The Dirt Lawyer's Blog Archive

You knew it was coming, but I'm going to note it anyway: an entity controlled by Oaktree Capital Management LLC filed a Chapter 11 petition on Monday, staying the foreclosure of the hotel and setting the stage for a sale of the property. It will be interesting to see whether this gets nasty, particularly with all the subs that might get stiffed on the condotel conversion. I am seeing how this plays out in the context of a another, smaller bankruptcy which admittedly has some different circumstances.

The WSJ , citing a study from Grubb and Ellis, reports that the amount of space on the sublease market increased by 4 million sf in the last quarter. Interestingly, rents are nonetheless continuing to rise, which might be one reason more space is going to sublease. And while some markets such as San Diego and South Florida are tanking, others remain strong (though with predictions that they will join the fold. Great news? No, not really, unless you are a prospective tenant or subtenant, in which case you might in some markets be able to get a bargain on some space. But don't hold your breath. If you are a landlord at least rents are not plummeting. That's when you start worrying, although you have to remember that real estate is, in a word, cyclical.

As I mentioned previously , one of my clients is working on a building that is expects to receive LEED certification. There are sometimes certain land use or other reasons behind such a certification (including getting City money or receive permit expediting or density bonuses here in Chicago), but let's face it: developers will probably build LEED-certified buildings when tenants demand it. According to this CPN story , corporations want sustainabilty and are willing to pay a premium for it. But tenants are having a hard time finding sustainable real estate solutions. Will that change? You would think. After all supply...demand. The amazing building at 111 South Wacker received a Gold certification and is hugely profitable. Yet, according to this interesting piece by the incomparable Blair Kamin, there are only 27 LEED-certified buildings in town and 1,100 around the country (albeit with many under development). While programs such as Chicago's helps, tenants can play

As the conduit market ground to a halt in the last few months, some lawyers necessarily have much less work to do. Most people would be happy to slow down after so many years of go, go, go, but these days the law firm market is such that too long of a slowdown could mean...well...issues. Above The Law has already reported that two firms known for their big structured finance practices are talking to their associates. Thacher Proffitt & Wood is allegedly telling its associates that there will be no layoffs and that partners will take a hit, if any, to avoid this. Although we've heard this before, I would actually not be surprised if this was really true here. I have done several deals with TPW, and they are good and stand-up folks. I think they also know they need a good team in place when everyone gets back on the CMBS bandwagon. Another firm, McKee Nelson, appears to be asking associates to consider voluntary moves such as retraining in another department, secondment to

Jordan Crouch was kind enough to cite me as the source for Macquarie's starting a CMBS group with some good folks from LaSalle Bank. But he's the guy who got me looking in the first place, so he should have been the first to write about it. (And yes, Macquarie is the bank that bought the Chicago Skyway.) For you lawyers looking for something new to do, how about taking the gig as Head of Legal and Structuring . Yes, lawyers, you can help run a CMBS department right here in Chicago. I have to admit there is something tempting about applying for that job, but it is not happening. Among oter reasons, the boss is not going to tolerate my making that commute again, at least not five or six days a week.

The weather is holding for now, so I'm going to be brief today and try to enjoy the weather while I can. (I also know I have several deals that will keep me chained to my desk all week next week.) I apologize in advance for the shotgun approach to blogging and the lack of analysis. First, Jordan Crouch has a great explanation for beginners on CMBS loans. Great job. Call it CMBS for Dummies. Next, check out a good story on the ripple effect of the Blackstone-EOP deal at Commercial Property News . The moral? We may not see the likes of it soon because of the credit crunch, but real estate people now know that at least theoretically, no deal is too large to do. (But would you want to?) There is also some good information on the flips and the "Blackstone effect" of rising rents in some markets. CoStar's watch list for this week contains a fairly lengthy summary of bank views on the lending market as it stands today. After only eighteen months of ownership, th

This story throws around a lot of numbers, perhaps too many for a non-tax lawyer to interpret. Seriously, folks, the predictions reported are $400 billion for the mortgage market, and a $2 to $4 trillion loss in the residential real estate market. (No mention of CRE prices that I noticed, but maybe I missed it.) Of course, I then read that the market lost more than $7 trillion "in the stock market collapse earlier this decade" (meaning, post 9/11, but I guess that it is politically incorrect to say that these days). We all know what happened there, right? The buying opportunity....why is there anything different about this? You tell me.

