Sofía and the Preservation of Value By César Ochoa
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few weeks ago, on behalf of a dear friend and client, I entered into a somewhat complex real estate negotiation. My friend, whom I shall name Santiago, is a developer who owns several industrial buildings. He was trying to keep leasing one of those buildings to Acme, Inc., an existing tenant whose ten year contract was about to expire. Santiago felt he was in a very difficult position. When he originally leased out this property a decade ago, Acme was paying him $3.80 per square foot per year. Because of an agreed upon escalation clause, the rent had been increasing at the rate of 2% per year and Santiago had expected Acme to exercise an option to extend the term of the lease at the rate of close to $5.00 psf. But Acme decided not to exercise its option and, instead, it sent Santiago a proposal offering only $3.75 psf. The argument, of course, was that the industrial lease prices throughout Ciudad Juarez had dropped sharply in recent years, a fact that is uncontested. Santiago’s Best Alternative to a Negotiated Agreement or BATNA was not good. He knew that if he couldn’t convince Acme to renew the lease, it was likely that he would end up with an empty building and that it could take him months to find a new suitable tenant. Santiago was making the very natural mistake of focusing on the weakness of his own BATNA, without taking into account that Acme’s BATNA was not favorable: Relocating a manufacturing operation is quite expensive and truly risky. Negotiation theory teaches us that a negotiator has two distinct tasks. The first and most obvious one is to claim value. In every viable negotiation there is always what is known as the ZOPA, or Zone of 44 JUAREZ - EL PASO NOW JUly 2013
Possible Agreement. This zone in the Acme deal was determined by the minimum amount that Santiago was willing to accept for his building, and the maximum amount that Acme was willing to pay for it. It lay somewhere between the $3.75 that Acme offered and the $5.00 that Santiago originally expected. The second and more difficult task that any capable negotiator must tackle is the challenge of creating value. As my teacher, Roger Fisher, author of the seminal book “Getting to Yes” would say: You have to “enlarge the pay”. The problem I had is that in this particular negotiation the crux of the matter was elsewhere. Of course, I had to claim as much value as I legitimately could for my client, and I also had to find ways to generate additional synergies for the parties but, above all, I had to protect the value that already existed in this transaction. Therefore, during my discussions with Acme’s representatives, I used the story of Sofía to convey to them certain facts that we often blatantly overlook. Sofía is a friend of mine and she is one of the most beautiful human beings I have met. She could easy grace the cover of any fashion, health or beauty magazine. However, while Sofía is undoubtedly a stunning young woman, her true gift is the fact that she is a remarkably happy and loving person. Even though I am sure she has bad moments, I have never seen her sad. You can always, and I mean always, count on her wonderful, easy smile. That is why, when she married about ten years ago, I felt obliged to have a man-to-man chat with the groom and I admonished him: “Son, you have a tough job ahead of you. You don’t have the difficult task of making your wife happy,
because Sofía IS ALREADY happy. That happiness is a rare treasure. What you have is the even more difficult responsibility of safeguarding that happiness. You are accountable for preserving her joyful state of existence.” A problem we often face as human beings is that we fail to recognize value that has already been created by us or by others. All too frequently, we take things for granted and disregard and endanger valuable assets in the pursuit of bargains or novelty. Sometimes we risk losing them out of sheer stupidity and shortsightedness. Fortunately for Santiago and for me, the executives who negotiated this matter on behalf of Acme were wise and savvy men who realized the many risks and hidden costs involved in uprooting a plant to relocate it in a different part of the city, simply to save a few rent Dollars. They were not a new company freshly arriving to town with a clean slate. Through a partnership with my client as lessor, and with their employees who predominantly lived nearby, they had already established a successful manufacturing operation. They recognized that their “Sofía” was happy, and they agreed to extend the lease for another five years at a much more appropriate rate of $4.30 psf. They wisely decided not to endanger their plant’s joyful state of existence. With your permission, I would like to take this analogy one step further. As one of the civilian members of the Mesa de Seguridad de Ciudad Juarez, the task force crated by the Federal, State of Chihuahua, and Ciudad Juarez governments, to devise and implement a strategy to restore order in Juarez, I saw how we momentarily mishandled the destiny of our city, by failing to protect the value that has been created here by hundreds of thousands of
devoted individuals, from many nations, who have labored in this region for decades. Fortunately, the people of Juarez have met this challenge with courage and talent, and have definitely turned the tide of violence. All violent crime rates in Juarez have dropped 90% or more as compared to where they stood at our darkest hour in January of 2011. Credit should be given to the law enforcement organizations, and to the government and civic leaders who have risked their lives, to set the city back on track. But our society must also honor the brave leaders of all of the companies that have operations in Juarez, who recognized the virtues of our city, and who resisted the temptation to flee when things got rough. For your resilience and foresight, you have the undying gratitude of the citizens of this region. Many things in Juarez are still not quite right, but its industrial and business infrastructure is intact. Sofía may not be completely happy these days but she is getting there. Hence, my very first piece of humble advice to you in this column is quite simple: Never underestimate the value that already exists. Value is difficult to create and extremely easy to destroy. In business, in matters of public policy and, above all in your personal life, treasure and protect the value that is present in this world… unfailingly strive to keep your Sofía happy. César Ochoa is a graduate of Tecnológico de Monterrey and of Harvard Law School. He is the head of the Mergers and Acquisitions Department at EGAO (egao.com.mx). He has been advising multinational companies for close to three decades. He routinely represents his clients in complex trans-border negotiations including acquisitions, maquiladoras, joint ventures, leases, construction contracts, and labor law matters. He may be contacted at: cochoa@egao.com.mx or Ph. +1 (915) 613-9882