I think an average house in America's Finest City is over $700K these days. Granted, there are other reasons for expensive housing, but CEQA is one reason for sure.
Thursday, May 31, 2007
I think an average house in America's Finest City is over $700K these days. Granted, there are other reasons for expensive housing, but CEQA is one reason for sure.
Wednesday, May 30, 2007
Tuesday, May 29, 2007
But the WSJ over the weekend notes a different problem: at least two good-sized 1031 exchange accomodators (in other words, the party holding the money for up to 180 days while the person wanted a tax deferral figures out what to do) have been allegedly misappropriating funds, running Ponzi schemes or otherwise losing peoples' investments. (Again, at the risk of sounding like a lawyer, these are all allegations). I sure hope these people get their money out, and it looks like the IRS is watching over this situation and will hopefully be lenient to these taxpayers.
I remember a client asking me if I could be the exchange accomodator. Nope. That is not allowed, though I have heard rumors of situations like that occurring notwithstanding the prohibition. What would I do if I were 1031ing funds? I'd use a company that is affiliated with a bank or a title company and has significant experience with 1031s.
Is Chicago just a less-hot market, is this just the plan or were there behind-the-scenes issues? I don't know. All I do know is that the prices will be too high for many opportunistic investors and that I agree with Crain's that there will be a second round of flips to still more people playing parts in this feeding frenzy. Nor does it mean the frenzy will last forever.
Now we are seeing yet another possible 11-digit deal. At this rate, anything under $1 billion will be a small deal in a few years. Have fun, everyone!
Posted by David at 9:11 AM
Friday, May 25, 2007
Thursday, May 24, 2007
Posted by David at 1:00 PM
The Tribune reports that The Donald and his brood are in town trying to pump up sales of Trump Tower Chicago. I love it. I'll give him this: Trump is a master showman. "[I]t's a great time to buy in our building because we aren't raising prices." Classic.
Apparently, roughly 1/4 of his units remain unsold, and I'll bet a nickel the building is approaching the break-even point, where the revenues from sales are sufficient to cover the financing and hard and soft costs, after which making each additional sale is almost pure profit. Thus the heavy push.
We'd like a little pied-à-terre in the city, but there's no way we'll ever buy from Trump. I wonder if buyers are starting to have some cold feet, as is sometimes the case on projects like this. (See generally the whole state of Florida.) Other potential buyers may be waiting to see how the Spire, a much more interesting and exciting building, will turn out. Still others may be waiting to buy after completion on the secondary market, in the hopes that they can avoid the typically one-sided deal in favor of the developer.
So why do I have absolutely zero sympathy for Trump? This is why.
Wednesday, May 23, 2007
Posted by David at 5:29 PM
1. The Wall Street Journal had a mixed bag article on shopping center growth in today's edition (sub. required). While the headline talks about signs of a boom, there is also concern about too much money chasing deals and owners preferring development deals to buying existing property, presumably because cap rates are so low. And even the CMBS guys, apparently, are worried about their conduit loan portfolios, perhaps because rating agencies are tightening the screws.
Interestingly, this blogger thinks that commercial real estate is destined to go "over the cliff" soon. I respectfully disagree, if for no other reason that, unlike residential real estate, the US commercial market is world-wide. And outsiders still see our dirt as super-cheap. (I hope I am right, of course, if for no other reason than I like being busy.)
2. Department stores are feeling the pain of the new big trend in shopping: mixed-use projects. Fine with me. Anyone in the business knows that, when doing a regional mall, the anchor stores can be the biggest pain in the posterior imaginable. The key issue? Control, of course, particularly regarding parking and tenant mix. My former colleague, Sheldon Halpern, stated that the big guys just can't get the control they are accustomed to anymore because of multiple owners. I also think part of the issue is that the big retailers are more like 400 pound gorillas these days, and certainly not 800 pound ones. I'm sure you can tell I am just weeping....
Posted by David at 5:05 PM
The word on the grapevine is that Lord Bissell & Brook, an old-line Chicago firm, is merging with Texas-based Locke Liddell & Sapp. This should be a good move for both firms. Lord Bissell is not known for a big real estate practice here, but I did do a deal with them late last year. Locke Liddell, OTOH, has a large real estate presence in Texas. And they pay well, too.
