|
BLN
HOME
|
June 2004
|
|
Welcome to the June 2004 edition of Business Leasing News.
From: David G. Mayer, a business transactions partner
of the law firm of Patton Boggs LLP and author of the book, Business Leasing for Dummies ® (BLFD).
Unfortunately, the book is out of print and only a few copies remain
available; so if you want to find a copy, please search the web
today! Thanks for buying my book for two and one-half years.
This
e-newsletter offers timely, concise information and analysis backed
by supporting research. Please contact Business
Leasing News (BLN) to provide us with your
feedback. Thanks for taking your valuable time to read BLN-which
does more than just report the news. |
**************************************************************
|
|
In this
issue: |
|
A Message From the Founder, David
G. Mayer |
**************************************************************
|
|
1. As Basel II Advances, Impact on
Leasing Remains Unclear
The Basel
Committee struck an accord on major issues on May 11, 2004,
setting the groundwork for final negotiations of Basel II by the end
of June. For the leasing industry, these agreements only accentuate
the need for continuing analysis of the impact of Basel II. A new advisory group formed by the Equipment Leasing &
Finance Foundation (EL&FF) will study the impact of Basel II
on leasing products and make new resources available to understand
and contend with Basel II. See: Basel II Accord Resource Home page of
EL&FF.
The essential questions for
leasing are whether and to what extent Basel II will affect bank and
non-bank leasing organizations and their products. Compliance with
Basel II requires a substantial capital investment. It will
potentially impact pricing, lease product offerings, best practices
in operating a leasing business, required technology and tracking
systems and new levels of balance sheet
capital.
Background on the Basel Accords
In 1988 the Basel Capital
Accord (Original Accord) established global standards for minimum
capital adequacy requirements worldwide for affected banks. The
Original Accord, often called Basel I, affects many U.S. banks. The
amount of capital set aside can increase or decrease pricing of bank
financial products and limit exposure to certain credit risks (that
is, companies using credit extended by the banks).
Basel II, which will eventually replace the
Original Accord, creates a more flexible and comprehensive framework
for capital regulation and will have an impact on worldwide bank
competition. Basel II consists of three mutually reinforcing
pillars: (1) minimum capital requirements, (2) supervisory review of
capital adequacy, and (3) market discipline.
Under Basel II, the minimum
required ratio of 8 percent (capital/risk) will not change from the
Original Accord. The modifications in Basel II occur in the
definition of risk-weighted assets, which generally refers to the
methods used to measure the risks faced by banks. The new approach
for calculating risk-weighted assets would improve the risk
assessments by banks. As a result, their capital ratios should be
more meaningful. More sophisticated banks could experience a
reduction in required capital. Less sophisticated banks could face
higher capital requirements. See: U.S. Banks Worry About Impact of Latest Basel
Accord (Business Leasing News June
2003).
Financial Organizations Impacted
Basel II may also have an
impact on equipment leasing companies regardless of their
classifications as banking or non-banking institutions. The first
question each leasing business must consider is whether it must
comply with Basel II. Basel II directly impacts 10 to 20 of the
largest internationally active U.S. banks and requires them to
implement the "standardized" and "foundation internal ratings-based
(IRB) ratings" provisions starting in January 2007. However,
non-regulated financial institutions with regulated European
subsidiaries may also need to analyze possible compliance with Basel
II.
*Tip:
U.S. financial institutions that intend to operate in
Europe should consider the impact on new leasing operations. It is
conceivable that leasing companies not strictly subject to Basel II
may nonetheless encounter pressure to comply with Basel II. For a
summary of the potential impacts of Basel II on leasing, see:
Basel II Means Big Changes--It’s Going to Affect Your
Business, Monitor at pages 8-13 (Nov./Dec.
2003)
Leasing Products Impacted
According to a recent press release issued
by the Equipment Leasing & Finance Foundation, Basel
II will tend to impact lease products that contain an element of
residual value risk. Each Basel II compliant leasing organization
will need to set aside on its balance sheet adequate capital to
mitigate the residual risk. Leases without residual value risk
should be less affected by Basel II. The less affected transactions
may include: (1) TRAC leases or split TRAC leases, (2) dollar-out
leases, (3) bargain purchase option leases and other capital leases,
(4) sale/leasebacks, (5) municipal leases and (6) first amendment
leases.
