Wednesday, December 22, 2010

Sears was even a lousy dirt play?

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.

Thursday, December 16, 2010

E-ticket deals in a B-ticket market?

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.

Monday, December 13, 2010

Liquidated damages

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.

Wednesday, December 1, 2010

A quick note of thanks....

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.

 
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