Real Estate Advisor Law Blog

Mixed Use Centers - How Do You Allocate CAM?

Scott Kadish — Tue, 09 Mar 2010 16:23:55 -0600

Almost all new build shopping centers are mixed use - they include some combination of office and residential in addition to the retail space. Elizabeth Hamilton, in house Real Estate Counsel at Office Depot, recently reminded me of the special problem this presents in allocating CAM, taxes and insurance. Some portion of each must be allocated to the office and residential components, but should it be on a strict per square foot basis for all users? Taxes and insurance should be allocated among all users equally on a per square foot basis. This means the dominator of the fraction defining a tenant's pro rata share should include all retail, office and residential space. (Of course, creating separate parcels eliminates or reduces the problem.)

CAM may be more complicated. The operating expenses attributable solely to the office component (such as the maintenance of an elevator or lobby area) should be allocated only to the office tenants, meaning that those costs should be deducted from the CAM allocated to the retail tenants. But then should the balance be spread over all tenants, retail and office? Retail tenants use more CAM then office tenants so that may not really be fair. Some landlords analyze it item by item to allocate between office and retail tenants. Some simply figure out what the market rate for office is and deduct that off the top. Others deduct based on a per square foot or percentage reduction and a general application of how they think CAM should be allocated. In any of these methods, the denominator of the fraction is just the retail area (because the aggregate CAM is reduced before the fraction is applied.)

The key here is to recognize the issue and have the Landlord explain how it allocates each item and then to make sure the Lease reflects this methodology. There is definite room for disagreement as to how to allocate, but the actual cost difference is probably not material. However, is this not another reason why fixed CAM is better?

Location, Location, Location !

Brad Kaplan — Mon, 08 Mar 2010 08:58:09 -0600

Recently, Crain's Chicago Business published an article about Vienna Beef's Hot Dog University. Given the continued state of the commercial real estate industry many of our colleagues have had to "look" for new opportunities. Hot Dog U struck me as just about the most entrepreneurial idea I have seen in a long time. All of the skills a real estate professional has acquired are necessary to be successful in operating a hot dog stand: drive, personality, street smarts and the ability to calculate cap rates on the fly, or at least make change for a $20 bill ! But the most important skill to make a success of a hot dog stand is LOCATION, LOCATION, LOCATION !!! Watch the video below:

AFA Does Not Mean Discounting Fees

Scott Kadish — Thu, 04 Mar 2010 12:12:30 -0600

Everyone is talking about Alternative Fee Arrangements (AFAs). Some clients are demanding it; some firms market themselves as special because they will consider it; some attorneys are frankly scared of it because they think all it means is that they will be required to discount their fees.

In reality, an AFA is nothing more than a bill based on something other than the amount of time spent on a matter multiplied by the hourly rates of the attorneys doing the work. Contingency fees are a prime example. Fixed fees are another. There are obviously countless other "alternative" ways to structure a legal bill. Each may or may not be less than the traditional hourly rate fee. The reason for an AFA may be to reduce fees, but there may also be other reasons:

(1) An AFA may provide certainty as in a fixed fee. The ability to budget legal costs with certainty may be more important to a client than getting the lowest price.

(2) An AFA may better align the interests of client and attorney. AFAs with success fees or premiums for desired results may actually increase legal fees. But the attorney is rewarded for obtaining the desired result in the most efficient manner.

(3) An AFA may allow for the client to provide a larger volume of work. The larger volume should drive efficiencies which create a more profitable engagement for the law firm while providing an overall smaller legal budget for the client.

(4) Where the assignments are repetitive or reusable, the law firm charging a fixed rate may lose on the first few engagements but then make it up in each subsequent assugnments. Or, in a slight variation, a law firm can quote certain matters at a loss and others at a premium without having to account for hours where the client can afford more in some cases and less on others (e.g., more on a lease for a large space and less on a smaller lease even though the same amount of time and effort is required.)

(5) The administrative costs involved with billing fixed fees, and with reviewing the bill from the client's perspective, are less than that with hourly billing. And this is actually a key benefit. A lawyer and client will never need to argue about an invoice - it is settled in advance and the issue about who spent how much time on what is eliminated. The only issue is did the attorney do a good job.

I think in some ways the AFA movement may be akin to the shopping center landlords converting from charging tenants their pro rata share of CAM to now charging fixed CAM. When it first started, tenants were wary thinking it was a hidden profit center for the landlord and landlords were wary of taking the risk of loss. Eventually, landlords came to realize that it decreased conflict between landlord and tenant because they were no longer arguing what was CAM and how was it measured, and didn't need to worry about audits. Similarly, tenants have come to see the benefit of budgeting exactly what their occupancy costs are without getting that extra reconciliation charge each year and not having to spend the time and aggravation negotiating CAM exclusions.

