The Dirt Lawyer's Blog

What is $190 million among friends? A LOT of money!

2008-07-15T14:59:00.004-05:00

That is how much Crain's estimates that Teng & Associates has plunked into the Waterview Tower/Shangi-La Hotel development on Wacker Drive. Other than a $20 million bridge loan from LaSalle Bank, that's apparently all cash we're talking here.

Neither I nor Crain's has seen any much activity there in weeks, and the trade reports that there are at least nine mechanic's liens that have been filed. (That is an UGLY statute in Illinois to deal with, by the way.) Often that's a sign of major league trouble. But the lender insists that the loan will be done and construction will then proceed. Good. I like staying at Shangri-La in Asia.

And, as you probably know, Teng is not alone. I have not heard anything about financing for the Chicago Spire either, but I assume Kelleher and Anglo-Irish (presumably a syndicate) will eventually do something to get that deal done as well. If you look at pictures, the hole in the ground is dug. There's a YouTube post with rumors (you can look it up if you care; no link here). Of course, I've seen holes dug and no building built thereafter for a looong time, but I don't know how this will turn out. I'm hoping, of course, the deal gets done.

The audacity of excellence?

2008-07-15T10:31:00.002-05:00

I got a kick out of this story on lawyer frustration and how to strive to be "above average." Apparently, lawyers are part of an "unintended byproduct of a profession that confines its lawyers to prisons of bureaucracy, internal politics, dysfunctional interpersonal relationships, inefficient systems and ineffective leadership. It is heartbreaking to see people who expect so much from themselves and others toiling in environments that perpetuate underachievement."

I'm lucky. Even when I was in a big firm I didn't have too much of that, and now I am free to be as good as I want to be. David Freeman makes some excellent points, the best of which is to Demand a maniacal focus on the client. I've been doing that as long as I can remember, so this is no big deal for me. It is nice to see it reinforced from time to time though. Sometimes it is hard to get over the fact that it isn't about you, it is about the client. Your success is often in tandem with that client, so work hard and get the deals done and mutually reap the benefit.

What a difference 37 years makes...Bolingbrook, Illinois

2008-07-15T09:05:00.003-05:00

I moved to Bolingbrook, Illinois in April, 1971. I was 5. I consider it my hometown, and we still own property in town, right down the street from my old neighbor, Mayor Roger Claar.

When I was a kid, we didn't really want to admit we lived in Bolingbrook. It had a cheap tract home reputation and everyone thought it was in the middle of nowhere. And I suppose it was. And it was also known for the world's first indoor amusement park and shopping mall, Old Chicago. The concept in its execution was ill-conceived, but in theory it was a great idea, and you now see larger, grander versions of this idea all over the world. We had good (year-round!) schools and teachers, nice parks, friendly neighbors, clean streets and pink flamingos! (That last one's an inside joke for old timers.)

How things change. The village matured, and thanks in large part imo to Mayor Claar, Bolingbrook is #32 in Money Magazine's Best Places to Live 2008. The village beat out Wheaton, Aurora and Orland Park in the top 100, and was surpassed by our neighbor, Naperville, which was #3 in the survey. And it's a great place too.

So cheers to my hometown. I was there last week and visit frequently. There's great shopping, excellent recreational facilities, good infrastructure -- all in all, it's a pretty nice place to live. They try to keep a small town flavor in spite of a population of 70,000. Just because you hear about certain people in the news does not make it a bad place, and Money confirmed that.

One last thought for the day - specialty lenders

2008-07-14T15:50:00.003-05:00

I ave not seen many stories about non-traditional lending sources. No, I'm not talking about Guido the Killer Pimp. Specialty lenders have their legitimate place in the market, either as lenders, mezz lenders, equity participants or combinations of the above. And guess what -- they are thriving in this credit market. I know -- you're shocked at this revelation.

But like Guido, be prepared to pay for the money and the speed in which a deal can get done. Everything comes at a price, and it isn't cheap. But if it beats the alternative....

Courtesy of Deal Junkie.

Wal-Mart Bombs? No, not really.

2008-07-14T15:43:00.003-05:00

Thanks to Counter Culture for pointing out this cool video on Wal-Mart's expansion. It reminds me of the movie War Games. Global thermonuclear war, anyone? Or how about a nice game of chess?

