Wednesday, December 26, 2007

Lifestyle centers and malls

The Economist has an interesting story on the rise and fall of the indoor retail shopping center and its replacement (I guess) by lifestyle centers. Some old malls have outlived their usefulness and either no longer exist or sometimes function half-open or with community-type uses such as senior centers, etc. Here's one interesting theory:

[Lifestyle centers try] to re-create a kind of prelapsarian downtown where there is no crime or homelessness. [R]omantic evocations of city centres are possible only because people have forgotten what downtowns used to be like. And they have forgotten, of course, largely because of the suburban shopping malls.... It was necessary to kill the American city centre before bringing it back to life.

It could also be that these centers can function as a downtown in places where there wasn't one before. Many of the newer suburbs just don't have an old-fashioned downtown. The lifestyle center can serve that purpose in part. Indoor malls are not dead, though. You may not see many new indoor regional malls being built, but they have their usefulness too (especially here in the Midwest with cold winter weather).

Gloom and doom contrarians weigh in again

It is great to be back. I had a wonderful Christmas with my family (including my three remaining grandparents -- it is such a blessing to still have them all at my age). I am expecting a slowish day or two that will allow me to catch up here, catch up with administrative work for my and prepare for 2008 (and some exciting plans for me personally and professionally).

As I have said before, some investors are not buying into the prevailing feeling in the market that 2008 is going to be a bad year in the commercial real estate market. And face it: many of the best in the game buy when everyone else is selling and vice versa. We saw this in the last two years. According to the contrarians, "The common belief is opportunity is knocking for the deep-pocketed crowd because the credit crunch has eliminated high-leveraged buyers from the bidding ranks due to lenders' tightening underwriting practices."

Most of these people have access to major league capital that will permit them to lever deals at only 60-65% without tapping the mezz market. So they can buy properties at higher cap rates with more of their own money. But I do disagree with them to the extent they think smaller players won't be able to get into the game at all. The smart ones will learn to adapt, but many others will have to sit this market out for a while.

Thursday, December 20, 2007

Merry Christmas and Happy New Year!

I have been a little light in posting and in creating original content because I am trying to help close a small but fairly complicated deal (it is actually three separate closings). That should be my last major project for the year. I'm hopping around even too much to buy Christmas presents, though I hope to rectify that right now.

Year-end is often crazy for real estate lawyers. We are all trying to wrap up deals by tomorrow, which is nominally the last real business day of the year for many people. In the past we've worked right up until and through the end of the year. I'm told it used to be even worse many years ago (for tax reasons if I recall correctly).

There are exceptions. Because of Y2K concerns, deals in 1999 and to a lesser extent 2000 all had to be pretty much wrapped up by 12/15 or 12/20. Of course that ended up being a non-issue, but it sure was a nice break.

In case my posting slows down during the rush, Merry Christmas and best wishes for a happy, healthy and prosperous 2008!

Wednesday, December 19, 2007

More on mezzanine loans

I have been writing a bit lately about a trend I am seeing toward more and more mezzanine debt being put on properties as a gap between the LTV required by a bank and the equity a buyer brings to the table.

The Wall Street Journal sees the trend too, as evidence by a story today. Novices may ask: what is so attractive about mezz loans? Think of it like a second mortgage. For the buyer that does not have the larger amounts of cash to do a deal in this market, it means the ability the lever yourself into a deal you could not otherwise do while still being able to get high returns on the back end. If you are the lender, it means getting higher rates of return than a first lender on the mezz loan, plus the ability to wipe out the buyer and take over the property dirt cheap (insert groan here) if the buyer defaults on the mezz loan. That is why you are seeing seasoned, big-name investors doing mezz deals. If the buyer performs you it a double; if it fails you could hit a home run.

(Update: But as Doug Cornelius rightly points out in the comments and here in his excellent commentary, mezz lending is not for the faint of heart, nor is it, as the article (and perhaps my post) might surmise, a guaranteed win. Negotiating with the lender and good legal documentation are also critical.)

