Thursday, May 31, 2007

Why real estate in San Diego is so expensive

This is one reason. Good old vernal pools, those puddles that emerge in the spring and bring life to rare species of plants, and yes, even shrimp.

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.

B of A confident about LaSalle victory?

That's what analysts are stating indirectly in the Financial Times today. Thoughts were that the RBS consortium would try to cut a deal with B of A to avoid years of lawsuits and billions in potential damages, but that has not happened. There's a holdback in the RBS offer for litigation costs, and the possibility of insuring the risk also exists. There are perceptions out there that the Dutch judge is to his country what the Ninth Circuit is to the U.S. -- overturned a lot. Looks like we'll have to wait about a month or so to find out.

Wednesday, May 30, 2007

It pays to live in the sticks?

Chuck Newton at The Spare Room Tycoon has an interesting post today about lawyer income. Citing an Indiana study, it appears that, if you are in a firm of five or fewer lawyers, income is actually higher in a small town than a big city practice. Less competition must be the reason. And don't forget the lower overhead of being in a smaller market, including cheaper dirt or lease costs. (I already know this, living in the country and all that.) You know the old yarn: one lawyer in a town will starve, but two will thrive.

REITs for sale....get your REITs right here!

Deutsche Bank has decided to upgrade its ratings on eight major REITs to "buy" in the wake of the Archstone deal announced yesterday. They also opine, "The deal suggests that any short position is vulnerable to a privatization announcement.'' There has been plenty of shorting of these shares because of the subprime disaster and softness on the residential side. So, will we see Simon, Kimco, Avalon Bay, Boston Properties, etc. going private soon? No deal is too big these days, so it is entirely possible.

Tuesday, May 29, 2007

1031 woes

One of my friends and former colleagues agreed with me some years ago that someday, if circumstances did not change, there was going to be an S&L-like scandal involving tax-deferred exchanges under Section 1031 of the Internal Revenue Code. My opinion was that a few bad apples pushing 1031s were not selling their product to appropriate parties; e.g. pushing a tenant-in-common share of a highly leveraged, somewhat risky commercial property on a an elderly person whose life savings were tied up in this exchange. So far, thankfully, no major scandals of this ilk have surfaced on my radar screen.

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.

Blackstone's auction finally comes to Chicago

About time. And again, a sale of a whole portfolio rather than piecemeal sales. This makes sense as a lawyer because you make the buyer take both the good and the bad; if there is some crazy due diligence issue (assuming there is any due diligence period at all), you force the buyer to tank the whole deal over it.

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.

Okay, it's official now

The RBS consortium is bidding $95.6 billion for ABN AMRO, which as you know, includes LaSalle Bank. That's major league money, even for hedge fund managers making a billion a year. (No wonder everyone is going into private equity these days.)

Tishman Lehman JV looking at Archstone

Funny how things change...just a few years ago, in order to stay under the limit of having to draft something called a "substantive non-consolidation opinion" in the CMBS market, deals generally had to be under $40 million. (If you don't know what this is, you probably don't want to know. Suffice it to say it is a complicated, reasoned legal opinion relating to bankruptcy and whether the insolvency of one entity will cause a bankruptcy court to consolidate other entities into the bankruptcy.) That is what I called the "big deal" threshold.

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!

Friday, May 25, 2007

The big question is still unanswered

Okay, Mark Rose, the CEO of Grubb & Ellis, made a bunch of really predictable platitudes about the merger with NNN Realty Advisors. Zzzzzzz. Given that the company will be run from The OC and that NNN will largely control the company, does this mean you are two years and done? Or maybe you move on and take a board seat in Newco as a consolation prize? I'd guess that's the answer, but inquiring minds want to know....

Thursday, May 24, 2007

Sundance Cinemas to West Loop - finally done

This deal had been discussed in Crain's some months ago (and it probably should not have been), but Sundance Cinemas announced today that it will open a facility at the old Fannie May candy site on Van Buren Street in the West Loop. I understand this is the second major tenant to sign up here. This is good for the area, as this development has been long in coming. Now the question is: What's next?

Sorry, Donald -- not buying, at least not from you


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

One more time....

I have to call it quits, but there is yet one last interesting tidbit out there. I just read that Fremont General is dumping its commercial business and a portion of itself to iStar Financial for $1.9 billion. Fremont is a good lender, even if their counsel are a bit nit-picky sometimes (almost all lenders' counsel are), and I hope that continues in whatever incarnation occurs.