And here go retail vacancy rates

2008-07-14T13:17:00.003-05:00

This is before Steve & Barry's, but Crain's reports a hefty jump in vacancy rates in the second quarter. This is not developers bringing space on line, either. Some of the projects I wrote about last year are delayed or dead. Rather some retailers are retrenching and others, as we know, are liquidating.

Is it all bad news? No. Some of it was expected. Kane County and many of the suburban submarkets were expected to rise, because retail is perhaps ahead of the rooftops. And some "bad" news is just a sensible slowdown. Walgreens, for instance, is "only" planning to open 365 stores next year instead of 500. And where the bodies with money are? Vacancies actually dropped below 4% on the north side of Chicago. So...location and money and you are probably ok. I guess that means we should expect a slowdown where I live, too, even with Bed Bath and Dick's coming in and Petsmart just opening. I guess that might mean another year or two for Panera Bread, alas.

Things are tough all over, eh...so what do you do?

2008-07-14T09:26:00.004-05:00

I know and hear that people with money are buying where prudent. This is notwithstanding more recession fears, Fannie and Freddie, huge numbers of retail store closings (including a Steve & Barry's BK and probable liquidation), record gas prices, war...good grief, is anything going well? And Anheuser Busch is going to be owned by WHO???

(Speaking of ICSC and retail BKs, here's a nifty little summary of the BK process after reform, which some say is just in time for landlords and other say leads to liquidations because of a lack of time to decide which leases to reject and keep.)

As we have all said countless times, real estate is about location. So if you only make money by buying, selling and leasing, and you can find a panicked or distressed seller (not as easy as it seems, bucko), then it is your business call. I can give you a few legal thoughts I see in my crystal ball.

First, involve your lawyer at the letter of intent stage, not once the main points are covered. We can make suggestions that might make your life easier.

Remember that unless you are a cash buyer your lender will drive the deal. Transactions are getting delayed a lot lately because of due diligence, committee approvals and just plain slowness, and you will need flexibility to meet your lender's needs.

Make sure your seller commits to obtaining high thresholds of estoppels and SNDAs that your lender requires (or negotiate this with your lender if posssible). Get as long of a financing contingency as you can. (Yes, the days of no free looks, no contingencies and close in fifteen days are gone for now.)

Find ways to get your earnest money back if a lender bails or significant problems arise. Be prepared for material changes that may occur during due diligence or the period between due diligence and the closing, such as tenant blowouts, bankruptcies and other similar issues.

Finally, be patient. Rome was not built in a day and, as we've said before, the real property market is probably not going to completely collapse (in which event I'll be out of a job and going back to graduate school or something!) Don't expect to find bargains on every street corner. (Also, this is just a summary of a few salient points. Keep that disclaimer in the sidebar in mind when reading this.)

P.S. If you are a seller, you ave legal issues of your own to consider, and perhaps I can cover that another time.

It's been a long and busy week

2008-07-12T08:48:00.002-05:00

But I could not let Saturday morning go by without giving props to Jeff Brown, the Bawld Guy. Yes, we've been reading about banks being taken over and Fannie and Freddie in trouble. It's enough to scare you and me and many people, eh?

Jeff will help bring you back to earth with two posts here and here. The moral of the story? We're in the last act of a movie we've seen before, one where the country is going to hell in a handbasket. But guess what? The crisis ends and we start casting for the next gloom and doom movie. It's just been a while between showings.

In short, what is going on is a sequel to previous crises. The old-timers have seen this before, and we'll all see this again. Yes, there are different casts, and some movies are scarier than others (sometimes because of the persuasiveness of the critics), but this is not a time to jump out of a building. Actually, no time is a good time to do that.

Enjoy your weekend. It looks like the skies may clear up enough to sneak in some golf.

But then again...

2008-07-07T09:15:00.003-05:00

Reports are that REIT prices are declining again:

According to the Wall Street Journal, real-estate investment trusts (REITs) saw a Q2 2008 that was basically opposite the first. The WSJ says the Dow Jones Equity All REIT Total Return index was down 4.9% in the second quarter. In Q1 of ‘08, it was up 1.4%.