By contrast, the following
leases may be more severely impacted depending on future Basel II
Committee releases: (1) leveraged lease, (2) fair market value
lease, (3) synthetic lease and (4) short term
rental.
*Warning: In each transaction, the
specific terms and conditions in the agreements may alter the level
of capital adequacy or the determination of whether the transaction
escapes capital requirements under Basel II. The methodology and
calculation of setting aside capital is very complex. Each leasing
company, leasing bank subsidiary or other financial institution will
individually determine how to set aside capital for itself or as
part of a larger banker/financial institution. See: Consensus
achieved on Basil II proposals at page 9 (May 11, 2004).
Amount of Capital Required
According to the EL&FF
for all Basel II compliant leasing companies, the primary factors that will determine the level of
capital to be maintained on the balance sheet by financial product
are:
-
Incorporation status of the financial
institution;
-
Advance type—retail or corporate
exposure; and
-
Finance product type—fully amortizing
credit risk product or residual value based product with credit
and residual value risk.
Pillar One, Minimum Capital
Requirements, of Basel II, will partially determine the amount of
capital, but the determination will be influenced by whether the
exposure is considered a credit risk only or a credit and residual
value risk.
More Questions Than Answers
At the moment, the largest
internationally active banks in the U.S. have probably already done
substantial work to understand and even alter the terms of Basel II,
which has been highly controversial among U.S. banks. For other
financial institutions, including lessors doing business or
expecting to begin businesses in Europe, Basel II produces more
questions than answers about implementing Basel II. The one known
point is that Basel II will have a broad impact on most major
players in the leasing business worldwide.
[Top]
2. Appraisers Add
Value From Boom to Bust
Using appraisals correctly often provides a way in and a way
out of leases and loans. As the economy continues to rebound,
determining the value of equipment or other collateral supports the
creditworthiness of the lessee or borrower, validates lease and loan
pricing and helps establish residual assumptions. Appraisals create
the backbone of many transactions. Appraisers can even be used to
monitor leased equipment or collateral on behalf of a lessor or
lender during a lease or loan term.
The Beginning, Middle and End of a Deal
At the outset of a transaction, a lessor may offer better
pricing when its appraiser determines that the equipment will retain
a higher residual value (the value at the end of the lease term). An
asset-based lender depends on collateral values to
support the "three Cs of credit. -- character, capacity and
collateral." See: Technology Tools Used in the Equipment Appraisal
Process, by Robert S. MacDonald, The Secured Lender
online (2003). A good appraisal can help avoid unpleasant surprises
for a lessor or lender that must rely on collateral value of
equipment to recover maximum value for a loan or lease investment.
During the life of a transaction, an appraisal firm may also track
equipment locations, values and maintenance condition through a
process sometimes called collateral control.
The Fundamental Tasks of an Appraiser
An
appraiser may work independently or as part of the staff of a lender
or lessor. Equipment lessors often hire equipment management
personnel with an appraiser’s training. In conducting a typical
appraisal at the beginning of a transaction, what tasks would an
appraiser perform?
-
Conduct proper due
diligence, including (i) field inspections of the equipment
locations and usage, (ii) interviews with the lessee or borrower
personnel in charge of maintaining and operating the equipment,
and (iii) industry and equipment research such as discussing
evaluations with appropriate manufacturers and/or equipment sales
representatives.
-
Obtain complete
descriptions of equipment, including make, model, serial number
and age as well as controls, software, attachments, engines and
related equipment.
-
Establish
values through the three accepted methodologies: (i) income, (ii)
cost, and (iii) market values, which professional appraisers use
under the guidance and rules of their associations such as the Association of Machinery
and Equipment Appraisers (CEA), International
Society of Appraisers (ISA), Appraisers
Association of America (AAA), and American Society
of Appraisers (ASA).
-
Apply current trends
to appraised assets to determine the most accurate future
value.
See:
Is Your Appraiser Covering All the Bases, by Craig Cappalli,
abfjournal (Jan. 2004).
