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

So by now you’ve been to at least three conferences which tell you the economy has hit the bottom, it’s a U curve, 2010 will still be slow with savings and not consumption being the key characteristic, 2011 is a comeback year, but real estate will never get back to the boom boom days of only a few years ago. So what does it all really mean to the real estate professional?

1. Increased Competition. Whether it be for legal services, brokerage services, or commercial space, there is less demand and thus greater competition. But price is only one component of the decision factor. Service and quality still will be key decision factors. For example, while new centers have issues, retailers will still be looking to get into the established market leading centers and will pay the higher rent to get there. And having or obtaining a good relationship with a customer by providing over the top service is a great hedge against competition.

2. Marketing is Still Important. We all need to pay attention to expenses, but marketing is not one of the expenses to be cut. In the face of increased competition, it is more important than ever to get the quality message across. However, the marketing budget should be examined to make sure that the budget is allocated wisely. Place an emphasis on direct, active marketing most likely to get face to face with prospective customers.

3. Be Careful Extending Credit. There will still be higher than normal business failures, even by well established companies.

4. Do Not Sign Long Term Deals at Today’s Rates. Consider short term deals even where you normally want long term ones. Although no one can say with certainty, there is a good chance that rates will increase in 2012, so signing a long term deal now could tie you up at lower than market rates. Also, a credit tenant may have really good leverage now. Resist the temptation to sign a deal at any price. The balance of power may shift in a couple of years and that credit tenant may not have such great credit in a few years. As a tenant, consider the goodwill you will get, which can translate into tangible benefits, by merely being reasonable and not taking undue advantage of the economic climate.

5. Consider Other Sources of Income. Can the attorney branch out to other areas? Can the landlord come up with alternative uses for its vacant properties or monetize unused space ? Can the broker branch out to other consulting services?

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In 2005 the United States Supreme Court in Kelo v. City of New London upheld the actions of the City of New London, Connecticut (the “City”) in forming a non-profit corporation to redevelop the Fort Trumbull area of the City. In order to capitalize on Pfizer, Inc.’s (“Pfizer”) private development of an adjacent research facility, the New London Development Corporation prepared a detailed development plan which included 115 privately held parcels. The Supreme Court upheld the City’s right to take the privately held properties in order to complete its development plan. 

Although the 5 to 4 decision was in line with a long history of Fifth Amendment eminent domain cases, it ignited a backlash throughout the country. 42 states enacted legislation placing further restrictions on the use of eminent domain for economic development. In Ohio, the Ohio Supreme Court held in Norwood v. Horney that the use of eminent domain merely for economic benefit violated the Ohio Constitution. The Ohio legislature also amended Ohio’s eminent domain law to make the “slum” and “blight” standards more stringent. Horney and the legislative changes tie the hands of government and swing the Kelo pendulum too far to the side of private property owners.

Although tax credits given to Pfizer were not a part of the Kelo litigation, Pfizer’s announcement last week that it would pull out of its research facility when its partial tax abatement ends re-ignited the discussion on Kelo. Those opposed to a public entity’s right to take property for private economic development point to the fact that, not only was the City’s plan never enacted, leaving the Fort Trumbull area vacant, but now Pfizer is leaving and taking over a thousand jobs with it. 

However, in urban areas, it is often impossible to complete any project of scale without involving private property owners. Often times these private property owners are able to hold an entire project hostage by demanding excessive values for their properties. Although the development in New London never came to pass, other developments which have civic value should not be permitted to die on the vine due to the self-interest of one property owner.  

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The following clause was in a first draft of a lease I recently reviewed for a client in the boilerplate provisions at the end under the heading “Mediation.” It is reproduced here verbatim (not kidding):

 “If a dispute arises out of or relates to this Lease, or the breach thereof, and if the dispute cannot be settled through negotiation, and if the parties so mutually agree, the parties shall first to try in good faith to settle the dispute by mediation administered by the American Arbitration Association under its Commercial Mediation Procedures before resorting to arbitration, litigation, or some other dispute resolution procedure. In the event the parties are unable to settle the dispute through mediation and, if the parties mutually agree, any unresolved disputes regarding this Lease shall be settled by an old-fashioned fistfight or best single card draw five-card poker hand. In the event the parties choose to settle the dispute by pugilism, each party waives any claims for personal injury damages or criminal prosecution against the other party. 

This may be my new favorite alternative dispute resolution clause. I am polling my colleagues to see if we have any golden glove boxing champs here. If so, I may have to insert this clause into my form. I can not decide whether the clause was a light hearted attempt to poke fun at how wordy leases have become and to see if the other party is actually reading it all, or whether it’s a reaction to the economy and an attempt to avoid legal fees, or whether the party drafting the lease (they are from Texas) just thinks they are tougher than us.

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The Leadership in Energy and Environmental Design (LEED) certification by the U.S. Green Building Council is a certification program for the design, construction and operation of commercial and residential “green” buildings. Although the LEED certification program includes a neighborhood design component, one area not specifically addressed by LEED is landscape design. In an effort to establish a standard for landscape design comparable to the LEED certification for buildings, the Sustainable Sites Initiative—a partnership of the American Society of Landscape Architects, the Lady Bird Johnson Wildflower Center at The University of Texas at Austin and the United States Botanic Garden in conjunction with a diverse group of stakeholder organizations—recently published the first set of national guidelines and performance benchmarks for sustainable land design, construction and maintenance. 

