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.
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.
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.
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.
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.”
25% of their time in a transaction spent on communications, calls, and video conferences. For a buyer’s lawyers, this usually includes (without limitation):
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.
18% of their time in a transaction spent on resolving issues that come up from time to time in a transaction, including:
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.
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:
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.
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:
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:
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.
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.
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.
The key components of our platform are described below:
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.