Monday, December 17, 2007

So what is it? Crisis? Opportunity? Both? Neither?

My bet is on opportunity. Some stories here piqued my interest.

The first, from Crain's, discusses both a record year in dollar volume in Chicago and what some are calling a challenge worse than that of 1998, when I was just a novice in the business. The pundits say that even insurance companies and banks are getting skittish and that LTVs for deals are in the 65% rate compared to what was going on a year ago. I have seen some skittishness, including from banks, but I am not (yet) seeing 65% LTVs required, though I'll bet that might be the case on a riskier deal. If so then the mezz lenders will be having a field day, be it in straight deals or equity kickers. Is it deeper or bigger? Beats me. I'm actually a just little busier than I want to be right now (which I guess is good this time of year).

IPE Real Estate writes about opportunity, and that big players are poised to buy globally in 2008, and have the cash on hand to do it. One example about people I know is Waterton Associates LLC. Waterton as always been able to capitalize on distress (see here for a great example -- the recent sale of property it bought out of a foreclosure a few years ago) and they have announced Fund X with CalSTRS, its usual partner, coming back to the table for more. They are, by the way, assuming 65-70% leverage, so those numbers in Crain's are probably sound. Good for you, Pete and David.

Advice to budding real estate lawyers

I received an email this weekend from a 1L asking for advice about law and real estate. I hope that person does not mind my sharing excerpts from that message with you.

The work of the real estate lawyer can sometimes be tedious, but so is any area of law. This is not necessarily a glamorous business, and to the extent there is it belongs rightfully to the clients.

Learning the legal side is good, but doing your own deals is paramount. You can always hire people to do the work. Remember, two of the top real estate moguls in Chicago are both trained lawyers who quickly got out of the business. They know the legal basics but have teams of lawyers to work out the details.

You will not learn the business side of real estate in law school or necessarily in practicing law either. No matter how much education you have, the hardest thing to do is get out there and take a risk and do the deal. I know this from experience. Start young. Be it good or bad, one thing law does is teach you the adversity of risk, and that runs counter to most good investors. Mitigating risk -- not avoiding it altogether -- is the key. And in my older age I have become more risk-adverse, perhaps to my financial detriment.

There you have it. I'm not perfect. I'm also not poor (nor am I rich) but I wonder whether, if I'd started investing to any degree seven or eight years ago, whether I might be retired. (Answer: maybe. But the grass is always greener, and during those years I've not had to worry about the next meal or house payment either. Spilt milk and all that....)

Friday, December 14, 2007

Riding the waves

Here's a little piece on strategies for investors in 2008. Ta-da! Be ready for uncertainty and prepare for the unexpected. You have probably read much of this before but I think it is a good idea to remind yourself about what you can (and can't) do.

What can I add? Throwing caution to the wind is sometimes, but rarely, justified. I'm a firm believer in the adage that if something seems too good to be true it probably is. Does that mean you can't get a bargain? No! But it does mean you have to have a healthy dose of "Am I missing anything in my analysis?"

Wednesday, December 12, 2007

Talk about a test case!

I have to say one thing from the outset: having worked on exactly one Sharia-compliant real estate loan (almost ten years ago), I am by no means an expert on these type of deals. But they do fascinate me. The whole prohibition on interest but allowance of profit elements, and all the other magic lawyers do to try to provide the security of without running afoul of Islamic law is very interesting.

Obviously, I was intrigued by the story in today's Journal about how a foreclosure might work in such a deal. This is apparently treading new ground. According to the story:

Islamic financial investments avoid the use of interest by being structured as leases on the property. Thus, instead of interest, the investor receives rent directly from the property. The amount of the rent is pegged to an amount a traditional investor would have received in interest.

In theory, the foreclosure of a Sharia-compliant investment shouldn't pose major problems for lenders. The lease that serves as the Sharia-compliant investment vehicle is subordinate to the underlying mortgage. So when a lender forecloses on the mortgage, the lease is canceled.

