Return of the New Shopping Center

For quite a while there has been very few new shopping centers being developed. Many people may have even questioned whether there would ever be any new significant shopping centers. Apparently, times have changed. In rapid succession, I have been engaged to do the lease up of two brand new, big time, large scale shopping centers.

Liberty Center is a new mixed use center being developed in Liberty Township, Ohio, just north of Cincinnati. Liberty Center will have over 750,000 square feet of retail/restaurant space, together with 75,000 square feet of office space, 240,000 square feet of residential apartments, and a hotel. Construction has started and leases have been executed. Grand Opening is scheduled for October, 2015.

Metropica is a new mixed use center being developed in Sunrise, Florida. Metropica will have over 450,000 square feet of retail/restaurant space, and it too will include office space, residential apartments, and a hotel. This project is just starting development but projects to be an impressive, high profile development. Grand Opening is scheduled for Spring, 2016.

 

Retail must be back, and not wholly replaced by the internet.

Golf Courses Changing their Swings !

While the rest of the real estate industry recovers from the downturn of the last several years, the golf course industry is struggling to emerge; it remains a buyer's market.  Some golf courses are converting to multi-use/multi-generational activities to attract more members and activity to their properties.  Others are converting from "member-owned equity" clubs to privately owned "non-equity" owned clubs.  Concert Golf Partners  has a interesting comparison in the difference between the two types of club ownership structure on their website.  

The more interesting trend which is affecting valuations is that much like other investment properties, the value of the real estate is now tied more to the cash flow generated by the business activities on the property rather than the raw value of the real estate. 

Foreign buyers have taken notice and have arrived in North America to go shopping for investment properties.  While the pricing may be attractive, deed restrictions requiring  a golfing use may prevent redevelopment. So, to survive and thrive, golf courses need to take a lesson and perhaps change their swing !

Two for the Price of One

If you do not know what "RevPar" is keep reading.  "RevPar" is defined as Revenue per Available Room or the total guest revenue divided by the total number of available rooms. ( STR Global  maintains a useful glossery of hospitality industry terms.)  RevPar is an important metric in the hospitality industry because it measures sold and unsold room revenue.  

So, why is this important to real estate developers and hoteliers ?  As the hotel industry rebounds and new properties are developed the competition for room revenue, especially in central business districts is heating up.  How do you help ensure that your RevPar is high while also bringing economies of scale to your development ?    

Develop a parcel which has two or three brands in or on the same property which share certain common facilities such as elevators, reservation systems, management and maintenance staff, kitchen facilities, parking facilities.  Take the old Cincinnati Enquirer building as an example.  This historic renovation in Cincinnati's central business district is being renovated by SREE Hotels into a dual branded Homewood Suites and Hampton Inn.  The project has been awarded Ohio Historic Tax Credits. When completed the development will operate two separate Hilton branded hotels which appeal to different types of consumers rather than one large hotel hoping that their target consumers fill all of their rooms every night.  

Just makes sense !

 

 

 

Re-Purposing for the Hospitality Industry

It seems that old is new again !  In cities throughout the U.S. buildings originally built for a specific purpose: banks, office buildings, schools and warehouses are being converted or "re-purposed" into other uses, but in particular into restaurants and hotels.  In Cincinnati alone there are three projects undergoing renovation for their new life as hotels (Old School for the Performing Arts, Enquirer Building and Bartlett Building). Recently, theNew York Times highlighted examples of re-purposing which are on-going throughout the country.  While this is not a new or novel idea, what is exciting and interesting is the focus on hospitality.  Could that signal that financing is flowing into hospitality uses in favor of other traditional uses ? Or, that central business districts where older buildings are generally situated are having a renaissance ? Or, both ?  These projects are ripe for historic and new market tax credit financing.  So, keep an eye out for the opportunity to save a piece of history and culture and bring life into your central business district.

 

Update: Interstate Land Sales Full Disclosure Act of 1968

Back when this Blog was in its infancy our partner, Kristin Boose, reported on the then legislative environment relating to the Interstate Land Sales Full Disclosure Act of 1968.  As many of you already know the Act is broad in its application and can be dangerous to a developer if not complied with to the letter.  Given the downturn in the real estate market in the last several years Congress saw fit to pass (410-0) H.R. 2600 which amends the Act to exempt out condominiums from Act's registration requirements.  The Senate version of H.R 2600 is awaiting action.  

The timing might be very good as this will reduce the red-tape for the development of condominium projects as new construction heats up.

