The Price of the Money (Part 1)

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Nov 21

Image sourced by Gabrielle Henderson @gabriellefaithhenderson

In June, we closed the refinancing of our Coop Corporation’s $3.75 million mortgage which was maturing.

The loan agreement and the supporting documents were approximately seven or eight inches high if you stacked them one on top of the other. Of course, I read most of them online; although I did print the primary documents.

As the only Board member with direct banking experience – I had worked at Citibank and JP Morgan Chase Bank for 15 years – I felt it was my responsibility, my fiduciary duty, to read every page of every document. So I did.

As a matter of fact, I made a number of comments on the documents, which I shared with Norman, the Coop’s attorney.

And mind you, based on my banking experience Morgan Stanley’s documents were ‘market standard’ – nothing out of the ordinary. My comments were designed to clarify some terms and conditions.

He shared them with Matthew, Morgan Stanley’s attorney for consideration.

Before Norman sent the comments to Matthew, I said to Norman, “Send the comments in. But don’t negotiate with Matthew. We need the money. And the only thing that negotiation will do is raise our legal fees.”

Interestingly enough, Norman told me that Matthew accepted some of my comments and revised the loan agreements.

Wow.

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But the point is. . .

It’s Very Important to Understand the Cost-Benefit Tradeoff in any situation.

Given that our existing lender pulled their term sheet and our existing mortgage was set to mature in a few weeks, we needed the loan from Morgan Stanley.

Realizing that there was Only one game in town – Morgan Stanley – and our negotiating power was limited at best, there was No point in taking a hard line with Morgan Stanley.

The likely outcome was we would have paid more money to Morgan Stanley’s attorneys.

To get the best deal for yourself and achieve the optimal results in a situation:

Gain a solid understanding of the subject matter at hand
Reach out to experts to gain valuable insight and advice
Hire professional advisors when needed – for example, attorneys and/or accountants
Ask a lot of questions. And don’t get flustered or discouraged if the other party (counterparty) dismisses your questions or attempts to embarrass you

They may be trying to get the upper hand in the negotiations; trying to embarrass you; or possibly hiding something.

Seek out options and alternatives for a given situation or opportunity
Gain an understanding of which party or parties control the game

With refinancing our mortgage, realistically, Morgan Stanley controlled the game. They had the leverage because our Coop needed their money.

Gain an understanding of the impact on you given tradeoffs in a deal

If this happens, then what?
What does it mean?
What will the change cost you?
Calculate the cost-benefit tradeoff.

Set your bottom line – what you can and can’t live with.
Know when to put your pencil down and walk away from the table. And move on to greener pastures.

Calculate the ‘price of the money’ and position yourself to get the best deal you can.

And keep in mind that you can always put your pencil down and walk away from the table.

See you next week.

Arthur VanDam

P.S. To Save More Money Every Day – click here.

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Disclaimer: OH and Please Remember, we are Not financial advisors, financial planners, attorneys or accountants and are Not providing any specific financial, tax, accounting or legal advice here. Be sure to conduct your own due diligence and consult your own professional advisors to get sound professional advice that’s specific to your financial and personal circumstances, risk tolerance, time horizon and investment goals and objectives among other key factors!