But what will happen in practice? It should be just like foreclosing on a leveraged lease, or maybe a mezz loan or UCC sale. I guess we'll have to keep an eye open.

Tuesday, December 11, 2007

Billing rates - whose fault is it?

This story talks about rising rates at big law firms. With associate salaries (and partner profits) climbing based on a perceived supply and demand issue, do you blame them, or do you blame the clients for paying the rates? According to the story, "'There's always been frustration. Now there's anger,' said Susan Hackett, general counsel for the Association of Corporate Counsel. " But to some degree I think you also have blame the clients.

There is no supply and demand issue when it comes to the number of lawyers and law firms in the market. But you do have a limited number of so-called "elite" firms. GCs have to decide whether it is always necessary to send all the work to the big firms, with the concomitant cost, or whether firms that charge less will suffice. (Heck, I am not cheap either, but I am compared to BigLaw.)

I see both sides of the coin. Face it, if something goes wrong the GC looks better if s/he can say "I hired the best guys money can buy." But that GC also looks very good if s/he can say, "The deal got done just as well, in less time and at half the price."

Sometimes it comes down to name, or the individual lawyer who happens to be at Firm X. And sometimes it is bet-the-company work or work where you need an army of lawyers jumping on grenades. Been there, done that. And it makes complete sense to me.

But before complaining too much, clients need to decide how much the name of Firm X is worth and whether good, first-rate lawyers that do great work while not charging an arm or a leg are appropriate for some, much or all of the work. In other words, if you are a client and you don't like the rates, don't just whine. Do something about it.

Monday, December 10, 2007

I know this is not a residential real estate blog, BUT

I have to digress tis morning. If you are in Illinois or a state that permits it, and you are married, you should almost certainly take advantage of the easiest asset-protection vehicle available to you: owning your principal residence as tenants by the entirety. In short, it prevents a judgment creditor from going after the home of a married couple if the credit obtains a judgment against only of one spouse. This can be important if you are a professional, own your own business...oh heck, it is important for anyone to take advantage of this protection if possible. (Of course, as always, consult your own lawyer to see if it is right for you.)

To read more, go to Peter Olson's blog and learn more about this important topic and recent case law developments from the 7th Circuit affirming that even co-op shares can be protected.

Friday, December 7, 2007

Lifestyle? Life? What's that?

Looks like you might not really know at DC-based law firm Arent Fox. According to the story, or at least my take on it, they don't want to be known as people who don't work hard; rather, they want to be known as people who make lots of money.

Good for you. As for me, I'm going to make sure all my loose ends are tied up for a Monday closing so I can (a) enjoy family time this weekend, (b) still collect my nice check and (c) not have to worry about working late tonight and perhaps tomorrow and Sunday like your guys will. To each his own, I guess...just hope you have the time to spend it someday.

Thursday, December 6, 2007

Brief reflections on the subprime bailout and politics

I'm wondering what other people think about the proposed subprime bailout. I guess I will do some reading later today, but let me give you my initial thoughts, which I had even before reading this piece in Forbes. It seems to me that all we are doing here is rewarding bad past behavior and encouraging future bad behavior. Yes, go ahead and be stupid, Uncle Sam will fix everything for you! What the heck ever happened to taking personal responsibility for your actions? And why are we letting everybody off the hook so seemingly easily? Am I missing something here? Yes, I understand the potential need to intervene into the market from time to time to prevent a disaster, but there has to be a limit. Isn't there a better way?

When I was a kid I always thought I would be a public official. Technically I am since I am proud to serve as a trustee of my local library. But then I became jaded by the necessity of full-time fundraising and the transformation of politics from statesmanship to partisanship. But reading stuff like this makes me wonder whether we need to find people willing to be a Cincinnatus, or at least people willing to put partisanship aside for the better good (and without worrying about lining one's pockets to boot).

