Friday, August 31, 2007
Thursday, August 30, 2007
Posted by David at 8:37 AM
Wednesday, August 29, 2007
Chicagoans who have been around more than a few years will remember that the firm's predecessor here, Rudnick & Wolfe, had about the biggest and best dirt practice in town for many years. So perhaps this kind of move is less surprising to us in the Windy City. I think the firm hit the nail right on the head by announcing this kind of expansion and at this time.
I do not purport to know all the facts here, nor am I assigning blame or even suggesting that anyone is in fact to blame. But, had I been involved, is there anything I could have have done to try to prevent this problem? Maybe, maybe not. At the least, I would have tried to obtain title insurance over this issue when buying the land. A basic title policy only insures ownership of the property in question. In a commercial deal of this size, if representing the buyer I would have insisted upon obtaining an access endorsement insuring that the property has access to a public street. (Practice hint: Read the endorsement and consider asking that the form language be modified to suit your needs.) At least there might be proceeds to call upon had this problem happeed anyway. And if I could not obtain this insurance, I would have flagged the issue for my client's consideration.
Maybe this is just one of those no-fault snafus. And there is no guarantee that anything I might have considered would have helped. But there is a lesson here: If you are a dirt lawyer, you can’t ever assume. Every deal of this nature is Development 101 for me, and I constantly have to question myself in each and every step of the process so as to add value to the transaction.
Tuesday, August 28, 2007
Monday, August 27, 2007
Some things I do know are as follows:
We are also, however, in a different paradigm than we were some years ago, when even then there were associate layoffs. Whereas profits have always been important, when you see the things going on these days at some firms to maximize profits over any other factor, then associates and non-equity partners are, in my opinion, more fungible than ever.
Well-run law firms will be prepared for this and will have reduced hiring in advance and taken other measures to be in a position to ride out a market slump. They will also be willing to tell partners to be prepared to take such a hit. I can think of firms that will be fine, albeit with reduced profits, and others that will not. So if you work at a shop ask yourself: how well is my firm run and prepared to deal with a down time?
Who knows whether there is a downturn at all? The media tends on glooming and dooming these things under the theory, "If it bleeds, it ledes" (or leads, if you insist on not using the journalistic term). I am still an optimist and do not think there will not be a major bloodbath, at least not in commercial real estate. But I also know I am not infallible.
Sunday, August 26, 2007
Actually, the budget picture is perhaps not as bad as I intimated, but only because we just finished building a new shower in our house (yes, it is all Kohler, but via Lowe's). Knowing that there is a spa that nice in the relative neighborhood (40-45 minutes from home, 30 minutes from the office) is a good, albeit expensive, thing. We have nothing where we live to compare, and the spa half an hour south of us is just not our cup of tea (thus no link to it here).
The short version of this post: given the location and demos, Kohler may just as well back up the armored car for all the money they will make in Burr Ridge.
Posted by David at 2:01 PM
Friday, August 24, 2007
Notwithstanding the FTC, the merger is now basically a done deal since a stay to delay it was denied pending appeals. And this is the right call. Retail Traffic hit it right on the head: Whole Foods now competes with the supermarket industry in general, not Wild Oats. So there's about to be one less retailer for you landlords out there.
Thursday, August 23, 2007
Wednesday, August 22, 2007
What do you call 50,000 lawyers in the middle of the ocean? On their way to Mumbai, Macau and Manila.
I know the Philippines the best of these, and it will be a great outsourcing location. Everyone speaks English (it is the official language of the court system), the legal system is a hybrid of US and Spanish principles, and, because of its former ties to the US, our cases (or at least old ones) have precedential weight.
But let's look at this from another perspective. Many of the people charging these types of rates are the lawyers you will bring in for so-called "bet the company" work. So these lawyers are not saving lives, but they may be saving companies and helping the lives of all those who are gainfully employed there. (Okay, so I am playing devil's advocate here.)
As for me? No thanks. I like making money as much as the next guy, but the pressure that comes with it is not my cup of tea, at least not at this stage of my career. And even if I did I'm not sure I'd ever get to the $16.67/minute rate anyway. Right now I'm happy doing what I call "important" work (in other words, work that means a lot to a client and for which that client is willing to pay a premium to have it done right) and sometimes even "commodity" (or routine) work. And if that means charging one-third the rate of the big boys (bargain hunters, note), then so be it.
Also, rates like that discourage (or should discourage) clients from hiring the biggest guns in the business for anything other than the most important work. And that is a good thing. Heck, Wachtell has been following that model forever, and it is the most profitable firm in the world.