 

 

Top 10 Things You Should Know About Historic Tax Credits

Earlier this fall, the National Park Service celebrated the 35th anniversary of the popular Federal Preservation Tax Incentives Program, which has helped in the preservation of historic structures across the U.S. and particularly in Ohio with its wealth of historic buildings. Because of the program’s numerous possible benefits and its important role in fueling economic growth in surrounding communities, property owners and developers should consider utilizing tax credits on applicable building projects.

But before making the leap, it’s helpful to better understand the requirements and limits of the program. Here are 10 key points to consider before you get started: 

1.    Your building needs to be historic.

 

First, you need the right kind of building. If it is on the National Register, or a contributing factor in a historic district, then you are all set. If it is not, you can get the building placed on the National Register or have the district expanded so as to include your building. In either case, this process will likely take a year. This is known as a Part 1 approval.

 

2.    Your plans need approval from the state historic preservation office (SHPO).

 

Some say this may be the biggest disadvantage of using historic tax credits. SHPO needs to approve your plans, both inside and out. This is known as the Part 2 approval.

 

3.    Your rehabilitation must be substantial.

 

In order to qualify for the federal historic tax credits, your rehabilitation plan must be substantial – in the eyes of the IRS, this means the rehabilitation costs must exceed your basis in the property.

 

4.    You typically need a third-party investor.

 

There are two factors necessitating the need for a third party investor. First, the credit must offset a tax liability. Most individuals do not have a large enough liability, therefore, most of the investors are C-corporations. The second issue is created by the passive activity loss rules. Basically, only a full time real estate professional can use the credits against active income. C-corporations are not subject to the passive activity loss rules.

 

5.    Historic Boardwalk has impacted how these deals are structured.

 

In the Historic Boardwalk case, the IRS successfully argued that the tax credit investor was not a real partner and therefore could not be allocated the credits. The IRS said that the investor must have real upside (not just from being allocated the credits) in the economics of the project (i.e., cash flow and appreciation) and real downside (i.e., the developer cannot completely indemnify the investor). The industry is waiting to hear from the IRS who has promised to issue a revenue procedure outlining a safe harbor for these investments.

 

6.    Your building cannot be transferred for five years.

 

The Internal Revenue Code provides that the taxes offset by the credits are subject to a pro rata recapture if the property or a controlling interest in the owner is sold in the five-year period after the property has been placed in service. This makes it difficult to condominium-ize a project and investors will want to make sure you have a truly viable project so that they are not faced with the prospect of foreclosure.

 

7.    Be careful when you work with a nonprofit.

 

Generally, the IRS does not allow a nonprofit to be involved either as a part owner or as a tenant of the building. Having the nonprofit form a subsidiary that elects to be taxed on its income can solve the issue. The use issue is trickier. Having the nonprofit use less than 50% of the space is the simplest way. If however, the nonprofit used the building before and will use more than 50% afterwards, you will need to contact a tax credit professional.

 

8.    There are both federal and state historic credits.

 

The federal credit is equal to 20% of the qualified rehabilitation expense (QRE). Provided you comply with the NPS standards, the credits are available to a project. The state of Ohio also has a historic tax credit program. That credit is equal to 25% of the same QREs but is currently capped at $5 million. The state credit is subject to a very competitive allocation process. There is a scoring sheet where job creation and economic development rank very high. Unlike the federal credit, a portion of the “credit” can be a refund, up to $3 million.

 

9.    What is included in a QRE?

 

A QRE is the base on which the credit is calculated. It includes all the hard costs of construction as well as soft costs, including developer fees, construction interest and professional fees. It does not include the acquisition price, enlargements, work outside the building or personal property expenditures.

 

10. You will need a bridge lender.

 

This is sometimes the most difficult part. Most of the investor’s equity comes in after construction and after the Part 3 has been obtained. The Part 3 is the final sign off by the SHPO that confirms that the project was completed in accordance with the approved Part 2. A bridge lender has to be comfortable assuming the risk that the project will be completed and the Part 3 will be obtained. Most lenders require either a guaranty from a deep pocket or outside collateral, in addition to a pledge of the capital contribution to be made.

 

 As previously published In the November 2013 issue of Properties Magazine

Ulmer Berne 13th Annual Commercial Real Estate Deal Maker Forum

The End of the Suburbs – Where the American Dream is Moving. That’s the title of the newest book by Leigh Gallagher, Assistant Managing Editor of FORTUNE Magazine, and the topic of much interest at the 13th Annual Commercial Real Estate Deal Maker Forum held this morning in Cleveland. The event was co-sponsored by Ulmer & Berne LLP, Colliers International and Inside Business Magazine.