Tuesday, December 4, 2007

I love the media....

The Los Angeles Times has a good story today about the current state of the California market. The main point? Sale prices are down and many sellers are holding right now rather than selling. The point you have to look for? Rents are still at record highs, vacancies are still low and all sectors in the industry are basically healthy. In fact, the story states, buyers are having a hard time finding so-called distressed sellers.

So...cap rates just came back to reality (I don't think the story said that, but I will), as did lenders. The best line in the whole story, in fact, is the very last one (no, they did not bury the lede) from DLA Piper attorney Michael Hamilton: "Smarter, more prudent lending practices will be implemented," he said, "but the market will continue to develop and grow." I admit that I didn't like the "chilly" headline of this piece, but the reporting was, in my opinion, pretty spot on.

Monday, December 3, 2007

Bye-bye Fifield, hello...who?

Crain's just reported that the Lakeshore Athletic Club on Lake Shore Drive (previous posts about this building are here and here) will now be sold to Integrated Development Group LLC, who, with a pension fund, will redevelop the property as high-end senior housing. The principal in the deal for buyer used to head up development for Hyatt's senior division, so he knows something about these types of deals! No purchase price is listed, but I would not be shocked if it was south of the $40+ million previously offered. (BTW, here is the Sun-Times story.)

This of course blows out Fifield Cos., which planned to put another one of its high-rise condo buildings on the site. And I'm glad. Yes, I was torn knowing that the re-development of that property might be tough and require some creativity, I do happen to like that old building almost as much as I like creative real estate investors. I'll happy to see it there instead of the likely alternative. Let's watch and see what happens!

ULI forecasts for the current market

Lisa Michelle Galley, a thankfully regular commenter here, has a superb piece about the ULI Emerging Trends conference in San Francisco. I'm not going to try to analyze it or summarize it. Just click here and you will NOT be disappointed. (And then bookmark or favorite her blog; it is worth it.) In addition to all the other prognosticating and a shortlist of ideas to consider in the current market (all of which I need to digest), the one thing I had to comment on is this comment: "Two years from now, a Class A non-green building will not be considered Class A." That says something to me. That may be a bit over the top, but if it did happen I would not be shocked, because it'll be tenant-driven.

Trumpy trump trump trump, trumpy trump trump trump, look at Donald go....

Yesterday the Tribune had a lengthy story titled "Towering Troubles?" about the Trump International Hotel & Tower going up at the former site of its competitor. It asks pointedly whether people are going to show up when The Donald gets his certificate of occupancy for the hotel floors, triggering the first round of closings for the condotel portion of the project. The story goes on to talk about throwing more equity into deals to keep lenders happy as well as the state of this high-end market in general, including the fact that two major projects are stalled for financing reasons. But they are not this far into the sky.

Here's the reality, or at least my take on it. I've come out publicly to say I am no fan of Trump's tactics, especially related to dumping the friends and family buyers. (He might have another side of the story, I understand, but this is just what I read.) And even though The Trump Organization hires small firms like mine, I don't think I'd ever work for the guy or someone of his ilk. But Donald's going to come out just fine on this, and here's why.

The sales will probably go all right. But let's say for the sake of argument that 30% or even more of the buyers dump out on the deal and walk away from the closings. In addition to keeping the earnest money as liquidated damages, you then rent out the hotel rooms (which will probably have very high occupancy when the hotel opens), don't share profit and then use those revenue numbers to sell to new buyers, probably at the same or a higher price. Trump also probably has the funds to pump in more equity if need be.

Finally, let's just say for the heck of it that the whole darn thing goes bust. According to the Trib, Trump says he has $40 million in equity, and then there's a $640 million construction loan with Deutsche Bank and a $135 million mezz loan. Let's go on to say that hypothetically the lenders foreclose and there's no workout, and the guy is wiped out of his entire equity position (in which event maybe you still get some licensing revenue for the name if you want to keep it). Even in an absolute worst-case scenario, if Trump loses the whole $40 million or even a little more, let's go to relative terms. If Donald's net worth is $2.9 billion per Forbes (Trump says it is $6 billion), you are looking at roughly 1.4% of his net worth. Think about that compared to your own net worth.

