The Dirt Lawyer's Blog Archive

Jeff Brown has a first-rate post about real estate investing and the various factors he considers when doing a deal. He reminds us that you cannot just look at the price and the cash flow and say "Sold!" This story is a must-read for the neophyte and a good reminder for even the experienced investor. I would add one other thing to Jeff's list, if I could. Are there legal obstacles that might cause problems down the road? For instance, if the building is destroyed for some reason, can the property be rebuilt in at least the same size and use as it is now? (I'm thinking zoning or other land use changes, etc.) Are are there agreements, restrictive covenants or other binding obligations that could be trouble down the road? Stated more simply, sometimes the price is attractive for a reason that you cannot ascertain without careful due diligence.

And that's a pretty big shove. The neighboring HOA has sued Shelbourne Development , who is developing the Chicago Spire, to rescind its easement agreement allowing certain access to the property. The complaint seeks declaratory relief in chancery. I have not looked at the complaint; I will if someone emails it to me but I have neither the time nor the inclination to go to the Daley Center to grab a copy. Based solely on media reports, here's a quick thought or two. Tom Corfman's article says the plaintiffs are alleging fraud on the part of the defendant and its attorney in that they waited until the easement was signed before revealing "the full scope of the project." If that is true, I can tell you that fraud is not an easy case to win in Illinois. Corfman also reports that Shelbourne doesn't think the HOA owns the land. (I don't know whether there is alternative utility access; if there is I assume it is expensive or hard to access or both. As a

To follow up on a previous post here regarding LEED and green buildings, here's some evidence (courtesy of Jordan Crouch) that building green buildings should pay off because of long-term cost savings and tenant demand. This is the wave of the future, folks, so catch it now or be late to the party.

I wrote previously about some firms with large CMBS practices and their plans for what to do with not so busy associates. At the time, one of the firms, Thacher Proffitt & Wood , was not planning any layoffs. But a month later, with no end in sight, reports from Above The Law are that the CMBS heavyweight will probably have to let go about two dozen associates in structured finance and real estate, and first-years in those groups are also apparently being offered generous severance packages given that they apparently have little work to do. As I said before, TPW is a good shop in my opinion and from my experience. It is disappointing to see layoffs might be on the way, but at least they are being honest (how could they NOT be?) by saying that the layoffs are economic-based. And maybe I was wrong before about comebacks in that these firms were probably geared up to do record, unsustainable volumes. I’m just not sure. And, according to the ULI's blog, The Ground F

Here is an interesting discussion on The Bloodhound Blog on paperless transactions to which I made a recent contribution. Thanks to Jeff Brown for pointing it out. I've been reading about this paperless phenomenon for years. We're still not 100% there in my opinion, and that's okay with me. Call me old fashioned, but I like having the final documents in some tangible form in addition to the PDF copy I usually consult for ease of reference. Thankfully, however, the mountains of due diligence materials I have to review on a deal are all scanned and put into eletronic form, thus making them easier to send around the world. (And we're also saving trees, although some documents just still have to be printed to read carefully. I find that a BIG monitor for the PC helps in this regard.) In most cases, there is just no substitute for a piece of paper with ink on it. And if you want to exchange documents electronically without originals, I like to make sure that you can demand

The latest on the retail market is mostly slight : slight increase in vacancy, slight increase in rents, and slightly more total space on the market. The only non-slight change is in the amount of retail under construction: that is down by about 600,000 sf from 11.2 to 10.6 million sf (isn't that about 5%? Maybe that is slight too.) Some think that even the retail sector is going into the dumpster. I don't...but I'm a veritable Sgt. Schultz in that regard. I think the holiday season numbers will be telling. Unfortunately Traffic Court tells us the numbers are somewhat confusing . The naysayers are saying we in for a very rough ride, but I still think a cheap dollar and good fundamentals may prevail. And even if they are right, the value deals are what to look for anyway.

