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

Recently, the news about the $300 billion China Investment Corp. (“CIC”) invested an additional $500 million in Blackstone’s Fund-of-Funds unit and earmarked about $800 million for investing in a Morgan Stanley Global Property Fund has stirred up another round of excited discussions about China’s money pouring into the U.S. Lately, the Wall Street Journal reported that CIC is in talk with U.S. private-equity funds, including BlackRock Inc., Ivesco Ltd. and Lone Star Funds, about potential investments opportunities in the distressed commercial real estate assets in the U.S.   According to the Wall Street Journal, last year, CIC deployed just $4.8 billion in global financial markets and this year it invested that much in a single month. CIC’s chairman has indicated that Mr. Jiwei Lou, if CIC's future returns are good enough, it might ask the government to let it invest more of China's $2.132 trillion foreign-exchange reserves.

CIC’s investment decisions are among the most watched indictors for Chinese private investors when they choose foreign investments. Will Chinese private investors follow CIC this time to look into the real estate market in the U.S.?

In contrast with the U.S. real estate market, China’s overall real estate market, both residential and commercial is very “hot.” Some even have concerns that a serious asset bubble is developing in real estate. According to Shanghai real estate and foreign investment lawyer, Zengli Li, a partner at Yaoliang Law’s Shanghai office, the hot China real estate market is mainly attributed to the “flood money” that Chinese investors have directed to the real estate market. According to Zengli, Chinese investors now do not have many choices when it comes to investment opportunity. Originally, Chinese investors invested heavily in manufacturing sector but because foreign consumers tighten their belts under the current economic situations, manufacture does not sustain good investment opportunity anymore. The lack of other investment opportunities domestically has pushed and concentrated the private investors to the real estate market.  In July, for instance, a land parcel along Beijing's Guangqu Road was auctioned off for more than 4 billion yuan ($585 million US dollars) after fierce bidding among major developers from the mainland and Hong Kong. In Shanghai, developers of the luxury Tomson Rivers apartments, known for their price of more than 100,000 yuan per sq m ($14,000 US dollars), sold 10 units in the first 25 days of June. Some investors are starting to look outside of China. Many high end residential real estate markets around the globe are seeing discreet Chinese buyers.

However, Chinese investors are not accustomed to foreign markets. It has been decades that people are used to foreign investment flowing into China.  Now Chinese investors start to reverse the general trend of investment. They have heard U.S. distressed real estate market and understand there could be opportunities for buy in low. 

The channel directing the flow in of Chinese money is still not there. If you can figure out a smooth channel to attract the abundant Chinese cash, you probably need not worry about cash flow for a long time. After all, $2.132 trillion can make quite an impact!

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Following an era of relaxed standards for issuing loans, lenders must be aware of a bankruptcy court’s ability to subordinate liens for equitable reasons. On May 13, 2009, in In re Yellowstone Mountain Club, the Bankruptcy Court for the District of Montana issued an order subordinating the secured lender’s $232 million claim below the (i) debtor-in-possession financing; (ii) administrative fees; and (iii) the unsecured claims. Section 510(c) of the Bankruptcy Code authorizes a bankruptcy court to subordinate a claim for equitable purposes, but it provides little insight into the reasons that would justify this harsh remedy. For non-insider claimants like the senior lender in In re Yellowstone, subordinating a claim is a drastic measure that bankruptcy courts will rarely utilize. But the lender’s conduct, in issuing a $375 million syndicated loan with little financial due diligence and far in excess of the borrower’s ability to repay, “shocked the conscience of the Court.”

The lender issued a $375 million loan to the Yellowstone Club, a high end development company controlled by Timothy Blixseth through Blixseth Group, Inc., the majority shareholder. The lender marketed its product as the equivalent of a home-equity loan, and Blixseth treated it that way, taking large distributions from Yellowstone that he never repaid. Although Yellowstone was unable to repay its debt, the lender benefited because it had obtained a $7.5 million fee for closing the loan and had unloaded portions of the loan to the other syndicates. The bankruptcy court, finding the practices tantamount to predatory lending, determined that equity dictated subordinating the loan.

