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Doing Deals Globally May Lead to Culture Shock

The saying goes, "money talks in any language." However, for American firms trying to expand into foreign markets, the local cultures and business practices often lose something in the translation.

Real estate is among the first barriers that invading American firms have to negotiate in order to conquer a foreign business market. Without substantive information on the market and an even better understanding of how to get things done, they could find themselves unable to survive.

For instance, in South America business negotiations usually are characterized as being less urgent than in the United States. Consequently, it's not unusual for a deal to drag on for months, with each negotiating point taking days or weeks to hammer out. And just when it appears all the details have been settled, the South American firm could announce it has entered into the same deal with another company.

"Many deals fall though at the 11th hour, after much time and work has been spent on them," says Pat Moultrup, president of Staubach International, the Dallas-based firm's international brokerage services division. "Many North American firms try to do business in South America and wind up leaving in frustration."

Undaunted, leading American brokerage companies are rapidly expanding their international service offerings to make foreign expansion easier, at least for their clients.

The merger of CB Commercial with England's Richard Ellis and the more recent pairing of LaSalle Partners and Jones Lang Wootton are two examples of large American firms joining forces with strong international ties. Not to be outdone, broker networks such as Colliers International, New America International and ONCOR International are continuing to expand into new world markets.

"If you subscribe to the notion that retail is becoming a more globally implemented business, then the investment community will follow wherever those business opportunities track," says Bob Welanetz, president and CEO of the retail division of Jones Lang LaSalle. "As a result, a service-oriented company like ourselves needs to be positioned to serve clients anywhere they are doing business in the world."

The lure of foreign markets Indeed, the niche is growing. Corporate boardrooms across the country are discovering that many American markets are saturated with their goods and services and are now looking overseas to add to their profits.

"Many American firms are already getting 50% or more of their revenue from international markets. And as more and more firms recognize this (trend), the desire to expand internationally will continue to grow," explains Quentin Knights, managing director of the Corporate Advisory Group - International for Los Angeles-based CB/Richard Ellis.

"The retail driver is people," says Jeff Finn, president of New America International, a Hightstown, N.J.-based retail brokerage network.

"There are millions of people in under-retailed markets around the world that need to be clothed and fed," he says. "It comes down to these locations vs. most American markets that are already fairly well saturated with retail."

"There is a tendency toward cannibalization of stores," adds Richard Wolf, executive vice president of Boston-based Colliers International. "The opening of new retail stores in this country often means taking business away from other locations, so they need new areas in which to expand."

World events also are shaping expansion plans. In Europe, establishment of the European Union and its single currency, the euro, is enticing more American firms to that continent.

"The advent of the euro has led to lower cost, since companies don't have to deal with exchange rates," says Phil Norwood, vice chairman of Dallas-based Trammell Crow Co.

"Companies can develop a European strategy now rather than one for each individual country," he says. "This has provided a big boost to the idea of expansion of American franchises in Europe."

"It is changing the way companies do business in Europe," explains Knights. "It will be easier for companies to have regional service centers and to centralize administrative functions because there is only one currency and invisible borders."

In Asia, the depressed economy has halted many new developments. But as rumors that the bottom of the market may be near, some firms see opportunities.

"In Tokyo, prices are down 50% since 1990," says Tom Wilkinson, executive vice president, global services management for Chicago-based Jones Lang LaSalle.

"We are seeing activity beginning to pick up in Asia," says Moultrup. "Now could be the time to make a move in the market, if you can afford to be upside-down for a year or two."

The same is true of Brazil. In December, the Brazilian currency, the real, was devalued. As a result, both property values and rental rates have dropped approximately 30%, adds Wilkinson.

"The business climate is difficult and markets are not as mature in most emerging parts of the world, but this also creates opportunities to complete some very profitable deals," explains Norwood.

He points out that to a lesser extent, the strong American economy is attracting foreign retailers to the U.S., "but generally, we are largely exporting (American firms), rather than importing (foreign firms)." However, most brokerage executives do see the importation of foreign retail into the U.S. gaining momentum.

Taking clients under their wing The attraction of global expansion is obvious, and to meet the unique challenges it presents, corporations are expecting more from brokers than ever before.

"The client likes to know going in that he has one firm with him all the way," says Stuart Eisenkraft, executive director of international operations at New York-based Insignia/ ESG. "They don't want to be taken so far, and then dropped off a cliff with the hope that they land right-side-up."

"It is a matter of hand-holding them all the way through the process," adds Moultrup, who points out that over the past 20 years, Staubach has completed about 7,000 international transactions involving various property types including retail.

An important part of the broker's job is to convey clearly to clients just what they can and, perhaps more importantly, can't expect when doing business overseas. "Managing a client's expectations is the first problem," says Knights.

