The New York Times had a good piece on the five year anniversary of Kmart buying Sears and becoming Sears Holdings. At the time, I said that Edward Lampert's acquisition of the retailing icon was as much a real estate acquisition as it was a retail deal.
Unfortunately on the retail side, the attitude of many people is, as the last sentence of the piece states succinctly, “Honestly, I’d rather go to Target.” Sears and Kmart are still doing poorly, and many think the future -- if there is one -- lies in the Sears strategy of trying to become an Amazon.com style retailer. (Go it its website with all the amalgamation of other sellers there and you will see what I mean.) Apparently Sears Canada is the company's saving grace.
The fallback point? Dump the dirt at some point. But given the current market even that isn't so attractive according to some analysts, and that makes sense. For every hot Sears or K-Mart location, according to analyst cited in the Times, there are three other locations that have four legs and bark. And that does not include the specialty stores such as Sears Hardware, outlets and the like. Perhaps the big buck stores can make enough money, but don't be surprised if there is ever a big liquidation of locations, you see a lot of empty or re-purposed stores. Given the co-tenancy clauses you see in many leases with national retailers, this can have a domino effect on shopping centers.
But that all puts the cart way before the horse. (Nor am I convinced this analysis is correct.) Many people had Sears Holdings dead a while ago, and they've hung on this far. One or two hit brands or lines (such as apparel, which I thought they figured out by buying Land's End some years ago, but I was wrong) can revive sales -- which are needed given a decline in its traditional dominance in appliances -- in a hurry, and that Chicago-based lady can be humming a happy tune again.
Wednesday, December 22, 2010
The New York Times had a good piece on the five year anniversary of Kmart buying Sears and becoming Sears Holdings. At the time, I said that Edward Lampert's acquisition of the retailing icon was as much a real estate acquisition as it was a retail deal.
Posted by David at 9:00 AM
Thursday, December 16, 2010
I could not resist the old Disneyland ticket system analogy in thinking about the Chicago market right now. (For you younger folks, search the term and you will understand.)
The great news in Chicago? Two trophy properties are trading. The Hyatt Center is under contract to
The Irvine Company (Billionaire Donald Bren is the long time head of TIC) at what is understood to be just over a 6-cap, or $625 million/$419 per square foot. I suppose that is not a B-ticket price for that great property. Then you have 353 North Clark trading from a Mesirow/Friedman Properties venture to Tishman with a purchase price, they say, of $385 million/$321 per square foot. The difference? Well, while I like both buildings, Hyatt is perhaps better located, but even more important is that little detail of a $374 million construction loan at Clark Street.
So, does this mean we are back? Not for all of us. Institutional buying is back to some extent for the right (meaning, Class A) property at the right price, whatever that may be to the buyer. What it could mean, though, is a little melting that will eventually reach to the non-trophy deals.
Once again, it is a matter of unclogging a logjam at the lender level and at the investor level, where money sits without the ability to finance deals at what many players consider acceptable returns for the risk. (Remember, pension funds and institutional folks often have completely different objectives than, say, opportunistic funds or developers.)
So yes, I'm glad to see properties trading. But I want to see different types of deals and financing and more volume before I can say the corner is really turning.
Posted by David at 11:18 AM
Monday, December 13, 2010
In my first year Contracts class in law school, we learned about liquidated damages; i.e. a clause stating that a certain amount of money is a reasonable estimate of a party's damages in the event of a default and that, in lieu of litigating the question of damages, the stipulated amount will serve as actual damages and not as a penalty.
Liquidated damages play an important role in many real estate contracts. I like them for both sides. It can limit the buyer's downside and quantify the seller's compensation if a deal goes bust. Most every big deal I run across has a lengthy liquidated damages clause, and more often than not the amount of the earnest money deposit is the stipulated sum. But this excellent article (about, of all things, the opulent former Adelphia Communications headquarters in Pennsylvania) reminds us that liquidated damages (a) should be tightly drafted; and (b) are supposed to be a reasonable estimate of the actual damages, not a number thrown out there. (I have not read the contract in question here.) It also reminds us that a seller can sometimes have a windfall in the event of a buyer default; in this case when the buyer defaulted the seller found a buyer who closed at a slightly higher price. The court nevertheless agreed that the provision was not a penalty, particularly because of evidence of what the actual damages could be. The fact that there were no little or no actual damages didn't matter.
Of course, the other big lesson is to have an honest lawyer. The buyer wired its lawyer $2 million to send to the escrow agent, who then let another client borrow the money. That other client tried to flee the country but was caught. The lawyer, of course, defrauded his client and was disbarred. Ouch.
Posted by David at 10:21 AM
Wednesday, December 1, 2010
If you look at the blog regularly but do not follow me on Twitter, you will see my updates here on the right of your screen. I use Twitter for short thoughts (duh) and quick information about what is going on in real estate that interests me. Long form writing, of course, will remain here.
I just wanted to take a moment to thank one of the better bloggers and Twitter folks out there, Duke Long, for including me in his list of the Top 50 Commercial Real Estate People You Must Follow on Twitter. I appreciate the recognition and will try to live up to those standards.
Posted by David at 12:05 PM
Tuesday, November 23, 2010
Pop up stores by national chains is supposedly the latest "phenomenon" in retail. Of course, this has been going on in a smaller scale by small tenants and even national retailers such as Hickory Farms for many years. The leases, being short term, are figured out and conformed and done. But what about the long term?
Some say this trend will continue over the long term. I tend to agree. Unfortunately I think it will depress prices unless lenders and buyers figure out a way to quantify and underwriter the pop ups, or pops enter into long term seasonal leases as a compromise, if landlords are willing to do so (and I would do so if the landlord had a cancellation right if it leases up the rest of the space in the mall -- there are all kinds of legal things we can do!) In a way, it makes a lot of sense. Cut down labor costs and dirt costs, concentrating on the couple of months that matter most.
What do I think might also happen? It will hurt the have nots. Let's face it: everyone wants to be in the major, in demand malls in major markets where your per sf sales are high enough to justify the year round store. But in the have not malls with 20%+ vacanies? You get the picture. And that triggers co-tenancy clauses, and that triggers -- dead malls. So, if you like to go to Water Tower Place or another mall that is basically 100% full, no change. If you go to my local mall (which I don't, by the way)...thjings could be a-changing.
Posted by David at 10:03 AM
Friday, November 19, 2010
This Globest.com piece might be the best I have read in a while. Why? Because it makes sense:
“Everybody got so burned by the downturn that they want safety and liquidity,” said Jonathan Gray of Blackstone Real Estate Advisors, during New York University Schack Institute’s 43rd Annual Conference on Capital Markets in Real Estate. Partly because everybody is chasing those same few deals in New York City, Washington, DC and a few other key markets, that means more opportunities in properties that are high-quality yet impaired....Bingo. If you want to make good money, get out into the rest of the country where the rest of us are not seeing a recovery as much as others. And the story is also telling as to the amount lenders are putting out there. Even though everyone says lenders are lending, transaction volume is still down 50%, 60% and more from a few years ago (not that we should be at those volumes again anyway). And even if you get that deal, the LTVs and rates are not exactly often going to knock you out. So the deals better be good.
That said, the fire sale of the 90s is not a reality right now, or so says someone who ought to know more than most anyone:
For one thing, while the next few years will see hundreds of billions of dollars in annual commercial mortgage maturities, it’s not at all clear that this will lead to a flood of distressed assets, said panelist Neil Bluhm. “The product is coming out much more slowly and in a rational way” compared to the ‘90s, said Bluhm, managing principal of Walton Street Capital.
For another thing, Bluhm said later in the discussion, it’s not certain whether the capital flow will continue. “Most of the money we were talking about earlier, we raised a few years ago,” he pointed out.(So yes, money is out there and just sitting on the sideline, just as everyone has said for almost as long as we can remember now.)
Posted by David at 9:32 AM
Thursday, November 18, 2010
This was published in Crain's a week ago, but it bears writing about, however briefly:
The long and short? Mega Chicago restaurateur Phil Stefani guaranteed a $7 million construction loan used to renovate the building where his office is located, and which is owned in part by Stefani and others, including the well-known local developer Keith Lord.. The loan is past-due and the lender, Harris Bank, is pushing what he described as tough new terms for an extension, including new equity and prepaid interest.