Tuesday, August 21, 2007
Now, the story contrasts this to the residential turmoil, but now the real question is whether this indicates continued growth or a lag. With sound fundamentals one would think the former, but with tightening credit, we'll have to see. In fact, the aforementioned S&P indexes show a 6.6% increase in May sale prices from a year ago, but the head of the index committe indicated, "[t]hese gains appear to be joining the residential market in their shrinking returns."
I just know I am busy right now and that I'd better stop blogging and start billing.
Monday, August 20, 2007
Here's my analysis of the three centers.
Poag: has the advantage of time and landing anchor tenants such as Von Maur. The disadvantage is that it is farther south at 111th, although that may be a blessing in disguise as more people are turned off by traffic on 59. (I was at the opening of Fox Valley Mall back in the 1970s, and I don't think I have been the area in at least ten years because of traffic. No thanks.)
Summit: not my favorite location at the intersection of Ogden and 75th, but at least it is the southwest corner. This is probably personal bias from way back. I think its biggest advantage is a smaller size. At 282,000 sf it may try to position itself as the elite, boutique lifestyle center. At least that would be my initial marketing angle. Regardless of the positioning strategy, it also has less space to lease up and therefore less risk.
PREIT: theoretically this is the best location although you can argue that the area is so congested that it is too busy. I also think a new high school is going in that area to boot. The downside is competition and being the last to the game, not to mention the fact that PREIT paid more than $13/sf for the raw dirt.
I call that kind of thinking risky, except maybe in the scarcest markets (Manhattan, maybe downtown SF, central London, etc.) and perhaps even there to boot. In the 1990s everyone thought rents would never go down and that demand would always exceed supply. El-wrongo. Now this is a completely different market from fifteen years ago, but as Santayana wrote (a phrase that, alas, Jim Jones co-opted in his tragic camp in Jonestown), "Those who cannot remember the past are condemned to repeat it."
Friday, August 17, 2007
Thursday, August 16, 2007
How low can they go? The investors can only take so much pain. And is this and the rest of what we have been seeing panic-driven, contagion-driven, both, neither...or are there other factors out there?
The other thing I want to know is how the real estate-driven private equity players are doing. I don't mean the big boys you read about in the paper; I mean the bread and butter people you only know about from being in the biz. If anyone, they might be okay so long as they have stuck to their general investment guidelines for doing deals. I know some are delving into development work because that is where the best returns are now, even though there may be a little more (calculated) risk.
I'll even bet a nickel that the more opportunistic funds, the people who want major league IRRs, probably have some money sitting on the sideline waiting for the must-come dip in prices so they can buy on the cheap, finance with slightly higher rates on a short-term loan and then refinance and/or flip when things calm down.
His take on what is going on? The near and mid term impact of the market may be bumpy and have some turmoil, especially with respect to highly-levered properties. But he also sees this crunch as different than the 1990s real estate crash, which was caused by worldwide overbuilding. We don't have that problem here. He also thinks that the feeding frenzy will slow down and that interest rates are at or near their peaks. Hopefully he's right.
Wednesday, August 15, 2007
(By the way, if you want to learn more about or more fully understand the nature of conduit loans and CMBS, try clicking here. This is at least a good start.)
Remember, because the holders of the CMBS bonds are expecting to clip coupons for the life of your loan, you can't prepay the deal. So, if you want to get rid of the loan for any reason (for instance, a sale), you have but two options. And the only things I can think of that are more painful than doing a conduit loan are (1) transferring that loan to a subsequent purchaser or (2) defeasing the loan. Tonight we'll discuss option (1). Option (2) deserves a section all its own another time. (Suffice it to say for now that it means substituting the collateral of the loan with enough US Treasuries to make all the loan payments.)
To make a short story long, I've had on more than one occasion the sheer joy and rapture of representing clients who were transferring or assuming conduit loans. So it was very interesting to read Kenny Pratt writing about this very topic today, if for no other reason than it makes you feel less alone. Whereas you saw a bunch of defeasances a few years ago because of low interest rates, I agree that you may well see more attempts to assign loans to take advantage of these locked-in rates. I feel sorry for the people involved in this deal, because you are at the lenders' mercy. I hope they are able to get the deal done more quickly, and I concur 100% with Kenny that there should be the ability to buy your way into premium service -- perhaps not unlike some companies in the defeasance business. (These people are my favorites.)
