Monday, September 27, 2010

A lease is just a lease? Yeah, right.

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.

Wednesday, September 22, 2010

A Tale of Two Loans

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.

Monday, September 13, 2010

Reason No. 136 to Hire a Real Estate Lawyer

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.

Wednesday, September 1, 2010

Picking a real estate lawyer - bigger isn't always necessarily better

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.
I'm not blaming or knocking Mr. Champion for wanting to work only with top lawyers and substantial firms.  It is his prerogative.  But I do think that sometimes you have to think more about who the lawyer is more than where he or she works.  Here is my checklist:
  • 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?
Anyway, my clients hire me for who I am and not for where I work or the name on the door other than mine.  And I guess that means not attracting certain clients, and I have to live with that.

 
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