A recent Daily Business Review by Samantha Joseph, “Client Balking at Attorney Fees? K&L Gates Has an Algorithm for It” reports on a new algorithm for attorney fees in real estate law. The article reads:
It won’t work for less predictable practice areas, but real estate lawyers at K&L Gates have an unconventional model for billing: An algorithm that prices each element of a deal to avoid sticker shock in a slowing market.
Critics say up-front pricing is risky in a sector where tough negotiations, permit hurdles, municipal demands and unexpected barriers to complex deals could leave the firm on the losing end of such arrangements. But K&L’s goal is simple: Avoid situations where cost-conscious clients balk at their bill.
“A cautious client wants to tie down every cost to the extent that he possibly can,” K&L Gates commercial transactions and finance attorney Douglas Stanford said. “Out-of-control fees became a problem. A lot of these clients are now asking for very firm fee caps or fixed-fee proposals in writing. And we are obliging.”
The firm’s detailed worksheet includes hundreds of fields, specifying fees for joint ventures, portfolios, due diligence, title and survey work, leasing and building management, documents for buying and selling real estate, loan documentation and specialized tasks such as U.S. income tax analysis and structuring for foreign clients. It then identifies which professionals will handle each portion of the deal and subdivides the categories to spell out each task involved, provide a blended hourly rate per task, targeted hourly rate, potential high rate, estimated fee and potential maximum.
Obviously, it emphasizes detail. For instance, the fee proposal for a customer seeking title and survey work includes 15 line items including title commitment, high-liability approval, boundary surveys, flood certification, municipal lien and assessment report, Uniform Commercial Code search, pro forma title insurance policy, insured-closing services, proof of satisfaction of mortgage, termination of Uniform Commercial Code financing statements, title affidavits, and title insurance policies for owners and mortgagees.
“We’re not cutting fees. We are trying to make a better business of accurately estimating what our fees will be. With our experience we know what certain kinds of deals will cost. We have a system where we study the deal, identify what kinds of issues will arise and then price those issues,” Stanford said. “In the same way you might find a health insurance company trying to price to the cost of a broken leg, we price each part of a real estate deal.”
The strategy has worked for K&L Gates, which strengthened its reputation as a major real estate practice by guiding Naples-based FTE Networks Inc.’s $75 million acquisition this year of construction management firm Benchmark Builders Inc. But as the real estate cycles slips past its peak, attorneys say clients grow increasingly cautious.
“Even given the complexity, you know what it’s going to take and can come up with at least a price range,” Stanford said. “We take a risk that the number is going to stay right there, and we stick with it. We don’t go back later on and re-trade or renegotiate a deal already agreed to.” The problem, though, is that real estate deals are hard to handicap, observers say.
“Until you end up going into the weeds … you don’t really know what’s going on on the other side,” Stroock & Stroock & Lavan real estate practice group partner Ira K. Teicher said. “You never really know going in where you’ll find problems.”
Teicher found such problems on a recent deal with 80 exceptions to title for a property at the center of what initially promised to be a simple transaction. He typically expects seven to 15 exceptions to title on average commercial properties — including utility easements, restrictive covenants and mortgages — which might be addressed to facilitate real estate trades. But finding dozens forced Stroock to ramp up the time its attorneys and staff needed to devote to the deal.
“You can always estimate the norm, but once you’re outside the norm … it opens up Pandora’s box,” Teicher said. K&L Gates’ algorithm is not the first time a real estate practice has taken an innovative approach to billing.
In 2015, prominent foreclosure defense counsel Thomas Ice disrupted the status quo with an innovation on the delivery of legal services. His Royal Palm Beach-based firm, Ice Legal, launched LegalYou, an online portal to offer free and low-cost legal services, including packages with per-minute prices.
“Just like any other kind of business, lawyers need to leverage technology, streamline operations and diversify their product offerings to bring prices back in line with the market,” Ice said at the time of the launch.
K&L Gates suggests the time is right for its algorithm when retailers with shrinking brick-and-mortar operations demand less real estate and the luxury condominium market cools. “The (price) negotiations happen going in,” Stanford said. “We agree on a real number going into a deal rather than arguing about it on the end.”