Real Estate Transactions Traditional Legal Cost Overrun Case Study – How we reduced Legal Costs by 50%

OVERVIEW:

Most real estate companies understand the importance of involving lawyers in their real estate transactions, especially on larger deals with multi-locations which are often being referred to as “portfolio” transactions.  In each real estate transaction, there are usually two sets of lawyers – i.e., lawyers representing the seller and another set of lawyers representing the buyer.  If there is financing provided by a lending institution, another set of lawyers will be engaged to represent the lender.   If the buyer has investors who provide significant investment to acquire the property, the investors would often engage their own set of lawyers.  In other words, in any typical real estate transaction, there may be 4 or more sets of lawyers involved.  

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One challenge that real estate companies are facing in these transactions is the high “cost” of, and sometimes uncontrollable, legal fees being charged by each set of lawyers to their clients.  

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On a smaller single transaction, smaller real estate companies may utilize a local solo or small real estate firm with a real estate attorney who does most of the work himself/herself with help from a paralegal or staff on his/her team.  However, on portfolio transactions with multiple states and locations, it is almost impossible for companies to engage and manage multiple small local firms by themselves, so the only other option would be to rely on a national or international firm with multiple offices across different regions.  However, by using such national firm (or international firm), the hourly rate of a lawyer would often go from $300 per hour in a localized small/solo law firm to $1,300 per hour in a national/international firm.    

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Lawyers at SeedJura have worked and struggled through these types of challenges with clients in the real estate industry with national and international firms in the past decades.  We understand that we have to tackle this problem head on by studying the processes of these types of transactions and find any inefficiency and factor which commonly caused the overrun of legal fees.  We have studied different transactions in the past two years that are portfolio deals with multiple states and locations.   The following is a high level description of some of our findings that we can share at this stage of study.  It is part of our process to continue this study and expand to other studies of the legal industry with the goal to improve processes and efficiency in the industry for the betterment of companies and lawyers.

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FINDINGS:

When we look at the time spent by lawyers on these transactions in five different major categories, we observed the following trend.  Note that the following is only a general observation and not from any specific transaction:

30% of their time in a transaction spent on preparing, drafting, negotiating, and finalizing legal documents.  The legal documents include purchase and sale agreement(s), joint venture agreement(s), forms of closing documents, general corporate consents, loan documents and other legal documents that are necessary in a transaction.  Each document is being prepared as a brand new customized document for each transaction and a tremendous amount of time is being spent by lawyers to put together a “fresh” document from various past similar documents to be used for a particular transaction.  We refer to this category as “Document Preparation.”  

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25% of their time in a transaction spent on communications, calls, and video conferences.  For a buyer’s lawyers, this usually includes (without limitation):  

• Regular status calls with client team, lender team, seller, investors, and any other parties involved in the transaction.  
• Multiple communications with different parties to follow up on their progress made on their tasks or request for answers or information and follow up with such requests.  
• Communications and calls to resolve any personality conflicts. (yes, it happens and if we don’t acknowledge this, we are not going to make the process efficient.)
• Communications and calls to discuss strategies and substantive issues or legal items.
• Locating certain emails and attachments from hundreds of emails being circulated in a single transaction.  (yes, this happens too and on a daily basis by lawyers and staff in law firms)

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19% of their time in a transaction spent on due diligence items, such as review of title, survey, property inspection report, zoning report, environmental report and other due diligence items.   ‍

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18% of their time in a transaction spent on resolving issues that come up from time to time in a transaction, including:

• Issues found through the due diligence process which need to be addressed and resolved before closing.
• Issues caused by change of scope or details of the deal.
• Issues with closing requirements and regulatory requirements.
• Issues that lawyers representing a specific party think that they are issues but are not actually “real” issues. (yes, this happens too!)
• Issues with obtaining SNDAs and tenant estoppel certificates from tenants.
• Issues caused by complicated personalities of people involved in the deal.
• Issues caused by failure of coordination of timing of the deal.
• Issues that nobody focused on until the last minute when they realized that they can’t close without addressing them.

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8% of their time in a transaction spent on the closing process.  This includes obtaining all of the closing documents and signatures, coordinating delivery and receipt of closing requirements, and organizing all of the parties in the closing process.

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The other observation is that most lawyers do not take any time to analyze whom within their team should tackle a certain task in order to maximize the result and still minimize the costs.  Here are some examples:

• We see it all the time that a $1,300 per hour partner from a large firm would make a follow-up call to another party’s attorney for a simple request or item and log in 0.50 in his or her time entry.  That is $650 charged to the client for a follow-up call.    
• Some legal teams also charge the client for the time they spent on training their associates by having the associate prepare an email or document and bill for such associate’s time and then also bill the client the time that the partner reviews and revises such email or document.  Typical time entries on this “dance” would be 4.50 hours from the associate’s time entry and then 1.20 hours from the partner’s time entry – working on the same document/email.  The total cost of that would be around $5,000.  There is no way for the client to know whether the 1.20 hours spent by the partner is actually bringing additional value to that document/email or just because he/she needs to review and revise the work done by the associate for “teaching” purposes.  
• The most inefficient costly task is status calls.  Each set of lawyers would usually have at least 2 lawyers on a status call that are being held by client and lender (and sometimes with other parties).  Let’s assume each party has two lawyers on the call, with the more senior lawyer at $1,000 per hour and the associate at $800 per hour.  On a lender status call, we will have at least 2 sets of lawyers and if the status call runs for an hour, the legal fees for that call would be at least $3,600.  There are usually additional hours that would be charged by both set of lawyers for preparation of the call and then afterwards for additional analysis or recap with their team members.  So, the legal fees for one status call can easily be around $6,000 in total.  