Grubb & Ellis thinks we will not see a recession, but some slowing in the 2008 real estate market. (Could it conceivably been going faster than in, say, 2006 anyway?) The main conclusion is that the four main sectors of the market -- office, retail, industrial and multi-family, will remain relatively healthy . I have been thinking that for a while, but only as a hunch and based on what I have been reading and know about. I'd like to think they are right.

Well, Macy's did not get sold (yet), as was the rumor back in July. And now the company, seeing sales in the tank, is trying to revitalize its flagship Chicago store on State Street. This is not a very lawyerly post, but oh well. You know what? Do all you want to the store. Give away stuff. Tell us how awesome the Walnut Room's new wine bar will be. Have a Britney Spears concert in the basement. (Oh, wait, you are trying to attract customers.) Personally, in the end I don't see Chicagoans going to Macy's in droves any time soon. They are hurt by the loss of an icon (albeit a faded one), and many of them are still mad, mad, mad.

Here is a good post by Jordan Crouch on different types of CRE lenders . Of course, we've been hearing the most about conduit lenders for the last few years, but don't forget those other sources! They can be more flexible than a conduit, especially when it comes to prepayments, transfers and legalese, and that is often worth the few extra bps that you will pay.

Here's a neat chart in today's Wall Street Journal showing the largely consistent decline in cap rates since 2001. And to think I remember the days of "Buy at a 10, sell and at 8..."

Here is a thought-provoking piece by Kenneth Adams on the use of the word "shall" in legal drafting. I agree with one main point: "shall" is overused and misused frequently in the documents we lawyers write. Personally I like the word "will," but Adams finds fault with that too. While I am not sure I agree with absolutely everything he says, I shall/will/must/might/should take much of what he does say into account when drafting.

Jacob Cynamon has some very good analysis of Chicago office trends here . The post picks apart a recent story in National Real Estate Investor on the topic. What I also like is that Jacob picked up on some editorial problems within some good content. Those were nice catches, and I half-jokingly told Jacob he should have considered law school. Seriously, though, lawyers have to sweat details like editing. I'll never forget having to proofread a metes and bounds legal description of an 878.3960 acre property. This was almost ten years ago, and yes, I still remember that number. The description was seven or eight pages long, and the description in the title commitment had to match the legal in the survey call for call. Yes, you can get a title insurance endorsement for this, but this was a big deal, especially to the partner running the real estate side of things. What I am getting at is this: details can matter. Sometimes they are trifling, and if so, I tend to let them go so

I really try not to be a big horn tooter on my blog. Heck, I sometimes wonder if I am just writing for my own amusement or ego. I truly enjoy writing, not as a money-making exercise or a client-attracting bait; I consider any business that comes from my blog as a bonus or a fringe benefit. I am liberal arts kind of guy, so while I don't think I can say with certainty why I blog, to some extent it is because I enjoy learning for learning's sake. And believe me, I am learning. So now I'm breaking the rule and blowing my trumpet, even though I am really a timpanist in my spare time: Commercial Property News has a story out about commercial real estate bloggers, and Brad Berton was nice enough to write about me. I think Brad captured my enthusiasm for practicing law and blogging in this article . Thanks, Brad. (It turns out that Brad and I have a number of common friends in the business, which just proves my axiom that we play in a very small world.) All right, I'm

Nice to be back from a brief vacation. Per today's New York Times, 42,904 is the number of layoffs estimated by Challenger, Gray & Christmas to have occurred this year at financial services firms based in New York. Not all of the sacked employees are from there, however. Is it me or were these stealthy layoffs -- almost as if to say, "We are not proud of getting leaner and don't want to admit failure." Dealbreaker.com says the numbers are roughly 8% of the Wall Street work force and they are worried more is to come. They also report that residential rents are declining in Manhattan and wonder aloud whether Tishman together with CalSTRS and Blackrock over paid for Peter Cooper Village/Stuyvesant Town. (Answer: imo, short-term yes; long-term, probably no.) I'm not super concerned yet, and here's why. If the downturn is supposed to be short and not too deep as everyone is predicting, then big tenants are not going to want to give up too much space t

