When negotiating an agreement, it is wise to keep a fall back plan. This is known in the world of negotiators as the Best Alternative to a Negotiated Agreement (“BATNA”). Having a strong BATNA helps parties negotiate from a position of strength.  Parties without a BATNA may feel insecure and more likely to give in.

Do Not Have a Bottom Line

It is not a good idea to negotiate by focusing on a bottom line. When parties are concerned with a bottom line, they may give too much or take too little and end of feeling like they never really reached an agreement. Parties are likely to defend against the bottom line and make decisions against their own best interest.  In the end, everyone ends up feeling tense, inflexible and less willing to find a mutually beneficial agreement.

Have a BATNA

In contrast to a bottom line, parties with a BATNA are not interested in the objectives of the negotiation, but rather the course of action if an agreement is not reached within a certain time frame.  Having a BATNA is a constructive approach because a party is less likely to accept an unfavorable agreement or a self defeating one because there is a viable option outside of the negotiation.

Creating a BATNA

It is a challenge for a party to create a BATNA.  The process involves problem solving, brainstorming and thinking of viable alternatives.  By carefully reviewing options and broadly discussing  and exploring alternatives, parties give themselves an opportunity to discover the most practical and attainable solution.   Such a solution is likely to result in a strong BATNA.

Why Is It Good to Have a BATNA?

Having a BATNA is like having a home insurance policy.  Even people with home insurance policies do not want their homes to burn down (for example).  Clearly, parties start the process of negotiating with hope and the desire that a mutually agreeable decision will be reached.   However, if it is clear that the negotiation is not leading to a beneficial outcome, the BATNA is on the back burner and the negotiator is aware of the consequences of failing to reach an agreement.  In such an instance, the negotiator will be more willing to stop a process that is unproductive.

What if a Party Does Not Have a BATNA?

Without a BATNA, a party may feel unsure and shaky.  The party may feel internal pressure to reach an agreement without awareness of what will happen if the negotiations fail.   For example, they may be overly optimistic about proposed agreements which have realistic and unexamined problems. The parties may feel forced to reach an agreement and if they fail to do so, may feel very negative about further prospects of working through the issues with the other party.

When Parties Take Positions

Arguing about positions induces parties to lock themselves into one view or approach during a negotiation, even if taking such a stance is not mutually beneficial to either party. Focusing on positions can even prolong a dispute and result in a less optimal outcome.

If the parties have an ongoing relationship, that relationship will likely deteriorate as a result of locked positions.

Those who take hard positions may be too withholding and damage the relationship, and those who focus on a position in a soft way may concede too much. In any event, the parties are less likely to arrive at an optimal agreement by focusing on positions, regardless of the method of doing so.

When Parties Focus on Interests

Those who successfully negotiate often find that parties who focus on interests are more likely to reach an agreement.

The best case scenario is one in which the parties work together to solve a problem. When the focus is on the problem and not on the people, parties are more likely to be open to exploring possible solutions. Most parties want to achieve an outcome in a friendly and time efficient manner.

Consider this classic example. Two sisters each want one orange. Each insists that she should get the entire orange. Ultimately, they decide to cut the orange in half and each take one half. The first sister then peels off the outside of the orange and throws it away in order to eat the fruit in the center. The second sister dies the opposite, keeping the orange peel in order to use its shavings to flavor her cake. Had the sisters discussed their interests – one eating the fruit and the other needing the peel to bake a cake – each would have had twice as much of what she needed. However, they locked themselves into positions rather than focusing on their interests.

If the parties focus on the bottom line, they stall productive discussions or end negotiations all together. In contrast, parties who discuss options for mutual gain and explore what each can get are more likely to become problem solvers.

Leaving Options on the Table

In short, be reasonable. Leaving options on the table during the process of negotiating is a good way to stay in the discussion without forcing a result.

It is best to keep emotions out of any negotiation in order to make decisions that may lead to a resolution based on reasonable presentations of each party.

With that being said, it is not helpful for any party to pressure the other. It is hard to resolve anything on the basis of pressure.