The ratings system works on a 250-point scale, based on achieving 15 prerequisites and a certain percentage of credit points. Achievement of 40% of the possible points equals a one-star level and achievement of 80% of the points equals the maximum four-star level. Points can be achieved for using vegetation to minimize building cooling requirements, providing opportunities for outdoor physical activity, and rehabilitating lost streams, wetlands and shorelines. 

Owners interested in minimizing their environmental impact and implementing sustainable design principles now have specific guidelines on how to do so with respect not only to their building, but the surrounding site as well.         

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In October, 2009 Morgan Stanley published its Mall and Lifestyle Center Handbook.  (Special thanks to Stephen Baumgarten, Senior Vice President Wealth Advisor Morgan Stanley Smith Barney Beachwood, Ohio for sharing the handbook with us).  The handbook is a must read for all retail developers, lenders, investors and retailers to understand the market forces impacting shopping center development and investment.

 

The handbook goes into great depth and analysis of the current state of the retail center real estate industry.  As of the date of publication of the handbook there were 1,095 regional malls in the United States and 268 lifestyle centers.  In 2007/2008 mall supply shrank 1.6% while lifestyle centers grew by 56% to 122 million square feet of space. 

 

The handbook analyzes "mall quality" identifying the characteristics which include some of the following: (i) trade area size and growth; (ii) tenant line-up; (iii) presence of "fresh" retail concepts; and (iv) anchor identity.

 

The authors of the handbook found that: (i) lifestyle centers presently have a competitive advantage over regional malls as a result of the variety of their tenant mix and less dependence on anchor tenants and apparel retailers; and (ii) public companies own 84% of the top 100 regional malls, while only 4 of the top 20 leading lifestyle centers are owned by public companies.

 

The authors predict that there will be consolidation in the shopping center industry as well as capitalized public companies and private investors look to expand over the next five years. 

 

Finally, the handbook contains an appendix of charts and analysis for market strength and market density for 40 of the largest United States metropolitan markets.

 

So, what can we take away from this study?  OPPORTUNITY does exist for current center owners to dispose of debt laiden centers; OPPORTUNTY does exist for REIT's and investors to acquire properties at reasonable cap rates; OPPORTUNITY does exist for lender's to finance well capitalized projects; and OPPORTUNITY does exist for retailers to enter centers which may not have previously been available.

 

Here is wishing for a strong Black Friday and a healthy holiday shopping season !

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That EXIT sign illuminating over the door could contain a radioactive gas called tritium, subjecting it to regulation by the Nuclear Regulatory Commission (NRC) or one of the Agreement States. The Agreement States have assumed limited regulatory jurisdiction over the use of radioactive materials.  

NRC estimates that more than 2 million tritium EXIT signs are currently in use in the United States. To determine whether your sign contains tritium, first look for a label that mentions tritium (H-3), displays the three-bladed radiation warning symbol, and states “Caution-Radioactive Materials.” If you cannot find the label, then turn off all the lights in the vicinity of the sign. The glow of tritium is green.

Tritium EXIT signs are considered “generally licensed devices” because they are inherently safe enough to be handled or used by anyone with no radiation training. The owner of the sign is considered a “general licensee.” The general licensee must designate an individual responsible for complying with the regulatory requirements.

A general licensee using tritium EXIT signs must comply with certain requirements regarding use and transfer of the signs. Additionally, when it is time to dispose of the EXIT sign, the signs must not be thrown in the general trash. Although tritium EXIT signs pose little or no threat to public health and safety, damaged or broken signs could cause mild radioactive contamination requiring expensive clean-up.  So it is important that the signs be properly disposed. Failure to comply with any of the requirements may subject the owner to civil penalties.  One more item for the transaction checklist and one more issue to address in agreements of sale and purchase !

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We have been following the continuing saga of the homeowners affected by Chinese drywall used mainly throughout Florida, Louisiana and Virginia when U.S. supplies ran low. According to affected homeowners, the Chinese drywall emits a gas that causes health problems such as headaches and nosebleeds, erodes metal and electrical fixtures, and leaves a foul rotten egg odor throughout the home. The only known remedy—removing and replacing all the Chinese drywall in the home—is costly and to this point has not been covered by insurance. Unable to sell the property, and unable to live in it, some owners have been forced into temporary housing and bankruptcy, the New York Times reports. 

Homeowners have filed hundreds of lawsuits against the Chinese companies that manufactured the drywall. These lawsuits, however, face a number of significant hurdles. For one thing, much of the drywall is simply stamped “Made in China,” with no indication of the specific manufacturer. Even when the manufacturer is known, many of them have gone out of business or refuse to respond to the lawsuits. China does not enforce civil judgments from U.S. courts and international court is costly and time-consuming. Some lawyers have proposed creative solutions to the problem, such as seizing the ships that transported the drywall to the U.S., but it’s not clear that any court would approve that remedy.   

The affected homeowners may have other avenues for a successful resolution outside of the legal process, however. Congress ordered the Consumer Products Safety Commission to conduct a study of the Chinese drywall. That study, while finding that the Chinese drywall had higher levels of sulfur and strontium than U.S. drywall, was unable to make a connection between those higher levels and the health and other problems experienced by U.S. homeowners. Further testing to establish a connection is under way. The chairwoman of the Consumer Products Safety Commission met recently with Chinese officials and discussed the drywall issue with the hope of reaching some agreement to help U.S. homeowners. Whether political pressure results in any substantial relief for U.S. homeowners remains to be seen.

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