So the message is AFAs can be a great tool, and the effect on overall pricing is only one factor to consider. They work well in many situations, not in all. To be truly effective both the lawyer and the client need to feel fairly treated. Like strategic business partners !

MORE SNDA THOUGHTS....

Scott Kadish — Tue, 02 Mar 2010 16:23:06 -0600

An interesting situation has come up several times just recently (these issues come in droves – after never confronting the issue for a really long time, all of a sudden you get the same issue coming up again and again):

Tenant relocates to new space in the same center;
Landlord and Tenant amend existing lease to provide new space, rent and term;
Tenant entered into memorandum of lease and SNDA when it executed original lease;
There is a new loan with new lender in place at the time of the relocation; and
Tenant enters into an amendment to the memorandum of lease at time of relocation.

Who holds the senior interest – the tenant or the new lender?

If it is the same center, with the legal description of the center attached to original memorandum of lease, and the new lender consents to lease amendment, I believe the tenant should have senior interest.

If the tenant executed an entirely new lease rather than an amendment to the existing lease, would the analysis differ? It should not, otherwise form would trump substance.

A lender who consents in any way to a lease or amendment should not be able to terminate that lease upon foreclosure (unless of course if the tenant is in default). Great minds differ on issues such as this, but law and equities lien in our direction. What do you think ?

Buy Swampland in Florida? Or, just a Bad Case of Buyer's Remorse? Discontent with Interstate Land Sales Full Disclosure Act

Kristin Boose — Sat, 27 Feb 2010 08:14:53 -0600

“I have some prime swampland in Florida to sell you” is a slang expression used to poke fun at the gullibility of a person. This saying is based on events of the 1960s and 1970s where local scammers would attempt to induce out of state purchasers to acquire “lucrative” land which, in reality, turned out to be worthless, undevelopable plots. The federal Interstate Land Sales Full Disclosure Act (“Act”), 15 U.S.C. §§1701, et. seq., passed by Congress in 1968 and patterned after the Securities Law of 1933, was a reaction to that and other scams involving the sale of land. The Act was intended to provide a mechanism to inform buyers of land and to curb fraud and misrepresentation by sellers. In short, the Act forbids a “developer” or “agent” (for purposes of this article, a “seller”) who uses interstate commerce to sell or lease any nonexempt “lot” without first filing an acceptable “statement of record” with the U.S. Department of Housing and Urban Development and delivering to the buyer, prior to the sale, a “property report” which meets the requirements of the Act. When a buyer brings an action against a seller under the Act, the remedy sought, more times than not, is complete rescission of the purchase (as opposed to damages or equitable relief). While not all land sales require compliance with the Act (such sales being exempt under §1702 of the Act), for those sales and sellers that do fall under the jurisdiction of the Act, failure to comply can have serious consequences.

Despite the Act’s good intentions, sellers and their advisors are citing three related concerns with the structure and application of the Act:

(1) Buyer’s Remorse. Sellers argue that instead of shielding buyers from unscrupulous sellers, the Act is being used by buyers to combat buyer’s remorse. This is especially true for buyers of investment properties or vacation homes who are looking for a way out of purchases and construction contracts made prior to the downturn in the real estate market. Sellers are arguing that the Act is being used as a vehicle by buyers – even sophisticated buyers who went into the transaction with their eyes wide open – to leave the seller holding the bag and incurring the buyer’s loss on a bad real estate investment.

(2) The Punishment Doesn’t Fit the Crime. Related to the first point is the seller’s second argument that outright rescission of the transaction, is an unfair, even severe, remedy for a situation where the developer or agent unintentionally failed to comply with the Act and where no fraud or misrepresentation was alleged. Instead of fraud and misrepresentation, recent litigation under the Act has focused on the following issues: whether the Act applied to a particular transaction, availability of exemptions, including partial exemptions, under the Act; and whether a limitation period contained in the Act bars a suit. To quote another saying, sellers contend that “the punishment doesn’t fit the crime”. An appropriate middle ground on this issue remains to be seen.

(3) Even Courts are Conflicted. Combine the above two points with the fact that there is a conflict in the courts over the interpretation of the Act, and it leaves sellers and their advisors playing an elaborate guessing game (or, perhaps a game of “Russian Roulette”) in navigating the complexities of the Act. In addition to being knowledgeable about the Act and the regulations promulgated thereunder, sellers must also be vigilant to consult local applicable case law on interpretation of the Act. It is for these reasons that some practitioners believe Congress must revisit the Act and update or modify it accordingly.

In summary, sellers who deal in and with real estate transactions would like to see changes to the Act to bring it in line with the lessons that have come to light in the past forty years, including, most notably, those derived from the issues discussed above. Nevertheless, the other side of the same coin is the admonishment to sellers to make review of and compliance with (if required) the Act a standard part of any real estate development project and to seek out professional help when needed. Don’t create an unintended escape hatch for a buyer in an otherwise solid, well-planned and executed development project.