Yup. And believe it or not, I'm still quite happy about it. The Urban Land Institute and PricewaterhouseCoopers LLP agree with the herd : prices will decline and lending underwriting standards will tighten. If you are a buyer, 2008 might be a very good year. If you must sell, then... not so much . PWC hit it right on the head: investors who went overboard may have some headaches. I think those who didn't over-lever deals and buy at extreme cap rates won't. And here's an interesting quote from the Business Week story: "The report surveyed more than 600 investors, developers, property company representatives, lenders, brokers and real estate consultants. Most believe real estate investments will outperform U.S. stock and bond returns next year. " (Emphasis added.) Now of course this is coming from within the business so it may be optimistic, but I would not be at all shocked if this were true. It is also a sign that the real pros do not see a crash in

(I can also spare a dime, by the way.) The Tribune reports that Jones Lang LaSalle is agreeing with others that while landlord conditions are great right now, absorption problems are likely in 2009, and low-rise Class B and all Class A space ought to be more of a tenant's market then. So, if you can wait a while, you may be able get a relative bargain. If not, well....

I wrote previously about Hotel 71, the East Wacker Drive property that has been struggling as of late. Well, we're not done yet. Crain's reports today that the Hotel 71 UCC auction of the mezzanine loan took place as scheduled on October 3, and that Oaktree Capital Management now controls the hotel. (Apparently two other bidders showed up but OCM, the mezz lender, prevailed.) So, according to the story it looks like OCM will try to take advantage of hotel values and put the property on the market. But (1) there's construction to be done (I checked out the Recorder of Deeds website to look at people who have and may not have been paid), (2) as we all know borrowing costs are higher, and (3) Wells Fargo, as the trustee for the participating lenders, has foreclosed on a $101 million senior loan that was due back in April. The article even hints of a Chapter 11 filing that would stall the foreclosure, deal with bills help clear the way to a sale. My bet is still on the

I wrote once before about a proposal floating around in Congress to tax carried interest as ordinary income rather than capital gains. I'm writing again because of an excellent op-ed counter to the USA Today editorial board's position in favor of this tax (Thanks to Traffic Court and The Real Estate Bloggers for pointing me to the pages.) People who love taxes are calling this a "hedge fund tax" that will go after billionaires and not harm little guys like you and me. El-wrongo. As Jeffery DeBoer points out , "It would be the first time that the sweat equity of an entrepreneur who is building a business would be taxed as ordinary income....Enacting this proposal would be playing Russian roulette with an economy that appears weak in the knees." If you want recession -- or even worse -- then let's enact this law. It will make sure that entrepreneurs pass on marginal deals or find other things to do. With tax costs doubled and the same as working f

I'm sure some people will ask: Why are you writing about the acquisition of a Burger King site that will be converted into a Fifth Third Bank in Old Town on a 20 year lease deal? Here's why. 1. I feel like it. 2. I like Burger King, and I like banks. 3. I know the territory. 4. I came up with what I think is an amusing headline. 5. I am slightly jealous of the developer, Josh Levy. He seems to have his act together and he is enjoying what he does: working on his own, taking care of each side of the transaction, working through the business issues and making things happen. 6. I sometimes wonder -- as do some of my friends -- why I am not doing some of this. (Main probable reason: Lawyers are trained to be risk-adverse.)

The owners of the Sears Tower are looking for a zoning change and $60 million in TIF funds in order to renovate the building and build a second structure on the site -- either a hotel or an office building. Estimated cost? $400 million. I'm going to reserve judgment on this one. My initial reaction was pigs flying. But apparently the original SOM design of the site contemplated two buildings. I want to see what the planners come up with here before I either laugh, cry or kiss my tax dollars goodbye. And it may be a brilliant conception! I'm admittedly not a big lover of the concrete plazas there now, so this could be an improvement.