Why is the project under water? In large part, because its anchor tenant, Amcore Bank, went under. But here is the real kicker. Amcore was also the lender for the project! When it was shut down by the FDIC, the feds rejected the lease at Stefani's building and handed over the loan and Amcore's operations to Harris. So...now Harris is putting on the squeeze because the lease of its predecessor in interest tanked the value of the property.
You can read about the rest of the case going on in the Crain's article, but that story sort of left me out of sorts. It seems like the banks get to have their cake and eat it, too. Call it an application of the Golden Rule, I suppose. And I have seen other similar situations where banks or government entities really play hardball for one overarching reason: because they can. But Stefani has some very smart lawyers here, and I'll be interested in seeing how this plays out.
Posted by David at 2:04 PM
Monday, November 1, 2010
According to this WSJ article Holiday Inn has just completed " a sweeping, global overhaul that upgraded their hotels' bedding, signs, lobbies and showers, among other things, at an average cost to [franchisees] of $300,000 a property."
In the industry this is called a PIP. So now what? On to the next one? The next idea is to incorporate breakfast buffets (a la Embassy Suites?), socialize the meal process and streamline food and beverage service to cut back on labor costs. This will, however, be implemented gradually, starting with some test markets to see if the idea works. Although I am not a frequent HI, I actually like this idea. That said, while the whole social networking thing is an interesting concept, most lobbies I see aren't usually big hubs of activity unless there is free food. Also, just because you finish one program does not mean you should not be on to the next idea to maintain relevance. It is almost like the people who redesign the menus at casual restaurant chains -- finish one and start the next! I also wonder if some franchisees will try to incorporate the cheaper portions of this idea faster to cut labor cost. I'll be interested to see whether and how this is implemented and whether this and the other HI upgrades pay off.
Posted by David at 10:52 AM
Okay, I'm taking a risk here, especially after the whole "I think Sarah Palin is a lousy speaker" debacle at ICSC. And I know this has almost nothing to do with commercial real estate. But what the heck.
I am a firm believer in common sense when it comes to immigration. As the husband of a legal immigrant, I believe in open borders -- to an extent. If someone, for instance, is most likely going to make a significant contribution to our country, why not let that person in? Take my wife, for instance. She jumped through years and years of hoops to obtain a green card and her "blue passport" (meaning US citizenship). Her marrying me had nothing to do with it. And she is a most productive member of society, treating our children and paying oodles and gobs of taxes to boot. I want the best and brightest of the world -- doctors, engineers, software pros, etc. -- to come here to the maximum extent possible. We have some programs available to encourage this, and I want more.
What has stuck in my mind for the last decade or so is our visa policy in some cases. I am seeing my family driven crazy by i. Take my highly-educated niece, for example. When her father was dying, our government refused her a visa on the grounds that she was a "flight risk" and not likely to return home because her application to join her family in the US was still pending. Because we did not to do anything illegal or risk her application, she never got to see her father again. She subsequently obtained her green card (after an eleven year wait) and promptly found a high-paying job as a software consultant.
My nephew's wife is going through a similar problem: her sister and father cannot visit her here because of "insufficient ties to the home country." She is literally in years because she'd like them to see the wonderful life she is building here with my family.
Let me say it isn't all bad. My mother-in-law, brother and law and his family have been back and forth several times now, with of course absolutely no flight risk. Many thanks to the consular officials who saw the honesty in them. My mother-in-law's tourist visa is up for renewal next year. I cannot imagine her being denied given her record of traveling back and forth, although if it is we will immediately file a petition for permanent residency.
Don't get me wrong. I absolutely see the other side of the coin. We don't want people overstaying their welcome as tourists and potentially becoming liabilities on our government. I totally get that and support it. But isn't there a solution?
My middle of the night idea, which for all I know exists or has been proposed already, is to have some method of sponsorship for someone who wants to be a tourist but is perceived in the government's opinion to be less likely to go home. In other words, if I want relative X to visit, I will personally guarantee his return to the home country, and put up a significant deposit or bond (be it a lump sum of x% of net worth) and be required to pay for all enforcement and deportation costs if that return does not happen. It should be a draconian amount, in my opinion -- one that no one will want to pay, and perhaps on a sliding scale based on income. That way no one will sponsor someone that isn't really, really, going back. Perhaps the privilege should only be available to citizens, or to green card holders with the possible penalty of losing your permanent residency. I don't know.
All this may be impractical or pie-in-the-sky. But darn it, I have family members who want to visit this country and go home again, and I'm willing to put my money where my mouth is to guarantee it. There is nothing legal we would not have done to let our niece see her father before he died (and no, we did not have sufficient time or clout to push a Private Member's Bill through Congress, which a friend of mine actually did receive some years ago). Is there another way?
Posted by David at 10:35 AM
Wednesday, October 27, 2010
Several people have asked whether I would be at the Chicago ICSC Deal Making conference tomorrow and Friday. I'm going to pass on this one, but will probably be at one or more in the future. I am also skipping the legal conference this year as it is in Florida, but I do plan to attend next year's law conference as it will probably be somewhere in the west, where I prefer to travel. I also have some personal and business commitments that would limit my ability to be there anyway.
The ICSC conferences are great. I love meeting people with whom I have been in touch, be they lawyers, deal people, brokers, clients and even people who were on the other side in past deals. (I have converted more than one of those into clients in the past.) But a lawyer's function, when the focus is major league deal making, is helping get that deal done. Right now non-retail matters are keeping me busy. On the off chance a deal was being worked out where I need to be involved I'd rather be near the office where I can literally crank out a first draft overnight and keep the ball rolling.
So what about RECon? I'll probably go to that every few years or so, although I reserve the right to change my mind. I see RECon as mainly a function of keeping my name out there and networking with people and learning more about the industry rather than actually getting anything substantive done. My clients are rightfully too busy doing deals. That is one down side to being the back room guy, so to speak.
But for those heading to the conference, do me a favor: get some deals done! Everyone keeps talking about the market picking up (yeah, tell me about the Water Tower Place refi...if that wasn't a no-brainer loan then they don't exist) but while I am busy personally I would sure like to see more evidence of it! (Case in point: I am blogging on a Wednesday, my usual day off.)
Posted by David at 12:43 PM
Monday, October 25, 2010
Let me preface this post by saying I am NOT a CPA or tax lawyer (see the Disclamer for that) and no expert on matters pertaining to accounting. But that said, I run across issues related to accounting all the time. Many times in leases or loan agreements or other real estate documents you will encounter language requiring that financial matters be prepared in accordance with generally accepted accounting principles, or GAAP.
Some of my clients hate this language. Why? Because they believe that while they are often close to GAAP reporting, it isn't "quite" GAAP and it rarely is in the real estate industry. (Oh, and it can be expensive, especially for smaller players.) They fear that a tenant or lender could use this as a trap to find a ticky-tack default. These clients often prefer seeing the language "sound accounting principles consistently applied." Of course, there is a counter argument to that phrase; namely, what does it really mean? Could "sound" mean "Enron?" GAAP, they contend, has sufficient flexibility to work in real estate without creating a trap; thus the word "generally." And the counter to that is that sound accounting means just that -- something that is not tricked up but meets normal, everyday standards but is still more flexible and easier than GAAP without being bad. In other words, sound does not mean Enron.
So who is right? No one, in my view. It can be deal dependent or negotiation dependent and sometimes even accounting firm dependent. I personally tend to prefer not stating GAAP, but I have been persuaded otherwise, too. And sometimes the opposite has occurred. Lesson here for me? Talk to the spreadsheet guys -- the CPAs. They have their expertise and you have yours, and if you work together as a team you are far more likely to get to a common sense solution that works for your client.
Posted by David at 12:56 PM
Tuesday, October 19, 2010
When I saw a piece captioned "Building Owners Toss Equipment for New Technology" it reminded me of a lease I negotiated recently.
When negotiating a net lease, tenants will often request that a building's operating expenses will not include capital expenditures. That makes sense. But when I am representing the landlord and that is the business deal, I try to add two carveouts.
The first is legal compliance costs. If you are saying, "Huh?" let me explain. Say a new law comes into effect after the lease is signed requiring landlord to install a widget in the building and that widget costs $25,000. While that is a capital expenditure, it was something that has to be installed to keep the building in compliance with the new code. That in my humble opinion is an expense that can be amortized as a non-capital expense. Now, if the code had already existed and the landlord just failed to comply -- that is a different story and should not generally be on the tenant's nickel.
