and facts to account for in your investment model, there’s another piece of information to consider just as important as all the other facts and figures, combined.
Who are my counterparties, and can they be trusted?
The cost of misplaced trust
When it comes to commercial real estate capital transactions, misplaced trust can be costly in many ways. You can lose money on a prospective deal or lose time working on deals that were never going to materialize. However, the most costly outcome of misplaced trust can lead to the loss of your own reputation, even if a failed transaction is someone else’s fault.
Let’s say you are looking to sell a property, and accept an LOI from a buyer that seems legitimate, and the price is what you are hoping for. There are several ways a deal can fall apart after the acceptance of an LOI, but in this case, the buyer, while they looked good on paper, and sounded good on the phone, was always intending to retrade the price. If that buyer retrades or pulls out of the deal after months of diligence and negotiation, you’ve at minimum lost time you could have spent marketing the property to another buyer, but there can be several other consequences. Perhaps in this time it is now too close to your loan maturity to exercise a patient sales process, or even find a good recapitalization option. If you have LPs, perhaps you set their expectation that they would receive liquidity, but now it’s not coming at the price and timing you hoped, and you have to explain that to them. Now you have a lender that is losing trust, an LP that is losing trust, and it’s not because you did anything wrong, but you trusted the wrong person.
A colleague of mine, Freddy Johnson, a Capital Advisor for StackSource based in Chicago, shared the story of a sponsorship group that had 3 key principals, one of which was a relationship of his that asked Freddy for financing quotes for one of their properties. Unbeknownst to Freddy, one of the other key principals had separately engaged a traditional financing broker that ended up asking for a loan quote from one of the same lenders that was matched and given access to the financing opportunity through StackSource. That lender, a major national group, was confused why they were getting the same financing request through multiple channels, and concluded that if the sponsor was keeping their Capital Advisors in the dark about how they were running their financing process through multiple parties, they were not a trustworthy enough client to do business with, refusing to quote the loan through either party.
It starts with me
There’s a classic piece of dating advice that’s relevant here. You can’t control whether you find your future husband or wife today, but you can choose to work on yourself first while you wait.
Deals really are a lot like dating. Your interactions with people either consummate in a transaction, or they do not. Working on yourself first (your strategy, your approach, and your personal character) pays off.
Here’s how to hone your own approach so you are a deal party worth working with.
A lack of integrity might be the most obvious way to break trust. Integrity includes honesty, but it also includes staying true to your internal moral code with your actions. A trusted executive coach once told me that integrity is being the same person on the inside as you are on the outside.
To cultivate integrity, you need to go back to your “foundation” - ask yourself, what code or principles do I really believe in? Where have I fell short of upholding those values? And then seek to bring that out in the open by talking about your failures (yes, really) with a trusted person in order to rebuild a habit that builds you up in that value. Making amends with people affected by your prior lapse of integrity also has a healing and strengthening effect on your integrity moving forward.
If integrity is doing the right thing, then transparency is opening up what you are doing so other people can see your process. It’s similar to openness, in that it’s not enough to just say things that are true, it also requires you to proactively volunteer the right information that gives a better understanding to those you are working with.
Competence is being really good at what you do. If you are honest and transparent, people will be able to see fairly quickly whether or not you are competent, and it will become a multiplier on the number of opportunities you receive.
If you display all three of the above traits sometimes, or only with some people, that means you lack consistency.
Often, inconsistency can actually be subconscious, requiring us to enter into an area of exploration with our own behaviors and biases. Asking for feedback regularly from the people you are working with, and really listening to what they have to say about us, however uncomfortable, can expose where we are falling short.
In a team leadership setting, cultivating consistency includes writing out Standard Operating Procedures (and enforcing them), as well as giving good feedback and checking in to make sure people stay on the right track.
Our expert Capital Advisors help you secure your ideal capital stack, resulting in a lower cost of capital for your investments in less time and with more transparency than a traditional commercial mortgage brokerage. Learn more at StackSource.com.