Leigh enlightened an audience of over 300 real estate and civic professionals on the dynamic forces leading to a return to urban living. And, of course, an increase in urban core residential occupancy is good not only for the housing industry, but for the retail and other commercial development that it spurs.

But as Leigh stated, “This doesn’t mean the end of the suburbs…just the end of the suburbs as we now know them.” Using a power point presentation of past and present communities across the country, Leigh showed the audience how suburbs are recasting themselves as “urban suburbs” with a “main street” feel, more work-live options and the incorporation of New Urbanism approaches to town planning.

Leigh is a frequent guest on NPR’s Marketplace as well as MSNBC’s Morning Joe and other national media outlets.


The End of the Suburbs is a great read with just the right amount of statistical support mixed in with anecdotal evidence to provide a convincing view of where this country is moving with its housing options. Those in attendance received a free copy of the book. We eagerly look forward to Leigh Gallagher’s next effort.

Parking as a Scarce Resource

In the 2011 book The High Cost of Free Parking Professor Donald Shoup thoughfully walks the reader through the history of parking in the United States into the present situation in which we find ourselves.  Everyone wants a free parking space; but as Professor Shoup explains, there is no such thing as a 'free" parking space.  Parking is a resource which should be treated like any commodity and priced accordingly.

The concept of "dynamic" pricing (ala airline seats and hotel rooms) should be applied to street and off street parking according to Professor Shoup.  He calls this "performance" parking.  He argues that street parking should be high enough to keep one or two curb spaces open during most times.  This will prevent the circling the block syndrome and create efficiencies.  San Francisco has adopted such a model in their SF Park program.  Take a look at their website for details. 

If parking costs rise and become an efficient economic model as opposed to a subsidized one less time will be spent looking for parking and ridership of public transportation will increase, thereby creating better economic benefits for that public resource. 

Professor Shoup advocates for the removal of parking requirements in our new development zoning codes and return meter revenue to the neighborhoods which generate the same.

According to Collier's International 2012 Parking Rate Survey  (a copy of  which can be downloaded by clicking on the link) identifies Cincinnati's parking costs as relatively low as compared to other major metropolitan areas. 

A concertive effort must ne made by city governments, transportation officials and developers to reverse to expectations and effects of "free" parking.

Just Add Water

Recently, at a conference in Santiago, Chile, I had the opportunity to meet Fernado Fishmann, founder of Crystal Lagoons, and to learn about how Crystal Lagoons is transforming real estate projects around the globe.  The concept came to Mr. Fishmann, a biologist turned real estate developer,  when trying to come up with a solution to turn around a troubled real estate project. Mr. Fishmann reasoned that if you can not bring the project to the beach, bring the beach to the project. Through the use of propriatary technology and algorythems, Mr. Fishmann has been able to enhance the value of real estate projects where previously a poor location could have dictated poor returns. A crystal lagoon is not a large swimming pool; it is a man-made ecosystem managed telemetrically from a central control center operated by Crystal Lagoons.

Imagine, transforming a stalled real estate project in the Midwest into a regional vacation destination by just adding water; or developing a functional beach for the residents of a residential subdivision in the middle of corn fields.  The idea is to bring recreational beaches to real estate projects anywhere.  If the project is subject to temperatures below freezing during the winter months, the lagoon can be transformed for skating and other winter recreational purposes.  

Mr. Fishmann and Crystal Lagoons have created and operate or are in the process of creating lagoons for real estate developments around the globe.  The applications are not just for real estate developments.  Lagoons can be used to provide cooling water for industrial purposes of many types.  The applications are endless.

Real Estate Industry Trends for 2013

With the first quarter coming to an end we have gathered a short list of what we believe are the Real Estate Industry Trends for 2013.  Let us know if you agree, disagree or see other issues which we missed.  Our list is not in any particular order and not intended to be comprehensive, just provocative.

  1. Urban development will be lead by projects utilizing tax credit financing as a project component;
  2. Healthcare and medical office space will be a desired investment;
  3. Existing home sales will tick up (5-7%);
  4. Retail leasing will remain strong as regional power centers continue to improve their tenant mix and tenant's lock in rental rates ahead of the market;
  5. Adaptive reuse of former retail strip centers and empty big box retail space will continue to change the complextion of the suburbs;
  6. Infill in the urban cores will continue;
  7. Foreign buyers will continue to see U.S. real estate as a safe haven given the relative stability of the U.S. real estate market; and
  8. The regions of the country where shale gas and oil are being found will continue to explode with opportunitise in drilling, road construction, housing, services and more (south eastern Ohio; West Virginia, Pennsylvania, the Dakotas, New York).   