A Fuel Cell for the Rest of US

Brad Kaplan — Wed, 24 Feb 2010 08:37:08 -0600

Recently, 60 Minutes aired a story about Bloom Energy, a Silicon Valley alternative energy start-up, which has developed fuel cell technology capable of taking us off of the electrical grid. The video speaks for itself so watch it below. As you watch it, think about how technology such as this will transform the real estate industry. Besides the reductions in electric costs, how power is brought into a facility or development changes with this technology. Green energy/alternative energy is only going to make us all better at what we do !

Watch CBS News Videos Online

Because Underwriters Never Really Liked You Anyway: Good-bye ALTA Endorsement Form 21-06

Jodi Rich — Tue, 23 Feb 2010 05:21:48 -0600

On February 3, 2010, the Board of the American Land Title Association (“ALTA”) voted to decertify the existing ALTA Endorsement Form 21-06 (Creditor’s Rights). Almost immediately, two of the largest title insurance underwriters, Fidelity National Title Group (including its subsidiaries Chicago Title, Fidelity National Title, Ticor Title, Lawyers Title, Commonwealth Land Title, Security Union Title & Alamo Title) and First American Title Insurance Company changed their underwriting policies to no longer issue the Form 21-06 or to provide any other coverage for claims arising from bankruptcy or insolvency within the insured transaction. Stewart Title Guaranty is reviewing its underwriting policy in light of the decertification by ALTA. At this time, Old Republic National Title Insurance Company will continue to issue the endorsement, however, it will now charge a financial review fee related to its due diligence prior to issuing the endorsement which is separate from the endorsement’s premium. As was the case prior to the decertification of the endorsement by the ALTA, due to the risk involved for the underwriter, the issuance of the endorsement is not guarantied and should not be expected in all cases.

The Creditor’s Rights endorsement is often requested by lenders to provide coverage for claims arising from the insolvency or bankruptcy of a party in the transaction. It arose when the 1992 form of ALTA policy created a new exclusion from coverage for insolvency or bankruptcy in the chain of title. The 1970 form was silent on the issue. The 2006 policy, in use today, scaled the exclusion back so that it only applied to the current transaction and did not provide exclusions for bankruptcy or insolvency in the chain of title. The current loan policy excludes coverage for “[a]ny claim, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors’ rights laws, that the transaction creating the lien of the Insured Mortgage, is (a) a fraudulent conveyance or fraudulent transfer, or (b) a preferential transfer for any reason not stated in Covered Risk 13(b) of this policy.”

Without the ability to obtain the Creditor’s Rights endorsements, lenders need to perform more of their own due diligence prior to loan closing. Transactions which deserve extra scrutiny are those (i) where less than 100% of the loan proceeds are used to purchase or refinance the property or construct the improvements; (ii) between related parties; (iii) where the consideration does not appear to be market or includes something other than cash consideration; and (iv) where the seller appears to be insolvent or a bankruptcy matter is currently pending. In cases where a lender would have previously requested the Creditor’s Rights endorsement, lenders should consider requiring, as a condition of loan closing, its borrower and borrower’s seller to execute an affidavit addressing the nature of the transaction, their solvency and the flow of funds.

Know Your Terminology Before Negotiating a Lease

David Lindner — Fri, 19 Feb 2010 05:44:34 -0600

When a prospective tenant speaks to a landlord about leasing space, one of the major points of discussion is usually the amount of square footage to be leased. The tenant will naturally need to rent sufficient space for the operation of its business, and the parties will often base the rent and common expense charges upon the square footage. However, although the parties may both use the term “square footage,” they may not be talking about the same thing. As a tenant, the natural inclination is to think of square footage as the amount of space you can actually use for your business. This is often called the “usable area.” In contrast, the landlord may view square footage as the amount of space for which he can charge his tenants rent. This is referred to as the “rentable area” or “net leasable area.”

To avoid misunderstandings, the parties need to be certain that they are talking about the same thing when discussing square footage. The Building Owners and Managers Association (BOMA) International promulgates a standard methodology to calculate both usable and rentable square footage; however, landlords are not required to use the BOMA standard and may instead use their own square footage calculation methods. As such, the parties should be aware of the following general definitions when negotiating a lease:

“Rentable Area” or “Net Leasable Area” is the amount of space for which the tenant will be charged rent and a proportionate share of common expenses.

“Usable Area” is the amount of space the tenant can actually use for its personnel, furniture or retail operations. The Usable Area will be less than the rentable area because it will not include areas such as utility closets, stairwells and other common areas.

When evaluating the Rentable Area and Usable Area available in different buildings, the following terms are frequently used:

“Loss Factor” means the percentage of Rentable Area that is not usable. A high loss factor may indicate an inefficient design or large common areas.

“Load” or “Add-on” is the percentage of common area added to the Usable Area to determine the Rentable Area.