It will be interesting, as always, to see what the post-merger fallout will be, especially if the service partners are going to be shown the door. The LA office of Lord Bissell was actually one of my original choices when I was interviewing as a law student. It turned out not to be a fit for me at all, but what the heck did I know back then? I wish them all well.
One good thing about the project is that it will throw off 178 units of affordable housing, which is well-needed. Meanwhile, Target's profits are up 18% in Q1, beating analyst estimates by $0.04 a share. Of course, TIF funds notwithstanding, this doesn't mean the project is a done deal, especially if the City Council decides to revive the big box ordinance. Da Mare has already warned the incoming Council that this is, at least for him, a non-starter.
William Ryan is in court with one of the Inland Group's affiliates over $500K in earnest money. Ryan decided to bail out of a development project in New Lenox, which until recently had been a very hot market. Inland won't agree to release the earnest money. (Apparently it is holding the money instead of a third party because no escrow agent is named in the lawsuit according to the Cook County Circuit Court file.) The story on the Inland/Ryan dispute reminds us that developers have sold 35% fewer homes in Q1 of 2007 compared to 2006. Ow.
Tuesday, May 22, 2007
Interestingly, both companies went with firms I didn't expect to see. NNN used Atlanta-based Alston & Bird, which is not too surprising since they are a BigLaw firm. G&E, instead of relying on anyone locally, went with Zukerman Gore & Brandeis, LLP, a relatively small (but from what I understand, excellent) Manhattan firm. As a small firm guy myself, I'm pleased to see good small firms land great deals.
Posted by David at 2:42 PM
What I can tell you is that the ICSC convention in Las Vegas is booming this year. The Retail Traffic Court Blog reports this morning that there's two million square feet of space in the Leasing Mall -- up 500,000 sf from last year -- and an estimated 55,000 attendees, which is 10,000 more than last year. If there's a slowdown, these people will have nothing of it.
One of my clients just reported in to tell me that they are booked solid with meetings every half-hour for the next two and a half days. Granted, they own some very hot property in a very hot market. It will be interesting to see what comes out of this.
My analysis? I don't live in a hot market, but I work in a very hot market. I think there may actually be a slowdown in some sectors, but I also think, based on the attendees and the deal-making going on, you will just have more people chasing the hottest markets. Deal flow will either be very hot or cold, with not much luke-warm. This is definitely worth watching with time.
Posted by David at 9:33 AM
Monday, May 21, 2007
One the toughest from my experience is New York. Not only is a plain dirt transaction completely out of my box, but even leasing can be different in that you have, especially in Manhattan, some standard forms that can really tax your patience not to mention your eyesight.
In any event, I finally got a chance to look at the website (currently under renovation, I'm told) of Jeff Margolis, principal of the Margolis Law Firm. I've looked at Jeff's materials and articles
in the past on the DIRT website and have found them useful. You probably will too. Check the website out, and check Jeff out, too.
Posted by David at 12:13 PM
I knew there was a housing slowdown, but a pullout is entirely another thing. It basically says: "failure." Eventually someone will have to build there. Heck, there's no place left to go when people are commuting as far as they are these days.
On top of that, you have retailers finally slowing down in new construction efforts. Crain's, as usual, is right on top of things with this report today coming from Mid-America. Case in point: Mid-America and The Daly Group are developing a strip center down the road from me anchored by Kohl's and, eventually, Super Wal-Mart. Other than tenants cannibalized from the mall or existing strips in town, there are no new tenants -- just the retreads that leave other space empty. Note: Buffalo Wild Wings has started construction on a pad, and the developer is optimistic about signing other national tenants to leases and pad sales. So all is not lost; it is just slowing down somewhat.
Does this mean a complete stoppage? Nope, thank goodness. Hot markets will stay hot, such as those in the city. And the report does indicate a continued growth interest in groceries, fast food and the like. And residential and commercial real estate are two different ballgames altogether, which is why I do not do house closings. (Call me if you need a referral, or get a hold of fellow blogger Peter Olson.) But others may be less likely to have the feeding frenzy there was. And maybe we can start slowing down a little and doing deals with a little more diligence and care.