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If the legal fees have been arranged in a way that client only pays for a cap fee (i.e., there is a maximum amount that client would pay for) or a flat fee (i.e., client pays for a set fee no matter the number hours spent on the transaction), then the lawyers on the transaction would have to absorb the “lost” time they spent on those tasks (i.e., the overrun of legal costs).  

The key shouldn’t be whether the client or the lawyers should absorb the “cost” of an inefficient and ill-managed process, but how we can together make the process more efficient to eliminate the pain in the legal process.

Most larger law firms try to analyze profitability of their matters by solely looking at the amount of legal fees that they collected and the time that lawyers spent in total on a single transaction.  If the sum of the hourly rate multiplied by time spent exceeds the legal fees collected, the matter is deemed as “not profitable.”  From the numbers perspective, there is nothing wrong with this calculation, but what they fail to understand is that the numbers reflect a much deeper issue – i.e., inefficiency of the legal services process.  

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CHALLENGES:

There are two major challenges that we have to overcome in order to bring any solutions to the problems that stated above in our findings:

1. Lawyers are the only ones who truly live in the daily process of delivering legal services to their clients.  It is very difficult for non-lawyers to step in and tell lawyers how and what they should do.  However, based on the current structure of the legal industry where lawyers are only incentivized to be rewarded for their hours spent on matters, analyzing their own processes for efficiency purposes is not something that they would be willing to spend time on.  In smaller firms, they don’t have the human resources and time to be allocated for efficiency analysis.  In larger firms, each lawyer within the firm has no incentive to do so because they are being compensated on hours billed each year.  So, without lawyers’ intensive involvement in tackling this issue, it is almost impossible to resolve the issue.  

2. Even if the legal services process is being analyzed, the current structure in the legal industry offers very limited options for clients and lawyers to implement any solution.  Currently, the options are – (1) local firms with limited locations and expertise but offer much reasonable price tags, or (2) large firms with multiple locations and broad expertise but such benefits come with much pricier legal costs.  With only two options, not many tools can be utilized to come up with or implement any solution.

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SOLUTIONS:

SeedJura has analyzed and studied various aspects of the issues and challenges with the current legal services by tearing apart the legal process of the entire real estate cycle from acquisition to exit and analyzed each component.  We have then:

• Identified (i) which processes are and should be repeatable which then can be standardized and (ii) which parts need to remain as customized and tailored services which then need to be provided by personal interaction with professionals.  
• Studied different communications and interactions between clients and lawyers as well as among lawyers and analyze what we can do to promote more efficient and better communications.    
• Identified typical issues come with real estate transactions as well as the best approach to resolve each type of issues.  When we say “best approach,” it means to provide practical and efficient resolution within the most economical approach.  

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Based on our study and experiences, we have built platforms to provide solutions to legal services, with one major area being tackling the legal costs overrun aspect of the legal services.  SeedJura’s platforms include the right combination of innovative processes, sophisticated and experienced legal process managers, and useful technologies for each industry and each type of clients and matters.  

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One specific platform that we created is the SOW platform.  Through the SOW platform, we assist clients engaging and managing different law firms and lawyers to work on a transaction based on their locations, expertise, rates, experiences, and personalities.  Lawyers will then follow a standardize process on our platform utilizing the technologies as well as working with our Legal Process Manager who oversees the entire legal services process and manage the communications and efficiency of how to tackle each issue.  Our team designs the legal services process based on client’s budget, the type of transactions, and client’s objectives.  

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In other words, on our platform, the appropriate person with suitable experiences and rate will be working on a suitable component of the transaction and/or will be assigned to resolve a specific issue.  We are not limited to just one firm.  We will manage multiple lawyers, professionals and law firms for the client and the client just needs to communicate and track progress on the transaction through our platform.  

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The key components of our platform are described below:

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By implementing and tweaking our solutions on our platform, we have successfully reduced the average legal costs for portfolio transactions up to 50% compared to the legal fees that would otherwise be spent on engaging just one national/international firm to cover all expertise and locations.  Managing legal fees is just one aspect of what we do.  We are continuing to tackle many other challenges of legal services through our SeedJura platforms.  Learn more about our platform at our SOW platform’s website: www.sowplatform.com.  Or learn about us through our SeedJura Group website: www.seedjuragroup.com.  

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