I'm sure everyone on the world is going to comment on this New York Times story about perks for BigLaw attorneys. Hey, I remember those days, too...and I don't blame the firms for offering them and the lawyers for demanding them. When you are not home for 14-16 hours a day (I remember them well), you have to have these kinds of bennies. I don't have a masseuse (I do have a cool massaging recliner, though), dry-cleaning pickup (I rarely wear clothes in need of it anyway), free sports tickets, pet insurance or a concierge. (I do, however, have what the Times considers basics such as a Blackberry [who doesn't?] and laptops.) So, what are the perks of my job? And, if you could, would you trade in your lifestyle coaches, mortgage guaranties, car discounts and the like for my benefits? (By the way, can you see why some clients might be irked when they read this story?) 1. Being able to work whenever I want and from wherever I want, with no "face time," requ

It looks like Congress will find a way to compromise and pass a long-term extension to the Terrorism Risk Insurance Act of 2002. This law is a federal backstop to the insurance industry for providing terrorism insurance coverage to property. Some of you may be saying, "Huh?" Terrorism insurance can be a very big and expensive deal if you are buying certain properties; e.g., shopping malls or high-profile properties. Think of the cost. TRIA is supposed to help lower rates on this product. On the legal and business side, if you represent a landlord or owner, you'd rather not have to provide this insurance if a lender requires it, or at least not if you cannot get it at "commercially reasonable" rates. Lesson of the day: always get your insurance people involved if you are looking at new language, coverages or any material matter regarding insurance. This is the important role that these fine professionals play.

I'm no expert on the CMBS market, nor do I want to be. While they are extremely useful to my clients, as a lawyer they are not the most exciting part of my day. But there was an interesting little trinket buried in the latest report that the CMBS market is going to take a while to come back. Now that we are going back to smaller loan pools, there is less diversity in the pools than in the megadeals we'd been seeing. What does this mean? Well, the bigger deals in the pool will have to be scrutinized more than ever because a default on that deal could be a huge problem. A $100 million deal defaulting means, as the story says, a lot more to a $2 billion pool than to a $4 billion one. It reminds me of 2001: underwriters are being cautious, rating agencies are worrying, B-piece buyers are kicking deals out of pools. I don't know yet what this means on the legal side. For instance, the bane of my existence when doing these deals is writing what is called a "substantiv

David Bodamer is on the spot again, citing reports today about declining commerical prices in some indicies. David also has a report in his post from the NAR convention in Las Vegas that, per NAR's chief economist, low cap rates are spooking some investors. Uhhh....Lawrence Yun is spot on. It is almost the duh of the year. Why buy at a 5 or 6 cap when you can get CD returns at nearly that rate? It is hardly worth the risk! Give me some nice juicy 20+ IRRs and I'm all over it. The declining prices will bring caps back up to where they, in my humble opinion, belong.

Jordan Crouch has a 6,000 word essay today that summarizes the current market quite well. Okay, it's actually six pictures , but each is worth a thousand words or more. Jordan might well, on a word-for-word basis, have the blog post of the year. Now that you are done groaning, here's my thought. Easy money is done. Does that mean you pack up your bags and move on? Yes, if you are not smart or do not have a smart team working with you. You can't just buy any old piece of dirt and expect it to rise in price (And if you had been doing that, then you're probably like the speculators in homes, tech stocks or tulips anyway.) Simply stated: there's money to be made! There really is. There always has been and there always will be. You only have to think, and work, and put some sweat into it to find the right place at the right price. It's just like the "old days." Don't think like a huckster and think like a prudent investor, and you should be fine if you

This is an interesting story, because the prevailing wisdom (mine included) is that a quality asset with a good tenant base will not be as affected by any current market shifts. Yet Principal Financial has apparently taken the Quaker Oats building off the market because the offering proces did not live up to expectations. I would not panic, but let's look at this briefly. The building is 95% leased to a single credit tenant, the Quaker Tropicana Gatorade division of Pepsico on what is reported as a long-term deal. Sounds like a high quality asset to me, and just what you'd want to buy in a crazy mixed-up market. Maybe some investors are spooked by the possibility of one tenant blowing out, leaving you with an empty building. Without doing due diligence and actually reading the leases, you don't know how much of Pepsico is on the hook for the lease or what the tenant's termination rights, if any, are. And also remember, today's major company can be tomorrow'

The NAREIT conference begins today in Vegas, and the talking heads will be...well...talking. Are REITs still buying back or planning to buy back their own shares? Instead of patting themselves on the back for yet another year of unbridled gains, one thing they certainly talking about is what companies are strong, weak and undervalued in the current market. Here are more thoughts from today's WSJ (subscription soon to be not required, they say).

I recently wrote about the impact of the CMBS slowdown on firms that have a lot of this type of business. One of them was McKee Nelson, who said they were not laying anyone off and that they hoped to some lawyers to other practice areas. Here's the latest effort to get associates to think about a change, courtesy of Above The Law : (1) depart with a full 2007 bonus plus four months' pay, or (2) take a year's sabbatical at 40% pay plus a full 2007 bonus (which is not chump change), but with no guarantee that you'll have a job in a year's time. Personally, I'd take option 2, and, since I'm supposed to spend the time making the world better, I'd probably do (more) volunteer work for my local community and take music lessons to improve my skills. (I still may do the latter.) Oh, and I'd write a blog on commercial real estate...oh,never mind, I do that already. Most firms would just can people. They sure did about the time I got out of law school.

