In The Trenches With The Banker...

While I don't usually do this, I was recently asked by the owner of a local investment property company to attend a meeting with their private banker.  They had refinanced some of their residential rental buildings within the last two years, and did not feel that the rate they were given was competitive.  They were therefore seeking a meeting with this banker to negotiate a reduction on that rate.

I agreed, and was given access to the relevant financial documents.  My research showed that two loan packages were in question.  The first comprised a number of rental units bundled together across varying locations in the area.  The second loan was originated on a single apartment building. 

It soon became apparent to me that the rate charge on the loans was not reflective of the going rate on the market at the time of origination.

I therefore agreed to attend the negotiations to present the owner's case.

Prior to the meeting, I reviewed my strategic goals:

• The first and most important was to agree an outcome that all parties could live with.
• The second was to probe for weakness in the bank's position before making any concessions to our own.
• The third was to, whenever possible, strengthen the negotiating position for the party I represented.

The first rule governed all the rest - it would do little good to alienate a partner that my client relied on to do business.  It was therefore important that I was careful regarding the means by which I challenged the position upon which the banker's case rested.

Prior to the negotiations, I had determined that the financial figures outlined the bank's argument.  I knew that I therefore had an excellent basis upon which to work. 

Figures are very straightforward, while open to many interpretations.  It was going to be important, during the course of the discussions, to determine whether, as the interest rates were determined, they were done so on the DCR ratios of the individual properties, or globally, on the business DCR as a whole. 

Just for those curious, DCR means Debt-Service Coverage Ratio, and reflects the ratio of total revenue for a property to its debt costs.  It essentially reflects the ability of an income property to pay its mortgage. 

A figure over 1.00 means that it can meet its mortgage, while under 1.00 means that it takes in less money than it expends. 

Banks typically want this ratio to come in between 1.2 and 1.3 (higher is better). 

At the time the loans were originated, the company I was negotiating for had a global DCR of 1.45, which was significantly higher than banks required for the best interest rates.

I recognized that if I knew this figure, it was highly probable that the banker did also.   To defend their decision on interest rates, he would have to find a way to alter the data so that it justified the approach the bank took.

I knew this too, and recognized that during the negotiations, the bank would have no choice but to ignore the global health of the company and direct their attention to the DCR figures associated with each individual building itself.

This proved to be true during the course of the negotiations.  I began by pointing to the robust health of the company at the time that the loans were originated, showing the bank the figures we had prepared.

As they were examined, the banker moved from the global health of the company, pointing instead to the group of the properties that made up the first loan bundle.  They were very healthy on the whole (with most reporting 1.4), but one straggler managed to lower the DCR to about 1.2 - this served to justify the bank's position. 

To this point, the back and forth followed the path that both parties had probably predicted.  However, once I had forced the bank to defend their reasoning by shifting from the global picture to the local figures, I had the opening I needed. 

By their own logic, they must have examined the figures for the final loan package on a local basis as well.  An examination of this second loan revealed that the interest rate was well above the market rate, yet the building was performing extremely well - at a 1.55 DCR. 

By his own logic, the banker across the table was forced to concede that the rate charged on the second loan was far higher than it should have been. 

Subsequent to these negotiations, the bank extended an offer to lower the interest rate charged on the second loan package by 2 percent.

The negotiations were an unequivocal success, and the concession the bank offered was worth around $30,000 over the short remainder of the loan term.

This may seem like a very one-sided victory, but it was an even compromise (or at least felt like one to the banker - which is the important thing), as the party I represented conceded that the first loan bundle would remain at the original interest rate. 

I include the above example to illustrate the format taken during the "Tactical" phase of negotiations.  For those who don't know, "Tactics" are the means by which a strategy is enacted. 

Strategy says "I need to take that hill."

Tactics says "We need to take these three pillboxes to get to the top....get the RPGs."

Going into these discussions, my strategy was to make the banker state whether he interpreted the financial figures globally or locally.  Once he did that, he would be forced to make concessions - and, while I did not mention it above, in the early stages of the negotiations, he did his best to avoid the figures entirely.

Once the strategic vision for the negotiations are arrived at, tactics take over. 

In negotiation, tactics are very straightforward:

1. Challenge the credibility of the negotiator by exposing weaknesses in their arguments due to:

• Factual errors
• Relevant details left undisclosed
• Skewed presentation of statistics and figures leading to misinterpretation
• Flaws in logical arguments presented

2. Strengthen your negotiating position by introduce fresh arguments that bundle points of contention together (consider the global vs. the local view above), remaining unemotional at all times, and attaching conditions to every concession that is given.

We'll continue this look at negotiations next week.

On another note, I want to apologize for missing last week's post.  I was incredibly busy dealing with the launch of my book "The Prodigal" and could not find the time to make the post.

"The Prodigal" has been selling very well and I appreciate those who have taken the chance on it.  So far, I've heard nothing but VERY positive reviews!

That's all for this week!