Saturday, May 19, 2007
In short, "the amount of capital targeting the relatively immature Asian market leaves a lot of questions open about the returns that can be achieved. Investors may be happy to gain access, but they shouldn’t necessarily expect a golden panacea on the other side of the door."
Bingo. There's still something to be said for good old fashioned fundamentals, both on the business and the legal side. I won't speak for the former, but as I've said before here, you sometimes barely have the time these days to do so on the legal. What I like to do here is, if possible, perform my due diligence while the contract is being negotiated or even during the bidding process, if such material is available. Clients will spend a little more cash up front, but at least the surprises may be fewer and farther between.
Posted by David at 6:38 PM
But on top of all the other vacancies, now we have Virgin blowing out of its location on the Avenue? The good news is that there is already a replacement announced in Forever XXI. But that, like H&M, is not much of an attraction, at least for me. (I guess I have to start facing the fact that I am no longer in the target demo for that area.) I always saw them and H&M as more State Street kind of places, but they are both on the Mile now, too. This is also a testimony to the continuing death spiral of retail music stores, as exemplified by the demise (and online rebirth) of Tower Records chronicled here previously.
Thursday, May 17, 2007
Posted by David at 8:49 AM
Tuesday, May 15, 2007
- Land is cheap in some mid-sized cities. Some companies have already taken advantage of it, and many employees are happy about it, too. I wonder if the predictions of the Net eventually making offices largely redundant will ever be a full reality. They might, but probably not for 20 more years until Gen-Y and the current generation are running things.
- "Minnesota Nice" also extends to Iowa and the Dakotas. Were we all so good to one another....
- Retail and hospitality is booming, even in small towns. It is more evidence that we are becoming a service-based economy (and even a tourist one in many places as more and more people are here from Europe to take advantage of the cheap dollar), and we should just face up to it.
- I just spent a few nights at an interesting concept: Two hotels under different flags with a water park in the middle. Presumably they all have the same owner, or there are some very happy lawyers who earned a lot of money figuring out all the issues that were associated with any co-ownership or with multiple owners. Either way, the lawyers still made money working on the franchise agreements, which had to be custom-tailored to deal with the two flags under one owner and the water park, and then there were the more routine legal issues associated with the dirt. This is a project, as a lawyer, that I would really have enjoyed!
Posted by David at 7:46 AM
Monday, May 14, 2007
Friday, May 11, 2007
Posted by David at 1:18 PM
Thursday, May 10, 2007
Posted by David at 2:16 PM
While I am bringing up this here, in a real estate blog? Two reasons. This private market could be a trend that other firms might build on to raise capital with less hassle, and Oaktree has a small but rather significant real estate portfolio. In fact, OCM just hired John Brady of Colony Capital to head their real estate operations following the departure of Russel Bernard (before you ask: my spelling is correct, that of the story in the link is not) and all the senior folks save one last year to start up Westport Capital Partners LLC. Russ and his team are raising money for their first fund, and I'd be shocked if they do not do phenomenally well.
There's been a trend, as markets fractionalize and retailers try to penetrate other markets, to experiment with smaller concept stores. Wal-Mart, Lowe's, Home Depot and OfficeMax are among the companies trying smaller stores, as the Journal points out today. (sub required). But Best Buy and Circuit City are taking this one step further, opening outlets that are dramatically smaller. 45,000 sf stores are now 30,000 sf stores, and 34,000 sf stores are 20,000. And fewer products are being sold in these stores.
Why? Well, the Web is one big reason. Another is the decline in sales of CDs and music, which can take up a good chunk of floor space. Still another is more efficient distribution systems. And yet another is the ability to maintain decent sales per square foot that will justify opening in small or fractionalized markets. Assuming the trend continues, what it also means for investors is that they will have to chase more tenants in some developments to fill box space, and that they will not be able to expect as much cash from these projects.