Now, of course, there is one huge, key assumption here: that Trump's loans are all non-recourse, meaning that if there is a default the lenders cannot go after him or even his companies personally. The sole recourse for the lenders would therefore be against the property. (There are usually exceptions for this for fraud or environmental issues, by the way, but let's stay on track. I can talk about non-recourse debt another time.) As I recall, Trump is on record as saying that after his workouts in the 1980s he doesn't do recourse deals any more. And I believe him.

Friday, November 30, 2007

Buying real estate? It's not all price and cash flow...

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.

Thursday, November 29, 2007

Association to Shelbourne: take your Spire and shove it

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 further aside, you can actually buy title insurance over the ability to obtain utilities facilities, by the way. But that is another story for another time.)

Susan Diesenhouse's story says that the HOA "also claims that given the nature of the waterfront land, excavation for the seven-story underground garage cannot be conducted without damage to the neighbors' homes, and therefore is not legal according to Illinois law." As for the settling and foundation damage, well, you have to pay for that of course. There's all kinds of case law there. I assume they are arguing that the damage might be so bad that you'd have to obtain declaratory relief to stop construction. Generally money heals these wounds, so they might be saying that there would be irreparable harm to the association's property.

It'll be REALLY interesting to see how this plays out. As of this morning there's nothing on the docket on this case set, but I have a strong feeling that you might see some attempts by Schiff Hardin, the plaintiff's lawyers, to obtain a TRO and some injunctive relief, as construction at the Spire is ongoing.

Wednesday, November 28, 2007

More on building green

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.

Update on law firms and CMBS

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 Floor, "At 'street level,' originations of commercial mortgage-backed securities loans are said to have come to a literal halt; some are saying the current downturn is worse than 1998 (which it clearly is, as the current impact is global and includes all facets of the debt capital markets)...Conclusion: this is going to take much longer than many thought possible to work itself out."

I do know this: As a lawyer, you can get really pigeon-holed in a structured finance practice, though, so maybe in the end this can be a silver lining in a bad cloud for the lawyers. When you see more and more deals being done with the old standby lenders, the insurance companies, it seems that many people are agreeing with my thoughts about doing traditional deals for now, waiting for better times before into the more restrictive and less forgiving CMBS market.

Tuesday, November 27, 2007

Paperless transactions: getting there but not quite yet

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 an original if you want it.

Monday, November 26, 2007

Chicagoland retail: "slight" of hand

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.

Friday, November 23, 2007

Job perks - which path would you choose?

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," required office hours or restrictions on what I do or when I do it, unless client demands are in the way. (My favorite is taking calls and answering email regularly from the golf course, thus allowing me to bill time while still having fun.)

2. Working from home four, if not five, days a week in a home office better than any office I had while working for the man.

3. Culling my tie collection from over a hundred to three since "dressing up" for me generally means not wearing shorts.

4. Working roughly one-third the hours for the same pay.

5. Ending the work day at noon on most summer Fridays just because....

6. Taking a mid-day work break to play games, watch a movie or visit my wife's office.

7. Being able to spend quality time with my grandparents and my mother.

8. Not feeling guilty about not being at the office on Saturday (though I admittedly do work some Saturdays from home when I have to or want to).

9. Not being chastised for doing volunteer work, for giving my time to others or to the community because I want to and not because I think it is good for business or my firm.

10. Not working on Black Friday. Having done it so many years, it feels sort of weird not to be doing it now.

By the way, I (and you!) do all of this while still being accessible to all my clients at virtually all times (the joys of the Internet, cell phones and BlackBerry all at work here).