The other cap ex that I think needs to be carved out is one that achieves actual cost savings. There is a sound reason for this in my opinion because it helps encourage such savings. Let's say a landlord opts to replace the old (but still working) HVAC system with a new, highly efficient one that costs $200,000 and will last twenty years. (For simplicity we'll amortize it in a straight line without interest at $10K a year.) If the new system saves $10K or more a year, then I think that cost should be passed through to the tenant. Why? Because the tenant is in no worse position than if the system had not been installed at all, and it will be less likely to have an HVAC failure with a new system than an old, creaky one. And if the savings exceed $10K, then the tenant will still realize savings.
But what if the savings are only $5,000? I think the tenant has a strong argument that only the $5,000 should be passed through. The point is to put tenant in the same position it would have been, and I think that is usually fair. (There is always an exception to everything, from my experience.)
In any event, this just one of many, many issues that come up in commercial leases. I find that a good balance between the landlord and tenant's needs will often get the job done, and in a fair and efficient manner to boot. Yeah, that cuts down a little on my fees if I am billing at an hourly rate, but it just gets us to where we'd almost always end up anyway in the negotiation.
Posted by David at 9:57 AM
Wednesday, October 13, 2010
- Democrats retain control of both the House and the Senate
- A GOP takeover of the House, while Democrats retain control of the Senate
- This is all a sideshow. Only time will heal the ailing real estate market and economy.
Posted by David at 12:13 PM
Tuesday, October 12, 2010
Posted by David at 11:37 AM
Thursday, October 7, 2010
Lots going on but I will just touch on a couple quick items for now. If there are ever any topics about which you'd like me to write, just let me know.
There has been a lot of commentary lately about the new GGP board(s). It is a good bunch of people; almost a Who's Who. And what about no Bucksbaums on the board -- is that fair in that they still own 7% of the company? It isn't shocking in light of the turn of events that occurred. That said, however, the company did turn out doing better in bankruptcy than many pundits expected and -- perhaps more important to many -- retained its independence (so far). My thought? Some day, maybe. Right now, no. Let's get some wind under these sails.
Are the rumors I am hearing of a strong 4th quarter true? And if so is that because more capital is coming in to save properties, more lenders are foreclosing, both or none? But hey, we heard this all last year too. Since I am trying to cut back on sodium I will take it with a grain of salt.
Not being an accountant and all, I will admit I am still trying to get up to speed on FAS 13 changes. One take is that it will lead to shorter retail lease terms and less aggressive expansion. Gee, thanks. That'll do wonders for property values. (Here is another view from earlier this year.)
Last and certainly not least, I will be appearing on the crePodcast next week, talking about ways a buyer or seller can make a contract better and general real estate type stuff. I'll try to do a good job!
Posted by David at 10:21 AM
Monday, September 27, 2010
This is a story of knowing your client. Here's why.
I love it when people -- usually ones not too experienced in the industry -- tell me, "Oh, leases are all pretty much the same. You have a landlord, a tenant, a building and a term. Just plug in the magic words and off you go."
In a word, wrong. In fact, this is wrong on so many levels that I felt I needed to write about it.
First of all, who is the tenant and what is the building? Different buildings and different tenants require completely different types of leases. Yes, some of the language can be the same but the needs are completely different between, for example, office and industrial and retail uses.
Here is just one example. Most commercial leases contain a clause requiring the tenant to use and occupy the premises throughout the term of the lease. Now, many of my landlord clients really do not give a hoot whether an office or industrial tenant actually uses the premises, so long as it keeps writing that rent check every month. But retail? BIG no-no. And that is why so many retail leases have very heavily negotiated "go dark" clauses. The reason? Landlords want to make sure a retail space is full and vibrant and has foot traffic, and even more so if there is a percentage rent component to the deal. Tenants, on the other hand, want flexibility in the event a particular location is not working out. Another really important reason you want tenants up and running is to prevent violating any co-tenancy clauses. But that is another time, another post.
There are exceptions to this, of course, which is why I said "most." The moral of the story? Any good real estate lawyer absolutely HAS to know his or her client. Each one has different so-called "hot buttons." We already mentioned one of many, many retail hot buttons. Sometimes the hot button is environmental issues. Other times it is parking. Often opportunistic investors concentrate on clauses such as the estoppel and SNDA sections that some other clients don't even think about much. Why? Because they are thinking ahead to refinancing or sale. Issues can be building specific, based on past problems the client has had to address or just a client's own personal preferences.
Furthermore, each lease has a certain objective, which may lead to negotiating or even drafting a lease one way or another. I'm not going to elaborate on that there, but it is important to remember, as a good real estate lawyer can help a client work through those issues and turn a proposed lease into reality faster.
Posted by David at 10:10 AM
Wednesday, September 22, 2010
Today's Wall Street Journal profiled two big Larry Freed projects that have had problems discussed here before: Block 37 and the old Carson Pirie Scott building, which some people might actually call Sullivan Center. They are probably the same folks who call Sears Tower the Willis Tower.
Before I go further: it isn't just the same developer we are talking about here. Both properties are in the same city, Chicago. And they are on the same street, State Street. Indeed, the two projects are what -- a whopping one block apart from each other.
Bank of America, as successor to LaSalle National Bank is the lender on Block 37; PNC, as successor to National City, is the lender on the Carson's building. As we know, B of A is trying to foreclose and appoint a receiver on the ill-fated Block 37, which has been through more developers and concepts than I can even remember at this point. PNC, on the other hand, has negotiated an extension -- for now.
Why? Oh, the story pretty much says it. It is, in my humble opinion, a question of numbers and hope and perhaps upside potential than one of a particular lender's style. I'm sure readers here can point out examples where Bank X was "lenient" on one deal and "aggressive" on another. I can. (I note, however, that the comments at WSJ to date were none too kind about B of A, and I know people who have the same opinion. I take none myself.)
There are all kinds of factors that come in to play. How willing is the borrower to play ball on renegotiating? How are other lenders in the syndicate reacting to the deal? (I say this because both of Fried's deals are syndicated.) Does the lender still trust the developer? (I say THIS because of court filings by B of A respecting a receiver for Block 37.) Is there a potential deal (namely, Target) that can save the project? Is the project almost "too big to fail?" Is there long range upside potential by dumping the borrower? (This one is pretty rare, as lenders are often loath to hold, especially in deals like these. But remember these are both high-profile properties.) And sometimes -- more often than not -- it is just about the money and the lease-up of a project. We don't know where each project is with respect to its DSCR or other benchmarks for performing properties. Case in point: the State Street office space at Carson's is doing well, but the retail is holding things back. A retail comeback changes things, although Target is not generally know to pay high prices for its dirt. (Legal side issue: since Target also virtually always owns its dirt, the vertical subdivision of that property must have been a lot of fun with all its twists and turns.)
PS: Here is a good video on Crain's about commercial cash out refinancing.
Posted by David at 9:29 AM
Monday, September 13, 2010
I honestly thought they were going to get rid of covenant fees by legislation from real estate transaction or the like. But according to this NYT story they are alive and well, at least in some jurisdictions.
Yup, the developer, for the next 99 years, gets what amounts to a 1% transfer tax whenever a property is sold. The thought, I guess, is that these rights could be securitized and sold to give the developer more cash or perhaps coupons to clip down the road. And now of course people are complaining that these fees were buried deep into a declaration of covenants and taht they are unfair. Yadda, yadda, yadda.
Part of me is angry at the developers for potentially being sneaky. (I can't say with certainty what disclosure, if any, there was.) But another part of part of me wants to laugh at the buyers. Where the heck was your real estate lawyer?
I live in an area where lawyers are not involved in most real estate transactions. I am also on the board of my homeowners association, which has some pretty lengthy and specific restrictive covenants. Regularly residents who violate the covenants complain that they did not know about Restriction X regarding their house. My first response is always: "Well, you bought the house subject to the covenants, so you are deemed under the law to know about them whether you read the document or not." My second response is a question: "Who was your real estate lawyer, and did he or she review the covenants and explain them to you?" When the answer is invariably, "I did not hire one," I usually need not say more, although if pressed I suppose I might reply, "Your negligence is not our neighborhood's problem."
And don't even think about filing an insurance claim, unless for some reason the declaration is not an exception to your title insurance policy.
The moral: hire a lawyer, for crying out loud. Few people make investments larger than a house. Cheaping out on something this important can be foolish. Yes, I am not a fan of resale fees, but at least if you know about them you can be in a position to not buy the property, negotiate a price reduction or perhaps get the covenants changed.