*Tip: When retaining an
appraiser, perform your own due diligence on the appraiser and his
or her firm. Ask about the appraiser’s (1) relevant training, (2)
areas of expertise, which should include the specific leased
property or collateral involved in your transaction, (3) cost of the
services, (4) specific form and substance of an appraisal report,
and (5) the appraisal firm’s years in business. You may need the
appraiser or related services during the life of your deal. For
example, you may need a collateral control service or an auctioneer
(to realize residual or collateral value) at the expiration or
earlier termination of a loan or lease term or on repossession of
equipment. See: Failing Credits: Minimizing Surprises &
Maximizing Value, abfjournal (March
2004).
Appraisers provide fundamental services in asset-based lending and leasing transactions. They understand the importance of their analysis of property in your deal. While their experience and skills may vary greatly, appraisers and equipment management professionals add value that should not be underestimated.
[Top]
3. Hospitals Focus on Technology
as Capital Spending Ramps Up
At $1.5 trillion last year, the United States spends twice as
much on health care as Australia, Canada, England and New Zealand
with mixed results in the quality of health care in the U.S. This
spending results in part from the highly complex and fragmented payment system in the U.S. that weakens the demand
for healthcare services and entails high administrative costs. See:
Spending Doesn’t Give U.S. Edge in Health Care, The Wall
Street Journal (S.W. Ed.), Page D:2, Col. 3 (May 5, 2004). It
should not be surprising that healthcare lessors expect to book up
$6.9 billion in deals this year and over $7 billion next year
arising out of this huge market for health care services.
According to a PriceWaterhouseCoopers study of healthcare
trends called HealthCast Tactics: A Blueprint for the
Future, many hospitals are approaching the mid-point of this
decade in a severe capital crunch. Hospitals must replace or
renovate aging physical structures. Similarly, physicians need new
technologies to provide quality medical care. These trends create
both opportunities and challenges for lessors and lenders,
especially in financing software. In general, the health care market
is a replacement market as older technology gives way to newer, more
advanced equipment including software.
Hospitals Plan Spending Increases
To illustrate these trends, the Healthcare
Financial Management Association (HFMA) recently said that
nearly three-fourths of hospital chief financial officers expect to
increase capital spending by an average of 14 percent per year for
the next five years. See: Hospital CFOs Predict Double-Digit Increase in Capital
Spending, HFMA Press Release (March 2, 2004). Hospitals must
replace deteriorating fixed assets (plant, property and medical
equipment), upgrade technology and increase capacity.
*Opportunity Point: HMFA
expects certain states to significantly increase their capital
spending in health care. These states include: Idaho, Georgia,
Florida, California, Tennessee, Alaska, Texas, Rhode Island,
Arkansas and Arizona. The laggards include Louisiana, Ohio, Iowa,
Maine, Montana, Nebraska, Wyoming, Hawaii and South Dakota. Such
general trends may affect marketing for financing or leasing
deals.
Technology Spending Plays an Increasing Role
Hospital CFOs overwhelmingly indicate that technology
requirements will dominate their capital spending budgets. Their
capital spending will inevitably include financing software. Lessors
and lenders often try to maintain a high percentage of hardware
costs as compared to software costs in making lease investments.
This balance enables lessors and lenders to sustain higher
recoverable collateral values or even upside on sales of equipment.
However, in many transactions, software costs continue to climb a
percentage of total costs, presenting collateral coverage and
intellectual property issues in each lease or financing transaction.
See: Still Growing and Growing… Not all opportunities in the
health care market concern health care, Equipment Leasing
Today at page 21-27 (February 2004).
*Tip: As a lessor or
lender, on one hand, or a lessee or borrower, on the other hand, you
can enter into agreements that enable you to use software as a
viable part of the collateral in a transaction. For example, as a
lessor or lender, you can:
-
Enter an agreement
with software vendor. Try to induce the software vendor to enter
into an agreement to provide the lessor or lender with essential
rights to use or transfer the software. Don’t be surprised if the
vendor refuses to cooperate due to the complexity of the software,
the need to control of the software and/or requirements to collect
additional payment from lessors or lenders for continued use of
the software. As a lessor, consider becoming the licensee of the
software, with the right to sublicense, provided you will accept
the risks of being the licensee.
-
Obtain a
security interest in software. As a lessor or lender, ask for a
security interest in the software rights, but not the obligations
of the lessee or borrower. The security interest may only amount
to a lien on a license or other proprietary rights in software.
See: Section 9-102(a)(75) (defining
"software").