I hope I'm not sounding like I am bragging about my life or bagging on BigLaw lawyers. I'm not trying to, and I apologize if it comes off that way. (And yes, even though I have a good practice, there are certain times I do miss the hubbub of it all -- and the collegiality of a big firm that I was fortunate to have experienced.) I'm just trying to point out that there is another way to doing what I do, a path that is, at least right now, better for me at this point in my career and one that I also think may be a healthier way for other lawyers to be in this profession. At least for me, actually striving for the lifestyle that so many seem to want is the trade-off for all the perks.

I leave it to you to decide whether you can or want to take this path, or whether you love the enviable path of the megaperks. As for me, I'm off to visit some friends and watch some football. :)

Tuesday, November 20, 2007

Terrorism Insurance bills look for Congressional reconciliation

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.

Monday, November 19, 2007

Loan diversity in the CMBS market

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 "substantive non-consolidation opinion." VERY generally speaking, this complicated letter is an opinion that a single-purpose borrowing entity acquiring property will not, in the event of a bankruptcy, have its assets consolidated with the assets of a majority owner, and vice versa. These opinions are usually only required for "big deals" and they are very expensive to prepare. So what is a "big deal" these days? At one time it was $15 million, then $25 million, then $40 million then perhaps even higher. I don't know what the big deal threshold is today, and I'll bet it varies from pool to pool and depends on the rating agency involved. But having to prepare these opinions -- and the "pairings" requested by the lender in such opinions -- can make a big difference for a borrower.

I also found quotes on trends by Anthony Downs of The Brookings Institutution buried in the story to be instructive: "“People who have all this money don’t want to sit on it. Gradually, the pressure will be greater and greater to make a deal.” Banks and insurance companies that hold loans on their books are in a position to start lending immediately, he said." So make like Nike and just do it.

Thursday, November 15, 2007

Weakness spreading into CRE?

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.

Yes, look AND think before you leap into buying property

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 have any knack for this business.

Wednesday, November 14, 2007

555 Monroe off the market

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's junk. Look at the Big Three auto makers.

The lack of acceptable offer could also be because of rates in the CMBS market or because Principal is only going to sell for top dollar and buyers are looking to get bargains right now. It'll be interesting to see how and whether a trend develops.

Still betting on themselves?

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).

Tuesday, November 13, 2007

Wow...paid sabbaticals...

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. So I say kudos to this firm for doing something unique, even if it hits partners in the pocketbook. (Trust me, I'm sure they are doing all right.) P.S. The PR will also be tremendous.

TIFs - Ain't we ready for reform?

(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 a TIF district. Farm land is blighted? The retailers are just moving from one part of town to another to take advantage of the tax breaks? Get out your Smell-O-Meter.

So are TIFs ready for reform in Illinois? Probably not yet. But I think it would be good to separate some wheat from the chaff.

Monday, November 12, 2007

More malls on steroids in Asia, but perhaps not where you'd expect

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 basically a pastime and with the Philippine economy improving the malls make sense in that regard. (Call centers for US companies are a big item there; you also high education levels, and just about everyone speaks fluent English). Lastly, let's not forget that the Philippine peso has improved in value against the dollar (an almost-official currency) by about 25% in the last couple of years. What was a 55:1 exchange rate is now more like 42-43. So my loss (when I travel there) is their gain, and that is all right by me.

P.S. What I forgot to mention is the construction cost! According to the story the mall cost P$1 billion. Divide that by 43 to get the cost in dollars, and then look at how much per square foot it cost to build this mall. No wonder you do it.

I swear this won't become The Chicago Spire blog, but...

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 (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 prudence. (I have no reason not to believe this, so I will. It makes sense to hedge your bets.)

One thing is for sure. The astronomical prices in dollars for this project don't look so bad in Euros or other currencies. (Heck, even the Loonie is at at $1.07 or something, which bodes well for snowbirds.) If Shelbourne can get buzz abroad on this project we may see some sales come January.

Friday, November 9, 2007

Legal developments at the Spire

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 good lawyers, that's for sure.)