I guess I am not surprised. The market on the whole has tanked lately. And also remember that REITs can be more volatile than stocks, especially the Dow or the S&P. They go diddley up-up, they go down diddley down-down. And let's not forget that the Dow in this case actually declined by more than the REIT index. So things could be worse. Oil and inflation are the dragging factors here.

All in all, it's still about the dirt

2008-07-07T08:47:00.002-05:00

Here's a story about pension and endowment and other institutional investors looking toward so-called "next generation" investments. In short,

Investors already experienced with the traditional alternatives — private equity, real estate and hedge funds — are now open to newer alternatives such as real assets, infrastructure and 130/30 strategies, said John Garibaldi, managing director, heading the alternative strategies group at JPMorgan Asset Management, New York.

Yeah, let's take advantage of market disconnects and make lots of money. Sound like something you've heard before?

In short, what goes around comes around. And as catchy as some investments are, don't forget that there's no more dirt being manufactured in the world, unless you count land created by dikes.

Now, if you've gotten this far in the post, you'll find that I buried the lede, which is exactly what this story did imo. Get this:

Overall, 94% of all investors stated that real estate is meeting performance expectations compared to 92% for absolute-return strategies, 88% for private equity and 87% for hedge funds.

Is that because of low expectations, or misplaced expectations for other investments or because -- wait for it -- real estate is a fundamentally sound investment? Ding, ding, ding...good answer! I knew you'd get it right or you'd probably not be reading this post.

Hope you all had good holiday weekends. I did.

Is Orland Park blowing its new downtown? The Main Street Triangle may just be a sliver

2008-07-03T09:52:00.005-05:00

I think they might be. Reports are that the village has decided to put off any bids for a new developer to take on the $100 million project until the fall. Why, why, why?

Related Midwest, based in Chicago, had been chosen approximately three years ago by the village to develop the triangle, but pulled out of the project in April, [village development services director Karie Friling] says. The village had a request for proposals, which was initially due in May and then pushed back until last month. “We had suspended it before we received any bids,” she says. The village halted the request because many of the interested developers had questions that village officials could not answer yet, she says.

These questions are presumably about the fate of a pretty old shopping center at the corner of 143rd and LaGrange that have some tenants with long term leases. Ummm....how about, buy them out?? And after all these years, how can the Village not only not have answers but need months and months of time to figure them out? The problem is that this project will lose traction and die on the vine. With business slow, now is the time to try and get developers at least interested in the project. They have time to think this through.

Let's face it, folks: Naperville this isn't, nor will it ever be. And support seemed awfully tepid, unless it was just the weather. I was at the ribbon cutting a couple of weeks ago, and the crowd for the ceremony and concert was almost outnumbered by the politicians in attendance. I will say this: the train station is very nice. But the pavilion they built in front of it is not especially attractive with oversize columns and a just plain feeling of "Why did they put this here?" It reminded me a little of Soldier Field. Blair Kamin would have a field day with this. And by the way, if this was pavilion was meant for concerts and music, the acoustics are just awful.

So, you south suburbanites, if you are waiting for a nice mixed-use, transit oriented development to go or even to live, don't hold your breath.

Not just law firms are consolidating. Will the average guy be squeezed out of the market again?

2008-07-03T09:40:00.005-05:00

First we had Staubach and JLL. Now the rumors are GVA and Colliers joining forces. I understand the whole concept of one stop shopping, but I think this can go too far.

Are real estate pros going to end up like accounting firms, where you have a couple of large firms and a bunch of small ones? It sure seems that way.

What worries me is the little guy being squeezed out of effective representation in the marketplace. It is already happening in the legal profession and it could happen in others as well.

It may even happen in the medical profession, so be afraid. For instance:

The Associated Press reports in an article that the Centers for Medicare & Medicaid Services will hold physicians Medicare claims for services furnished on or after July 1, 2008. According to the article, the holding of claims is intended to temporarily delay the implementation of the 10.6 percent reduction in the Medicare payment rate for physician services until Congress returns from the July 4 recess and has time to address the scheduled payment cut.