Keep in mind that the precise means of calculating the Rentable Area and Usable Area may vary based on the locality or the parties involved. Therefore, it is important to set forth the basis for the calculations in the lease agreement. Having an understanding of the general definitions of these commonly used terms before negotiating a lease will help ensure landlord and tenant are speaking the same language. In some instances it makes sense to include the electrical closet in the calculation, in other situations it does not. Additionally, the tenant may want to reserve the right to verify the landlord’s square footage calculations to ensure the tenant is getting all the space it requires.

REPORTS OF MY DEATH HAVE BEEN GROSSLY OVERSTATED

Jodi Rich — Mon, 15 Feb 2010 04:32:17 -0600

In 2001 when Congress repealed the estate tax for the far off year of 2010, with the estate tax returning in full force in 2011, everyone assumed that Congress would act to revise the 2001 law before January 1, 2010. However, to everyone’s surprise, Congress did not act. The new year has come and gone and so has the tax—at least for now. But is this a good result? Is 2010 a “good year to die”?

First, although there is no estate tax in 2010, in 2011 there is a $1,000,000 exemption and 55% tax on the remainder of the estate.

Second, the estate tax could change before the end of the year. There is precedent for Congress retroactively restoring taxes that have been upheld by the courts. This means that while there is still time for Congress to do something about the estate tax repeal, what they may agree to is unknown.

Third, in 2009 and 2011 the basis of an asset inherited or received will receive a step-up in basis to the value as of the date of the owner’s death (or the alternate valuation date six months later). In 2010 there is no step-up in basis, but instead there is a carry-over of the decedent’s basis to beneficiaries. However, an estate representative can elect assets for a basis increase of up to $1,300,000 and an additional $3,000,000 of basis increase if there is a surviving spouse of the deceased. Anything exceeding those amounts is subject to carryover basis—the basis for the heir is the same as the basis for the deceased. On very large estates that may have held real estate, stock and other assets for decades, the carryover basis may be a fraction of the current fair market value of the asset which will result in a large taxable gain to the heir when the asset is sold.

Fourth, most wills and trusts are currently drafted on the assumption that there is a federal estate tax. Language in trusts often refers to the exempt portion of the estate, but under the current repeal this language does not make sense since all of the estate is exempt.

Fifth, the tax rate for lifetime gifts has been lowered from 45% to 35%. But again, it is unclear if Congress will change this tax rate if they patch the estate tax. That makes this year a year of uncertainty for lifetime gifts as well, although the $1,000,000 lifetime gift exemption is still in effect.

Be careful not to assume that your assets (e.g. cash, securities, business interests, real estate, retirement accounts and the face value of life insurance policies) fall below the exemption. Now is the time to review your family’s assets, your beneficiary designations and your estate planning no matter the current value of your estate. Check back here periodically for updates on this issue as Congress is expected to act sooner or later.

Legal Certainty

Brad Kaplan — Wed, 10 Feb 2010 15:37:49 -0600

Long before 'billable hour" accounting became the norm in law firms, lawyers would price projects based upon what was fair to both the client and the lawyer. That is not to say that billings based on time is unfair, only that it can be unpredictable. Billable hour accounting dictates accountability which is and will remain a reality for all law firms now and into the foreseeable future. However, trying times demand flexibility from both the client and the lawyer. Clients, both entrepreneurial and institutional, desire certainty from their vendors to permit accurate project budgeting. Lawyers and law firms understand that to be and remain relavent to their clients and potential clients they must remain or become a client's "business partner, " add value and be perceived by their clients as a "well worth the expense."

Litigation matters have been priced by lawyers using contingency and success fees for many years. Rarely, do we see transactional matters priced using such tools. However, alternative fee arrangements such as tiered fixed fees, capped fees and blended rate fees all based upon size and complexity of transactions are being offered by law firms more frequently. Law firms desire to build and maintain client loyalty. An alternative fee arrangement can be one tool in the law firm tool box to generate client loyalty and deliver legal services in a cost efficient manner; but, alternative fee arrangements are not appropriate for every client and every situation.

Successful alternative fee arrangements: (i) dictate that the client and the lawyer share intimate information about the proposed assignment, goals of each and their cost structures; (ii) should represent the client's valuation of the matter compared to the reasonable fee to the lawyer structured to take advantage of the law firm's resources and efficiencies; and (iii) should not be static arrangements. In other words, be structured to change as the assignments and relationship changes.

Look for the business partner who is the "value proposition" which will enable the achievement of the goals of the business plan and with a "long term" perspective on relationships.