Posted by David at 12:00 PM
Wednesday, September 1, 2010
I was reading Shopping Centers Today (the ICSC's member magazine) last night and enjoyed reading the lead article, a piece on lessons learned by developers that left them wiser.
But then I read one of the tales, from Bob Champion, a well-respected Southern California developer whose company rings a bell in my head, though I can't recall having done any deals with it. Champion recounted a story where he received legal advice on rehabbing a historic building. Apparently, the advice was to the effect that his project would be exempt from the Americans with Disabilities Act (and though not stated, perhaps also its stricter, as I recall, California counterpart). It turned out that the city decided the property did have to comply and it cost him. Ouch.
Now, this is just an anecdote in a magazine article, so I don't know whether anyone reached out to the city (the first thing I would have done), whether the decision was litigated (if it fact it could be) or any of the other facts. But I was somewhat surprised at the lesson learned. Why? The story says Champion circled back to the law firm to advise him to complain, only to find that it had disbanded. So..."The lesson? 'Always use top attorneys and substantial firms for your work,' he said."
I agree 100% with the first part of the advice but not the second. You should always use a good lawyer. That ought to almost go without saying. There's plenty of good ones out there. But the second part of the advice troubles me. What is a "substantial firm" these days? Let me make the following observations:
- By "complain," does this mean making a malpractice claim or just reaching out to the lawyer who advised him? I don't know, but just because the firm dissolved does not mean the lawyers is gone or that there isn't insurance coverage somewhere. Of course, one thing any "top" lawyer knows is that dealing with any government entity on an issue of this import is often a crap shoot.
- Yes, non-substantial (small?) firms dissolve, but do so "substantial" ones. Ask people once at Heller Ehrman, Jenkens & Gilchrist, Brobeck, Phleger & Harrison, Coudert Brothers, Altheimer & Gray or Keck Mahin & Cate, just to name a few that I have seen tank during my career.
- "Top" lawyers simply are not always at "substantial" firms, and sometimes "substantial" firms don't have "top" lawyers in the field in which you need advice. Take Joshua Stein: He is certainly a top real estate lawyer by any measurement. And until a month ago he was at a most substantial (and outstanding) firm: Latham & Watkins. But he started his own practice. Why? According to this piece for Stein it came down to certainty and predictability on rates for clients. (I assume he might be doing some flat fee work on deals, something I also like to do.) And he is not alone. There are people who want more control over hours, lifestyle and running a practice than you might be able to get at at a "substantial" firm. (This is not a knock on BigLaw, by the way. It has its time and place and need and I'm glad they are around. I like many just had enough.) And sometimes, especially in niche area like zoning/land use and the ADA, to name two, smaller firms specializing in that area might just be the ticket.
- Does the lawyer do good work, or come recommended for good work?
- Does he or she return phone calls or emails promptly?
- How much of the work is passed off to associates and paralegals, at what rates and with what level of supervision?
- What is the person's level of expertise or knowledge on the specific type of deal being worked on?
- How willing is a lawyer to learn more about an area of law with which he or she has less experience without incurring client costs to get up to speed?
- What is the turnaround time on work?
- Does the lawyer suggest alternatives or other ideas about a deal?
Posted by David at 10:48 AM
Monday, August 16, 2010
I am in a obscure quotations mode today, so please excuse me in advance. No, I am not about to start brushing up on my Shakespeare or start quoting him now. (In fact, I'm not sure I ever even seen Kiss Me Kate all the way through.) But this weekend I had to think about what I have seen the last few years.
I know economists have their own definitions of recession and depression and all that. But I also know that you can cook the books on statistics such as unemployment. (This is nothing new, by the way. And thank you, Benjamin Disraeli.) We are seeing more talk of depression-like problems: the so-called 99 weekers (a term I first saw here), a real unemployment rate that is higher than the statistics indicate as people just plain give up on looking for work and thus are no longer in the stats, companies that refuse to spend the money they are making and declining to hire out of a fear of higher taxes and low demand for products (aside: I don't know a single small business person looking to hire anyone in the foreseeable future), and commercial real estate discounts of -- well, let's just say big discounts if that's okay. And the prices at the top were too darn high anyway.
On the other hand, you read that lenders are starting to foreclose and dump REO deals to get them off the book, which is good news for buyers and bad news of course for those being foreclosed upon. Others say the market is choppy. Still others say prosperity is just around the corner if not already here. (Thank you Herbert Hoover.)
Finally, I am seeing and hearing a lot of what my father called NATO: No Action, Talk Only. What do I mean? If you read this blog regularly you can figure it out, as you are probably pretty savvy about the market. We don't cater to the rank beginners here.
Traffic Court hit this one on the head a month ago from the commercial real estate perspective:
The lesson, again, is that commercial real estate is a complex business with lots of moving parts. We’re going to have crisis alongside recovery. There’s no simple narrative to be had here. We’re not going to see a clear commercial real estate recovery nor are we going to come upon a moment where all is collapsing. So let’s stop looking for the one-line takeaways about commercial real estate.Okay, I'll stop here. My point, at the risk of burying the lede? Let's all stop worrying about how to put a name on what is going on right now. Whatever you call it, what is really important is what is actually happening and not its label. So, you go and do that voodoo that you do so well and meet me back here with some deals! (Thank you Cole Porter.)
Posted by David at 9:54 AM
Tuesday, August 3, 2010
Both, probably, but more good than bad in my opinion.
Depending on what you read, CMBS delinquency rates are at an all-time high of 8.71%. This article citing Trepp LLC is the first I came across. And I remember when I said, oh, that 2.1% default rate is not so bad. And Fitch is telling us that the default rate is 9.48%, even closer to the 11-12% predictions that have been out there. So that is bad news, yes? Some call it part of the continuing slo-mo crash. Yes and no.
The good news, if you look at the chart, is that the upward trend is flattening. Is that a sign of moderation? Maybe. But let's not forget that there is a ton of CMBS debt coming due - a trillion dollars of it over the next five years. Again, good and bad.
But what I find most encouraging is this: loan mods. According to Trepp we have had more mods in the first half of 2010 than in 2008 and 2009 combined. So the servicers are getting their acts together, borrowers are coming to the table, and more deals are even going to REO.
And that brings to mind another factor that I like: pricing. I'm reading and hearing about some deals being done at fire sale prices. No matter the fundamentals or the market or the conditions, sometimes the price is just so right that you pull the trigger and do it. And as I have been reading, some private equity folks just can't sit on money forever and are taking that plunge, even back into development where the potential returns can be the best. (The offset to that, however, is whether Dodd-Frank will helpful or harmful to CRE; we just do not know yet and we all know uncertainty is not a good thing.)
So, I feel like Tevye in Fiddler on the Roof: On one hand, this; on the other hand, on the other hand....But I come out a little more positive than negative at the end of the day.
Posted by David at 2:23 PM
Thursday, July 29, 2010
The one thing we know is this: markets hate uncertainty. And after reading this CoStar piece about Dodd-Frank I can see why there is a lot of angst and uneasiness among some investors in the commercial real estate market. It is going to take time -- and a lot of manpower and legal analysis -- to sort through yet another behemoth set of laws, rules and regulations. While I am not a deal guy, here's what I am thinking, and I encourage you to critique me or even tell me I am dead wrong.
Pricing and cap rates will have to be lower than they were to sustain any good returns on deals. If the days of what I liked to call "cowboy lending" are over, that is fine. I was never a big fan of it anyway as a lawyer. But we need to adjust to the fact that with lower LTVs on loans and stricter underwriting (including the requirement that lenders keep at least 5% of all their loans on the books as so-called "skin in the game") and more documentation (yay, lawyers!), this will be a change from the go-go days. Yes, we will all have to work a little harder and be a little more careful. Once again, fine with me. If you have real money at stake you are going to be more careful. But at the same time that means the "home runs" of a few years ago are going to be harder and harder to find, unless we go the the old days of, "Buy at a 10 cap, sell at an 8."
What I think is a dual concern and an opportunity is that some people will just stay out of real estate or exit the investment market. Why? Better places to make returns right now, even with prices deflated by as much as 50%. There is already evidence of banks dumping their RE investment arms and advisory groups to boot. So why is this an opportunity? Plenty of good pros will be out there needing something to do, and there will be a lot of property on the market. Hopefully one or two of them will be calling me. And what does this do to the hopefully slightly reviving CMBS market? Again, uncertainty.