-
Insist on acceptance
of software. To assure the software has been installed and is
working, obtain a certificate of acceptance of the software from
the lessee or borrower.
-
Create specialized
remedies. Software requires different kinds of rights and remedies
on default such as the exclusive right of the lessor to control
the software rights and exclude the lessee from exercising those
rights. For example, a lessor can ask for the right to turn
software off, or un-install it from a lessee’s equipment after a
default.
-
Establish a software
escrow. For certain software vendors, lessors or lenders may be
able to arrange for the deposit of certain source codes and
related documentation in an escrow to use pending a
lessee/borrower default or financial troubles of a vendor.
Although owners or licensors of complex software may strongly
resist this approach, having access to these assets under proper
confidentiality agreements may save the value of equipment that is
worth little without its software.
As
technology equipment demand increases in the health care markets,
lessors and lenders will need to structure transactions with a
mixture of software and hardware assets. Lessor and lenders who
understand these assets should have ample opportunity to help
hospitals make a full economic recovery.
[Top]
4. BLN Case &
Comment: Software Lease Fails - In Re CNB International, Inc.
In re CNB International, Inc. (CNB) is a
bankruptcy case in the Western District of New York (99-11240B),
2004 WL 635093 (March 30, 2004) arising in part out of the lessee's
contention that its lease of software did not constitute a true
lease. The case generally presented complicated questions
about the validity of the lease, the standard for calculating
liability of the lessee and the fair value of access to unused
computer software. This Case & Comment focuses on the unique
aspects of software leasing because this case illustrates an
opportunity lost. What could have been a true lease of software and
potential recovery in bankruptcy turned out to be a total loss for
the lessor.
Facts: CNB, a manufacturer and marketer of industrial
presses, machine tools and related parts, needed to acquire a new
computer system. The system consisted of equipment and customized
software developed by Symix Computer Systems, Inc. (Developer). CNB
entered into a Master License Agreement with the Developer.
To
make this acquisition, CNB entered into an off-balance sheet lease
with Amplicon, Inc., as the lessor. Amplicon paid for the software
and hardware, but it received no rights to the software. The
Developer retained the exclusive rights to "[a]ll trademarks,
service marks, patents, copyrights, trade secrets and other
proprietary rights in or related to the Products"…[all of which it
said] "will remain the exclusive property of Symix or it
licensors."
On March 10, 1999, less than a year after the lease
commenced, CNB filed a bankruptcy petition. CNB did not pay for or
use the software from the date of the filing. Amplicon filed a
motion to compel the assumption or rejection of the lease. It also
asserted that Section 365(d)(10) of the Federal Bankruptcy Code
imposed on debtor the obligation to pay the contract rent starting
on the 60th day after the filing of the petition. CNB ultimately
rejected the lease and Amplicon renewed its request for
post-petition rent. The parties settled with respect to the
equipment portion of the lease; so the court turned its attention to
the claims regarding the software.
Issue: The court considered whether the transaction constituted a true lease of the software that entitled Amplicon to use the special rights under Section 365(d)(10) to recover post-petition rent.
Outcome: The court found that the parties did not
enter into a true lease with respect to the software. Rather, the
agreement represented an executory contract, which CNB could reject.
The transaction did not even constitute a security interest because
CNB had no interest in the software that would enable it to grant a
lien to Amplicon (page 12). Although Amplicon’s lease satisfied the
"bright-line tests" under Section 1-201(37) of the Uniform Commercial Code
(UCC) to avoid being characterized as a security agreement (page 8),
the transaction failed to qualify as a lease under Section 2A-103(1)(j) of the UCC. The UCC defines a
"lease" as "a transfer of the right to possession and use of goods
for a term in return for consideration, but a sale…or retention or
creation of a security interest is not a lease." See: Lessees in Bankruptcy Declare Open Season on True
Leasing, Business Leasing News (May 2004). The court
determined that Amplicon did not have the essential right to
transfer a right of use to CNB, as lessee, because all rights to the
software had been retained by the Developer. The court said: "With
respect to the software, Amplicon simply owned nothing that it could
have transferred to the debtor" (page 9). Consequently, Amplicon
suffered a total loss regarding the software, including any
additional payments for the post-petition period during which CNB
had possession but did not use the software.
