Real Estate Advisor Law Blog : Ohio Real Estate Lawyer & Attorney : Ulmer & Berne Law Firm : Columbus, Cleveland OH

As methods of delivering information continue to evolve, we at Ulmer & Berne notice that more and more of our clients and contacts are actively doing business in an “on-line” environment. The tools of the Web 2.0 world of social networking and blogs of every type and nature have created a connectivity of people and a sharing of information never before witnessed. These tools have made a large world smaller and more manageable.

The Real Estate Advisor Law Blog (get it REAL) is written to disseminate pertinent information in a timely manner relating to real estate, construction, financing, environmental and related matters.  From time to time we will write about other issues we think those in the real estate, construction, design and finance industries have an interest in or should be aware of.  Our posts will be concise articles written to identify trends and opportunities that our clients and contacts deem important for their businesses.  We know that your time is valuable and if we are fortunate enough to have your attention for a few minutes a week while reading a blog post we want you to come away with an idea or tool which will translate into making you more effective, profitable and successful.

 Ulmer & Berne is uniquely situated with offices throughout the Mid West and with one of the top real estate law practices in the Mid West. Our attorneys see trends developing from local, regional, national and international perspectives.  We hope that by us sharing our thoughts with you we will demonstrate to our clients and contacts that we have "skin in the game" just as they do. 

The Real Estate Advisor Law Blog is now open for business! You can receive the new blog posts directly by subscribing through your RSS reader, email or just bookmark this page and visit us periodically.  Thanks for visiting us and make sure you leave us your comments from time to time on your thoughts relating to the blog posts which will be published here.

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I continue to be amazed at the reaction I get when I recommend to clients that they purchase title insurance as part of a real estate transaction. Granted I could be considered biased as I am a licensed title insurance agent, clerked in law school by searching titles in Franklin and the surrounding counties and spent the first 2 years of my legal career as an underwriting attorney for Chicago Title at their headquarters in Chicago. Generally, lending clients have accepted title insurance as a must; but not all developers and residential purchaser's have seen the light; notwithstanding the Erpenbeck situations which arise from time to time.

So, if you are not yet convinced that title insurance should be a necessary component of your due diligence and closing requirements, below is a list of 73 reasons why you should change your mind which has been assembled by Stewart Title and Lawyers Title at their website Know Your Closing.com.  Most of these items can be located by a search of the public records, but not all.

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A side effect of the foreclosure crisis has been a growing concern among lending institutions over the possibility of “lender liability.” Lender liability encompasses any number of actions that may be asserted by a borrower against a lender based on either the lending process or final loan documents. Borrowers have been seeking new and inventive ways of avoiding foreclosure, often by bringing these claims against banks as counterclaims in a foreclosure action. 

One of the most fruitful areas for lender liability claims to arise is in pre-agreement negotiations. It is easy for a borrower to embellish conversations to claim that an agreement arose, or even that its terms were more favorable than written. A few simple steps can minimize (although not eliminate) the chance a borrower may be successful on such a claim:

1.        Require a written acknowledgement that any pre-execution communications between borrower and lender are not binding. This is particularly important in the loan work-out setting, where a lender does not want to grant concessions under the original loan documents until a final agreement has been reached.

2.        One of the recurring themes in lender liability cases is the borrower’s perception that ongoing negotiations have resulted in an agreement. Placing a termination date in all pre-execution documents can avoid this problem.

3.        Early in the loan application process, send a letter to the prospective borrower laying out all the required steps to be taken, by both parties, before a loan will be made.

Remember, especially in these times, you must “hope for the best and plan for the worst.” As a lender, you are hoping to benefit from a transaction financially, and are eager to get a deal done. But should litigation arise, you want a pile of evidence that all plainly supports your version of the deal. This shouldn’t be a hard sell, as extensive documentation also benefits the borrower by setting out the path to approval and eliminating any misconceptions. 

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 It seems like every day another retailer files bankruptcy.  Many more have frozen new deals, cancelled scheduled openings and even closed open stores. A shopping center landlord must monitor tenant monthly gross sales reports and tenant public filings to anticipate which of its tenants are or could become problem tenants. The landlord should also act quickly to declare a default of a tenant which is not paying rent and other charges timely.  One strategy for a tenant is to withhold rent to build a war chest before it files bankruptcy. A landlord that terminates a lease prior to the tenant filing for bankruptcy protection has significantly improved its leverage.  A well drafted lease, including tight permitted use clauses, can also increase the landlord's bargaining power.

A relatively new development is "designation rights." A tenant with multiple locations files for bankruptcy. The tenant then has the right to accept or reject its leases. The tenant sells this right to a "designation rights acquirer."  The acquirer seeks a return on its investment by finding new tenants to purchase the leases. In a successful center, the landlord may become vulnerable to having the lease assigned to a party the landlord would prefer not to have in its center, or at rates less than the landlord could otherwise obtain. So another potential income stream to the designation rights acquirer is payment from the landlord  in exchange for the designation rights acquirer rejecting the lease because the landlord does not want to take the chance of having a bad assignment. As more and more retailers are stopping expansion plans, it is possible that designation rights will become less valuable because the designation rights acquirer will both have a smaller universe of potential assignees and because the landlord may be more willing to accept a larger universe of assignees.

The new Bankruptcy Code amendments to Section 365(d)(4) which effectively shortened the period for a tenant to accept or reject a lease was supposed to give the landlord more leverage (120 days/extenable to 210 days).  However, sticking to the rejection period and taking all of the other steps will do no good if there is no demand for the space. The economic reality may still cause the landlord to extend the rejection period and work with the designation rights acquirer. So the real question is whether there is simply too much retail space built and how do we absorb the existing space? One answer seems to be mixed use - adding office and residential into the retail center. In any event, it is clear we will see a shake up in the retail industry in 2009.