As we all know all real estate is local.  Market behavior in one market will not guaranty market behavior in other markets.

 

 

Small Really is the New BIG !

Small fuel effiecient cars are nothing new.  In fact many of the major car manufacturers are now offering a variety of options which achieve 40+ miles per gallon.  However, what we have not seen until now is a highly fuel efficient car which is highly affordable.  Introducing the Elio to be produced in Louisiana by Elio Motors.  This 3 wheel car is expected to achieve 84 miles per gallon and cost under $7,000.  Given the price point and the convincing argument that small cars make great commuters how can the Real Estate Industry encourage the development and use of this segment of transportation ?

Both cities and private parking owners and operators need to reconsider the structures, pricing and parking options for smaller more fuel effiecient transportation vehicles.  Either lower the price for these less-impacting vehicles or raise the price of bigger heavier vehicles to park.  Just like the gasoline tax is essentially a user fee, parking rates can be structured to encourage good behavior and support of lighter, smaller, more fuel efficient vehicles.  Parking operators should partner with vehicle manufacturers and municipalities to make such vehicles more common.  What a great way to cross market !!

Cincinnati Central Business District

There has been much written of late about how Central Business Districts (CBDs) are the key to regional economic health, growth and sustainability.   We have written in the past about new urbanism concepts and concerns such as walkability and density. We have also written about the benefits of practical public transportation.   As I walk through the Cincinnati CBD I cannot help but notice that there is a gap in the use/tenant mix: the areas’ most high profile universities do not have a presence in the CBD. 

Let’s examine the example Chicago presents. In the Chicago CBD there is Northwestern University School of Law, University of Chicago Graduate School of Business, DePaul University, DePaul University School of Law, Loyola University School of Law, John Marshall School of Law, Roosevelt University, Columbia College, School of the Art Institute, Harold Washington College, Spertus Institute for Jewish Studies and Rush Medical College.  I am sure that I have missed a few, but the list is impressive regardless.

 

What is the benefit of having institutions of higher learning located in the CBD ? An influx of students, professors, administrators and all of the commercial activity they bring each day all year long. They create a need for housing, food and dining services and transportation services.

Institutions of higher learning and their students and staff being located in the CBD are within easy access of the businesses and professional service firms which draw upon their talent pool.  

 

So, Cincinnati, why not here ??? 

 

Why not relocate the University of Cincinnati School of Law and Graduate School of Business in the Cincinnati CBD ? Why not relocate the Xavier University School of Business in the CBD ? Why not relocate The Chase School of Law in the CBD ?  

 

The major regional corporations are in the CBD; the majority of the regions law firms are in the CBD. Having easy access to students eager and willing to work full and part time, intern and  perform case studies could only create more collaboration for both the respective universities and the region’s businesses; while at the same time opening up valuable space in land locked campuses for other uses. 

 

Holes in the CBD would quickly fill up with the needed office buildings and housing projects; not to mention the food and dining needs. One project will create the need for another and create a 24/7 community which is vibrant and complimentary to the successful effort which is transforming Over the Rhine, the Banks, Pendleton and other near in neighborhoods.

 

With the coming of a street car system the ease of moving about the CBD, and eventually connecting to the Clifton area, can only help the CBD become an ideal location for universities.

 

Cincinnati, think outside your own borders; come together as an integrated community where the institutions of higher learning affect more areas than their traditional campuses and put their talent pool in front of the businesses which are the likely employers for many of the students enrolled in your programs. 

Put That Unproductive Space to Use !

Take a look at how the Korean's are putting previously unproductive space to use and combining internet sales with brick and mortar real estate.  Good idea huh !

"Pocket Neighborhoods": A Concept Worth Consideration

Architect Ross Chapin, who has spent his career championing the "pocket neighborhood" concept has proven that "walkability" and "new urbanism" concepts which are successful in the Northwestcan be successful in the Midwest. TheInglenook community development in Carmel, Indiana is proof that "pocket neighborhoods" can be successful anywhere. We particularly like the concept for in-fill parcels and in first and second ring suburbs.  To learn more about the concept see the links above and the video below.

 

Smart Buildings Done Easy !

Take an old technology which has not seen any real updates in decades, make it internet connected and add a few semiconductors (to make it smart) and radically change the way offices and homes consume energy !  That is what the Nest Learning Thermostat promises to do. See the video below.