*Comment: This case
confirms that, as the court put it: "If properly structured,
software leases function as an effective mechanism for access to
intellectual property" (page 10). To lease software and overcome the
challenge encountered in this case, consider these critical elements
with respect to software:
-
Structure a
software (and hardware) lease to pass the
bright-line test under Section 1-201(37) of the UCC.
-
Enter into
three-party agreements with the lessor, lessee and software
developer in which the developer transfers rights of possession
and use of the software rights to the lessor. Have the developer
acknowledge that lessor will then transfer such rights to the
lessee. Consider entering into an agreement of the type described
in Article 3 above regarding health care, titled: Hospitals
Focus on Technology as Capital Spending Ramps Up.
-
Determine the value of
software in a lease transaction as a separate leased asset to
improve your chances of recovering post-petition rent payments in
a bankruptcy case under Section
365(d)(10).
[Top]
5. Leasing 101:
What
is "Usury"?
As the Federal
Reserve contemplates raising interest rates, the question of whether
interest charged on transactions exceeds lawful amounts may become a
more frequent concern.
Usury generally
refers to constitutional and statutory provisions that limit the
amount of interest or other compensation that a lender can contract
to receive, charge or actually receive on the principal amount of a
loan or forbearance of money. (Forbearance generally refers to
delaying the collection of money due or later to become due from a
borrower.)
The states have a
veritable menu of complex rules governing usury, which requires you
to evaluate the rules on a state-by-state basis.
*Tip: Ask local counsel to
assist you in evaluating loans, fees, equity interests (such as
warrants), interest rates and other compensation for the use of
money or forbearance from collecting money, as well as other usury
issues in each lease and loan transaction.
For example, in New York, Section 5-501 of the General Obligations Law (GOL) establishes maximum
rates of interest that a lender can charge. The maximum rate is 16
percent unless otherwise provided under Section 14 of the Banking
Law. In theory, usury applies only to loans and not to leases
because leases do not involve a loan or forbearance of money. See:
Orix Credit Alliance, Inc. v. Northeastern Tech Excavating
Corp., 222 A.D.2d 796, 797-98, 634 N.Y.S. 841 (3rd Dept. 1995)
(holding "because a lease does not constitute a loan or forbearance
of money, it does not fall within the definition of usury"). In New
York, usurious loans are void. Criminal penalties exist when certain
non-exempt lenders charge rates exceeding 25 percent. See: Section
5-521 of the GOL.
Texas offers another example of usury rules that can be
managed, but are complex. In Texas, Article 16, Section 11 of the
Texas Constitution and Chapter 301 et seq. of the Texas Finance Code provide usury rules. The lawful
interest rates range from 6 percent to 28 percent (Section
303.009(c)) depending on the nature of the transaction. See: Rate Ceilings. Like New York, a true lease or
rental of personal or real property does not involve a loan subject
to Texas usury laws. See: Apparel Mfg. Co. v. Vantage Properties,
Inc., 597 S.W.2d 472, 478 (Tex. 1980) (rental of real property
not subject to usury). In Texas, the penalties can be severe,
including a statutory penalty of three times the excess amount of
interest plus attorneys’ fees, and possible liability for principal,
interest and other amounts charged by the lender.
*Warning: Here are two
important concerns:
Structure your lease to assure that
it is not recharacterized as a disguised loan. If a court treats
your lease as a loan, the deal may subject a transaction to usury
laws and possible penalties. See: Kinerd v. Colonial Leasing
Co., 800 S.W.2d 187 (Tex. 1990).
Use usury savings provisions in
contracts (that attempt to cut back to a lawful rate any excessive
interest), but don’t depend on those provisions if you have any
doubt about whether your transaction fits within the usury limits of
the local law.
[Top]
6.
BLN
Briefs: Major ETI, Energy Bills in Motion; Boeing Tanker Lease Out
of Gas
Major ETI, Energy Bills in Motion. The Senate passed
the Jumpstart Our Business Strength (JOBS) Act (S. 1637) to repeal the U.S. exclusion of
extraterritorial income (ETI). The World Trade Organization imposed
sanctions on the U.S. in response to this allegedly illegal export
subsidy. The JOBS bill also contains energy
incentives, including wind energy tax credits. The House of
Representatives appears poised to vote soon on its version of the
bill, the American Jobs Creation Act of 2003 (H.R. 2896).