Tuesday, August 14, 2007
Monday, August 13, 2007
This is the right move for Macy's, which is admittedly not one of my favorite companies because of the Marshall Field naming debacle. Because of its location, Minooka has great distribution capabilities, and a modern facility has to be more efficient than the old lady on the north side, which is a building of over 1.5 million sf on six levels. I doubt many of the current staff is going to want to commute to Minooka unless they already live south, so most of the the 350 staff might be looking for new jobs instead of applying for the 210 jobs the new warehouse will generate.
Anyone who has been to the old warehouse, however (perhaps at the six or so sales a year they had), has to have at least a little soft spot for it. I just thought it was...well...cool. I had the chance to get an inside tour of the place about eight or nine years ago in connection with some legal work I was doing. One thing is for sure: unless someone else keeps its current use, any other type re-use of this building would be both fascinating and challenging.
Well, the changes are a'comin', and they appear to be roots-based. Yes, it is back to fashion and accessories, and let's face it: that is what made Michigan Avenue famous, just as it did Fifth Avenue and Rodeo Drive (no matter how much rent the Apples and Sonys of the world want to pay). Potential new tenants include two Ralph Lauren concepts and Zara.
Much as I am an electronics and gadgets junkie, that is what malls are for. Give me clothes when I am shopping up and down the avenue.
Other than the fact that lenders are having some trouble pricing loans, I guess I don't see the "woe," unless I represent a client that bought a property at a 4 cap who is trying to flip it. The CMBS spreads have been crazy low for a long time, and the freewheeling nature of some of the lending had to end sometime. Maybe I am naive, but what I am seeing here is largely a return to the status quo ante of, say, seven years ago. And I still say that is generally not a bad thing. The price corrections should be temporary so long as rents continue to rise and vacancies continue to decline. Sound fundamentals do not mean woe, at least but to me. Of course if the fundamentals sour combined with a credit crunch, then I may change my tune.
Friday, August 10, 2007
Westfield appears to trying to consolidate its holdings in certain growth markets, perhaps with an emphasis on the Sun Belt. So what about Chicago, which is definitely not Sun Belt? One could point to the fact the the Shops at North Bridge is on the market, but let's not forget that (a) Westfield only owns one-third of it together with John Buck Co. and Morgan Stanley and may or may not be selling its stake (my guess is that it will try to stay put), and (b) Westfield owns five other malls in the area: Hawthorn, Old Orchard, Fox Valley, Chicago Ridge and Louis Joliet. My take? They're going nowhere for now.
UPDATE: for more analysis on the St. Louis side of the transaction, particularly with respect to the JV portion of the deal that I did not discuss, check out David Bodamer's post here and his comments posted below.
Thursday, August 9, 2007
The anonymous Atlanta associate, The Snark, has written a very clever and witty post on fire drills at law firms when corporate deals blow up (free sub. required).
You might say, "How can there be real estate fire drills? The land (or the building, etc. etc.) is not going anywhere." Trust me, there are. Just because the real estate is not there does not mean that there are possible penalties or defaults for not closing on time, or other backup deals waiting for you to mess up, or lenders deciding to draw a line in the sand, or interest rate commitments expiring, or 1031 tax-deferred exchange deadlines arriving.
I've been through more fire drills than I can count. At first they are stressful and even a little scary. Then they become fun and interesting and maybe even -- to the extent it is possible -- exciting. But with time, and especially if you go from one fire drill to the next with little or no break, they become tedious, mind-numbing and question whether you should ave gone to the fire academy instead of law school, since most fire drills rarely leave time to practice much real law.
Unlike my last comment on The Snark, where I didn't agree with much of anything s/he wrote, today's commentary is spot on, with one possible exception. This is the paragraph:
The more common BigLaw fire drill happens when a partner goes into panic mode, either because: a) she is bored (see above) and needs a little excitement; b) she is angry that she was recently de-equitized in order to help the firm pay for associate raises and wants you to earn your keep; c) she suspects that her client’s merger may be blowing up in her face and the (legal) world may be coming to an end; or, less commonly, d) the merger really is blowing up in her face and the world (all of it) really is coming to an end.
I would add an (f): the client either (i) just called wondering why nothing has been done on the matter all week or (ii) has been or is on vacation or has just forgotten to call, and wants to update the partner on all the things that had to be done on the deal by yesterday. Even partners are not immune to client fire drills.
Wednesday, August 8, 2007
I have been trying to learn about how one goes about obtaining a LEED certification. As I understand it, you have to earn "points" based on about a zillion factors, including proximity to mass transit, green roofs, energy-efficient design and so on. If you want to learn more, read about it with me at this site. I find it all quite interesting and I hope to write more about this in the future.