Parties should not agree to anything they really do not want

Stay tuned to part three which will highlight specific, helpful techniques.

The Georgia Constitution of 1983 mandates that the judicial branch of government provide “speedy, efficient, and inexpensive resolution of disputes and prosecutions.” The Georgia Supreme Court promulgated Alternative Dispute Resolution Rules to establish a statewide plan for alternative dispute resolution processes in Georgia Courts. Alternative Dispute Resolution (ADR) refers to any method other than litigation for resolving disputes.

Mediation and arbitration are two common methods of ADR.

Mediation

Mediation involves the use of a neutral third party, the mediator, to facilitate the resolution of a dispute.

The mediator does not have the authority to make a decision or impose a settlement upon the parties. Typically, the mediator attempts to focus the attention of the parties on their respective needs and interests rather than rights and positions.

Any settlement is entirely voluntary. In the absence of settlement, the parties do not lose the right to a jury trial.

Arbitration

Arbitration is a process in which a dispute between parties is resolved by an impartial person or persons for a final and binding decision.  Arbitration is less formal than a court trial, but the results can be enforced in court. The essential difference between mediation and arbitration is that arbitration is a form of adjudication, whereas mediation is not.

Now that we better understand some definitions, next time I’ll talk about negotiations attitudes that can result in positive outcomes and reasonable resolutions for both sides. Stay tuned.

Friday, the administration announced its plans to expand the eligibility for its Home Affordable Modification Program (“HAMP”).

Didn’t Work As Planned

In February 2009, HAMP was introduced as a plan designed to help 4 million mortgage borrowers. However, HAMP has helped fewer than 1 million homeowners.

Banks Encouraged to Reduce Loan Principal

To encourage the implementation of the expanded plan, incentives will be tripled to pay banks that reduce principal on loans.

Lenders will be paid between 18 cents and 63 cents for every dollar the lenders take off the mortgage principal. The prior amounts were between 6 cents and 21 cents for every dollar.

Freddie Mac and Fannie Mae Included

The expanded plan will include incentives for Fannie Mae and Freddie Mac to reduce principal on loans.

Until now, only private lenders and banks were offered incentives to reduce principal on loans.

Calculation of Debt to Income Ratios Will Be More Flexible

HAMP was designed to lower the debt ratio of mortgage borrowers to 31% of their income. Homeowners with mortgage payments below that ratio did not qualify for a loan modification. New guidelines will permit a more flexible calculation of debt to income ratios.

Expanded Umbrella

Previously, only mortgage holders of owner-occupied homes qualified. Now owners of rental properties may also qualify, thereby expanding the number of people this can affect.

Program Extended

The program is extended to December 2013. It was initially set to expire at the end of this year.

The changes in HAMP do not take effect until the end of April 2012.

How does the Federal Housing Finance Agency View the Changes?

The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, issued a statement that said it would consider the changes to HAMP.

However, it noted that an analysis it recently conducted found “that principal forgiveness did not provide benefits that were greater than principal forbearance,” signaling that the housing authority may not support reducing the principal on loans as a way to help homeowners.

Questions For You

What do you think about the Federal Housing Finance Authority Agency Study?

Do you think real estate investors should be subsidized with taxpayer money while rents are rising in this economy?

Do you think it is a good idea to subsidize the real estate investor in an effort to prevent housing vacancies and lower housing values?

Questions and Concerns

My last post was an open letter to hedge fund managers and private equity investors, and I’d like to share a few follow up concerns and questions.

Fund marketing must be more transparent. Firms must provide historical documents showing how they calculate internal rates of return.

What if some numbers in a firm’s marketing materials contradict numbers in its SEC filings for non fraudulent reasons? Will the firm be liable and subject to sanctions?

The SEC is permitted to share information with certain agencies. Will this lead to congressional access resulting in investment strategies becoming a matter of public record?

What is Next?

After the Advisors Act deadline passes, buyout shops will have a new Form PF which private equity firms will be required to file once a year within 120 days of the end of the fiscal year.