But these stores can also fill in gaps and be boons. Case in point: our local Best Buy, which is in a closed Toys' R Us. It is not huge but it gets the job done, and I like going there. Of course, I should also tell you that the only electronics I bought there are (a) the PC on which I am typing and (b) my home theater speakers. All our other electronics were bought on the Internet, mainly because the higher-end products we sometimes seek just are not in stock and can be bought online for much less money and without sales tax.
Wednesday, May 9, 2007
Patrick Lamb hit the nail on the head today. Increased salaries = increased billing rates. And it will hurt, even in real estate deals, as clients will pay to have their young associates learn on the job about due diligence and the like. It also sends a message that alternative billing options should be looked into.
Nothing against these very smart and talented young attorneys, but if you are a real estate professional reading this, who do you want working on your deal for $350/hour - a young or even mid-level associate, or a seasoned attorney who happens to be at a smaller firm with less overhead (and who, by the way, will do the work in less time thanks to experience)? (Actually, sometimes the right answer, especially on due diligence, is a senior real estate paralegal who is often the person training the associates and sometimes even the partners!)
Right now, the big clients are sticking with BigLaw (and rightly so sometimes on some deals because of the bodies necessary to close portfolio transactions), but I think others are starting to hedge their bets and that you will see more of that if this salary/billing rate trend continues.
Case in point: One of my friends left BigLaw for a small firm some years ago, lowered his billing rate by $100/hour and has never been happier -- or busier.
Posted by David at 11:25 AM
I noticed that the Inland Steel Building is back on the market. As Tom Corfman rightly points out, "Only in the current environment could a building in less than two years lose its largest tenant, accounting for about a fifth of the space, but see its value jump by more than 20%."
This building has strikes against it: age, somewhat small floorplates for me (12,000 sf) and a 22% vacancy rate. I don't know if there are significant landmark issues to deal with, though I doubt it. But there's also opportunity in that the vacancy rate means you can chase significant tenants. Still, projections of up to $285 a foot for the building are awfully high, but hey, if they get it more power to them! In this market the sky is still the limit.
Tuesday, May 8, 2007
Is it true? Maybe. I won't speculate. The staff report apparently says the project will not get "reasonable rates of return" without TIF money. Does that mean institutional rates of return or Walton Street-style rates of return?
By the way, if you want to know more about TIFs take a look here. You can also learn about the positive aspects of TIFs there. If you want an opposing view on TIFs, however, look here.
Monday, May 7, 2007
...and not a divorce lawyer? This is one big reason. I have a counseling background and was once well read in psychoanalysis and things like that, and many of my friends have told me I'd make a great divorce lawyer. I've also been told I'm empathic and extroverted, traits supposedly not common in attorneys.
UPDATE: the sign has been taken down for failure to have a proper permit. Of course, the lawyers got their publicity, and there's no such thing as bad publicity. Kudos to Alderman Natarus for his efforts. It is nice (though not surprising) to see he is still working hard even though he is leaving office.
The other story was about Tower Records living on like Montgomery Ward on the Internet, but also possibly reviving as bricks and mortar someday. I loved going to Tower on Sunset Blvd. when I lived in LA. It is hard to believe it is gone.
Why is the letter being written? There's a big fight down here about impact fees and development and the use of tax increment financing (TIFs, in the biz) to stimulate commercial development. The most recent issue relates to the expansion of Bradley-Bourbonnais HS. A second straight referendum to raise school taxes recently went down to a more than 2-1 defeat. More portable classrooms and probably split shifts are inevitable. (I have strong views on this topic, but this is not the time to share them.)
Joe rightly lambastes those who are not in the know about a dearth of retail development where we live. Joe says, "The demographics of this market fractionally support commerce at a greater level than what is already provided." My translation: the Kankakee area does not have the demograpics to support more retail without cannibalizing what is here. Some retailers are simply not coming here until there are more people and higher median incomes. Once you have that, they will come regardless of taxes and fees.
Joe says developers here pay "significant" impact fees. I'm not sure I agree with him there, but he may be able to convince me otherwise, as I am not an expert in any local market. There are fees, but they pale in comparison to some other places where I have done deals. And some fees, such as building permits, are thought of by some (including the Mayor of Bourbonnais) as impact fees when they are, in fact, not.
