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

Remember Enron and off-balance-sheet accounting scandals? The efforts to clean up these accounting practices are still in the works and are about to hit the world of commercial real estate—arguably at the worst possible time. The Financial Accounting Standards Board (FASB) (which is endowed with the power to decide U.S. generally accepted accounting principles) and its international counterpart, the International Accounting Standards Board (IASB) are hoping to enact a new lease accounting standard by 2013. The Securities and Exchange Commission in a 2005 report to Congress estimated that the current lease accounting standards which went into effect in 1976 allow tenants to keep about $1.25 trillion in future liabilities off-balance-sheet.   

Currently, a lease may be shown on a tenant’s balance sheet as either a capital lease which is treated on the balance sheet much like a finance transaction or as an operating lease which is mostly off-balance sheet. The FASB and IASB believe that investors are not getting a full picture of a tenant’s obligations when the lease is treated as an operating lease because the lease payments are recognized as an expense when they are incurred or paid rather than all of the rental payments for the term appearing as a liability on the balance sheet. 

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The current economic downturn and the corresponding contraction of the retail sector have resulted in a glut of vacant “big-box” retail stores in shopping centers across the country. Vacant big-box spaces pose special challenges for landlords and communities. While the number of vacant big-box spaces is daunting, there are glimmers of hope as landlords and communities have become increasingly creative in their re-adaptive uses of these dark spaces. For creative landlords who are willing to invest in redesigning and redeveloping vacant big-box spaces, big boxes can provide opportunities for both landlords and communities.

Across the U.S., vacant big-box spaces have been successfully retrofitted for use by nonretail users such as churches, schools, colleges, medical and dental facilities, libraries, office and municipal tenants, health clubs, and other tenants who require large parking areas. Because traditional retail tenants are not available to fill vacant big-box spaces, Landlords should strongly consider non-traditional tenants for re-adaptive uses of vacant big-box spaces because they fill up highly visible vacant spaces (and community eye sores); they tend to be long-term, stable, credit tenants who may invest up-front in infrastructure improvements; and they are often well received by the community because of the benefits they provide.

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The Situation:

Certain covered dwellings that are not designed or constructed in strict compliance with the Fair Housing Act are increasingly subject to suit, with strict liability befalling developers, designers, and contractors alike.  In fact, contractors are strictly liable for FHA violations even if they correctly follow a designer's noncompliant drawings.  Further, courts across America are consistently holding that potentially liable parties cannot sue each other for alleged contribution for a FHA defect, which enhances exposure for those sued directly by FHA protected class  members.  Needless to say, the financial risk of FHA noncompliance is grave.   

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Take a look at a very informative article appearing in the July 2010 Shopping Center Today  describing the recent activity of several sovereign wealth funds shopping for distressed real estate to acquire.  Perhaps this is the cash we have been hearing about which has been sitting out the downturn ?

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Green building is quickly becoming the "norm" across America, and those who are not familiar with it could be missing important opportunities in today's construction climate.  The United States Green Building Council ("USGBC") is a non-profit community of leaders working to make green buildings available to everyone.   USGBC developed the Leadership in Energy and Environmental Design ("LEED") process for green building.  LEED  is an internationally recognized green building certification system, providing third-party verification that a building or community was designed or built using strategies aimed at improving performance across metrics for green building: energy savings, water efficiency, CO2 emissions reduction, improved indoor environmental air quality, and stewardship. 

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 The Situation:

Certain covered dwellings that are not designed or constructed in strict compliance with the Fair Housing Act are increasingly subject to suit, with strict liability befalling developers, designers, and contractors alike.  In fact, contractors are strictly liable for FHA violations even if they correctly follow a designer's noncompliant drawings.  Further, courts across America are consistently holding that potentially liable parties cannot sue each other for alleged contribution toward an FHA defect, which enhances exposure for those sued directly by FHA protected class members.  Needless to say, the financial risk for FHA noncompliance is grave.   

FHA Coverage:

The FHA applies strict liability to developers, designers, and contractors who participate in the design or construction of a covered dwelling.  Under the FHA, each participant in the design and construction of covered dwellings has an independent obligation to comply with the FHA.  The term "covered dwelling" is construed broadly and applies to points of access in popular mixed-use commercial, retail, and residential properties. 

Those held liable for FHA non-compliance risk more than a "slap on the wrist."  Rather, FHA damages include (1) the cost to rebuild a covered dwelling; and (2) the prevailing party's attorney's fees.  Thus, developers, architects, engineers, and contractors must take caution and ensure their own compliance with the FHA. 

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