More ICSC notes....

Two more quick things on ICSC:

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....


Law firm rumors....


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.

Morgan Stanley/Crescent Merger

This is not really Chicago-specific, and I don't have any insight on which to comment, so if you are looking for info on the Morgan Stanley/Crescent merger, take a look at The Real Estate Bloggers for the scoop.

Nice money, if you can get it

Mayor Daley really wants Uptown redeveloped -- so much so that he's willing to lob a $43.1 million TIF subsidy at a 5 acre project anchored by Target that will create an estimated 200 jobs, or $215,500 per job. While my initial reaction was that this looks awful on the surface, I guess Uptown really needs it, or the area could remain stagnant.

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.

Another example of builders blowing out

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

There goes another Chicago company....

Grubb & Ellis has just announced that it will merge with NNN Realty Advisors, with a closing expected to occur in the 4th quarter of this year. NNN will be the larger partner in this deal, with 59% of the combined company, six of nine board members and the CEO's seat. The company will run out of NNN's headquarters in Santa Ana, California. As I recall, G&E almost merged with CB Richard Ellis back in 2002, but that deal was called off. Assuming the NNN deal closes, yet another good corporate citizen in Chicago is histoire.

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.

Maybe I spoke too soon - Mall convention now as big or bigger than some malls

Perhaps the local downturn rumored to be happening here in the exurbs is just local. Or maybe not. Only time will tell.

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.

Monday, May 21, 2007

Site Shout-Out : The Margolis Law Firm


Thanks to having worked at national law firms and with the assistance and guidance of many able local counsel (email me if you need a referral to one of these fine people), I have worked on deals in, at last count, 37 states.

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.

It might be, it could be...a little slowing down?

I was meeting with a client yesterday, performing one of my regular legal check-up sessions for them and making sure all their needs were being met. We were speaking about the real estate market, and I was warned of two distressing signs. The first is a big decline in retail traffic locally, especially in local restaurants. (I don't think much is attributable to simply having more choices.) The other is a rumor that some local builders are pulling up their stakes down here and calling it quits: That's right. Not just slowing down construction or cutting hours at the sales center. We're talking shutting down and selling the models. Again, there's no confirmation of this yet.

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

Fund of Funds - an Asian gambit

Here is some excellent analysis on fund of funds (free sub required). The gist of the story is that while fund of funds can be an excellent vehicle, Asia may not be the place to put it because there is so much money chasing deals.

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.

Hey, Bruce -- you sure weren't kidding!

When I mentioned last week that Bruce Kaplan thought seed changes were occurring on the Mag Mile, I believed him. (I don't always do so, but this time I did. Nothing personal, Bruce.)

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

Get out your checkbooks

New York City and the MTA (which owns the dirt) are putting the Hudson Yards up for auction. But the yards, at 11th between 30th and 33rd, are not going anywhere. So this will be an air rights deal with a billion dollars worth of platforms on which construction will commence, a number of which we have seen in Chicago. Bloomberg's vision is to turn the yeards into the next business district -- another Rockefeller Center.

Assuming it ever gets done, this is going to be one expensive, challenging and LONG project. One has to coordinate with trains, deal with platforms, drill caissions between tracks...oh, man, the engineering will be insane. And it'll be interesting to see whether the old High Line El, which is to be converted into an elevated park, will survive. Developers will not want to deal with that, too.

You might be able to make a career out of one deal. If you think this 12.3 million sf project will be done in ten years, let me know what you are taking and send me some. Fifteen or twenty years may be more realistic.

Tuesday, May 15, 2007

Thoughts from the Road

I am on the road most of this week, so posting will necessarily be sporadic. I'd like to share some thoughts on the dirt world while I driving through this beautiful land of ours (and paying through the nose for gas for the privilege):
  • 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!
Enough. Posting frequently is one thing, blog obsession is entirely another.

Monday, May 14, 2007

Michigan Avenue Blues

Chess Records may have been at 2120 South Michigan Avenue, but today North Michigan Avenue is where people are singing the 8 and 12-bar riffs. That's right, the unthinkable is happening: large chunks of space are opening up on and near the Mag Mile.