Legislation Introduced to Create Condominium "Super Lien" in Ohio

David Lindner — Fri, 05 Feb 2010 07:38:25 -0600

Representatives Ken Yuko and Brian Williams recently introduced House Bill 408, which would create a condominium “super lien” in Ohio. Ohio condominium associations currently have the right to lien a condominium owner’s unit for unpaid assessments; however, that lien almost always sits behind the first mortgage lien. When the unit is foreclosed upon and sold at sheriff’s sale, the association often finds that the sale proceeds all go to the first mortgage holder and the association is unable to collect what it is owed despite having filed a lien. Condominium associations have argued that their right to collect past due assessments deserves priority over the first mortgage because the association uses those assessments to keep up the entire condominium property, thereby protecting the collateral of the first mortgage holders. Thus, the associations have argued, it’s unfair for the first mortgagee to take all the sale proceeds and leave the remaining owners to make up for the lost assessments. To address this problem, some states have adopted “super lien” legislation, which allows a condominium association to collect up to six months of assessments from foreclosure proceeds before any other liens on the unit are paid. Not surprisingly, most mortgage lenders are opposed to these super liens. We will follow this legislation and keep our readers apprised of the latest developments.

Cognovit Update

Reuel Ash — Mon, 01 Feb 2010 12:38:59 -0600

Ohio is one of the few remaining states that still enforce cognovit provisions in promissory notes and other loan documents. A cognovit provision allows a creditor to take judgment immediately against a borrower upon the borrower’s default without having to endure the time, expense, and risk of a lawsuit. Cognovit provisions are only enforceable in commercial transactions.

Recent Ohio case authority has addressed the problems that occur when a lender seeks to take a cognovit judgment for principal amounts owed under loan documents and attorney’s fees, when the attorney fees are not yet liquidated, i.e., established in a definite amount. In one recent case, the lender sought a cognovit judgment in the amount of the note plus "reasonable attorney fees." As is commonplace, the judgment debtor, who had guaranteed corporate obligations, challenged the cognovit judgment.

In that case, the cognovit judgment was not a final, appealable order because it did not fix a figure for attorney fees. The judgment debtor would probably have been better off not forcing the issue by filing motions and appeals. Instead, they should have either sat still or challenged the lender to execute on the judgment, since Ohio law provides that a lender cannot execute on a judgment that is not a final order.

The take away point is that it is better practice for the lender to split the fixed portion of the obligation (i.e. the promissory note or guaranty obligation) and the attorney fees into two separate orders, if the lender does not wish to assign a definite amount of attorney fees when the lender takes judgment. The judgment on the promissory note or guaranty should also state that there is no just reason for delay, per Ohio Civil Rule 54(B). The lender can then present the judgment entry for the attorney fee portion once the amount of the fees is fixed. Whether you are a borrower or a lender watch your cognovits and continue to police your loans !

Reinventing Retail?

Scott Kadish — Tue, 12 Jan 2010 15:24:55 -0600

Recently, David Birdsall, Chief Development Officer for Phillips Edison, spoke to a group of real estate industry executives about the state of the retail industry and its impact on retail real estate. Dave believes we are at the dawn of a new/old retail era. Dave showed how the internet is changing how consumers shop and will continue to evolve to present easier and perhaps more desirable shopping experiences for consumers. We have already seen retailers changing their strategy to have one or two stores in a market at the top locations with the internet covering the rest, instead of trying to "store" the entire market. Dave says successful retail will instead be "experience" driven. Shoppers will come to a retailer or a shopping center for the experience. Thus, restaurants may become the new anchor. Authentic, local, family owned retailers may have a new special appeal. Retailers will not be looking at mass openings but will concentrate on improving existing operations. New developments will be scarce. Existing "distressed" centers may need to be redeveloped for other uses. And successful retailers and landlords will be those who are really good operators - not just good financiers.

We Are All Our Brother & Sister's Keeper (Lessons of Right & Wrong)

Brad Kaplan — Thu, 07 Jan 2010 14:14:53 -0600

Our good friend, Abe Schear, Chairman of the Leasing Practice Group at Arnall Golden Gregory in Atlanta, pens a newsletter called Baseball Digest(able). Abe's January issue is a powerful piece of insightful writing which merits all of our attention. Since many of the deals in the real estate industry occur as a result of the reputation and faith we all have in each other based upon mutual experience, we are all put in the position of being an "enabler" at some time or another. Therefor, it is in all of our best interest to head the lessons which Abe so aptly points out. Abe has graciously given us permission to reprint the newsletter below. Thank you Abe.

New Year’s Musings

Having just returned from Berlin where Linda and I spent four nights over the year end holidays, numerous reflections come to mind. First, and somewhat surprising to me, there is so much to see I’d like to go back in the summer when the weather is more temperate and there is more than eight hours of day light. Second, what is it about us Americans that wholly rejects timely and clean bus and train service? The public transportation in Berlin was beyond wonderful – clean, efficient, affordable and it went most everywhere we wanted to go. Third, most of Berlin appears to have come to grips with its history, good and bad, and the city is full of contemplative art and youthful energy.