So, doctors stop getting reimbursed for the ostensible reason that the 106% cut will be rescinded. Yeah, right. There's government efficiency (one of my favorite oxymorons) hard at work for you. What might doctors do? I read an email the other day suggesting that doctors simply take their low reimbursing insurance patients -- such as Medicare -- and lump them all into brief clinic visits at limited hours on a first-come, first-served basis. This means that the doctors can spend the lion's share of time working on paying patients. (Sorry, I know this is off topic, but it is important!)

It may seem unfair, but think about it. If you have two people asking for your professional time -- one who pays and the other who does not -- whose call will you take? I thought so.

Will this happen in the legal and real estate professions? Probably not. The average person just won't have access to the system. But still: be afraid.

Another retail chain in trouble? A line on Steve & Barry's and some thoughts on defensive leasing

2008-07-01T14:42:00.003-05:00

Boy, they weren't kidding about retail woes. Now I am reading that Steve & Barry's, a cheap chic chain, is talking to Weil Gotschal and thinking about closing 1/3 of its stores as it decides on its future.

I found the comment about defensive leasing from a Greenberg Traurig lawyer interesting. From a landlord's perspective I guess that means (for instance) watching out in a down market for big TI allowances and shelling out major money on a lease that could go south. Boy, have I seen that.

Defensive leasing also exists for tenants in an up market; this is a term I am more familiar with. In other words, tenants will sometimes take more space than needed or commit to so-called "must-take" options to add on space in the future in order to lock in possible expansion needs. This is, of course, seen more often in office leases.

I've heard about real estate developments being a bomb, but this is ridiculous

2008-07-01T12:20:00.003-05:00

CNN is reporting about a subdivision in Orlando that apparently contains, oh, live bombs.

Yes, you read that right.

I don't know what the law is in Florida, but I can't see anything that would actually cover this on a disclosure report in Illinois. Maybe that's because no one in their right mind ever thought someone would build on a, um...bomb range. I've heard about unexploded ordinance in the UK many times, but here? Not so much.

Interestingly,

Nearly two decades ago, the 1989 development order, in which the county granted the permission to develop the land, shows that builders and developers knew "of the site's history of military use."

Wouldn't the terms of a development order typically show up on a title report? Was this excluded, and why? I know I have seen development orders when reviewing title before? Of course, there will be inevitable lawsuits against the developer for failing to disclose this. No one wants to buy, no one wants to lend, so what will be the outcome? I'll be in touch with friends in Orlando to see if there's anything more here worth discussing.

Meanwhile, back in retail...and law law land....

2008-07-01T11:20:00.003-05:00

I was sad to see that Whitehall Jewelers is calling it a day. But I guess it might have been inevitable. The family of a college classmate used to own Whitehall so I always cheered it on.

On another front, you can see the latest Marcus & Millichap report on the retail market here thanks to the Sibdu Blog. Ready for it? Holding your breath? "The retail commercial real estate market is softening … amid a slumping economy, the prolonged housing downturn … and, you guessed it … the credit crunch."

Sorry, no big surprise like the Chicago office numbers yesterday. Asset sales, like most other sectors, are way down. I guess the one thing moving is self-storage. And industrial also looks relatively healthy.

Oh, one other encouraging thought: law firms are BUSY. One friend canceled lunch with me last week because work is crazy busy with deals. Another firm I know is swamped with workouts. So there's hope yet, even if lawyers think they are going to be fired....

1031s -- down but not out and possibly set for a boom

2008-07-01T09:48:00.005-05:00

If the capital gains tax goes up -- a possibility under McCain and a virtual certainly under Obama -- the 1031 market is going to go through the roof as people will try to defer their capital gains.

While in some sectors 1031s are still very popular, I don't see many of them in my practice -- maybe two a year these days. I expect that number to rise, and I am starting to bone up on current events in the field and various rulings and nuances of the law to make sure I am ready for that boom.

If you too are interested in thinking about 1031s, one website I stumbled across was this blog from the 1031 Alternatives Group. It is (as it ought to be) an ad for their services (which includes TIC deals), but I also found their information interesting, and I learned a ting or two about some recent developments. There are also some very basic concepts discussed for neophytes.

My property taxes may decrease? I'm rolling on the floor laughing...

2008-06-30T14:22:00.002-05:00

Here's a thought-provoking story nonetheless about a housing slump meaning that state and local government will have less revenue because of, among other things, declining home values.