Case in point: Bud Cataldo and Roy Disney's family recently flipped the Amalfi Hotel at a 12% profit in just seven months of ownership. Nice work if you can get it. And the profit could be higher depending on what costs were allocated to intangibles (the profit is based only on values culled from the public records). And if you do the research, you will find this is not an isolated transaction. There was at least one other similar flip in River North last year, IIRC.
Tuesday, August 7, 2007
My take: Perhaps it is, for megadeals and crazy cap rates, but not for the market in general. Okay, these guys may be encountering more resistance than a few months ago in raising $17.1 billion in debt (gee, imagine that -- what is the world coming to?) or lining up some flips to cut the risk. Nor is this necessarily even a bad deal in my opinion. It just means people are not treating deals like Monopoly money right now, and that is a VERY good thing. A delay does not change the fact that there is SO much money in the market for sensible plays. I know that players are looking to make acquisitions, but only if the conditions are right and not nonsensical.
So, if you feel like Chicken Little right now, stop. The sky's not falling yet. Yes, there are clouds and you have to watch for a big storm, but remember from someone who lives near corn and soybean fields that a little rain is good for the crops. (Oh jeez....could that be the most cliche-ridden paragraph I've yet written?)
Monday, August 6, 2007
This is not at all surprising, though the reason here may be different. You don't buy groceries as much of the Web as you do electronics, but efficient supply chains and smaller demographic markets are good reasons to move this trend in to the grocery realm.
The only bad things I see here are: (a) I like large grocery stores myself because of the perception (if not the reality) that you can find more varied product, and (b) developers have to find more tenants to fill space, but that might be at higher rents than you can charge a big box anyway.
But in the Philippines, specifically Manila, mall operators need to plan for space so priests can celebrate Sunday mass. A largely Catholic nation (85%, IIRC), when I last visited Manila I was flabbergasted when I went to the mall and saw Mass being celebrated in the middle of the courtyard! No, church was not held in a vacant storefront (I hardly remember seeing any vacancies)...it was right between stores and you were asked to be relatively quiet while walking by.
I was reminded of this by a recent story I read where Manila Archbishop Gaudencio Cardinal Rosales requested that Mass "be held in the establishments’ chapels or in decent places, even “in a quiet corner” where people could actively participate." Remember however that trips to the mall in the Philippines are practically a national pastime.
Now developers, who are building malls so large that they make what we have here look puny in comparison, are building permanent chapels in their facilities. That is easier to do there than here, again for many reasons, including First Amendment claims, lower dirt and construction costs and increased opportunity costs in a Catholic country where one can argue that the extra cost is justified by the increase in foot traffic. It also does not hurt that the matriarch of the billionaire Sy family, the largest mall developer in the country, is a devout Catholic.
Friday, August 3, 2007
I like to think I know the business end of real estate to get by and then some, but I also know there is always plenty to learn. So I try to take time from my schedule to attend business-side meetings when my clients don't mind my doing so. Of course, I don't charge for my time, because I consider it a good education for myself and a way I can add value for my clients down the road. (While clients are usually happy to have me there in any event, it is even more appreciated when they know the meter is not running.)
One of my clients was good enough to let me sit in on a two-hour development meeting yesterday, and it did confirm that the learning curve on the business side of real estate is almost continuous, especially in this field. I learned plenty about pending deals and changing strategies, and I know it will pay off down the road when I have to jump in on a deal and get it done, if for no other reason than (with apologies to Meredith Willson) that I will know the territory. That's my job, and it is fun, though there are times when the grass looks greener on the other side of the fence....
Thursday, August 2, 2007
This means the building is almost certainly a go. The fact that the venture is apparently being backed by pension funds is also helpful because it makes the project largely immune to tightening in the credit markets. I'm looking forward to seeing this project come online, albeit probably in four years or so.
Wednesday, August 1, 2007
For those of you investors out there that have the tons of cash to buy property and then leverage it down the road, or those who can do deals with a lower LTV, then I think you'll be in a good position to pick up some deals in the near future. Buy now, hold the property and then lever it later when credit loosens again. And it will loosen, sooner rather than later in my humble opinion. Of course, this means not buying property at a 5 cap, as your IRR on an all cash deal might not be as attractive as you want, depending on your investment strategy and goals. But remember that I'm just the lawyer. You figure out the numbers.
Only the higher, view-protected floors are being converted, and again, while there is a glut of condos on the market, this building screams location location location. If you have anything but the purest west view, the scenery is spectacular, and, because of where the building is, that view is going nowhere. And the area itself, right off Michigan near Millennium Park, is hot.
I will be interested to see how they handle the ~45,000 sf floorplates with condos and the interesting shape of the building. It ought to be nice.