Boeing Tanker Lease Out of Gas. The Boeing 767 KC-767A
aircraft lease procurement program ran out of gas
on May 26, 2004. Secretary of Defense Rumsfeld put it on hold until
December 2004. The $23.5 billion transaction will have to be
negotiated anew and the Pentagon will have to reconsider its need
for the aerial fuel tanker. The delay may represent the end of the
program for Boeing, which has faced an uphill battle for over a
year. The leasing transaction is a casualty of political and
economic forces. See: Boeing 767 Tanker Lease Slimmed Down, Business
Leasing News (November 2003).
[Top]
7. Training Offered; Webinar on True Leasing
Training -
Substance the Easy Way!
To help improve
your business operations, deal processing and risk management, I
offer private training seminars tailored to your specific needs at
your designated location. My interactive and informative training
includes topics I cover in BLN. I customize the format and content
for your specific training needs- no canned programs.
After one of my private training
sessions, here’s what one of the company’s senior managers
said: "David, thanks again for an excellent presentation. You helped
us tackle a complex, but important topic. Your expertise is first
rate and you are an excellent teacher to boot—that’s a rare
combination."
Feel free to call
me at (214) 758-1545 to discuss the possibilities.
Webinar on True
Leasing
On July 14, 2004,
from 1:30 p.m. to 3:30 p.m. (Eastern Time), the Equipment Leasing
Association will sponsor a web seminar titled: "True Leases Under
Attack: Structuring a True Lease in the Face of New Challenges."
I will lead a panel of speakers with business, corporate and legal
backgrounds who will present this program in "webinar" format, with
slides and about 75 pages of back up materials available online. The
panel will clarify some confusing terminology of true leases, using
a "cheat sheet" of terms, and discuss how you can meet today’s
challenges to true leases as disguised financing arrangements. The
panel will emphasize how Financial Accounting Standards No. 13 and
true tax leasing concepts interact with current trends affecting
leases to provide guidance for structuring, pricing, negotiating and
closing lease transactions in the current market. Please join us.
Marketing, executive, pricing, accounting, legal, administrative and
tax participants in leasing can benefit from this program. For more
information, visit http://www.elaonline.com/ and look for the sign-up
information on this event.
[Top]
8. Feedback; About Patton Boggs
LLP and My Practice
Feedback
I receive comments
from readers of Business Leasing News. Here are a few from
the last month:
One reader e-mailed
from down under - Australia: "Australian Fan…Dear David, I must say that your BLN Site is
such a great joy to read! Often tax and accounting issues make for a
dreadful read - but you have managed to provide information that is
both very 'readable' and at the same time very
informative." Another reader simply added: "Your work continues to be very impressive."
A third reader, whom I
met at the ELA Large Ticket Conference, said: "I really enjoy reading [BLN]… and I look forward
to it each month."
Thanks for your
feedback. As always, I encourage you to e-mail me or call me and
think of Patton Boggs LLP as a broad-based legal resource available
to you in a broad range of disciplines.
About Patton Boggs
LLP and My Law Practice
As you may be
aware, I am a part of the Patton Boggs LLP Business Transactions
Group in our Dallas office. Patton Boggs LLP is a law firm of about
400 lawyers located globally in multiple locations. The firm has
extensive capabilities in over 50 areas of legal practice that
include leasing, secured transactions, personal property financing,
securitizations, syndications, power project and mezzanine
financing, bankruptcy, real estate, public policy, litigation,
intellectual property and technology law, and much more.
The leasing and
secured transactions practices regularly involve the buying,
selling, financing and leasing of real and personal property of all
kinds, including business aircraft, energy, facility, production,
power plant, technology and health care assets. We also structure,
negotiate and close secured transactions of all kinds, tax-exempt,
state and federal leasing arrangements and corporate and portfolio
acquisitions, among a full range of financing and acquisition
transactions. Despite the improving economy, we continue to assist
our clients with troubled deals and bankruptcies, including
repossessions, lift stay actions, true lease contests, deficiency
litigation, workouts and forbearance arrangements.
Please feel free to
call me at (214) 758-1545 or e-mail me at dmayer@pattonboggs.com for
information about any of these areas or the many others available at
Patton Boggs LLP, or to discuss anything I have written in
Business Leasing News. I welcome the opportunity to build a
relationship with you!