Lenders should be mindful of a court’s power to subordinate claims, even if it is rarely used. Although the bankruptcy court withdrew this opinion because the parties had reached a settlement on the issue, this case is still instructive for creditors. It illustrates that bankruptcy courts can use their own discretion to determine whether a lender has indulged in unsavory lending practices, a troubling thought to secured creditors everywhere. Nonetheless, equitable subordination for non-insiders is rare (it almost never happens), and lenders that employ responsible lending practices are unlikely to ever encounter this problem. 

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When representing a tenant, I always want an SNDA so that if the landlord defaults on its mortgage my client is assured that it can remain in the space as long as there are no tenant defaults. 

When representing a landlord, it is becoming increasingly more difficult to get lenders to make any change to their form subordination non-disturbance agreements ("SNDA").  Lenders are insisting that  tenants give up termination rights, offset rights, right to casualty proceeds and other valuable rights contained in the lease that the landlord was willing to give and which may even be customary provisions in a retail lease in today’s market.

Recently, I encountered the situation  where the lease contained a standard termination clause if a co-tenancy failure could not be cured within a set period of time. The landlord's lender would not agree that the tenant still had that right after a foreclosure.

So, is a tenant better off without an SNDA? If you weigh the probabilities, a tenant may be better of without one. If a lender forecloses, chances are the center is not performing well. If the lender forecloses and terminates the lease because there is no SNDA, how hurt is the tenant? Maybe the tenant would prefer termination. In the co-tenancy situation, the tenant gets the very remedy it was trying to preserve.  Without an SNDA the lender either has to terminate the Lease or accept every provision in it.  In this situation, the Tenant may be better off without the SNDA.

Granted if the tenant is performing well and does not wish to leave, there is some risk. But even in this situation, the only time a lender will terminate the lease is if the landlord wishes to redevelop the center.  A redevelopment, which will cost substantial sums, is highly unlikely in a healthy center. It is more likely that the lender will be doing everything it can to keep a well performing tenant.  Just something to consider – a tenant may very well be better off without an SNDA.

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In December 2007, a Lake County Common Pleas Court judge issued a landmark decision holding, among other things, that an owner of real estate that touches Lake Erie owns title extending as far as the water’s edge. State ex rel. Merrill v. Ohio Dept. of Natural Resources (2007), Lake County Common Pleas Case No. 04CV001080. Lake County is one of eight Ohio counties which contain Lake Erie shoreline.

On August 21, 2009, the Court of Appeals for the Eleventh Appellate District affirmed that holding in State ex rel. Merrill v. Ohio Dept. of Natural Resources, 2009-Ohio-4256. In particular, the Court of Appeals determined “that the waters and submerged bed of Lake Erie when under such waters is controlled by the state and held in public trust, while the littoral owner takes fee only to the water’s edge.” 2009-Ohio-4256 at ¶129. The Court of Appeals reasoned that “[t]he water’s edge provides a readily discernible boundary for both the public and littoral landowners.” 2009-Ohio-4256 at ¶128. The actual water’s edge, or shoreline, is the line of contact of a body of water and the land between the high and low water marks. 2009-Ohio-4256 at ¶¶97 and 127. 

In reaching its decision, the Court of Appeals reviewed appeals by environmental organizations representing members who make recreational use of the shores of Lake Erie, and cross-appeals by individual landowners and a non-profit corporation representing owners of littoral property on Lake Erie. In an interesting twist, the Court of Appeals found that the attorney general lacked the authority to pursue an appeal on his own behalf and ordered the state of Ohio’s assignments of error and briefs stricken.

The Court of Appeals did vacate that part of the trial court’s decision whereby the trial court attempted to reform any deed granting to its owner land extending lakeward of the water’s edge. The Court of Appeals found the issue of reforming the deeds was not before the trial court and, therefore, the parties had not been afforded the opportunity to argue their positions. 2009-Ohio-4256 at ¶103.

Any party wishing to appeal the decision must file a notice of appeal to the Supreme Court within 45 days from the entry of the Court of Appeal’s judgment.

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