Editor’s Note: Events such as the sale of a business, a divorce or a buy-out between partners are occasions where the parties often disagree on the value of the item in question. These occasions are an opportunity for a valuation expert to provide a neutral opinion of value and earn a handsome fee. In such cases, each side typically hires its own expert. As Barry Lebow explains, arbitration is a method that saves both parties time and money while providing the practitioner with lucrative and challenging work. In this story, Lebow discusses the nuts and bolts of arbitrating one particular type of dispute, lease negotiations.

Stepping in as an Arbitration Consultant

By Barry Lebow

Offering arbitration services is a great niche area for appraisers and other professionals who have a particular area of expertise. Offering your services as a valuation or construction/building expert allows you to apply your expertise in a new and challenging way. This story focuses on lease negotiations and how valuation experts can reduce the costs for both parties while profiting handsomely.

For example: say a tenant is a restaurant/tavern owner. The lease is up for renewal and the tenant feels that anything over $15 per square foot is robbery, while the landlord wants no less than $22 per square foot. The first question is: where did each party get their opinion of market rent?

To resolve this issue using the classic adversarial approach, each side would hire their own appraiser, their own attorney and possibly their own arbitrator – with a third neutral arbitrator brought in to split the difference. Using this approach, the dispute can take months to resolve and wind up costing each side $15,000-$20,000, if you consider the costs of the hearing room, stenographer and other required parties.

Now, here is what I offer to solve the problem and keep costs down. Each side hires me and signs a declaration and fee agreement which states, among other things, that I am a fully independent party working to resolve the issue in question. Each side agrees to abide by my report and the market rent that I estimate after a full investigation and analysis. The agreement is usually for five years but that can vary. I often have to investigate to determine if other leases of like kind have “step-ups” or if there are rights of further renewals. Typically this is spelled out in the existing lease.

Rules of the Road
I make certain both parties are present when I inspect the subject premises. I never speak to one without the other hearing every word. I will not deal with either one without the other being present nor with one law firm without the other. I make clear to each party that my report is independent and neutral.

My minimum fee for this service is $5,000, which includes a narrative report. On top of that are fees to meet with lawyers and to attend the hearing(s). Lease information is not easily obtained. In many cases I have to interview tenants and landlords individually and often they are not forthcoming. My fees increase when there is a difficulty factor. I leave this end of my contract somewhat open.

Not for Everyone
Split two ways, my fees save each party a great deal of money. But arbitration is not for everyone. While I act as a valuation expert on many lease disputes during the course of a year, I am typically working as an advocate for one side or the other and not as a neutral arbitrator. Not every client is able to trust me to be neutral or is willing to give away their bargaining rights. Each time I am contacted about a case of this type, I offer both parties the arbitration option: one report, one value and one fee. While there are some takers, I typically complete only four or five cases a year as an arbitrator. Most often I am retained by one side to go through the full process. I recently had one tavern owner/tenant spend $70,000 on a legal process that resulted in a final agreement that could have been determined in one day through arbitration. It was a complete waste of good money.

If this process sounds appealing, there is a great deal of opportunity for aggressive appraisers who can promote themselves to commercial real estate agents, attorneys, landlords, etc. Most of these cases rest on one issue: what is the real estate worth? Who better to give that answer than you?