 

Modular Construction

Has modular construction finally come of age ?  The Modular Building Institute thinks so.  Modular construction is no longer just for preparation of walls and roof joists.  Today, contractors are using prefabrication and preassembly in construction of steel framed structures, multi-story structures, health care and education facilities.  The benefits of modular construction positively affects:  

  • labor and employment rates as the work on components can proceed in any weather conditions, no bad weather days and increased work place safety;
  •  job site environmental conditions (less waste and scrap materials to dispose of);
  • work crew scheduling;
  • increased speed of construction and project completion; and
  • reduce need for certain on-site storage of materials.

Efficiency and green, modular construction is coming of age.  See the video below to see the process. 

 

New Word: "De-Malling"

In the late 1960's and 1970's the retail industry clustered under a common roof in controlled 72 degree conditions.  As consumer tastes changed and populations shifts, the "life-style" center became the next new thing.  The problem being addressed today is what do we do with all of the covered malls around the country ?  One mall under going a "de-malling" is Randhurst Mall in Mount Prospect, Illinois by Casto Lifestyle Properties once the largest covered malls in the country. Follow this link to view the video of the redesign rendering.  The locations of older covered malls are prime today as many were originally built at the fringes of city limits or around close in suburbs; over the years new suburbs developed and completely surrounded these retail centers.  As developers and municipalities consider what to do with their tired covered malls mixed use opportunities abound.  

 

 

Risk Appetite: One Perspective from Chicago

YoChicago.com recently interviewed Alan Lev, CEO of Belgravia Group.  Alan discusses his company's recent performance and strategies in this challenging market and his thoughts on the future of the Chicago residential real estate market and its ability to absorb the current inventories. What struck me as insightful and telling are Alan's insights (at the video 10:40 min. mark) about the demographics and risk appetite of the developers and lenders as the industry comes out of the recession.  

 

 

Value of Walkability

According to walkscore.com a walkable neighborhood has:

1)  A center: Walkable neighborhoods have a center, whether it's a main street or a public space.

2)  People:  Enough people for businesses to flourish and for public transit to run frequently

3)  Mixed income, mixed use:  Affordable housing located near businesses.

4)  Parks and public space:  Plenty of public places to gather and play.

5)  Pedestrian design:  Buildings are close to the street, parking lots relegated to the back.

6)  Schools and workplaces:  Close enough that most residents can walk from their homes.

7)  Complete streets:  Streets designed for bicyclists, pedestrians, and transit.

As we wrote previously in our post titled "Trends We Are Watching", car dependency costs dearly and households which eliminate one car can increase their mortgage carry capacity by approximately $100,000. In order to shed a car in a typical two car family, public transportation options must be practical and convenient. Walkable neighborhoods have more density than typical suburbs and are usually closer to the urban core of a city or region. Cottage homes and neighborhoods which are built on in fill sites in mature neighborhoods can bring residents into or retain existing residents as they transition between phases of their lives. Businesses locate where their customers are located. 

 

Check out walkscore.com to see what your project's walk score. 

Co-Working Office Space

As more workers and entrepreneurs are requiring space to hold meetings and appointments outside the company office, there is a growing need for locations away from homes in which to "plug in", make phone calls without the background music and noise of a Starbucks or other such cafe. The industry which addresses this need is referred to as the "co-working office space industry."

 

Two companies on the west coast are now meeting this need: NextSpace and Blankspaces. Both offer a table, chair, phone and Internet, coffee, conference rooms, private offices all for a daily, weekly or monthly fee. 

 

The benefits of "co-working office space" is that the working space is quieter, easy to plug in computers and cell phones, meet and collaborate with colleagues and clients. This is another way to take our over abundance of retail and suburban office space and adaptively reuse it. 

 

So, whether you are managing a work force and need space for them to operate from outside the company's offices or you are a property owner looking to turn empty space into income producing space, this is an idea worth considering!

Is There a Walmart in Your Future ?

 Walmart has opened its supercenters in many if not most urban and rural communities.  Where do they go next ?  With the over abundance of strip store space just about everywhere Walmart has many options.  Walmart is embracing the concept of 'in-flll" with three concept store formats with which they are experimenting:

 

  1. Walmart Express:  15,000 square foot small store concept with a variety of product assortment;
  2. Walmart Market:     25,000-70,000 square foot grocery and home goods focused stores;
  3. Walmart on Campus:  3,300 square foot stores with product assortments geared to the needs of students (cross between a Walgreen's and a Staple's).