Eddie Baeb at Crain's is reporting that, per a survey conducted by DLA Piper (formerly Rudnick & Wolfe, for you old-timers), Chicago real estate pros are increasingly bearish about the market. The results were almost a complete turn around from a similar survey in April. Three things stand out to me here. One is that a bear's pessimism is a bull's opportunity. The second is closely related -- if the herd goes left, my clients like to go right. The third is Louis Cohen's view that the "pessimism is probably more a function of the individuals surveyed and not a reflection on Chicago’s market." Bingo. Busy dirt pros are not filling out surveys. They are doing deals you are not yet hearing about. Speaking of which...back to work.

The Real Estate Bloggers report that the IRS is applying greater scrutiny to tax-deferred exchanges of like-kind property pursuant to Section 1031 of the Internal Revenue Code. This tax-deferment vehicle has become hugely popular in the last ten years as a way of not having to recognize the gain on the sale of property. Because of the rise in popularity, every Tom, Dick or Harry now wants to be an exchange accommodator. And frankly, not every deal is done by the book. One thing to remember: your lawyer, your accountant and your real estate broker , or any entity under their control, cannot be the qualified intermediary. I've seen this more than once (though not on deals in which I was involved directly). No matter how perfectly those people may otherwise be able to handle your 1031, if you take that route you just blew your 1031, and if the IRS audits you, guess what? Taxes, penalties and interest. No thanks.

Here's an interesting perspective on how much space some mega-retailers lease or own. Wal-Mart, for instance, has more space than is in all of Manhattan. Subway, on the other hand, has just a little more space than in Central Park, albeit spread out over what -- 12,000+ locations? Thanks to Jordan Crouch's new -- and recommended -- blog for this tidbit.

It was bound to happen. At least one of the so-called "friends and family" who bought condos in Trump Tower, only to have the contract canceled later pursuant to a developer "out" clause in the contract, is suing for, among other things, fraud and deceptive practices. I have not read the complaint, but fraud is a tough uphill battle in many instances. A deceptive practices count is less onerous to prove, however. While I don't really agree with it personally, in a sense I see Trump's point. He wanted the right to back out of deals because they were not money-makers. I have not read his contract, but I'm sure he has an iron-clad right to back out of the deal for any or no reason, and the developer may well win because of it. On the other hand, the developer got the benefit of being able to tout pre-sales that probably (and in my opinion) either pushed the construction loan forward or got them better loan terms. (It is not my money, so it is easy -

The headline of the story is gloomy: retail sales growth is slowing because of housing and unemployment concerns. But in addition to saying that he thinks things are fundamentally sound here, Peter Lowy's interview goes beyond mere sales numbers in the retail sector. Check out the vacancy rate at Westfield's US properties: 6.5%. The article intimates that this is apparently high compared to the UK or Australia, but that is pretty low, if you ask me. Come to where I live and check out the Simon-owned mall here. I can guarantee the vacancy rate is above 6.5%, and at least one other store is in its death throes according to newspaper ads. (I never go to the mall anymore so I haven't confirmed this.)

Kenny Pratt's sources are reporting that while all-in rates on conduit loans are not improving, lenders are getting their arms around the current dynamics of the market which ought to stabilize the spreads. Then you can jump back into the CMBS market more easily, in my opinion. By the way, the opinions on the state of the market were coming from Wells Fargo. From my experience Wells is a good lender to deal with and they have, in my opinion, good lawyers who get what they need without driving you too insane. (Remember, this is a conduit loan.)

Not really a big surprise , as the 'burbs have sprawl and more inventory coming on line all the time. That is less so in the central business district of Chicago, at least until new buildings come on line in 2009. Normally, scarcity brings vacancy rates down, and low vacancy rates mean higher rents, and, of course, vice versa. But I find it interesting that rents, except in the O'Hare area, still went up in the 3Q compared to 2Q. Maybe landlords are holding out in spite of 20% vacancies, or maybe more A space (that commands higher rent) is on line right now. Also, the numbers may be a little skewed given that subprime tankings probably caused at least 600,000 sf of space to come to market. Take that space out of the equation, and that may be why landlords are not dropping rents just yet.

