Relevant Deal Issues
Case Study of a Failed Purchase

Some Japanese owners have tried selling their U.S. properties, but American buyers have repeatedly failed in their attempts to acquire them. In fact, they seldom pass the initial offering phase, first base. Are American investors repeatedly making the same mistakes? The answer is a resounding yes. American investors have a false impression of Japanese sellers, their reasons for selling, and the reasons why they don't sell.

In the example case, as in past failures, the American investors and observers were shocked at what happened. Nevertheless, they all gave the same wrong reason for the failures. This should come as no surprise as they all employed a similar strategy built in large part by the broker's incorrect approach. Everyone lost again because neither the broker nor the investors realized the strategy was faulty, based on misunderstandings, and predictably destined to fail from the start. What can be done to prevent similar debacles in the future?

When repeated attempts result in repeated failures, and the strategies employed in those attempts conform to a widely adopted paradigm, it is essential to scrutinize the validity of the paradigm itself. Several understandable and logical reasons exist for the failed attempts, but none are embodied in the model currently accepted for developing acquisition strategies. The common paradigm which American investor's base their attempted Japanese real estate purchases must be considered dubious, if not entirely flawed.

Sometimes paradigms are erroneous because they are based on misunderstanding or ignoring the issues involved. AES has long maintained this is true for the issue of failed Japanese property acquisition attempts by Americans. The perceived stereotype is a myth comprised of the following three erroneous illusions:

• Japanese owners are forced to sell their properties at substantial losses to avoid bankruptcy.
• Japanese-owned U.S. properties offered for sale are beginning to flood the market.
• Sellers will refuse to sell if the offering price is lower than their unreasonable expectations.

Japanese owners are not forced to sell. Numerous news articles report that Japanese owners, already close to financial ruin, are forced to sell their properties at substantial losses. This is untrue. Yes, the Japanese unquestionably are suffering serious financial distress. Japan's banking system is in shambles. It is so bad, they can't foreclose on their delinquent loans, measured in the trillions, without creating their own insolvency. Even if the banks wanted to act against the sellers, they can't. Furthermore, most sellers entered into forbearance agreements with the banks that by design, qualify their loans as performing. They are, therefore, in no immediate danger of foreclosure. At worst, the Japanese mortgages are in technical default only because their collateral value has decayed. The belief that Japanese owners must sell is a myth based on misunderstanding and ignoring the facts.

The market is not flooded with Japanese properties. For years, news stories have periodically appeared that quote experts as saying that Japanese-owned properties are starting to be offered for sale in flood-like proportions. The stories identify several properties as recently sold for prices substantially below cost as proof of their assertions. With only a modicum of scrutiny, however, the stories are discovered to be rubbish. There is no flood of Japanese property offered for sale. Not only is there no glut, it is unusual to even find a Japanese property offered for sale. Where are all the properties that have been sold? More rubbish. Only a handful of properties have been sold. For the three or more years the stories have appeared, the list of recently-sold properties always cites the same few properties. Plain nonsense, or is some public relations department doing a fine job of planting stories?

A seller's expectations play little, or no role in it's decision to accept an offer. The difference between a property's current market value and the owner/seller's unreasonable expectations of selling price has been labeled the Expectation Gap. The experts who coined the phrase wrongfully concluded the Expectation Gap is the reason for the failed attempts. They reached their conclusion after hearing the Japanese sellers repeatedly exclaim, "I paid a high price, so I should be able to expect to receive a high price!" This attitude is attributed to the seller's resistance to lose face because the loss incurred is a product of his poor investment. Regardless of the rationale employed for accepting the Expectation Gap as the reason, it is not the reason. The experts simply did not understand that the sellers were actually expressing shock. The experts also failed to hear the seller say that can not sell at current market prices without committing financial suicide. AES contends that a seller's inappropriate expectations or face-losing fears are not legitimate causes for failed acquisition attempts by American investors. A rudimentary understanding of legal issues in Japan leads to the conclusion that the seller cannot sell at current market values without suffering financial catastrophe.

How could such a flawed paradigm become so widely adopted by the American investment community? Notwithstanding the experts flawed thinking, investors have heard the experts repeating the same unfounded myths over and over. When people are repeatedly told the same falsehood, they ultimately accept the lie as truth. Politicians, advertisers, and public relations agencies have employed this technique for years.

Every American reader of this study has read the numerous news stories always quoting the same experts. It would be difficult to not have encountered them. For years they have appeared with regularity every three- to six-months in daily newspapers, the financial news media, and major periodicals, e.g., Time, Newsweek, etc. It may be surprising to some that the stories were created (and planted) by the same experts who are quoted as experts within the stories. The stories are an integral part of a misdirected strategy designed, in part, to cast their author's as experts to the real estate investment community. Unfortunately, their ploy seems to have met with success as they are viewed and followed as experts, despite their expertise being manufactured in their own conference room. The large number of failed attempts by their followers is a tribute to the efficacy of the expert's campaign. The intended audience for the news stories is not limited to the American investors. The stories were also crafted to serve another roll, but, with the Japanese community.

Japanese-owned U.S. property is a near-rarity in the marketplace, but reports to the contrary abound. A business firm with a profit motive to increase the flow of Japanese property to the market, fabricates the reports of a flooded market. By design, the news stories inform Japanese owners that their peers have started to rush to market with properties for sale to the highest bidder. They are informed the current value of their property is much lower than what they paid, and it would be foolish to expect higher prices. The owners are implicitly warned that further hesitation to sell will only lead to further price erosion, and greater losses. Japanese businessmen are appropriately insulted by the news stories. They and their peers cannot sell at current market values, so there is no rush to do so. To think they would is labeling them as stupid! The experts claim to possess an extensive understanding of the Japanese, but their strategy indicates the opposite is true.

The widely-adopted paradigm upon which American businessmen base their acquisition strategies is terribly flawed. Its replacement must comprise the following facts:

• Japanese owners are not forced, or under pressure to sell their properties.
• Japanese sellers will sell if the sale relieves them of all encumbrances.
• Japanese sellers will sell if losses are minimized and tolerable.
• Japanese cultural and business issues must be understood and applied.

The investor's buying strategy was based on the broker's and the so-called expert's flawed thinking, misunderstood cultural issues, and ignorance of Japanese legal issues. Obviously the time has come for the American investment community to follow a different piper, or develop a working knowledge of the Japanese business system, or better yet, employing appropriate expertise to deal with the issues. The latter choice is probably the most efficacious, as the issues are monumental in number and complexity.