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.