(With apologies to the late, great Chicago alderman Paddy Bauler....) The Civic Federation feels we need more information and public input on tax increment financing. According to this story , the Federation feels that TIFs are an important tool but need more transparency in how they are done and what they accomplish. In Chicago, "$242.6 million in public subsidies generated $1.1 billion in private investment — a more than 4-to-1 ratio-in the Central Loop TIF district." Not bad, though the Federation questions how much of that development would have been done without TIFs. I have been part of several deals involving TIFs in Chicago, and I don't think any of them could have been done without some help. And they've been, by and large, very successful projects that have brought jobs and renovated blighted buildings. That does not mean I disagree 100% with the Federation. I have seen some deals, typically outside Chicago than in, that have a questionable benefit for

Megamalls in the Philippines or in Asia are hardly news, but when they are in my wife's hometown that's news to me. Taytay, Rizal is just outside Metro Manila. It is a densely-populated municipality with a population of some 200,000+. And infrastructure in places like this are not what you expect here in the US. But there's amazing development going on, and this mall was built by the mogul of all moguls in the RP, billionaire Henry Sy. It is not someplace you'd expect to see a mall as large as many in the United States. But it is there , and it is already hugely popular. Lines of hours to buy things have been reported. And the really big big malls in are Manila! So why build in Taytay? Because the roads are so narrow, it can take 45 minutes just to go 6 miles from Taytay (not to mention more outlying areas in Rizal province) to Pasig or Mandaluyong (where even bigger malls can be found), so Sy's theory is to bring the mall to the people. Plus, shopping is

Hey, it is potentially an amazing development (and I for one would love to see Garrett Kelleher build it even if to say "I told you so"). Thanks to the amazing posters at SkyscraperPage.com ( here is a link to the Spire discussion, which has very cool pix of the site under construction), I was able to look at Shelbourne's and Thomas Murphy's responses to the HOA dispute . My summary of Murphy's comments are: 1. We have an ironclad easement drawn up by the condo association's lawyers (Hmmm...not even going there...I may actually have to go read this document). 2. This will not affect the construction timetable. (Maybe. I don't know the project well enough to know.) 3. We're in a construction zone. Townhouses settling two inches in five years = de minimis non curat lex . (Sounds fair on its face, but I'm not a judge or a construction litigator.) 4. Even though our rights are ironclad, we applied for a revised foundation permit out of prude

Here's an interesting twist (I know, bad pun on a Friday) to the Chicago Spire deal. Apparently Shelbourne Development paid the neighboring condo association $500,000 for an easement across some of its land. The association claims it thought this was only to run utility lines, but apparently the plan was also to build some foundation in the easement area as well. And that plan, according to the story, might cause some adjacent townhomes to settle by two inches. I have not looked at the easement agreement so I obviously cannot say whether Shelbourne had the right to do this. The association wants to say "never mind" and rescind the easement, and has retained Schiff Hardin to do so. If they pursue this it'll be interesting to see the legal theory under which they think the easement should be extinguished. Mistake? Fraud? We changed our minds after really thinking about it? (OK, not that one. But it really will be interesting to see where they go. They have g

Here's a couple of noteworthy posts from my blogging colleagues that I heartily recommend: Trafic Court found a story about Kohl's green initiative on all its newly-built stores. I was at an ICSC talk this morning and the presenters gave evidence from Wal-Mart that retail sales increase significantly in green buildings. Global warming aside, that's a good incentive for any retailer. So, it is not just the usual suspects at work here; you should expect to see green initiatives in all sectors of the market now. If GE Cap and Bill Clinton are behind it (lenders are apparently liking green because it represents a better investment in the event they have to take the property), more will follow. And Jacob Cynamon has a well-reasoned post on data centers. Apparently the "glut" of several years ago has caught up to the demand and we now need more data center space. And old otherwise obsolete industrial buildings are candidates for such space. Pretty cool, if you ask me

Work is getting the best of me, so just a few quick items of note this morning: The Tribune has two recent stories on green initiatives that caught my eye. One is about buildings being built or renovated (the Merchandise Mart -- that's big!) with green in mind. The other is about Mayor Daley's own city-wide green initiative that will be published next year. Some of it seems a little pie-in-the-sky at first glance (wind turbines at Sears Tower?), but hey, this is the city of wrought iron too. And, as promised, here's more on the carried interest debacle and some estimated impact on the market. Read it and weep .