As a taxpayer I don't want to finance most or all of the burden myself, but I also want good schools, which are critical to proper and sustained growth. And as a lawyer who represents developers, I don't need the additional expense passed on to buyers or tenants or have my clients eat them, thus marginalizing many transactions. Finding the balance is the hard part, and I admit I don't have the solution.
Finally, Joe is spot on when he says that "The Journal's suggestion that the developer of Bradley Commons is irresponsible in his lack of success in attracting outside retail investment should be replaced with an apology from the community that the local marketplace cannot meet the hopes and expectations of outside investors who depend on dynamic growth for reasonable success." Bingo. I don't really know Daly Group, but I do know the Mid-America guys, and they are first-rate retail people. My clients have leased up several projects with their help. Don't blame them for our demographics.
So we have a conundrum -- really almost a Catch-22 -- similar to one I experienced first-hand as a kid in Bolingbrook, where the 7,500 population of 1971 is now more like 70,000 in 2007. Here's what happened in Bolingbrook, intentionally or not. Growth went on for years with tax breaks and little or no impact fees in place in order to reach a critical mass where there was enough population to demand more development, even if the incomes were below that of neighboring areas. The schools and some (but not all) services suffered a little. Many Bolingbrook kids had to go to Romeoville HS for 20+ years.
At some point tax breaks became unnecessary as demand outweighed supply, and retail flowed in. Then higher-end developments started flocking to town, bringing with them higher residential tax revenues. And a few years back, the voters passed a referendum for a new $100 million high school (resulting, I should add, in a tax increase) by a 2-1 margin. And people there are generally happy.
What am I trying to say after this really long post? There is no easy solution. It may well be decades before everyone has what they want. So, if you live where I do, be prepared for a bumpy ride.
Saturday, May 5, 2007
Posted by David at 1:04 PM
Friday, May 4, 2007
The Tribune is reporting today about the plethora of problems facing development, including over $1MM in contractor liens, a foreclosure action on the dirt, criminal allegations, asbestos removal complaints...you name it. The Daily Southtown also reported on this issue a month or so ago (typical south suburban coverage by the Trib, if you ask me.)
Kellogg was, by the way, elected for another term, notwithstanding accusations of impropriety being made by the Southtown on his part in running the town. Conveniently, it took the village a year to find certain records, which were released three days after the election. I guess I would like to hold my breath, come to think of it. But for how long?
So much for the "miracle on Dixie Highway," at least for now. By the way, the 57 acres that have been sitting vacant since 1979 were sold originally to Deneen for $500,000, or less than $8800/acre. (A fair price given the demo, land values in Harvey and the asbestos remediation necessary.) Will anyone even pay that now? Nope. Unless that miracle that Mayor Kellogg spoke of occurs, I'm betting perhaps five to ten years down the road before something will happen there.
Thursday, May 3, 2007
The difference is, as the story points out, that unlike residential, defaults are at an all-time low. And money keeps pouring in from private equity and foreign markets. (You see a little of that in the residential market, with Europeans buying houses here because they are so relatively cheap.)
There has been a lot of money chasing deals, resulting in some lax underwriting and cheap money. And a lack of equity in the game is always troublesome, especially in a non-recourse deal. But I don't think we have a full blown crisis here. Unlike the residential market, there's no sign of the train even slowing down let alone stopping, at least on the acquisition front.
There are two scary parts to this, however, that could be of concern. One is a decline in demand that some (but not all) brokers are seeing. The other is that "Huge deals are being concluded with great haste, leaving little time to research the buildings thoroughly....Macklowe Properties, a Manhattan company, took only 10 business days to complete its $7.25 billion purchase of eight Midtown office buildings that had belonged to Equity Office Properties before Equity was sold to the Blackstone Group in what was then the largest leveraged buyout ever. The average annual rent for the buildings is $55 to $59 a square foot, but the deal was underwritten with projections of future rents of $100 a square foot or more."
Wow. I have to question the value, and two weeks to do a deal of that size just isn't sufficient to conduct any due diligence unless the buyer relied on any diligence performed by Blackstone in the EOP acquisition. That's neither due nor diligent.