Expect to see Walmart and its competitors rolling out stores as they fine tune these concepts.  Will communities embrace these stores or tighten zoning and use rules and regulations ?  As we have written in prior posts, retail is going to re-tool and re-define itself;  developers and lenders take note.  

 

Are We There Yet?

            The ubiquitous refrain at any gathering of commercial real estate professionals in the past 24 months can be summed up in a few short questions: Are you busy? Who is lending? No, seriously, who is lending? And -- of course -- when will this end?

            As 2011 kicks into gear the refrain is the same but our answers (hopefully) are beginning to take a turn for the better. The refreshed outlook is largely supported by a recent Morgan Stanley report titled “CRE Recovery in Place: Investment Cross-Currents.” Though heavy with charts and graphs, some of the positive takeaways include:

 

            1.         2010 formed a solid bottom and 2011 should see gradually increasing commercial asset prices and risk appetite. The caveat? Recovery is still market-by-market and much slower in those areas where housing is a primary economic driver.

 

            2.         A base (i.e. middle of the road) projection of a 12.5% increase in value for commercial real estate assets. This would leave prices about midway between the 06-07 peak and the 2009 valley.  As many owners begin to get above water on their loans, lending can be expected to pick up.

 

            3.         Bank losses on commercial real estate will remain high, but will begin to decline in late 2011 or early 2012. While the ratio of non-performing loans continues to be above average, forward-looking projections of delinquencies have decreased. As this improvement moves forward, expect CRE-heavy banks to out-perform others. Perhaps this could drive banks back to the market?

 

            4.         Strip-center based REITs will see a pick-up as major anchor tenants, including Wal-Mart, Best Buy, Dollar General and Jo-Ann Stores, have announced expansion plans for 2011.

 

This is music to the ears not only of real estate professionals like us, but also to the commercial property owners that had to sit on assets to avoid taking large losses through this past cycle. Maybe at our gatherings in 2012 we’ll be asking when we’ll get our next vacation instead of our next deal.

Resale Fees ?

Recently, The New York Times  published an article entitled Resale Fees That Only Developers Could Love . The article does a nice job describing what resale fees are and how they are created and even the securitization of future resale fees so we will not go into it here.  Briefly, resale fees run with the land as covenants binding all subsequent owners to their conditions.  The typical place you would find them, if created for a project, would be in the project declarations of covenants, conditions and restrictions.  Since this is a somewhat novel concept just starting to receive the attention of law makers and regulatory agencies, if you are a developer considering resale fees, make sure that your state does not prohibit them and that your buyers have full disclosure of the issue to avoid any possible future problems.  Also, lenders might consider the existence of resale fees and receiving an assignment of the same as collateral for a project's financing.  Creative and novel so caveat emptor !

Contractors, Landlords, and Property Managers Must Take Care to Comply with New Lead Paint Regulations

Pursuant to a new rule passed by the Environmental Protection Agency, all contractors, landlords, and property managers performing or hiring for painting projects that disturb lead-based paint must now become "lead-safe" certified before performing work on houses built before 1978.  The new requirement also applies to weatherization projects, and to schools, day care facilities, or other commercial properties occupied by children.  "Lead-safe" certification is meant to minimize potential airborne contamination from dust or seepage into surrounding soil form debris. 
 
A "lead-safe" certified professional is required for work that disturbs six square feet or more of painted surfaces indoors, or twenty square feet of painted surfaces outdoors.  The "lead-safe" certified professional must be physically present at the site where the work is taking place, and proof of certification is required to be presented to the home owner or property owner upon request.  "Lead-safe" certification is achieved through demonstrated knowledge of lead-safe procedures, like testing of dust contaminants, and cleaning and disposal of lead-based paint.  Certification typically requires an eight-hour EPA training course. 
 
For more information, visit:  http://www.epa.gov/lead/pubs/renovation.htm

Transfer Fee Covenants ?

Ohio House Bill 292, which prohibits the future creation of transfer fee covenants, was signed into law on June 14, 2010 and will become effective on September 13, 2010. Transfer fee covenants in effect prior to September 13, 2010 are not affected by the new law.

Transfer fee covenants create revenue streams for real estate developers. A transfer fee covenant is created by a seller (the “Covenantor”), usually a real estate developer or builder. It requires subsequent buyers of the Covenantor’s grantee to pay a transfer fee back to the original Covenantor each time the property is sold. Transfer covenant fees generally range from 1% to 3% of the purchase price of the property and are payable to the Covenantor. 