There is, in fact, a sculpture in a small park near the original site of an old synagogue where Jewish men were separated from their mostly non-Jewish wives and children near the end of World War II. Their wives and their families protested night after night, blocking streets and creating a stir the Nazis neither expected nor wished to see gather wider support. While these courageous women were not successful in completely stemming the tragic transport of these men and others to the concentration camps, their voices were heard, and the transport was slowed. The part of the sculpture which comes to mind sits directly across the park from the memorial to these heroic women. It depicts a man sitting idly on a park bench looking away from the other pieces, a man who wants to appear to know nothing, will do nothing, feels nothing, and cares for nothing and no one but himself. Our guide referred to him as the “ambivalent stranger”.

This “know nothing – do nothing” concern affects all of us around the world. As we look at the tabloid-friendly Tiger Woods situation (or the never-ending baseball steroid matter for that regard), regardless of what Tiger did, what Tiger took, where Tiger took it and who he got it from, does anyone seriously believe that there was not a bevy of enablers, people as self serving and cold as the statue, who knew better but said nothing and did less?

For instance, is it remotely possible that Tiger’s caddy, his agent, his so called friends and representatives of his sponsors, did not know what was going on which led to this very sad fall from grace? Under what pretense did they think that they were being Tiger’s friend? Were these people simply protecting their own meal ticket? Is there no circumstance when doing right is more important than making money?

Business, naturally enough, raises this quandary every day in the ethics and morals of our work. What is right and what is not? When do we lend a hand and when do we turn our backs? When do we take a moment to comfort and when do we fail to be a friend?

These issues are particularly important as we enter a new year. Sport is, of course, a daily lesson about rules and teamwork and fair play. Sport is a reflection on our society and on us – we follow sports that we care about and, as we do, we often learn a lot about ourselves. As we set our goals for the new year, we routinely look at our productivity – hours worked, time billed, money earned – or whatever our productivity measures may be. We set goals to be better parents and better children, to go to our houses of worship more often, to do more volunteer work. Perhaps we should ask ourselves what we would have done had we been in Tiger’s inner circle. Would we have had the courage to try to correct the situation? Would we have lied about not knowing anything? Would we have done all we could to save our paycheck?

I have some idea how I would have reacted had I been in that inner circle, but there is no doubt that many of these people wish or will wish that they had taken the nobler path and will ask themselves why they didn’t act when there was opportunity. I know that none of us want to be memorialized as a “know nothing, do nothing” person – not for ourselves nor for our families.

Creative Leasing

Brad Kaplan — Thu, 31 Dec 2009 13:48:26 -0600

Vacancy rates are up; occupancy rates are down. This spells opportunity for tenants and challenges for landlords. The instinct which once prevailed in the real estate industry was to "go for the jugular" and cut the best deal you possibly can. But real estate professionals know that today's "tenant market" will become tomorrow's "landlord market." So, savvy real estate professionals are approaching the present "soft" market with a creative approach which has the intention to make everyone a winner.

Consider surplus space give backs; move-up to better space for the tenant with better terms for the landlord; percentage rent structured office leases for certain types of revenue generating space users (such as micro-office suites). The options and opportunities are endless. So, before you slit the throat of your adversary remember, what goes around comes around !

Yes, The U.S. Immigration Laws Apply to the Real Estate Industry

Brad Kaplan — Tue, 29 Dec 2009 11:10:45 -0600

The federal government recently announced several changes to U.S. immigration legislation. Two key topics involve increased enforcement efforts of the Immigration and Customs Enforcement (ICE) and changes in request for prevailing wage procedures.

Preparing for an I-9 Audit or Inspection

Immigration and Customs Enforcement (ICE) has significantly increased its enforcement

efforts with respect to undocumented workers and Form I-9 recordkeeping. Employers must be prepared to quickly and effectively respond to an ICE-issued Notice of Inspection (NOI). ICE may review the employer’s files in as few as three days from the time the NOI is issued. Often enough, a prompt and complete response to the ICE office handling the investigation will end or significantly curtail their inquiry. In any event, a cooperative employer is far less likely to face fines or sanctioning. With that in mind, employers can prepare themselves for responding to a NOI by ensuring the availability of the following records:

Original Form I-9 (Employment Eligibility Verification Forms) and any attached documentation presented at the time of I-9 completion for at least the past three years;
Employee roster or payroll listing all persons employed for at least the past three years;
Monthly payroll reports for the past 12 months;
Copies of four most recent state quarterly tax reports;
Copies of IRS Form 941 Quarterly Tax Statements for the past 12 months;
Listing of any independent contractors and their dates of hire and termination for the past three years;
Copies of IRS Form 1099s for all independent contractors;
A current listing of all paid on-call individuals employed on a sporadic, irregular, or intermittent basis and who are not deemed to be an employee;
Copies of any Social Security Administration Employer Correction Requests (socalled “No-Match Letters”) for the past 12 months;
Copies of any U.S. CIS Form I-129 or I-140 (temporary or permanent worker) petitions and related Department of Labor (DOL) certificates for the past three years
Copies of the company’s articles of incorporation, business license and most recent annual report
Employer Identification Number (EIC) and Taxpayer Identification Number (TIN) documentation
If available, a copy of the company procedures or policies regarding Form I-9 completion
E-Verify Memorandum of Understanding (if participating in program)
Documentation related to any previous inspection by either ICE or the DOL
Documentation related to the use of temporary staffing agencies