[Top]
A Message From the Founder, David G. Mayer
E-Mailers Beware
I often miss
meeting face to face with others in a transaction or other
collaborative efforts. With less time and more to do, we seem to
e-mail more and talk less. We rarely get to meet in person for a
negotiation or a closing. There’s a special value in seeing the
other person’s face, hearing their views, reading their body
language and even breaking bread together. It seems that,
increasing, we communicate extensively by e-mail, perhaps
exclusively so, or by telephone. For me, e-mailing creates a feeling
of detachment and distance from others with whom I work.
In a recent study
in the by Janice
Nadler, an assistant
professor at Northwestern Law School and a research fellow at the
American Bar Foundation, Nadler finds that failing to establish
personal rapport before the start of an e-mail negotiation can lead
to a total breakdown of the transaction. See: "Rapport in Legal Negotiation: How Small Talk Can
Facilitate Email Dealmaking," 9 Harvard Negotiation Law
Review 225-253 (2004). Nadler’s study reveals dramatic
differences in results of two negotiating teams to buy a car—one
that established rapport with "small-talk" secretly before
negotiations started and one that conducted negotiations solely by
e-mail. The e-mail team failed to reach agreement 40 percent of the
time while the small-talk team failed to reach agreement less than 9
percent of the time. In other words, the team that made a personal
connection succeeded four times as often in closing the deal.
Developing a
personal connection at the inception of the negotiation helped
develop a "cooperative mental model" rather than a competitive,
uncooperative approach experienced by the e-mail team. The call at
the beginning of the negotiation set a positive tone and spirit for
the rest of the negotiation. See: The Pitfalls of E-Mail, Psychology Today
on-line (Mar/April 2004).
When you negotiate
a deal next time by using e-mail, consider this study, and the value
of working with your counterparts personally. Take a little time at
the beginning of a negotiation to establish rapport with, and take
an interest in, the other parties, in person or by telephone. If you
spoke to Professor Nadler about this approach, she would almost
certainly predict that by doing so you will have a much, much
greater chance of achieving successful results in your transaction.
Good luck in
finishing a strong second quarter this month!
Thanks to the BLN
Staff
I extend a special
thank you to my editors at Patton Boggs LLP for their comments on
this edition, Atwood Jeter, Adrian Nicole McCoy and Steve Reagan and
our primary web site review partner, Jeff Turner. The technical
team, consisting in part of George Barber and Winston Jackson,
provide you the easy-to-use e-mail navigation and artistic
appearance of BLN.
*Technical
Point: Some people have mentioned
to me that when they print out BLN, the words go off the page and
don’t print. To capture all the words on an 8.5 x 11 inch sheet,
just change your print margins on your computer or ask your
technology friends for help. Your printer can print BLN in
full!
[Top]
All the best,
David
David G.
Mayer
Founder and Publisher
Patton Boggs LLP
2001
Ross Avenue
Suite 3000
Dallas, Texas 75201
(214) 758-1545
(phone)
(214) 758-1550 (fax)
E-Mail: dmayer@pattonboggs.com
©
David G. Mayer 2004
NOTE: You may receive BLN from other
people and that often occurs. To SUBSCRIBE, change your address or to change
your e-mail format, simply click
here. To UNSUBSCRIBE, click
here. To correspond with BLN, send your message to bln@pattonboggs.com.
Thanks.
The "For Dummies"
part of my book, Business Leasing For Dummies (BLFD)®, is a
registered trademark of Wiley Publishing, Inc.
|
Disclaimer:
BLN information is not intended to constitute, and is not a
substitute for, legal or other advice. Comments, tips,
warnings, predictions, etc. in BLN provide general insights
only. You should consult appropriate counsel or other
advisers, taking into account your relevant circumstances and
issues. The Disclaimer linked here also shall be
deemed to apply to Business Leasing News in any e-mail format.
BLN does not endorse or validate information contained in any
link or research material used in BLN. You should
independently evaluate such information or material. Readers
are urged to print information under linked pages as they are
subject to change over time. Comments made in BLN do not
represent the views of Patton Boggs LLP, but rather those of
David G. Mayer. |
[Top] | |