Today I agree with the ubiquitous and eminently quotable Bruce Kaplan about this having a "profound impact" on where things may be going. In a way, it may have started years ago with the 700 N. Michigan Shops, which never really took off the way people expected. (The tenant mix was just never right for me, and I only went there for the food court. Maybe Best Buy will help.)
The Water Tower space not being taken by American Girl, while large, will rent out, and for more money than was being paid. But the existing American Girl and the CompUSA spaces, which technically are off Michigan but important nonetheless, are more problematic. And more retail space is coming, including at Trump Tower.

I don't think this will affect rents greatly, either. But the trend I find disturbing, just like the big box trend on which I recently commented, is the cannibalization of existing space. For instance, in the linked story, Gene Stern of Swiss Fine Timing is mentioned. As I recall, Gene actually came into that space in 2004 through a sublease with Ferragamo, which rented that space and and other space that it decided to sub out.
I have two concerns here. One is high end retailers cutting back on sales space to the point that they are not carrying full lines of merchandise. (What is Ferragamo now -- 1/2 or 1/3 the size it once was?) The other is that so many small tenants may clutter up the area with doors and that it will detract from the beauty of Michigan Avenue. I know it was a big issue three years ago when we negotiated the Swiss Fine timing sublease, because there would be three storefronts in what we thought was a very narrow space. It turned out that it worked out beautifully, and I think the architects and designers did a magnificent job making the area look great. But that won't always happen, and landlords need to be on the lookout when working on their leases with respect to assignments and subleases, megarents notwithstanding.

Friday, May 11, 2007

Poor Frank Gehry


I mentioned recently that the Inland Steel Building is going on the market. Well, renowned architect Frank Gehry is none too happy about it. He apparently took a 3% stake in the building without using any of his own money (but lending his name to the deal), and now he does not want to sell.

I've never been a fan of this building, but I can see how it is significant, and I guess I understand Gehry's attitude. He loves the building and wants it preserved. Apparently he plans to donate his share of the proceeds to charity, perhaps because he considers it blood money.

As for me, I will make a public statement to Harvey Camins right here, right now: If for any reason you want to add my name to a deal (after all, once you labnr it, how can you forget it?), I'll do it for 2% of the deal, and I won't complain when you make me a couple hundred large for my "effort." Of course, I don't design bandshells in Millenium Park that look like an explosion occurred inside (a pretty explosion, granted, but an explosion nonetheless).

Thursday, May 10, 2007

BULLETIN - Fast Eddie Indicted

Just as I'm ready to head out for a quick nine holes, I learn that Ed Vrdolyak was indicted over his role in the old Dr. Scholl School of Podiatry building deal on the Gold Coast in 2004.


As I recall, there were higher bidders such as the Newberry Library that were shut out of the deal in favor of Smithfield Properties, and Stuart Levine is apparently singing about it.

Here are the Tribune, Sun-Times, CBS, NBC and Crain's links.

Private equity, privately traded

Now this is a twist. We've been reading about private equity funds raising money in the public markets through offerings and such, but Oaktree Capital Management is trying a new idea: raise $700 million, but to so through a private trading market being developed by Goldman Sachs and called the "GS Tradable Unregistered Equity Market" or GSTrUE. Nice move by OCM. Raise money, give up basically no control, and no dealing with the BS of a public offering while offering the possibility of liquidity. Heck, I'd consider buying a little of that action. (Note to self: find $100 million, the minimum you'll need to get into the action.)

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.

Welcome to Small Box Leasing


A common phrase heard in the leasing business is a "big box." For those of you not in the business, a big box is like obscenity for the late Supreme Court Justice Potter Stewart: you know it when you see it. It is a large format retail outlet that varies in size depending on the industry. Wal-Mart? Big Box. Target? Yup. Borders or Barnes and Noble? You got the picture.

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

Young Lawyer Salaries - a boom or a warning sign?

Wow. Young BigLaw associates are now really turning into loss leaders. $160k is starting to become the new standard for fresh law school grads. That's fine on the face of it, but the consequences down the road are potentially scary. Why? Clients, most of whom are looking to save money, are eventually going to revolt.

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.

All these strikes = opportunity?


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

TIFs - a worthwhile pain in the neck


Let's face it: Tax increment financing (TIF) deals can be no fun at all. (But they can be profitable for a lawyer jumping through hoops, and you have to keep jumping through them for the life of the deal.) But this form of financing is often what makes or breaks a deal, or at least so developers will tell you. And that's just what Walton Street Capital is telling the city as I type, as it seeks $51 million in TIF funds for the Old Post Office.