Another concern is development. It might be a lot harder to build new projects with reforms and tighter standards in place, like we have had the last few years. Again, this is not necessarily bad, but without construction moving then how is the economy ever going to really recover?
This is not meant to be gloom and doom for real estate. I see and hear and know about opportunities in the market all the time. But I do think some certainty and then some major league creativity is going to be what it takes to really get the market moving again. That's going to be a fun cycle once it comes, be it next month, next year or down the road. We will all have to put on our thinking caps for each deal.
Lastly, I also wonder aloud to what extent this will make mezz financing even more popular as a means to improve return rates to the levels that some of the players really want. But we'll save that discussion for another time.
Posted by David at 10:20 AM
Monday, July 19, 2010
According to this nicely-done New York Times post, not in real estate:
Private equity real estate fund-raising fell in the second quarter to its lowest level since 2004, suggesting that a recovery has yet to take root in the investment property market.For years you kept hearing about everyone having "dry powder" but not using it. Is that like the Mutual Assured Destruction theory of the Cold War? I think the story correctly states that many lenders are wary to lend money to PE-backed concerns. But it could also be --as the piece correctly mentioned -- that these entities raised a lot of money in past years, are looking for the right deals carefully and slowly; so looking for more cash right now when you are not deploying what you have is not necessarily a good thing. The deals I know about are often all-cash ones, perhaps or perhaps not levered after closing. That just makes a take-down of the dirt so much easier when you can do that.
The piece also talks about an expectation of continued choppy prices -- you can expect that when volume is still low. For all the talk in the market of recovery I'm still unconvinced it is robust and sustainable. Of course I want to be wrong.
As the story says, right now it is all about the lending. The PE folks make their money when they can deliver big IRRs, and high interest rates and low LTVs don't help on the big returns unless the purchase price is THAT good. (And that is not common.) Yes, there is a little life in CMBS and the life guys are kicking in and reeling in some deals, but without liquidity of a type we saw, say, perhaps 9 or 10 years ago, we may not have a very robust recovery in our part of the market, at least not for the PE guys.
Posted by David at 11:10 AM
Thursday, July 15, 2010
Why are so many brokers and lawyers mortal enemies? I cannot being to tell you the stories I've heard about broker x and lawyer y fighting with one another to the detriment of a deal. I think there are two main reasons for this: (1) lack of communication and (2) interference.
I had a great conversation with broker and fellow blogger Duke Long yesterday that made me want to write about this.
In many deals if not most, brokers are at the table before the lawyers, negotiating the business terms and working the deal. That said, smarter client in my humble opinion get legal counsel involved earlier, such as at the LOI stage. They often take ownership of the deal, guiding it through for the client and to collect that commission. Sometimes we lawyers laugh at the brokers, thinking that they do nothing to earn their money -- which, by the way is way too much anyway since it is so much more than the legal fees. That happens sometimes, but not as often as lawyers think in my opinion. (And heck, sometimes lawyers don't earn their fees too.)
Conversely, some brokers unjustifiably see lawyers as deal killers. But our function is to point out flaws in deals, possible problems and raise issues so a deal can be properly underwritten. OK, once in a blue moon I will find a deal that "needs killin'." But that is few and far between -- a very rare occurrence. And even then, my advice is simply there to accept or ignore, to point out good and bad things about a transaction.
A lack of communication is often a problem here. Brokers, please realize that we are just out to protect our client's interest. That is what we are paid to do, and if we don't, we are in major league trouble not to mention incompetent. Lawyers need to realize that brokers have a vested interest in getting a deal done and should work with them toward that end. Getting to the closing table ought to be the goal. That is why I like to talk to my client's broker in the deal, so he or she knows where I am coming from and that I am simply not some annoying impediment to a commission.
That leads me to interference. We each need to respect the other's boundaries. Brokers should try to lawyer the deal; when a legal issue comes up, refer it to counsel. It is not only the right thing to do but usually the legal thing to do, unauthorized practice of law and all that. (Note: Here in Illinois, a lawyer that has a broker's license cannot act as both the lawyer and the broker on a deal.) And lawyers should, unless there is a compelling reason or unless you are asked, stay out of the business side of the deal. A lot of us are frustrated business people or (in my case) business owners ourselves. But by and large that is not our function, substituting our client's judgment with our own. And they hired a professional to help with that. (There are exceptions to every rule, of course, but I see this all the time.) And often our business advice as lawyers is not quite as stellar as we might think it to be.
As a general rule, I have had terrific relationships with brokers. We respect each other. Have I run across some for which I have had little respect? Sure, but not as many as you might think.
In short, there's room at the table for everyone. We each have our function, advising our clients and getting deals done. I think brokers and lawyers would get along a lot better if they just realized that instead of trying to bash the other as a waste of money or time or a detriment to the deal process.
Posted by David at 3:12 PM
Friday, June 25, 2010
The protestations that it would not materially impact the industry notwithstanding, a lot of my friends and colleagues in the commercial real estate industry are breathing a sigh of relief. Once again, provisions taxing so-called carried interest as ordinary income will not be passing Congress. Well, at least that's what everyone is saying. Remember, health care was dead too at some point and we all know what happened there.
I understand the appeal of the law -- get those hedge funds! But it also goes after real estate with a vengeance. Take your small to mid sized real estate developer who takes a risk by working on a brownfield or on a project in a marginal area or with IRRs that only work because of the nature of the investment. So, those borderline deals go away, as to the leases, the sale, the construction jobs, the employment that comes with the finished real estate. You get the picture. What seems reasonable on the surface is a devil in the details.
Or, as Robert Green puts it (with a hat tip to David Bodamer)
Put another way, we are not by any means out of the woods yet, gang, at least not in my humble opinion. Let's not do anything rash that could cause a double-dip in the market. As it is the industry is not exactly, shall we say, robust.
Repealing carried interest is losing appeal as more and more leaders oppose its consequences, unintended or otherwise. It’s a growth killer in this weak economy and it’s un-American to tax small businesses with ordinary income after their lifetime of hard work to build up their business with risk capital. These entrepreneurs, including investment managers, deserve capital gains when appropriate. And remember, often times carried interest is ordinary income too.
Have a great weekend!
Posted by David at 10:19 AM
Friday, June 11, 2010
An excellent commentary from PERE (reg. req'd) on the whole carried interest situation can be read here. Like politicians do they call it the “The American Jobs and Closing Tax Loopholes Act of 2010.” What a riot.
Now, I understand that experts are saying that this law will not impact a recovery (if indeed there actually is one going on). After all partnerships are just one way of doing the deal (albeit the most common one) and there may be other tax efficient ways of doing so, but there is no denying that (a) returns will be lower, meaning (b) some people will not deploy as much money into dirt because the IRRs do not work, especially on the opportunistic side, and (c) some deals that "work" now will not work with higher taxes. So, how this means more employment is a mystery to me.
And the "loophole closing" is sort of a laugher too. As PERE points out:
So there. Here a tax, there a tax, everywhere a tax tax. And have a good weekend!
The introduction of a hybrid rate is an admission by lawmakers that current carry tax is in fact not a loophole but merely a revenue opportunity they never seriously considered until now. In fact, a code whereby GPs who hold investments for seven years or more enjoy favourable treatment on their carry shows Congressional faith in incentives for long-term investment.
Posted by David at 11:37 AM
Wednesday, June 2, 2010
I am going to promote some lawyers other than myself today, because they deserve it. I'm sure the social media "gurus" out there would say I am a moron for doing so, but I honestly do not care. This blog is a resource and a fun project for me. Hire me? Great! Hire them? Fine, too. Hire no one at all? Do so at your peril....
The law firm Goodwin Procter published what I think is an excellent article on subordination, non-disturbance and attornment agreements (SNDAs) recently that I would like to recommend to my readers.
This particular piece is in the context of hotel acquisitions rather than your "garden variety" SNDA that you might find in an office, retail or industrial deal among the landlord/buyer, tenant and lender. The article suggests -- correctly in my opinion -- that buyers are getting stuck between the lender and the hotel operator on higher end hotel deals because of the competing interests of the parties. The lender obviously wants as much control over cash as it can as well as maximum flexibility in terminating the operator and perhaps even reflagging or closing the hotel, while the management company wants the opposite.