A year ago , Electronic Arts inaugurated a new Chicago studio at 215 W. Ohio. Mayor Daley even had nice things to say. (They had a small operation that was expanding.) How times change. The studio is losing money, as employee count increases while revenue generated there does not. So, with no profit in sight... shut the doors . No word on how many of the ~150 people there will be offered jobs elsewhere. I don't recall there being any TIF or tax breaks for this facility, but if someone has better information please share it.

The other day I mentioned that the large players in the real estate securitization field were holding on to their staff, assuming that the market would improve. And I liked seeing that in print. But not every law firm can, could or would do that. Thus Clifford Chance axed six relatively senior structured finance associates who apparently worked exclusively on S&P matters, under the theory that the work was never coming back. Not a huge layoff by any BigLaw standard, but it is nonetheless news. CC is of course in a different situation than the big boys in securitization, and if the work truly was gone for good there was probably nothing else to do with these folks. So the story says, they all get severance, but apparently not those 2007 NYC-level bonuses, which can be pretty large for senior associates. It will be interesting to see where these lawyers will wind up. I do agree with Above The Law that CC at least did the honorable thing by not calling these "performance-

You have to give Frank Gehry credit. He wanted to invest in a building and even when his partners decided to bail he found a way to stay. And thus the Inland Steel building changed hands . The new owners are also saying that they intend to green up the building and will submit their plan to the City tomorrow. I don't know whether that means seeking some form of LEED certification, but I think it is cool regardless.

I'm going to blog about this proposed disaster until it is dead as a doornail. The Real Estate Roundtable is the latest group denouncing the proposed Temporary Tax Relief Act of 2007 (HR 3996), a/k/a the Let's Make Sure the Economy Goes in the Tank Act. Yep, let's make sure entrepreneurs have another reason not to undertake risk. And then let's see the "pervasive effect on jobs, economic growth and the tax base" that this law will have. I'm almost in pain thinking about it.

Here's an interesting quote from the head honcho at GGP from this GlobeSt.com story : "Our new rents continue to increase as demand for quality remains high. We’ve completed new and renewal leases for 6.3 million sf of space in the year, 13% higher than the first nine months of 2006. I’m not so naïve to say that everything is perfect, we expect to see a softening in certain retail sectors, but not so much that it should change retailers’ expansion plans by any degree." Of course optimism is in every developer's blood. But this is conference call fodder, and the GGP numbers are telling, as are the still-low vacancies. Short-term pessimism might be a good thing (unless you just bought shares of Coach at $42 to see it plummet to $35), but over even the medium let alone the longer haul I still don't think we're going in the tank.

Lisa Galley's Our Green Journey is the newest addition to my blogroll and a good one at that. I enjoyed reading Lisa's post on her experiences at the Counselors of Real Estate conference in San Francisco. Her post yesterday on extinct loan terms got me to thinking about cycles again. Example: mezzanine lending was an endangered species a couple of years ago, but now you are starting to see mezz debt come back. Just as demand is cyclical, certain types of deal structures are too. Hopefully we won't see the days of interest only loans and overly generous cash-out refis on residential property that assume continued astronomical appreciation. I don't think they are healthy for that market. I was just talking to a banker friend of mine about some of his clients doing cash out refis in the commercial market, albeit at LTVs that (hopefully) make sense.

A developer friend and I had a chance to chat for a moment this morning about this story in today's Tribune . There is more and more speculation about casino gambling being allowed within the Chicago city limits and just where that license to print money might be located. Without naming names, I thought some of the locations were nothing short of absurd for political reasons and because the dirt is just in the wrong place. I would not want to go to probably half those locations. Personally, my money (but only a $2 win bet) is on the Old Post Office, which I have written about before . It is a compelling location visually, the owners have gaming industry experience, I assume they can find a way to get traffic in and out, and the logistics (which the Trib thought might be a problem) shouldn't be because the building basically has to be gutted to get rid of all the asbestos, thus allowing the placement of all the high-tech stuff a casino demands. But in this town, you never know.

Traffic Court cites a NAREIT story saying that up to fifty REITs now buying back shares now or planning to do so. Gee, you think they think their share prices are undervalued? Of course that does not mean this is always right. Some analysts think the management should just concentrate on running the company, and sometimes you can also argue that the decreased liquidity can be bad for some shareholders. But I do like the fact that these companies are at least thinking they are a good deal right now, as if the market overreacted.