Change in Request for Prevailing Wage Procedures

On December 4, 2009, the DOL announced its new procedures for obtaining a prevailing

wage determination (PWD) with respect to the H-1B, H-2, E-3 and PERM programs.

Beginning January 1, 2010, all requests for PWDs will go through the National Prevailing

Wage Helpdesk Center in Washington, D.C. This marks a change from the current

processes available to employers through either the State Workforce Agencies or Foreign

Labor Certification Data Center.

It is never too soon to review your internal I-9 compliance systems or create one and ascertain the

availability of the documentation listed above.

Fannie Mae Partners With Cuyahoga County Landbank

John Weber — Tue, 22 Dec 2009 09:55:22 -0600

The Cleveland Plain Dealer has reported that Fannie Mae, a player in the national secondary mortgage market and unwitting owner of numerous abandoned properties in the Greater Cleveland area, has reached a deal with the newly formed Cuyahoga County Land Reutilization Corporation to sell properties to it for $1 each.

Compared with our last report here, the deal represents a significant step forward for the Landbank which until now had acquired approximately 20 properties with 60 more under evaluation. The first set of transfers from Fannie Mae will consist of 25 properties, 24 of which have homes on them that will likely need to be demolished. Fannie Mae has agreed to pay up to $3500 of demolition costs on each property.

Going forward, Fannie will essentially provide the Landbank with a purchase option on any foreclosed properties valued at under $25,000. The Landbank will have 30 days to evaluate the properties for acquisition prior to them being listed on the wider market.

In other Landbank developments, the Board of Directors will consider authorizing a line of credit with KeyBank at its December 18, 2009 meeting. The credit line would go up to $7.5 million and would be a significant portion of the $15 million in financing the Landbank is looking to generate in 2010.

Both the Fannie Mae deal and the Landbank’s new financing options demonstrate that the bank has substantive long-term plans to redevelop established Cleveland neighborhoods. The Landbank has already been cited by experts as a national model for addressing lingering problems from the foreclosure crisis. In the near future, once the influx of abandoned properties have gone through the demolition and cleanup process, there should be a substantial opportunity for investors and nonprofit organizations to take the lead in transforming once-residential space into new neighborhood uses.

Ladies and Gentlemen Start Your Engines !

John Weber — Sun, 20 Dec 2009 10:00:27 -0600

On October 30, a coalition of federal regulators issued the Policy Statement on Prudent Commercial Real Estate Loan Workouts. The Statement is designed to give greater flexibility to lenders in renegotiating or restructuring loans secured by commercial real estate, and should aid the flow of financing to credit-worthy borrowers.

The first purpose of the Statement is to shield institutions from criticism for restructuring loans if an adequate review of the borrower’s financial condition has been performed. A review of the borrower’s condition is adequate if the management has:

(1) Put in place a workout policy establishing loan terms and amortization schedules and that allows for modification of terms in the event there is a default in repayment;

(2) An individual credit plan that analyzes current information on the borrower and guarantors and supports ultimate repayment, including (i) updated financial information; (ii) current valuations of the collateral; (iii) analysis and determination of loan structure; and (iv) appropriate legal documentation;

(3) A global analysis of the borrower’s debt service;

(4) The ability to monitor ongoing performance;

(5) An internal loan grading system that accurately reflects risk; and

(6) An Allowance for Loan & Lease Losses (ALLL) methodology that recognizes credit losses.

Second, the Statement provides that restructured loans will not be subject to an adverse credit classification solely due to a deterioration in the underlying collateral value, or because the borrower is associated with a particular industry that has been experiencing financial difficulty of late.

As an example of these more favorable classification guidelines, the Statement offers a scenario where a lender refinances a $13.6 million balloon payment at maturation over the next 17 years. The borrower was paying timely up until the maturation date, but has experienced a decrease in cash flow and, per a recent appraisal, the LTV ratio is 104%. Under the Statement, the loan is properly classified as “pass” because the borrower has demonstrated the ability to make continuing payments even with the decline in collateral value and decreased cash flow.

This ability to avoid adverse credit classifications will prompt institutions to be more willing to engage in loan workouts where there is a realistic probability of repayment. Borrowers that have a sensible repayment plan going forward may also be more willing to approach lenders about restructuring as they will not be tied to other failures within their industry.