Covenants often provide for a lien in favor of the Covenantor if the transfer fees are not paid. If recorded, the lien makes financing for future purchasers difficult because the lien created by the transfer fee covenant takes priority over the interest of a subsequent lender.

Transfer fee covenants may create problems for subsequent owners. The covenants require subsequent owners to pay the transfer fee to the original Covenantor, but as time passes, it may be difficult to determine to whom and where the fee should be paid. Transfer fee covenants also pose potential title problems because the covenant may only be contained in the original deed and could be missed during a title exam if the exam covers a shorter period of time than the typical 99-year existence of a transfer fee covenant.     

Creditors should obtain thorough title exams prior to issuing a loan or proceeding with a foreclosure action to avoid any potential problems created by existing permitted transfer fee covenants.

Performance and Payment Bond for Public Project Deemed Discretionary

In the much-publicized "Kenwood Towne Place" litigation in Cincinnati, which involves over $40MM in lien claims, presiding Judge Beth Myers issued a Decision and Entry that disposed of subcontractor claims against the Port Authority of Greater Cincinnati (the Public Authority involved with the project).  The Court dismissed the subcontractors’ claims for takings and negligence. 

One aspect of Judge Myers' decision makes it glaringly important for contractors of all shapes and sizes to perform independent assessments of front-end protection on a public project: the Court determined that the requirement of a performance and payment bond (or lack thereof in this case) was a matter of discretion for the Port Authority and, consequently, not mandatory under Ohio law.

To reach its Decision, the Court focused on Sections 4582.31 (specific to port authorities) and 153.54 (applies to public projects) of the Ohio Revised Code.  The Court determined that Section 4582.31 gives the Port Authority discretion whether to require competitive bidding and whether to require security--"As a matter of law, it had no duty to require a performance or payment bond."  The subcontractor claimants relied on Section 153.54, which requires performance bonds in competitive bidding, and the competitive bidding provision of 4582.31.  But the Court found that the Kenwood Towne Place litigation is governed by the discretionary provisions granted to port authorities because the project was funded exclusively from bond proceeds and special funds (bond discretionary) instead of general revenue funds or funds raised through taxation (bond mandatory). 

Among other things, the Court summarily dismissed the subcontractors' common law claims for negligence because, under Ohio law, when a statute imposes a duty upon a public entity which is intended for the public good, the failure to adequately perform the duty does not permit a private right of redress for injuries caused by that failure. The Court's ruling may come as a surprise to many contractors in the public sector.  Notwithstanding, Judge Myers' decision should be a lesson to all that significant diligence for adequate assurance of payment should not be delegated or accepted at face value.  The current economic climate places that duty at an all-time high for those contracting for work in the public arena. 

 

Buy Swampland in Florida? Or, just a Bad Case of Buyer's Remorse? Discontent with Interstate Land Sales Full Disclosure Act

 

 

 “I have some prime swampland in Florida to sell you” is a slang expression used to poke fun at the gullibility of a person. This saying is based on events of the 1960s and 1970s where local scammers would attempt to induce out of state purchasers to acquire “lucrative” land which, in reality, turned out to be worthless, undevelopable plots. The federal Interstate Land Sales Full Disclosure Act (“Act”), 15 U.S.C. §§1701, et. seq., passed by Congress in 1968 and patterned after the Securities Law of 1933, was a reaction to that and other scams involving the sale of land. The Act was intended to provide a mechanism to inform buyers of land and to curb fraud and misrepresentation by sellers. In short, the Act forbids a “developer” or “agent” (for purposes of this article, a “seller”) who uses interstate commerce to sell or lease any nonexempt “lot” without first filing an acceptable “statement of record” with the U.S. Department of Housing and Urban Development and delivering to the buyer, prior to the sale, a “property report” which meets the requirements of the Act. When a buyer brings an action against a seller under the Act, the remedy sought, more times than not, is complete rescission of the purchase (as opposed to damages or equitable relief). While not all land sales require compliance with the Act (such sales being exempt under §1702 of the Act), for those sales and sellers that do fall under the jurisdiction of the Act, failure to comply can have serious consequences.

 

            Despite the Act’s good intentions, sellers and their advisors are citing three related concerns with the structure and application of the Act:

 

            (1) Buyer’s Remorse. Sellers argue that instead of shielding buyers from unscrupulous sellers, the Act is being used by buyers to combat buyer’s remorse. This is especially true for buyers of investment properties or vacation homes who are looking for a way out of purchases and construction contracts made prior to the downturn in the real estate market. Sellers are arguing that the Act is being used as a vehicle by buyers – even sophisticated buyers who went into the transaction with their eyes wide open – to leave the seller holding the bag and incurring the buyer’s loss on a bad real estate investment.  