"They often don't understand that working overseas can be more treacherous," says Moultrup. He adds that many decisions have to be made regarding legal matters, potential joint venture partners, architectural details, potential contractors and vendors ... the list can go on and on.

Eisenkraft notes that the problem can be partially alleviated by high-tech communication. "We have been able to bridge a lot of these problems by direct connections with our clients through linked databases," he says. "In this way, we are able to communicate in real time, without ever having to pick up the phone. And that is important when you are 12 hours apart."

American companies may also be spoiled when it comes to the number of location options they are accustomed to having in domestic markets. A company may need 50,000 sq. ft., but in some markets all the sites available may be much smaller or much larger than that.

Quality is another limitation. "Grade A space may be only 15% of the market in a South American city," says Knights.

For example, Wilkinson points out that in Sao Paulo, Brazil, a city of more than 8 million people, less than half of the buildings are air-conditioned. "The properties there are much older," he says.

The age of the buildings can also be a safety concern due to a lack of government regulation in some countries. "In the United States and Europe, potential tenants don't have to worry about building safety because they are inspected regularly," says Wilkinson. "But that is not the case in South America or Mexico."

The broker must address this issue for his client by hiring inspectors to check out the buildings. In addition to the safety hazard, a lack of inspections can be a factor in insurance costs.

The same vigilance is necessary when addressing zoning regulations. Some buildings may be in violation of zoning laws by having an additional floor or an enlarged basement dug beneath the street.

"If the violation comes to light after you have occupied the building, officials will make the tenant vacate," explains Wilkinson. "They will even go to the extreme of knocking out the windows so the building cannot be occupied."

The laws themselves present some problems. In China and a few other countries, it is illegal for foreigners to own real estate. A foreign firm often needs a local partner in order to operate. Even in Canada, American firms usually have an easier time if they operate with a Canadian partner, says Wolf.

The innocents abroad But most of the problems encountered by American companies working overseas are simply cultural differences in how business is transacted. That fact doesn't make resolving those differences any easier.

Perhaps the most common cultural difference is the slower pace of life, particularly in Latin and South America.

"We usually tell our clients to figure twice as much time to get something done as it requires in Europe," says Moultrup. "There is just much less concern about deadlines."

Companies see potential in certain markets, and the pace is just one of the tradeoffs firms have to make. "It is just a matter of tempering the opportunity with the reality," says Finn.

In some parts of the world the broker may have a problem getting tasks done quickly, but in other parts of the world he may have difficulty just being recognized as a player in a transaction.

In Japan, the client-broker relationship is not well understood.

"It is a deep cultural belief that, as a rule, a consultant or third party is brought into a deal only when something is wrong, " says Wilkinson. So the client may have to do business personally while the broker maintains a low profile.

In South America, leasing can be a complicated problem because of the unusual ownership of some buildings. In order to raise the capital to construct a building, individual floors are often sold to buyers and in some cases divided among buyers.

"If you need to lease five floors of a building, you may be dealing with 10 different owners or more," explains Moultrup. "Our job comes in finding all of the owners (some of whom may be foreign owners) and getting them together to complete the transactions."

In several foreign markets, the broker's primary concern may be to keep his client on the right side of the law. Corruption is rampant in many business cultures. An interesting example is the concept of "black money" vs. "white money."

In India, two payments are commonplace in real estate deals, explains Wilkinson. The first payment (white money) is by check, which the seller shows the government for tax purposes. The second payment (black money) is in cash, which the seller pockets to avoid paying taxes.

The broker has to know how business is conducted, whatever market his client is in.

Perhaps the most puzzling cultural difference for American retailers to comprehend is taste.

"It's difficult for American retailers in Europe because it's hard for them to adjust to the taste of European customers, which can be very different from those back home," says Robert K. Futterman, president/CEO of Futterman & Associates, a New York-based brokerage firm.

"The colors and styles that are successful in America may not be as appealing to European customers," he says. Ferreting out such differences is just as much a part of the international broker's service offering as finding the retailer a good store location.

"Part of our job is to put the retailer in touch with local consultants that can help them tailor their presentation and merchandise offering to better match their market," says Wolf. "It is such a critical part of their success or failure."

This issue can work both ways. Foreign firms locating in the United States need to understand the market and consumer they are trying to reach as well.

"Some enter the market without a strategy," says Sandie Witmer, principal with Retail Estate in Coconut Grove, Fla. "They need an imaging campaign to let the consumer know who they are and what they do. Without this, they can't get into the psyche of the community."

Given the difficulties of operating in international markets, American firms are looking to brokerage companies that exhibit the capabilities to handle their worldwide expansion plans.

And brokerages are taking up the challenge, increasing their knowledge of emerging markets and expanding their service offerings to accommodate these global-minded clients.

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