First-Time Homebuyer Temporary Federal Tax Credit Extended and Expanded

Beth Farrell — Mon, 07 Dec 2009 07:56:42 -0600

On November 6, 2009, President Obama signed the Worker, Homeownership and Business Assistance Act of 2009. The new law extends the first-time homebuyer temporary federal tax credit for qualifying home purchases to April 30, 2010 and expands the eligibility requirements for purchasers.

Under the new law an eligible taxpayer must buy, or enter into a binding contract to buy, a principal residence on or before April 30, 2010 and close on the home by June 30, 2010. The new law also authorizes the credit for long-time homeowners buying a replacement principal residence and raises the income limitations for qualified homeowners claiming the credit.

Homebuyers who purchased a home in 2008, 2009 or 2010 may be able to take advantage of the first-time homebuyer credit. The credit:

Applies only to homes used as a taxpayer's principal residence.
Reduces a taxpayer's tax bill or increases his or her refund, dollar for dollar.
Is fully refundable, meaning the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax owed.

Under the new law, the maximum credit amount remains at $8,000 for a first-time homebuyer (single person or married filing jointly or $4,000 for married persons filing separate returns). A “first-time buyer” is a purchaser who has not owned a primary residence during the three years up to the date of purchase.

The new law also provides a “long-time resident” tax credit of up to $6,500 to others who do not qualify as “first-time homebuyers” (single person or married filing jointly or $3,250 for married persons filing separate returns). To qualify as a “long-time resident,” a buyer must have owned and used the same home as a principal or primary residence for at least five consecutive years of the eight-year period ending on the date of purchase of a new home as a primary residence.

For all qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 tax returns. To claim the credit, a taxpayer must file Form 5405 with the Internal Revenue Service, which you file with your original or amended individual federal income tax return.

Income Limits Increased under New Law

The new law raises the income limits for people who purchase homes after November 6, 2009. The full credit will be available to taxpayers with modified adjusted gross incomes (MAGI) up to $125,000, or $225,000 for joint filers. Those with MAGI between $125,000 and $145,000, or $225,000 and $245,000 for joint filers, are eligible for a reduced credit. Those with higher incomes do not qualify.

For homes purchased prior to Nov. 7, 2009, existing MAGI limits remain in place. The full credit is available to taxpayers with MAGI up to $75,000, or $150,000 for joint filers. Those with MAGI between $75,000 and $95,000, or $150,000 and $170,000 for joint filers, are eligible for a reduced credit. Those with higher incomes do not qualify.

New Requirements under the New Law

The new law contains new restrictions on purchases after Nov. 6, 2009:

Dependents are not eligible to claim the credit.
The purchase price of the home cannot be more than $800,000.
A purchaser must be at least 18 years of age on the date of purchase.

For Members of the Military

Members of the Armed Forces and certain federal employees serving outside the U.S. have an extra year to buy a principal residence in the U.S. and still qualify for the credit. An eligible taxpayer must buy or enter into a binding contract to buy a home by April 30, 2011, and close on the purchase no later June 30, 2011.

It's The Economy Again Stupid.

Scott Kadish — Wed, 25 Nov 2009 07:45:21 -0600

So by now you’ve been to at least three conferences which tell you the economy has hit the bottom, it’s a U curve, 2010 will still be slow with savings and not consumption being the key characteristic, 2011 is a comeback year, but real estate will never get back to the boom boom days of only a few years ago. So what does it all really mean to the real estate professional?

Increased Competition. Whether it be for legal services, brokerage services, or commercial space, there is less demand and thus greater competition. But price is only one component of the decision factor. Service and quality still will be key decision factors. For example, while new centers have issues, retailers will still be looking to get into the established market leading centers and will pay the higher rent to get there. And having or obtaining a good relationship with a customer by providing over the top service is a great hedge against competition.

Marketing is Still Important. We all need to pay attention to expenses, but marketing is not one of the expenses to be cut. In the face of increased competition, it is more important than ever to get the quality message across. However, the marketing budget should be examined to make sure that the budget is allocated wisely. Place an emphasis on direct, active marketing most likely to get face to face with prospective customers.

Be Careful Extending Credit. There will still be higher than normal business failures, even by well established companies.

Do Not Sign Long Term Deals at Today’s Rates. Consider short term deals even where you normally want long term ones. Although no one can say with certainty, there is a good chance that rates will increase in 2012, so signing a long term deal now could tie you up at lower than market rates. Also, a credit tenant may have really good leverage now. Resist the temptation to sign a deal at any price. The balance of power may shift in a couple of years and that credit tenant may not have such great credit in a few years. As a tenant, consider the goodwill you will get, which can translate into tangible benefits, by merely being reasonable and not taking undue advantage of the economic climate.

Consider Other Sources of Income. Can the attorney branch out to other areas? Can the landlord come up with alternative uses for its vacant properties or monetize unused space ? Can the broker branch out to other consulting services?