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

Why am I a real estate lawyer...

...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.

I'm not a divorce lawyer because I can't do the over-the-top things that some divorce lawyers are known for. A particularly egregious example of this is the above ad, created by a law firm that will, in this blog, remain nameless unless you can read the small print. Ads like this just contribute to our profession's sinking status and bad name. This is not "cutting edge." It is pure exploitation. For shame.

I'll give these people one thing: they know their dirt. The ad is located in the heart of Chicago's Viagra Triangle.

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.

Various interesting deals


The Retail Traffic Court Blog has a couple of tidbits that I found interesting. The first is on the conversion of the former K-Mart HQ in Troy, Michigan to...yes...a mixed-use lifestyle center. No word on whether there will be a K-Mart or a Sears in the center.

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.

The conundrum of impact fees hitting home

I saw a letter in yesterday's Kankakee Daily Journal from Joe Perry, a big player in local development down here and I guy I know casually through golf and the business in general. Joe does some very nice work, generally in the far south of Chicagoland. I should add that Joe took a risk in writing this because what he says is, to some extent, not very pretty, but I agree largely with what he says.

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.

Okay, the brakes are on

And the M&A guys can slow down a little. The RBS-led consortium offer is, of course, rejected as being insufficient and risky, the board is going to let the shareholders give their views in due course, and now there's litigation with B of A to resolve, litigation that will probably be too material to allow a closing to occur. Heck, the LaSalle Bank Chicago Marathon may even have one last hurrah in October the way things sound this morning. Maybe this gets resolved by each bank cherry-picking assets. The problem there is that LaSalle is the asset worth fighting over.

Saturday, May 5, 2007

Looks like the Feds are on to some people

Saw this story online last night, but I didn't feel like writing about it. The light of a beautiful day has made me reconsider. I don't know, nor have I ever met, any of the people mentioned in this article. And Broadway Bank, owned by the family of our young state treasurer, is mentioned though not implicated at this time. But it sounds like some people are going down for the count, and Tony Rezko (who is already under indictment and has pleaded not guilty) may be just the tip of the iceberg.

Friday, May 4, 2007

Not holding my breath or whistling Dixie in Harvey


Funny how elections can create false optimism. Even in the run-up to the election last month, Harvey Mayor Eric Kellogg was hailing John Deneen's effort to develop Dixie Square Mall into a power center. (Yes, this is the mall where they filmed the car chase in The Blues Brothers.) Problem is, according to deadmalls.com, it looks like demolition halted last November.

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

Rating agencies taking a stand

Yesterday's New York Times reports that the rating agencies are fearful of too many risky loans coming into the CMBS market and that they will adjust their ratings accordingly. They are concerned that lenders are becoming too lax in underwriting.

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 winner for LaSalle? So far, lawyers

I guess this is no longer a real estate matter, but because LaSalle Bank has been such a major player in mid-market lending (not to mention its role as trustee in the CMBS market), I am captivated by what is going on.

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

Fixed fees, fixed costs, fixed income - a win-win?


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.


What do you mean by "Back in the game?"

First of all, the headline is a misnomer. Former EOP chief Richard Kincaid is not back in the game, he's in the process of getting back into the game. And he will, and he'll succeed; he's a talented guy.

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

Im Westen Nichts Neues

Yup, all quiet on the western front so far, for the most part. Zell and Sternlicht had a nice chat (well, okay, they got into a little bit) this morning about the EOP deal. But we all expected that. Barry put Sam on the defensive over the way the deal one was done, and Sam parried, calling it a "godfather" offer that could not be refused, especially since it was one sans broker commissions.

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....

Breaking News from Delaware and Michigan?


Probably not. But I have to get some feelers out this afternoon to see whether any interesting thoughts come out of DLA Piper's big real estate summit at the Four Seasons. The speaker list is a literal Who's Who of the business. I think I know why residential is in the tank while commercial is booming but I'm hoping the speakers confirm (or deny, for that matter) my suspicions.

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.


It's about time

If you look at this deal on the surface, it looks like another garden variety retail transaction in the south suburbs of Chicago, and yet another indicator of the growth of LA Fitness in that area. (They just built a huge location in Tinley Park next to the convention center, on land at 80 and Harlem that is highly visible but lacking the land and great access that you need for major retail.) Oh, and personally $30 net for strip tenants seems a little high to me.

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.

 
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