A related concept with hotel franchise agreements is the so-called comfort letter, stating that the lender can keep the flag of the existing brand in place following a foreclosure. Here is another good article from David Neff at Perkins Coie on hotel due diligence that I happened to stumble across while researching this post.
Of course, some of you may be wondering why I am not talking about garden variety SNDAs, as they are also a hot topic. I will probably get around to that soon. If you are dying to read more about SNDAs in the meantime, I commend you to the always brilliant Joshua Stein of Latham and Watkins. Look around his site and you will find some good materials on SNDAs and otherwise.
Posted by David at 4:48 PM
Tuesday, June 1, 2010
I feel like Clark W. Griswold, having just come off the road and 4600 miles of driving. It was fun but tiring and I am paying the price for my trip with a wonderful summer cold. So if you will all indulge me, here are my thoughts about the last two weeks.
ICSC's RECon meeting in Las Vegas was great. It was so good to put a few faces and voices together, some of whom I have known only by the latter for ten years. We also had a great tweetup at the meeting; my only regret was that I could not stay the whole hour. As to my sense of the show, the smaller size meant the floors were crowded. Not the Eisenhower Expressway at rush hour, but crowded enough. Tenants were telling landlords that they wanted and needed to be in certain locations, but on terms that may have been a little less favorable to landlords -- perhaps shorter terms and more options, rent concessions, etc. There may not have been the urgency of a few years ago (remember I was a first timer) but these meetings were, in my humble opinion, more than mere meet and greets.
If you want to drive traffic to your blog, say something about prominent politicians. I had unbelievable traffic here after giving my candid views on the keynote speech. But this is an industry blog, not a political blog. And the carried interest tax did pass the House last week.
Hotels were, by and large, more crowded than I expected, but rooms were always available and often at reasonable prices. I actually tried Hotwire two nights and would not repeat the experience. I want a guarantee of the room type and the ability to make special requests (even if they cannot be granted); I also for whatever reason felt like a second class citizen.
I am shocked that a major hotel chain allows its franchisees to still have second floor walk-up units in their mid to high range flags. When you travel with an 81 year old that is somewhat problematic, especially when the flag refuses to (or cannot) give you another room.
Kudos to Marriott, by the way. They have a stringent book but it shows in property quality; even 30 year old properties (with periodic PIPs were still nice). Ditto to Hilton.
The house we rented in Las Vegas was a great way to be in the city. I am not much of a gambler and the Strip is just so crowded. It was nice to have our own pool and jacuzzi, a kitchen and plenty of room to spread out. I would do that again in a heartbeat.
A 65 mph speed limit in rural Illinois is ludicrous. The 70-75 mph (even 80 for one small experimental stretch) limits we encountered to our west were more reasonable.
Everyone should take a long car trip at least once in his or her life. Yes, planes are convenient, but you miss the beauty of this country and its people when you travel by air.
Of course, post-vacation and post-ICSC traffic are keeping me busy, so let me stop here. Back to work!
Posted by David at 10:41 AM
Monday, May 24, 2010
There is a lot of activity in the halls today and people seemed very deal focused. Appointment schedules are booked up and people I was hoping just to say a quick hi to are too busy working deals. I am glad to see that of course. Since I am a newbie it is hard for me to say how attendance is but it sure looks okay to me.
Although I do not agree with him on some issues, Robert Reich gave a pretty good, entertaining and witty presentation this morning regarding his thoughts on the economy. You can read my Twitter feed for the details. Now, he is a policy wonk, so comparing Reich's speech to Palin's would be unfair. But apparently some people think I am a pinko Commie for daring not to like Palin's speech. That of course makes me chuckle; you can read a response to a comment if you are into the political thing.
There's another good round of cocktail parties and the like tonight, but I plan to pretty much be done by 5:30 or so, as I plan to have some family time and then take off from Las Vegas tomorrow morning, perhaps after one last short visit to the convention floor.
If I have more to report, such as activity from the Tweetup, look her or, again, on Twitter. Hope everyone is having a good convention!
Posted by David at 2:05 PM
Sunday, May 23, 2010
Just got back to our house (rather than stay on the Strip, we decided to rent a private home) from the first day of the ICSC RECon in Las Vegas. Keeping in mind that I am a first timer, here are some initial impressions.
Thank goodness for the cool weather. That made walking miles and miles easier.
The morning breakout sessions were even better than I thought they would be. The panel on workouts gave good, practical advice for dealing with lenders in a variety of distressed situations. I learned some things I will use and I will also probably study up more and blog about what additional things I learn.
The legal special interest group session was also good with practical advice from in-house folks. Some of the advice was fairly obvious -- keep in touch, let us know about changes, bill regularly and with sufficient detail. The best advice I think was this: don't buy me lunch - make me want to use your firm. I was somewhat miffed -- perhaps wrongly so -- by a large firm lawyer saying something like, "You can't compete with the guy working out of his house on price, so you have to develop expertise or make yourself stand out in other ways." It made me feel cheap, until I learned my billing rates were higher than large companies want to pay for commodity work (not that I really do a lot of that). It seems like law firms are racing each other to the bottom on hourly rates. I will not do that. I charge a fair fee, be it hourly or an alternative fee arrangement; I work quickly and efficiently and make the client look good, thus adding value. So I am comfortable with what I do, and I cannot remember the last time a client complained about my bill. Like I say: try me once and you will not be disappointed.
Speaking of disappointment, let's talk about the keynote address from Sarah Palin. In short, it was a standard stump speech with a few superficial comments about shopping centers and retail real estate. It was awful and a borderline train wreck in my opinion. All Palin had to do was add in a paragraph about the pending disaster of carried interest and she would have not only won over the crowd but gotten significant fundraiser cash from the industry if she runs in 2012. As it stands, I do not know if she knows what carried interest is.
As to deal making: I am a first timer, so I cannot imagine a larger hall. There was buzz in the smaller (but still HUGE) facility. Some booths were empty and others were packed. I chuckled at the fact that Burger King and McDonald's were right across from each other, as were CVS and Walgreens. If you want a veteran report on the day, check out other bloggers. The always excellent David Bodamer comes immediately to mind.
Some other random thoughts:
Commercial real estate is very white male dominated and very red meat.
Sex. Still. Sells. Period.
One easy way to spot RECon veterans from newbies: shoes. Newbies wear stylish shoes; how you walk three or four or more miles in a day wearing tight lace-up shoes, 5" Louboutins or Pretty Woman boots is beyond me. Vets wear comfy shoes; my friends warned me of this so I showed up prepared. I nevertheless picked another pair of comfy shoes for tomorrow on my way home.
There seemed to be a lot of optimism on the deal floor. But remember we CRE people tend to be eternally optimistic. The direct operation booths were more crowded than broker booth. GGP was packed, I am happy to say. I did not get to some other major booths today.
Kudos to LoopNet, which rolled out a new low-cost property information service today. The marketing staff was kind enough to give me a tour of the product and I liked it. I made one recommendation and offered to do a little testing of the site. I plan to write more about the service after I have played with it a bit.
Tomorrow I will be attending the Dealmakers Magazine Tweetup at their booth; I hope to see you there. I will probably not be at the show at all Tuesday; if I make it I will just stay for an hour or so that day and leave for my vacation.
That's all for now. More tomorrow!
Posted by David at 9:49 PM
Tuesday, May 18, 2010
Just when you thought land use regulation in California could not get any trickier, along comes this.
By way of reference, I started my career in California working with the California Environmental Quality Act, better known as CEQA. I haven't stayed current with CEQA, but I can tell you that complying with it can be a veritable minefield for a developer. Groups and people, whether well-intentioned or not, can hold up a project for years or even stop it entirely for more reasons than I can count.
Now you can add another mine to the field: curbing greenhouse gases. Municipal planning organizations can conflict with local plans, and then you have possible inconsistencies with general plans, specific plans...I could go on for an hour and I am not even a expert in this area at all. It will be a field day for lawyers, though!
It isn't clear how this will all play out, but what is clear that uncertainty will be in the market. And we all know how much investors like uncertainty (not).
Posted by David at 12:09 PM
Yes, I am a first-timer at this year's ICSC conference. I'd been planning to go for years now, but family commitments always stood in the way. So this year, I'm taking them with me!
