Commercial real estate insider and legal expert Howard Kline weighs in on industry pitfalls and how to balance competing interests while still closing deals.
After four decades of navigating the industry, Howard Kline knows a thing or two about commercial real estate. Over the years, Kline has served as general counsel for several prominent organizations, as a tenant representative in New York City, and as a broker for numerous lease transactions throughout the country.
Kline’s true passion, however, is sharing the insights he’s developed throughout his career with others — both within the CRE industry and beyond. Since November 2010, Kline has dedicated most of his energy to running CRE Radio & TV, a weekly radio show that helps listeners of all backgrounds achieve a deeper understanding of the CRE industry.
We recently caught up with Mr. Kline to discuss some of the major pitfalls of which all CRE brokers need to be wary, and to hear his advice for up-and-coming CRE professionals.
Kline’s Advice: Do Your Homework
After negotiating real estate deals in both legal and brokerage capacities, one thing has become abundantly clear to Kline: a failure to do one’s due diligence when orchestrating a lease or purchase is a huge risk. Lawyers certainly have a role in drawing up contracts and parsing various real estate agreements, but if brokers, tenants, and landlords want to avoid future litigation, it’s absolutely essential that all parties take appropriate cautionary steps prior to signing on the dotted line.
Doing so often entails recognizing one’s own weaknesses and being willing to reach out for help when necessary. According to Kline, the best way to be successful in CRE is “to do your homework, prepare yourself, do your due diligence, and employ people with different perspectives who can advise you on the things that you’re not an expert in.”
Though still broadly applicable, Kline admits that this advice becomes slightly more difficult to put into action when it comes to interfacing with lawyers, as legal and business perspectives don’t always perfectly align. “Lawyers tend to be pretty conservative,” he says. “If you listen to lawyers all the time before you get into a deal, you’re going to miss a lot of great opportunities. Their job is to say: ‘Here are all the things that can go wrong.’”
But, as Kline continues, if one only listens to their lawyer, “you don’t get to hear all the things that can go right.” That’s why he believes that the most successful CRE professionals are those who are able to consider advice from legal and business stakeholders alike. “Balance the risks with the rewards,” he says. “It’s up to you to figure out when to take a chance.”
Common Legal Pitfalls
Jumping on the right opportunities when they present themselves — especially in contravention of counsel’s injunctions — is a critical component of CRE success. But, as Kline re-emphasizes, “You have to do your due diligence in order to do that.” That means making an effort to understand the pitfalls endemic to the CRE landscape — and there are many.
At the most fundamental level, commercial real estate brokers must contend with property appraisal processes that can become far more complex than standard residential valuations. Determining a fair price for a commercial space is often complicated by a space’s distinctive character, as it’s not uncommon for a property to be a unique asset in its city or region. If a town only has one movie theater or one bowling alley or one sporting arena, finding comparable properties on which to base a valuation can be a challenge. For this reason, it’s crucial that brokers and their legal teams record every minute detail of an asset when crafting a lease, as courts seldom look beyond the text of a contract when settling disputes.
Relatedly, CRE buyers are not covered by the comprehensive consumer protection laws that apply to residential purchases. For instance, the list of mandatory disclosures required of commercial landlords is far shorter than the list required of the average private citizen putting their home up for sale. Consequently, brokers and buyers should carefully research building histories, environmental risks, and other factors that may bear upon the price of a commercial property.
Finally, without going so far that they violate their fiduciary duties, commercial real estate brokers must be as forthcoming as possible with respect to the details of the properties they are marketing. Around 70% of lawsuits brought against brokers involve either misrepresentation or failure to disclose, offenses stemming from a misstatement of some material feature of a property or a refusal to reveal a significant detail of a property, respectively. In order to avoid exposing oneself to these kinds of litigation, brokers should use formal seller disclosure forms wherever possible and refrain from resorting to unverifiable selling points such as “this property is sure to appreciate.” Legal protections for CRE buyers may not be as strong as those for residential buyers, but the law still frowns upon fraudulent non-disclosures. Brokers should not be tempted by “say anything to make the sale” strategies.
Striking the Right Balance
Success in the commercial real estate world doesn’t demand unlawfulness, but a strong sense of when a deal approaching the periphery of propriety is worth the risk. Lawyers are there to keep one in bounds — an essential function — but a real estate professional will never succeed if they allow their strategy to be determined only by everything that could go wrong.
Thankfully, CRE professionals have all the necessary tools to conduct thorough, thoughtful research about properties of interest. CRE tech platforms like Reonomy provide instant, streamlined access to the most relevant data points, including a property’s debt history, owner contact information, zoning specifications, and more. In an industry that depends on taking the right chances, tools like Reonomy minimize risk and free CRE professionals to envision, as Kline puts it, everything that could go right.