Firms with at least $2 billion in assets under management will be required to answer questions at the portfolio-company level about leverage, bridge financing and financial-industry investment. Firms with over $5 billion in assets must file Form PF following the first fiscal year after June 15, 2012. Firms with under $5 billion must begin filing the first year after December 15th of this year.

The Volker Rule

The Volcker Rule, which is to be finalized in the next few months, will prohibit banks from engaging in proprietary trading and from owning proprietary or sponsoring private equity funds.

One question: Will break-ups be truly “arms length” or will banks have merely created third party entities to do proprietary trading? What do you think?

Private equity investors and hedge fund managers must register with the Securities and Exchange Commission (“SEC”) under the Investment Advisors Act of 1940 (“Advisors Act”).  This additional monitoring at the fund and portfolio company level starts this year depending on the size of the firm.

The February 14th filing deadline for registration arose out of the passage of the Dodd Frank Wall Street Reform and Consumer Protection Act in July 2010.

In November 2010, the SEC proposed a set of rules to implement the new requirement that private equity firms come under the purview of the Advisors Act. Many venture capital firms and the smallest fund managers are exempt.

This monitoring will be an ongoing administrative task. Firms will most likely find it necessary to designate a compliance officer. The compliance manual and monitoring programs are important to guard against insider trading, for example.

The SEC has set the February 14^th deadline for registration. Thereafter, the SEC will work on approving the registrations before the final compliance date of March 30^th.

“Filing the SEC registration form after February 14 won’t violate industry rules, but advisers risk that their applications may be rejected, or require more information,” said Guy Talarico, chief executive officer of Alaric Compliance Services LLC, a New York-based consulting firm.

In these types of arrangements, there may be overlapping indemnity obligations between the fund and the portfolio company. Indemnification provisions are typically found in the organizational documents of the fund and the portfolio company or in stand-alone indemnification agreements. While separate fund and portfolio company indemnification obligations protect the board member against personal liability, it often creates confusion regarding the relative priority of the indemnification obligations.

If the agreements do not specify whether the fund or the portfolio company will be the indemnitor of first resort, how will courts interpret such arrangements?

In the case of Levy v. HLI Operating Company Co., Inc.,* the Delaware Chancery Court allowed a board member to seek indemnification from the private equity fund without first seeking it from the portfolio company. The court suggested that the private equity fund should pursue a contribution action against the portfolio company and made it clear that, absent a contractual arrangement to the contrary, the fund and the portfolio company would be expected to share in liability for any indemnity claims.

Though the Levy case was decided by the Delaware state courts and involved a Delaware corporation, it is likely that other state courts would apply the underlying legal concepts with equal force to contracts and cases under the laws of those states.

This decision is one that underscores the need for private equity funds to clarify indemnification obligations relative to those of its portfolio companies.

*Levy v. HLI Operating Company Co., Inc., 924 A.2d 210 (Del. Ch. 2007).

With our recent move to our new offices, we’ve also given our website a new look and feel.

I’d be delighted if you’d visit our new site to learn a little more about what we do in the areas of:

Banking & Finance

Business & Corporations

Commercial Lending and

Real Estate

If you have any questions, please don’t hesitate to ask.

I think it is a good idea that the Federal Housing Administration (FHA) is suspending its anti-flipping rule for another year. Since suspending this rule in February 2010, FHA reports that it has insured nearly 42,000 mortgages worth more than $7 billion on properties resold within 90 days of acquisition.

Research shows that investors are able to acquire, renovate and resell properties in fewer than 90 days. The rule (now suspended) required them to hold properties for more than 90 days which resulted in increased costs and vandalism.

The terms of the suspension include:

• All sales must be “arms length” transactions.
• The lender must demonstrate that the property was not subject to prior flipping.
• The property was fairly and openly marketed for sale.
• The lender must justify and document the reasons for the increase in value if the sales price is 20% or more above the acquisition costs.

Quick Background

The anti-flipping rule was issued by The Department of Housing and Urban Development in 2003 to prohibit lenders from using FHA financing in transactions where single family property was being resold within 90 days.

What do you think about the continued suspension of this rule?

Thank you for reading!