Lastly, the foundation permit is revised to exclude the easement area, so we'll have to see whether that makes this go away. Although it is sometimes almost inevitable, having an angry condo association next door is never good for a developer.

Thursday, November 8, 2007

Silicon, name it

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.

Now let's do green data centers!

Wednesday, November 7, 2007

Random, scattered thoughts...

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.

Tuesday, November 6, 2007

Boy, that didn't take long - EA gonersville in Chicago

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.

Not every firm is keeping the team intact

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-based" layoffs.

What can you learn from this? The biggest thing is to not let yourself get pigeonholed if at all possible. Wen I was an associate I tried and was given a wide variety of real estate assignments so I can be of the most use to clients, the firm and for my future. It can pay to be really, really good at just one thing, but if that one thing becomes obsolete, you've got trouble in River City. Ask your local blacksmith if you don't believe me.

A man of his word...

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.

Monday, November 5, 2007

More on the Guaranteed Recession Debacle

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.

Friday, November 2, 2007

Optimistic words from John Bucksbaum

Here's an interesting quote from the head honcho at GGP from this 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 na├»ve 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.

What goes around comes around

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.

Thursday, November 1, 2007

Wanna bet?

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....

REITs are still buying and buying

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.

Wednesday, October 31, 2007

Hotel 71 is now Hotel 11

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.

G&E: available sublease space up 5%

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.

Tuesday, October 30, 2007

To LEED or not to LEED, demand is the question

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 a major role in driving this bus. If they demand that future buildings be green and that existing buildings adopt green-friendly, it will happen. This is a reverse Field of Dreams: if you come, they will build it.

Monday, October 29, 2007

CMBS slowdown hitting law firms

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 a client, a sabbatical or even assistance with a career change. I do not know enough about McKee Nelson to make a comment, but again, the name partner is saying, "[N]o one is losing their job." Again, a good call for the future.

Today, Crain's reports that Sidley Austin's CMBS work has plunged by 70%. Once again, no layoffs are "expected...though some of its 250 capital markets-oriented lawyers could shift focus." We'll also see what happens here.

P.S. Let's not forget there is a lag in deal-making. The CMBS market is starting to pick up a little, though maybe not to crazy-busy levels, and that will bode better to firms who ride it out.

Law job of the day: a new CMBS player

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.

Friday, October 26, 2007

Friday thoughts and musings

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, the landmark (and stunning) Rookery Building in Chicago is being sold again. According to the story, Broadway Partners bought the building for $56 million and they are selling to Metzler North America for about $73 million. Even with the money they had to spend on leasing up the building from 65% to 97%, that is probably still one heck of an IRR for an eighteen month hold.

Thursday, October 25, 2007

But the New York Times says....

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.

Wednesday, October 24, 2007

G&E says: relax, people

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.

Macy's? What's that? Some New York store, 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.

Lenders, lenders, lenders...get your lenders right here!

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.

Charting cap rates

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..."

Tuesday, October 23, 2007

Shall, must, might: get me a dictionary and an aspirin!

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.

Analyzing trends and catching typos

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 as to not run up the client's bill. But other times they can really make or break a deal. I am dealing with such details (involving adjoining property rights) currently on a local matter in which I am involved, and believe me, the little things you might think "don't matter much" really can, especially when you get a lender or third parties involved. So be forewarned: sometimes you do have to sweat the small stuff, so get a good team to help.

Monday, October 22, 2007

Blogging and Beyond

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 putting my mouthpiece and mallets away now. Back to dirt.


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." 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 too quickly. Why? It might just be cheaper to eat the space. If you give it up too fast and the economy turns in 12-18 months, you are right back on the market for space again, and who knows were rents will be? (Short term sublease? Not really practical.) Commercial lease prices in Manhattan have not been affected yet to my knowledge, and I am not yet throwing in the towel until I see commercial absorption tank. I've been wrong before, of course, and even if I am then you might have a new buying opportunity for the players that have been sitting out the wave.