If you want to meet or talk about dirt or anything else during the conference, please feel free to email me at dstejkowski (at) stejlaw dot com, or via at Twitter at DirtLawyer. (Sorry, I want to try to do something to avoid you know what.) I will be attending the Dealmakers Magazine Tweetup on Monday at Booth S283 Q Street. I will also be at a LoopNet function on Sunday to see what they have going. And Sunday morning I plan to attend the legal special interest group function. I know I have a bunch of other things going on, but of course I do not have my agenda with me while I am writing.
I'm looking forward to meeting many of you, so don't be shy! Here's to a great RECon.
Posted by David at 8:12 AM
Friday, May 7, 2010
I remember the first time I heard the term "best and final" as a lawyer. My client was trying to lease space to the federal government and the contracting officer asked for best and final offers. It was as if all the previous negotiating was just a game. And maybe it was.
And maybe it is with the GGP saga. Simon has said its latest $20 offer is best and final and that it would walk if a bankruptcy hearing goes forward today as scheduled. (Is that true? Your guess is as good as mine.) They also upped the recap offer by a dollar. We should know more about a postponement very soon, and I will tweet that information once it is known.
What I find interesting in the story is, almost predictably, buried in the penultimate graf: "The two sides have also been working to put together merger documents so they are ready to go should a deal be reached, the source said." We all knew or assumed the due diligence was basically done, but M&A documents take time and a lot of money to negotiate and put together. So obviously there is some teeth to all this if the source in the story is in fact correct. Lawyers are not cheap and M&A agreements are not short.
One way or another, this should come to an end soon. Simon supposedly has all its cards on the table and the Brookfield offer expires next week. That low-slung block of a building on North Wacker is either going to be very happy or somewhat disconsolate -- depending on what the board decides to to -- pretty darn soon.
UPDATE: This report says that GGP is expected to ask the Brookfield recap be approved by the court today. I think independence has always been in the mind of the company and the Brookfield offer keeps the doors open on Wacker.
And the pot is sweetened as follows: "William Ackman's Pershing Square Capital Management, which has committed to invest in General Growth alongside Brookfield, agreed to forgo its interim warrants, reducing the overall package by 14 percent."
What the heck. Ackman bought into GGP at what price? I think he can afford this concession.
Posted by David at 8:57 AM
Tuesday, May 4, 2010
So, Simon is now apparently at a bid of $18.25 for all of GGP. We are right back where we started from, just at a higher price. Did anyone seriously think anything else was going to happen? While I obviously don't know the story (I am not a reporter, just a blogger), I do know this: If I were representing a buyer, I would have suggested a partial buy in to GGP as a potential means of getting the assets I want. After all, who wants your competition breathing down your neck?But if that does not work -- and it won't -- go back to the jugular.
And gee, guess what? Simon is willing to divest up to 15 million sf of malls to make the deal happen and get over any anti-trust concerns. That means they can buy the company, sell off the assets they probably did not want anyway and keep the trophies. Sounds like a good plan to me.
Metz and Co. of course want to run their own show, so they are going to rely on their recap plan to win the day. Obviously none of us know how this all plays out but do not be shocked if GGP does recap the company, but after selling a bunch of malls to Simon. Win-win? Maybe.
Posted by David at 10:12 AM
Monday, May 3, 2010
Originally we thought it was over. Wrong. It looks like the whole carried interest debate is back. Like a cheap pair of sunglasses, it just won't go away. They are even trying to plug ways around it now; call me silly but I would rather spend time doing deals than working out complicated tax law solutions.
I wrote about this topic almost three years ago, and I have done so on other occasions. You can look here and here for some other thoughts. It is not something I like seeing just as signs of life are showing in the market and hopefully in development to boot.
Posted by David at 10:02 AM
Wednesday, April 28, 2010
Okay, now things get serious on the GGP front. (IIRC, this was also brought up in February, so have they been doing due diligence all this time?) And people on Wacker Drive may not be thrilled because they know or at least think having the guys from Indy and their hedge funds looking over their shoulders does not bode well over the long term. And that assumes they don't buy the company. According to Bloomberg Businessweek:
Blackstone’s “No. 1 focus has been on being our partner if we’re able to buy the company,” Simon said from the Milken Institute Global Conference in Beverly Hills, California. “But I think they are considering whether they want to buy some stock as part of a recap as well.”
The latest recap offer apparently keeps Simon below 20% voting rights. I'm not sure that matters. They would be in the game.
All this bargaining does not mean the sector is out of the woods. The WSJ sort of reminds us of that today in this story of REIT stocks going up even though there is a lot of debt to structure.. GGP is unique in that is has trophy mall assets that can't be easily replicated. So the next move is?
Posted by David at 8:07 AM
Wednesday, April 21, 2010
I will probably skip most or all of Tuesday at ICSC, as I will have my family with me and want to do some non-work things with them before Memorial Day. But I will be Vegas from Friday on, and I am certainly planning to stop by the booths where people have invited me to visit. If you follow me on Twitter I will note my whereabouts.
On Monday from 5-6 PM, I will be part of a Tweetup, a meeting of people who are on Twitter, being hosted by Dealmakers Magazine at Booth #S283 Q Street. Many thanks to Anthony Pingicer for putting this on for all of us. I understand there will be a limit on the number of people they can host, but you can RSVP at http://event.pingg.com/ReconTweetup. Hope to see you there!
Posted by David at 12:12 PM
Monday, April 19, 2010
This post is a mix of politics and real estate. I usually do not talk much of the former on the blog, but I feel impelled to do so today. So stop reading now if you are not into that.
I usually watch Sam Zell's thoughts on the market carefully because I have a theory that you should never bet against Sam. But I blew it on this one, until now, as I missed what he had to say at ULI last week.
Per NREI, Mr. Zell remains bullish on the US markets. But here is the quote: “I continue to be an optimist about the U.S., if no other reason than I think we are going to alter the current political situation. If the current political situation is indicative of the next half century, I think we’re screwed.”
Screwed? Wow. It is no secret that Zell has been a critic of President Obama. Check out this juicy statement in Crain's: "Zell said he saw similarities that are "a little eerie" between Nero's Rome and the United States of 2010."
And then to what he sees as the way to go? Distressed debt. Make sense. "I don't see any great equity opportunities on the real estate side in the United States. All of our activities have been in buying distressed debt in one form or another."
That said, I think equity deals can also make sense if you are buying at a good enough discount to value. And Zell thinks hotels may be where to invest right now.
But let's go back to the above. What scares people?
Taxes. A lot of people are frightened about tax hikes, which will be inevitable given increases in deficits and spending and government. The carried interest tax (a/k/a the developer-killer) is the scariest one. There are probably as many ways to find loopholes as there are tax lawyers, but I think dirt people would rather just be building than worrying about how to create a ultra-complex structure to cut down on tax. And then you have capital gain hikes as well, which may lead to more 1031s and other structuring issues.And then there is the possibility of a VAT or other additional taxes that will hit hard on --well, those who otherwise have the coin to put into dirt. Instead that cash may go to Washington.
Regulation. Again, it is the unknown. What is going to happen in that realm? I'm even worried about the seemingly impregnable medical office market because we don't know what health care reform means for doctors other than many of them are sadly abandoning private practice to become hospital employees.
I'm sure his critics will say that Zell just sounds like a disgruntled Tea Party member. I don't think so. From talking to average people on all sides of the political spectrum, I think it is more a fear of big government that has a lot of people upset. And most of them, in my opinion, do not feel they have a political party that will truly represent their interests. I for one feel that if we just elect a ton of Republicans in November we will throw one set of rascals out and put another set of rascals in. I have to wonder if the real solution is the demise of the so-called privileged political class and the institution of true citizen politicians who do the job for a few years and go back to their real jobs.
We get these anti-government sentiments historically and in the end they do not lead to much change. And that may happen here, especially if the economy goes in the direction most economists seem to think it is going. (I know this -- stimulus money seems to be involved in every road project that messes up my driving to and from Chicago!) Whether this sentiment will be fundamentally different remains to be seen, but November is coming. And we'll also see what if anything all of this does to the real estate market.
Posted by David at 10:26 AM
Wednesday, April 14, 2010
So the latest letter from David Simon to Adam Metz is on the street. They will jump into the recapitalization with $2.5 billion, together with another $1 billion from Paulson & Co. They say this is a better deal than is currently on the table in that they are not seeking warrants, and that they are also willing to work with the other bidders on a recap. Finally, they expressed a continued interest in a financed acquisition of the company. (Thanks to Traffic Court for its summary of the situation.)