The Dutch courts have frozen the sale of LaSalle, citing the requirement that its shareholders approve the deal. which opens up the possibility of more bids for ABN AMRO as a whole. It is also likely that Wachtell will be let loose in the US courts to claim $220 BILLION in damages from ABN if it pulls out of the deal. I can only imagine Wachtell's fee for that baby.
As I recall, the Dutch courts also held up the sale of Urban Retail Properties Co. by Rodamco to Simon, Westfield and Rouse a few years ago, but that sale was ultimately allowed to go through. Interestingly, Ross Glickman eventually led a management-led buyback of that company, while Rodamco is about to be acquired by the French. I don't really know Ross at all, but I know most of his senior team quite well, and they are a first-rate bunch of managers and people.
Wednesday, May 2, 2007
The Wall Street Journal had a good feature today on law firms and alternative billing arrangements. The billable hour still reigns supreme, but big firms and companies are starting to get the hint when it comes to flat-fee billing arrangements; namely, that it can work out well for all. Here's the link for you subscribers.
I like flat fees, especially in real estate. The hard part is figuring out a flat fee for more complicated mid-market deals. (The largest portfolio deals can, in my view, be treated like a corporate deal.) Just charging a percentage of the dollar value does not always work because sometimes, the bigger the deal the easier it is. I've worked on $10 million transactions that took twice as much time as $100 million ones. But certainty is a good thing all the way around. Clients like fixed costs, and lawyers like knowing there is set income. It will be a long time coming before we see the end of the lawyer's most dreaded companion: the billable hour.
There have been niches in our field where flat or blended fees have been the norm for a while now. Residential lawyers charge flat (and really low, much of the time - I've seen $195!) rates for house closings, and routine retail leasing is often done at a flat rate. With a little bit of thought and perspiration on the front end this can be translated to other real estate transactions as well. But I also think attorneys have to be ware about getting lazy in a flat fee arrangement. You still have to work hard for the client to get the job done.
The hardest part of the equation is making sure neither the client or the firm is completely hosed by the flat fee. If things get out of hand or the deal tanks there needs to be an understanding as to a breakage fee or a true-up for an extraordinary situation, which takes some of the certainty out of the equation but also allows for fairness. At the end of the day, though, clients and attorneys need to trust one another in a long-term relationship and realize that, if both sides look at things fairly, things will even out. No such trust? Then no flat fee.
Given his comment yesterday at the Four Seasons that public companies are likely to continue to lose talent to privately-held funds, my bet is that he'll go to private equity or start his own fund, although you never know. I think there's at least one major IB opportunity out there in New York, so maybe that opportunity is out there if Kincaid desires. If I were him, I'd do my own fund. Being your own boss, regardless of where, is a good thing.
Tuesday, May 1, 2007
They also told us what we all know about CRE as alluded to in my last post: foreign money finds US real estate cheap. Private equity is fine because they turn public again and keep REITS going. The next president is irrelevant unless s/he starts tinkering with the real estate or REIT market. Regardless of who it is, there will be some turmoil. Spring 2009 should be interesting....
I did not even try registering, although in hindsight I probably should have called some people I know to get in and listen for myself. Of course, it is not like I want to fight the immigration rally traffic anyway, and I'm sure I can get a day's worth of information distilled into a two minute blurb from a friend. Then I can pass it along to you.
What makes this otherwise ordinary deal so interesting is the amount of time it took to get done. This land was first in play around 1999 or 2000, as I recall, and even then Home Depot was the anticipated anchor. The village was very hot to get the site redeveloped, to the point that, as I recall, there were even veiled statements made about a Kelo-type taking of the land. Ten years to get a mid-sized, two anchor strip done is a bunch of time especially with the same major players. HD clearly wanted the site.
Everyone knew the deal would get done eventually, as the seller has a great new facility out in Matteson, which, alas, sits alone in the middle of a huge tract of land that ought to be a great intermodal park. (Come on, Shaw Company -- get it done! You are going to get passed by. Trust me, I know what's going down in the area.) So the seller gets what it wanted, the buyer is happy and you'll be getting some good retail in an area that really could use it. Patience = win-win.