Wednesday, October 17, 2007

More slowdown and lower price predictions

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 the works.

Brother, can you wait 'til '09?

(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....

Hotel 71 saga continues

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 OCM team to do all right.

The good news? Lenders and borrowers are getting the hang of current conditions. And hotel sale prices are still doing well, as are room rates in downtown Chicago. Perhaps it is a combination of a medical convention and the USC-Notre Dame weekend, but when I tried to book a hotel room for tomorrow and Thursday nights not much was available, and the rates were, by usual Chicago standards, sky-high.

In any event, if you are dying to do a hotel deal in Chicago, it looks like now's your chance. Sophisticated dirt players (and their lawyers!) need only apply.

Tuesday, October 16, 2007

Want to guarantee a recession -- or worse?

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 for the man, why take the risk of, for instance, developing land when you can just take a paycheck and get taxed the same way? Of course, there may not be many jobs around if we pass this law. What a disaster in the making.

Monday, October 15, 2007

Would you like fries with that loan?

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.)

Friday, October 12, 2007

Will we soon call it Sears Towers?

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.

Bears and Bulls and Dirt, Oh My!

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.

Be careful with those 1031s -- the IRS is watching!

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.

Thursday, October 11, 2007

Wal-Mart > Manhattan

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.

Wednesday, October 10, 2007

Friends and Family play Trump card: a lawsuit

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 -- too easy, perhaps -- to say that the morally right thing to do is to sell at less or no profit. I'd probably want a way out, too, if it were my money.) But this is Chicago, not New York, so we'll see what a judge says.

Westfield: retail sales slow; vacancies low

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.)

Tuesday, October 9, 2007

Conduit borrowers - can you sit tight just a little longer?

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.)

Monday, October 8, 2007

Vacancies: city up, suburbs down

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.

Property taxes - be afraid. Be very, very afraid

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, but the seller has no tax bills for the SSA, it is 30 years old, and no record exists in the assessor or government files that any special taxes were due and owing. The land is all under the same property identification number (PIN) Special tax counsel for the seller opined that the SSA no longer existed.

The buyer and seller close, and, lo and behold, the buyer gets a tax bill for the SSA. Not a little bill, mind you, but a seven-figure bill. It turns out that the general and special taxes were all under the same PIN, but that the general tax bill went to one address while, for some crazy reason, the special tax bill went to another address. My guess is that it was the address of a previous owner and that the special taxes never got transferred over.

At the end of the day, the seller paid the taxes, the title company ended up with a claim that was settled and everyone went on their merry ways, albeit a little shell-shocked. The moral of the story: if something on the title commitment looks a little out of sorts, think not twice but about fifteen times before saying "no big deal." And get your friendly neighborhood underwriter involved, as s/he may have seen this before.

Thursday, October 4, 2007

If the Wal-Mart era is over, what is replacing it?

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 Kroger more each time I go. Now if the new Kroger would just open....

Walgreens and CVS? I only go to Walgreens in a desperate pinch. I can't remember the last time I was at a CVS (and I am not alone - a CVS near our house closed about a year after opening). I'm an Osco guy for pharmaceuticals but the $4 scrips at Wal-Mart are a steal. But based on the number of scrips the boss writes, I will say I think that Walgreens is the most popular pharmacy in town by far.

Petsmart and Petco? Pretty rare. Wal-Mart and Target generally carry what we need for the cats.

Niche market retailers like H&M? LOL...although I did buy a Cubs T-shirt at Wal-Mart this week.

Finally - Costco. I would convince the boss to move from Sam's to Costco if the nearest Costco wasn't 45 minutes away. So we are a Sam's family for now. And unless it is a complete mess, we'll probably shop regularly at the Super Wal-Mart when it opens. In the immortal words from Monty Python and the Holy Grail (or Spamalot, for that matter), "I'm not dead yet!"