The letter also says, "Simon’s voting interest in GGP would generally be limited to 20% of the outstanding shares." That probably keeps the FTC off their backs, but I am no corporate expert by any means. At the risk of crystal-balling, what I do see is this: GGP will not want Simon as a major shareholder for very long. Everyone knows that. So, they either get rid of Simon -- sooner or later -- by dumping off some of the properties Simon is coveting. That is my immediate shoot from the hip thought on the purpose of this letter and a possible response. It may also force Pershing and Fairholme to up the ante further. The game continues, that's for sure.
UPDATE: The WSJ moved a piece with an interesting sentence worth pondering: "The strategy could be viewed by the General Growth and Brookfield camps as an effort to undermine the Brookfield bid and eventually return to making a play for General Growth in whole."
Posted by David at 9:24 AM
Tuesday, April 13, 2010
I found it hard to believe that Simon was going to pull out of the GGP bidding just because of antitrust concerns. It knew that had to be coming from the start. If there was a real reason it might have been more like, oh, we lost our chance to get the company cheaply and can deploy our powder elsewhere or something else.
The latest is that a revised bid is not off the table and that there could be a deal to dump some assets to make the deal work and keep the FTC off everyone's back. Simon of course covets some of GGP's trophy properties, as would any sane person in the shopping center business. So let's see if that revised bid is forthcoming and what it says. And for those of you who sold the news yesterday, let's see where the ticker winds up now.
Posted by David at 2:04 PM
Friday, April 9, 2010
Wow -- three years of blogging this Sunday. Since I do not plan to write this weekend, I want to take a moment now to reflect on what the past three years have meant to me.
First and foremost, blogging has been fun and educational. I truly believe that, thanks to reading more, writing more, and interacting with pros in the business I have become a better adviser to my clients. Yes, the technical lawyering and drafting and stuff is very important. But I have learned much by trying to put on the glasses of your client and thinking practically, while also keeping that lawyer hat on. That said, I know I am not the business guy, but I also think I can give better advice while at least keeping in mind that side of the coin. You just do the best you can.
I have also changed as a blogger, and hopefully for the better. I get more news and posting from Twitter now than I do from the news or from other blogs. I do not know whether that is good or bad, but I know it is the reality of the situation. I am posting less, but I hope there is more to quality than to quantity. Just as I would rather have 1000 good readers than 10,000 not so good ones, I would rather write a meaningful post once a week than spew out garbage daily. I respect all of you too much to do that.
I've met, in person and virtually, some really great people in the field. I am still amazed that people read this blog or even give a darn about what I have to say. I have gotten a little bit of recognition -- or perhaps notoriety -- in the field, be it good or bad. Most people seem to like what I write, although you always have detractors. You just learn to be true to yourself, write what you feel and say to yourself that no one has to read the DLB. And I am okay with that. And for that matter, not everyone should read this blog. Yes, I said it before and I say it again: we have a self-selecting audience here of people who are commercial real estate pros. As I have said before, I do not dumb down what I have to say, even if what I say is sometimes dumb. There are plenty of blogs and news sources out there.
Has this been a great money generator? Frankly, no. But it did not take me long to figure that out. I decided not to worry about that, to keep writing anyway when I had time, and to use social media as a learning and networking tool, not to mention as a conduit for my creativity in addition to my music. It has been suggested that I find ways to brand myself better and I expect that will be a future goal. I may not be the most successful dirt lawyer on the planet, but all in all I am one of the happier and friendlier ones, and there's something to be said about that. After all, life's too short, and no one ever said on his deathbed, "Gee, I wished I had worked more."
Last but not least, my thanks to all of you who take a few seconds or minutes from time to time to read my musings. I sometimes wondered, a la the musical 1776, "Is anybody there? Does anybody care? Does anybody see what I see?" In the music business we call performing to an empty house "playing for the walls." And yes, I've done that. While I sometimes felt that way here, too, I am reminded regularly that it just isn't the case. I hope you will continue to visit, and I look forward to meeting more of you in the months and years to come.
Best to all,
Posted by David at 11:18 AM
I had to take the plunge and moderate comments today. There has simply been too much spam and junk that I do not want any of you to have to read. I do not generate -- nor do I expect to generate -- a lot of commenting on this blog anyway, so I should be able to post them fairly quickly should you decide you have something to say. Comments actually related to my posts are, of course, always welcome.
I know regular, loyal readers will understand, and I thank you for that!
Posted by David at 10:38 AM
Tuesday, April 6, 2010
I had lunch last week with a local reader of my blog; it turns out we have a mutual friend in the business. I had a great time and I look forward to doing it again. I'm telling you this because of a great story that my lunch companion shared with me, one which, with his permission, I want to share with you.
My friend at one time represented a large real estate developer and landlord in commercial evictions, typically for retail deals with mom and pop tenants. He looked at the leases as a litigator might, and asked his client, the general counsel, why the landlord reps were not getting more guarantees, more security deposits and other terms that might help the landlord mitigate its damages if the tenant defaulted under the lease.
The GC -- a savvy guy in my opinion based on the way I heard the story, said that my friend was only looking at the bad deals. There were also many good leases, and if there were not some bad ones out there then the landlord reps may not be prospecting hard enough to find tenants. In short? The bad leases were okay because in the mix were many, many more good leases.
The moral of this story? Not every deal is a home run or even a double. Sometimes you have to do some deals that are marginal or have a little hair on them to make sure you are doing enough deals and filling properties. Perhaps the only thing worse than bad deals are no deals at all. The key is to do more good ones than bad, and that in the end is up to the business guys. Their jobs depend on it!
Posted by David at 12:14 PM
Monday, March 29, 2010
I am finally taking the plunge. I just registered for the ICSC conference in Las Vegas in May. Yup -- my first visit to RECon!
They are saying that registrations are up 15% from this time last year, and it'll be interesting to see how many people show up. I know a few people who are making some last minute decisions to attend and I hope they will all show up.
In any event: I am hoping there may be a tweet-up on Saturday night or Sunday for those of you who use Twitter (@DirtLawyer, in case you did not know). The Hard Rock has been suggested as a venue.
I would really enjoy meeting up with my fellow real estate pros, whether we've met before, traded emails or phone calls or heck, even if we've never had any contact at all. (I will admit that I like knowing that someone is actually reading what I have to say.) I can be reached at dstejkowski (at) stejlaw.com and I will keep my BlackBerry handy if anyone has a little free time.
Hope to see you in Lost Wages!
Posted by David at 9:20 AM
This article and podcast from John B. Levy is a few days old, but it really makes a great point in my opinion. He says that lenders are finding the right mix and that is what is causing an increase in loan activity, including even some CMBS loans. Yes, the LTVs are low and the rates may be -- well, they are what they are -- but there is activity.
My take? Time heals most wounds. No matter how much private or public intervention there may be (TALF, schmalf), lenders and buyers had to sort through this whole market and find a middle. There are signs that the middle is actually being found in a few deals, and you are finding deals with mezz debt and equity replacement coming in to make up for lower LTV loans and reduced equity in properties.
I also agree with the conclusion that we are nowhere near from being out of the woods. Banks are still having problems, especially at the community level. We've gone from a dead stop to some movement. Full steam ahead? Not yet. But to continue the maritime analogy, the steam is hopefully building so speed can be increased. I just hope we do not go back to the flank speed we were at a few years ago for the rest of my career. We've seen that and hopefully learned our lessons. The cowboy mentality that I sometimes saw at the the height of the market was just no fun, at least not for this dirt lawyer.
So what next? We watch and we negotiate and we see what I think will be some complex deals go down. They ought to be interesting to watch and, in hopefully a few cases, to participate in them. And of course this will be a market by market recovery. Don't just expect the spigot to open this morning. Phones ringing and emails flying are always my first clue. And that will be a welcome sight and sound for most of us.
Posted by David at 9:10 AM
Friday, March 12, 2010
As regular readers know, I like it when old buildings can be rehabbed and reused. So it comes as no surprise that I am happy to see that this is going to happen with the old Cook County Hospital, "a Beaux Arts gem" that will be converted into offices.
Christina Lee has put together a very nice piece on the rehab project for McGraw Hill's Engineering News-Record that you can see here. I'm interviewed near the end of the piece; fortunately she had a wide angle lens. :) So if you will excuse me, I am getting back on the treadmill. Have a great weekend!
Posted by David at 3:23 PM