While I would love to see a decline in my property taxes (they went up by, IIRC, 3% this year), let's just say I am not holding my breath. I also have to remember that our local high school district wants to tack on an extra grand to build a new school. Yeah, right.

Downtown office vacancies are.....down???

2008-06-30T13:55:00.002-05:00

You read that right, and by no small number either. Vacancies dropped by 0.6% in the last quarter and demand improved to boot.

Now, before you get too excited, let's remember that portions of two big buildings went off the market due to pending hotel conversions, and that more space is coming on line in 2009. So, while this is welcome news, it may be a bit artificial. But if it isn't....

Chicago legal industry thoughts

2008-06-30T10:09:00.005-05:00

An interesting (possible) incongruity I am finding: Half of GCs surveyed are planning to do more work in house and cut back on law firm usage (one big reason -- the cost of hiring BigLaw firms to do less than bet-the-company work).

Yet, notwithstanding this, smaller firms that could perhaps compete on this front are still merging into BigLaw. On the heels of Welsh & Katz (a fine IP firm) announcing its merger with Husch Blackwell Sanders (itself a recent merger!), now we have the first-rate mid-sized Schwartz Cooper dissolving, with almost all of its lawyers moving to Detroit-based Dykema. In turn, Dykema got its start in Chicago in 2004 by merging with Rooks Pitts, also a well-known mid-sized firm.

So, is this economies of scale? A fear that you have to grow to compete? How will clients react? Schwartz Cooper was well-known for its work for LaSalle Bank (now B of A); did that play into it as well? I'm going to have to make a phone call or two.

One last thought: just as we have lost most of our locally run banks, is this now the irreversible trend for law firms, too? I hope some stay around. One that I particularly thought did something interesting recently is Much Shelist (which is well known for having a top real estate team), which announced the creation of a board of outside advisers to help with its strategic direction. I'll have to follow this and see where it takes them.

Mixed-use, transit-friendly projects: Having clients ahead of the curve is fun

2008-06-25T08:55:00.003-05:00

This is for a good and smart cause in a day and age of $4.00+ gas. GlobeSt.com reports that, at the Transwestern/Real Estate Forum Twelfth Institutional Investor Symposium, the hot topic was mixed-use, in-fill projects near mass transit. That was news to me, because I just assumed everyone's been doing this for years. Obviously I cannot take the credit, but I remember doing these deals very early in my career. So, you current and former clients of mine doing this cutting edge work, congratulations! You were a decade or so ahead of the game.

My favorite non real estate blogs

2008-06-24T14:05:00.003-05:00

With perhaps one exception, my blog links are only for real estate related websites. I made that decision intentionally. But that does not mean I don't have other faves of my own that are not part of the legal or dirt worlds. And here they are:

1. Opera Chic: As a musician (former professional, now a dedicated amateur), I like reading about the music biz. And Opera Chic is as good as it gets. OC knows her stuff and is not afraid to tell it like it is. There are great stories, videos, and pictures of all things opera and classical music, with a particular emphasis on La Scala. OC is perhaps the Howard Cosell of the music biz (and I mean that in a good sense). I also like going to myauditions.com once in a while.

2. Piled High and Deeper: techinically speaking this is not a blog. But Jorge Cham writes some of the funniest material you can imagine about the bizarre world of academia. (I am a former Ph.D. student, so maybe that is why it makes me laugh so much.)

3. Sex and the Ivy/The Chicktionary: I don't klnow why I love reading posts about the sex life of a young Asian-American woman attending Harvard. But I do. Maybe it is the voyeur in me. But Lena Chen not only writes interesting -- sometimes compelling -- material, but she does it very well for someone so young. You go girl!

4. Go Fug Yourself: Celebrities in monumentally tacky fashion designs. Enough said.

5. Above the Law and the WSJ Law Blog: they are law blogs, but they don't relate much to what I do; however, I do get a guilty pleasure from reading them.

So there's a very basic list. It is not all-inclusive. But it's a start.

What if this working from home thing actually catches on?

2008-06-24T13:54:00.004-05:00

If I were still working at a law firm, I would demand to be able to work at home whenever I could. Why? Energy prices and recaptured hours.

The main reason I created my own gig was because I needed that flexibility. A 120 mile commute was not working for me.