I had a nice round of golf Friday with a friend who is one of the most seasoned veterans in the commercial title insurance business, and one of my four or five "go to" people that I would call on to do a deal with me if had the choice. He's bailed me out of more than one crisis in my career. As we often do, we spent a little time swapping war stories on transactions, and I heard one that made think that, no matter how long you've been in real estate, you'll never encounter every crazy fact pattern. And this one was really bizarre and a little scary if you are buying land, so much so that I had to share it with you. Here's the basic story: buyer and seller enter into a contract to sell property in Cook County. For you out-of-towners, Chicago is in this county. The property was in a "special service area" (SSA) created in the 1970s, meaning that extra tax levies can be imposed on the land. The title company pulls title and sees the assessment area

The WSJ made a bold prediction yesterday. But is it true? Let me give you my personal perspective for kicks. They say that Wal-Mart is being replaced by the internet and some sector retailers and by companies emphasizing quality. Although we own a few shares of Wal-Mart, I do not like shopping there. I much prefer Target for its wide aisles, short lines and better products. And I will pay for that. The one nearest our house is not, in my view, a pleasant shopping experience. There are, however, two supercenters under construction near us, so I will reserve judgment. I do shop a lot on the Internet. It is generally easy. Best Buy? I like the place, but I rarely see a crowd at our new local store. We bought my latest monitor at Sam's Club, but we have bought a desktop and a laptop at BB in the last year. Kroger? I think the Kroger nearest Chicago is here in Bourbonnais. Although I have always been a Jewel fan, I don't like the new store they opened here, and I like Kr

Jacob Cynamon reports that CB Richard Ellis is going to limit the distribution of its research reports to paying clients. I don't blame CBRE for doing this, because I think it is a good business move. But I am also bummed, as I found the information very interesting. If I were on the business side I'd probably subscribe; for me, however, the information is more educational so I will have to pass.

Why, you ask? Fundamentals, fundamentals, fundamentals. It is simple. Investors "see that many of the companies trade at a discount to their net asset value, a key measure of the underlying worth of the company's real estate value, and therefore represent good deals. They were also encouraged by the REITs' continued access to capital throughout the recent credit crunch." And as the story also says, a lot of people think this is a good time to be a landlord. It also looks like 3Q earnings will be important. Many of these guys stayed out of the private buying frenzy, so as prices correct, REITs and their money (or access to money) may jump into the acquisition game.

I know my blog is about commercial estate, but I keep hearing about proposed legislation that, if passed, will bring depression to the entire real estate market as a whole. I keep reading about a proposed bill being touted by Rep. John Dingell, a Democrat from Michigan and Chairman of the House Energy and Commerce Committee, is proposing legislation that would phase out the cherished (and previously considered untouchable) home interest deduction on anyone who owns a home with more than 3,000 sf. The ostensible goal of this tax is to promote the environment by building smaller and more efficient homes. Talk about a penalty on not just the rich but also on people who choose to move to the boonies for more home or for large or extended families living together. What a disastrously bad idea. Home sales and prices would plummet. Builders? Out of business, not to mention construction workers. I cannot think of an idea this bad since the Smoot-Hawley Act. Now, ordinarily I would say this is

Seven quarters in a row , says CB Richard Ellis. It is nice to see this kind of absorption, as Chicago was in some ways more like Dallas than New York in terms of vacancies and rents. And Tom Corfman is also telling us that there are fewer LaSalle layoffs than planned ("only" 2500?), thus meaning "only" 500-600,000 sf on the market. The less good news is that you have buildings under construction, but that is a couple of years away. Looks like, at least to me, the "crisis" is not affecting leasing, at least not yet. So, continue to be prepared for rent hikes over the near term.

Bank of America has completed its acquisition of LaSalle Bank, and the stories in the news all report that thousands will lose their jobs as a result. That comes, of course, as no surprise at all. It looks like one good thing may come out of this for the dirt folks: B of A is moving its commercial real estate operations to Chicago, and I applaud them for doing that. There are some super pros at LaSalle and having this at least cushions a major blow to our banking business somewhat. I'll be interested in hearing from borrowers how dealing with the B of A unit will be compared to how things are today.