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If we want a healthier community we need to start with a healthy core city.    I am a social worker, turned tax attorney, turned real estate deal maker. I tell you this because those phases of my life have all brought me to this point in my career.   You know the theory about the donut. If there is a hole in the middle surrounded by wealthy suburbs, eventually the suburbs will crumble. Besides, urban areas are rich in character, more ethnically diverse and in general are more interesting places to hang out. Given the choice many people would prefer to live work and play in an urban landscape.

Tax credits, whether they be historic, low income or new market fuel urban development deals. Without these tax incentives restoring old buildings in the urban core makes little economic sense. The costs to rehabilitate are more then the fair market value of the buildings upon completion considering the low rents and sales price per square foot. Especially in these economic times when every bank is looking for a reason not to lend money, tax credits are even more important. Yes, tax credit deals take more time, are more complicated and result in higher professional fees. However you can raise almost 50% of the project cost in tax credit equity/ subordinate debt through tax credit programs.

Just recently I read an article in the Sandusky Register Online about the Ohio Preservation Tax Credit and the resultant loss of a deal in the Sandusky area because the program makes it difficult for it to be used with the New Market Tax Credits program. While the article oversimplified the problem, the problem still exists and I and other professionals are having a hard time convincing the Ohio Department of Development and the Ohio Department of Taxation that it needs to be fixed. Basically the program requires the credit to be allocated in proportion to a member’s ownership interest. In other words it does not allow the credit to be “specially allocated” to a member. This is important because urban development deals usually involve federal historic tax credits, state historic tax credit and either low income housing tax credits or new market tax credits. Different tax investors have different appetites depending on their presence in Ohio and their tax liabilities. If the credits could be specially allocated then investors would pay more for them rather then trying to find one investor for all credits. 

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Recently at the January monthly Real Estate Roundtable breakfast sponsored by the University of Cincinnati, I was introduced to a fascinating new concept – the Roof Lease. Featured speaker Mike Phillips, President of Cincinnati based national real estate developer Phillips Edison Company, mentioned that Roof Leases are starting to spring up across the country. The basic concept is that in exchange for 15 – 20 years of guaranteed income (or in other words, payment for electricity generated from solar panels installed on the roof) a solar energy provider installs and maintains solar panels (generally with the help of grant money) on the roof of your shopping center. Once installed, the solar panels are capable of generating sufficient electricity to power the entire shopping center and provide a number of direct benefits for the landlord. These benefits include the ability to market as a green center featuring controlled electricity costs for tenants, reduced common area electric costs for itself, and the potential of becoming eligible for certain energy related tax credits. As an added benefit, solar panels can be easily hidden from sight; so there are no aesthetic concerns nor is their addition to an existing center likely to run afoul of antiquated zoning code height restrictions.

As a side note, if anyone knows about emerging trends in the shopping center world, it should be Mike Phillips. His company owns more than 240 properties across the county and his popularity was evidenced by the largest turnout by far of any UC Real Estate Roundtable breakfast in recent memory. 

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If you are building new or renovating an existing building, you may have considered trying to obtain LEED certification for your project but decided after analyzing the cost that it was not within your budget. Well now, thanks to the Ohio Bipartisan Job Stimulus Plan (HB 554), LEED-certified projects may be eligible to receive funding. A little-known agency in Ohio has been tasked with reviewing and approving grants and loans under the Advanced Energy portion of HB 554. With $150 million in funding available over the next three years, this little-known agency, the Ohio Air Quality Development Authority (OAQDA), could become your next funding source.

The $150 million has been divided into two parts: $66 million for clean coal technology projects and $84 million for non-coal related projects (to be distributed in three $28 million annual appropriations). The projects eligible for non-coal related funding include various projects such as fuel cells, increased efficiency in electricity generation, advanced solid waste or construction and demolition debris conversion technologies, and renewable energy resources (wind, solar, etc.). Another category includes, “Any technologies, products, activities or management practices or strategies that reduce or support the reduction of energy consumption or support the production of clean renewable energy.” 

At a recent presentation given by Kimberly Gibson, Assistant to the Energy Advisor at OAQDA, Ms. Gibson noted that “green” building projects may be eligible to receive a grant or loan under this last category. Constructing or renovating your building to be green would reduce the building’s energy consumption, the requirement of this last category. Inclusion within one of the categories is not the only requirement. When determining whether to approve a grant or loan, OAQDA also evaluates whether the project will result in new jobs, will assist Ohio manufacturing, and whether the project is adequately funded.

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You know how you can smell the familiar scents of the changing seasons in the air ? Well those of us who have the honor to have survived a career in the real estate industry have recognized the smell in the air for some time. Right now that smell is pretty offensive; but we know from experience that it is going to turn sweet before you know it ! Recently, I was speaking with Mark Sinkhorn of Lawyer's Title Insurance Company National Services Division in Columbus, Ohio who reminded me that back in 1980 when the economy was experiencing record inflation and the only transactions we were doing were land contracts; and more recently in 1987 and 1994 there was a similar collapse in the lending market. In all instances, the economy and real estate industry rebounded .

Today, other than for some condominium developments in larger markets, the commercial real estate market is not over-built and once credit frees up again commercial development should lead the way as businesses expand their operations. In the mean time, manufacturing and distribution operators might wish to consider sale-leaseback transactions as an alternative to creating cash and moving assets from on balance sheets to off balance sheets. Sale-leaseback transactions properly structured are a "win-win" for both the developer (buyer/landlord) and the company (seller/tenant).  Residential sellers might consider loan assumptions, seller purchase money mortgages and land contracts once again as tools to move their properties. There is a lot of room for creativity in commercial and residential property transactions, but care should be taken in the structuring of the same.

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