But what if, instead of 1-2% of people working from home, that number went up to 10-20%? What would happen to the commercial real estate market? That's one of the thought-provoking questions in this post by Lisa Michelle Galley.

I have two observations:

First, prices would take a dip for sure. Supply -- demand, blah, blah, blah. But then developers would stop building until demand caught up with supply. So there's an additional lag and no new construction for a bunch of years. People in Chicago know all about that -- how many years did we go without a new high rise?

Second, not everyone can do this. Certainly my wife as to go to the office and the hospital and people have to come to her (although when I was a kid both my pediatrician and my dentist worked out of their homes, come to think of it). And many retail and service based industries have to do the same. But phone-based customer service people? Consultants? Lawyers? Accountants? The demand for an office is not as compelling in 2008 as it was in 1988 in my opinion.

The big obstacle was always IT. But gee, these days you can almost always call in to a computer to fix a problem. I have that ability and I use it all the time. (Ironically, however, a friend of mine who works for Citrix told me the other day that he always seems to be in his office!)

I'd personally like to see this, maybe because I took the plunge myself. On the other hand it may not be as good for business as I'd like.

PS: imo employers should also encourage the policy as well as flex time and 4 day weeks when possible. I think anything to cut back on energy demand is good for the country and the economy right now.

The end of CMBS as we know (or knew) it for a while?

2008-06-23T10:30:00.003-05:00

That's what this GlobeSt.com report states:

The are widespread fears that if rating agencies develop a separate category for structured securities it will further erode investor confidence in CMBS and RMBS and delay these markets’ return.

Apparently the SEC wants to bring some transparency to the market, which I think is a good thing. And if that means it takes a while for the conduit market to come back, then so be it. I was personally having little faith in some of the rating agencies' work on deals, especially when things were hot and heavy.

That being said, however, this could bode poorly (and improperly so, perhaps) for structured finance vis-a-vis other rated securities:

Separate ratings [according to Jan Sternin, and SVP at the MBA] would lead to the perception in the marketplace that corporates and munis have an even higher level of insulation against loss -- and that structured finance may be even more prone to loss. "It would render all AAAs not created equal," she says. It would also lead to an exodus of capital from structured securities as investors would assume corporates and munis are safer.

Maybe we're not ready for reform yet, but I'm glad we're at least considering these kinds of issues.

Wednesday tidbits

2008-06-18T09:30:00.004-05:00

Why do I love technology? Because the weather could not be more perfect today here in Bourbonnais (in other words, an average day in San Diego or Santa Barbara). And, it is my wife's day off. SO, that means my emails and work calls will come in on the Blackberry while we run errands, go to the golf course and otherwise find ways to enjoy the glorious weather.

That being said, here are some quick thoughts for the day:

JLL's paying $613 million for Staubach in a down market with fears that tenant rep services will not be as in demand as in past years. I still think it is a good bet. Staubach is a primo brand in the industry. It is hard to put a tag on that price. Plus, the net present value of the deal is apparently only $317 million.

Recourse loans? We're going back to recourse loans? Good grief, that's scary. We all know about the Macklowe guaranty on his risky bridge loan, but I've been hearing about at least partial recourse quietly on some deals, especially new construction. That's gotta put fear or inertia in the heart of some developers. (I remember reading Donald Trump saying he'd never do a recourse loan again after his problems some years ago.) The alternative I would recommend for my developer clients is to bring in a money partner with enough equity to make the LTV on the deal small so recourse is not on the table. But such is the problem in this market, and by bringing in a money partner you lose much of your upside unless you negotiate a good promote and get good development and management fees.

Editorial: If anything's going to mess up this economy, energy prices will. So yes, let's drill for oil domestically and find alternative energy sources, especially for cars. (We already know nuclear is the solution for power but have to get off our butts and build plants.) Honda should license its nascent hydrogen fuel cell technology, and let's get the whole auto industry collaborating to improve and make the technology affordable. And not 15 years or 10 years from now. RIGHT NOW. Treat it like the war in terror because ultimately it is a big part of that.

OK, I'm done. Off to enjoy this day.

The smartest guy in Chicago?

2008-06-17T12:28:00.006-05:00

'I don't trust you guys'