 

            (2) The Punishment Doesn’t Fit the Crime. Related to the first point is the seller’s second argument that outright rescission of the transaction, is an unfair, even severe, remedy for a situation where the developer or agent unintentionally failed to comply with the Act and where no fraud or misrepresentation was alleged. Instead of fraud and misrepresentation, recent litigation under the Act has focused on the following issues: whether the Act applied to a particular transaction, availability of exemptions, including partial exemptions, under the Act; and whether a limitation period contained in the Act bars a suit. To quote another saying, sellers contend that “the punishment doesn’t fit the crime”.   An appropriate middle ground on this issue remains to be seen.

 

            (3) Even Courts are Conflicted. Combine the above two points with the fact that there is a conflict in the courts over the interpretation of the Act, and it leaves sellers and their advisors playing an elaborate guessing game (or, perhaps a game of “Russian Roulette”) in navigating the complexities of the Act. In addition to being knowledgeable about the Act and the regulations promulgated thereunder, sellers must also be vigilant to consult local applicable case law on interpretation of the Act. It is for these reasons that some practitioners believe Congress must revisit the Act and update or modify it accordingly.

 

            In summary, sellers who deal in and with real estate transactions would like to see changes to the Act to bring it in line with the lessons that have come to light in the past forty years, including, most notably, those derived from the issues discussed above. Nevertheless, the other side of the same coin is the admonishment to sellers to make review of and compliance with (if required) the Act a standard part of any real estate development project and to seek out professional help when needed. Don’t create an unintended escape hatch for a buyer in an otherwise solid, well-planned and executed development project.

Reinventing Retail?

Recently, David Birdsall, Chief Development Officer for Phillips Edison, spoke to a group of real estate industry executives about the state of the retail industry and its impact on retail real estate.  Dave believes we are at the dawn of a new/old retail era.  Dave showed how the internet is changing how consumers shop and will continue to evolve to present easier and perhaps more desirable shopping experiences for consumers. We have already seen retailers changing their strategy to have one or two stores in a market at the top locations with the internet covering the rest, instead of trying to "store" the entire market. Dave says successful retail will instead  be "experience" driven. Shoppers will come to a retailer or a shopping center for the experience.  Thus, restaurants may become the new anchor. Authentic, local, family owned retailers may have a new special appeal.  Retailers will not be looking at mass openings but will concentrate on improving existing operations. New developments will be scarce. Existing "distressed" centers may need to be redeveloped for other uses. And successful retailers and landlords will be those who are really good operators - not just good financiers. 

 

KELO REVISITED

 

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.  

Cuyahoga County Landbank Update

Some time ago in this space I wrote about the prospects for revitalization from the creation of the Cuyahoga County Land Reutilization Corporation, better known as the County Landbank. Since then the Landbank has gotten up and running, or walking perhaps, but has made little progress toward its goal of returning significant amounts of abandoned and vacant property to productive use. 

As stated on its website, the Landbank acquired its first two properties, not the estimated six “test cases” that had been reported, on September 3, 2009. Both properties are vacant land abutting the Big Creek Trail in Brooklyn and are slated to be added to the Trail. The Landbank should become more active in acquiring abandoned properties toward year’s end as it expects to receive its first installment of bond and loan money in November.

 

The Landbank is also considering a new method for acquiring properties that would proactively assist homeowners prior to the initiation of foreclosure proceedings. A proposed “better bank” would buy mortgages from lenders at a discounted rate and then pass the savings along to the homeowner in the form of a reduced mortgage payment. This new mortgage would then be sold to a lender to recoup the Landbank’s initial expense. The proposal seems like a winning situation for everyone except the original lender who would take a significant hit against its expected return on the mortgage. However, the discounted rate offered by the Landbank on properties that are seriously deteriorating and at risk for foreclosure may be its best outcome as well. 

 

While some have questioned the legality of this “better bank” under the enacting provisions of Senate Bill 353, the idea is in fitting with the Landbank’s general purpose to “[f]acilitat[e] the reclamation, rehabilitation, and reutilization of vacant, abandoned, tax-foreclosed, or other real property within the county for whose benefit the corporation is being organized.” Further, S.B. 353 specifically stated that the Landbank’s purposes were not limited to those enumerated items. 

 

Even if the “better bank” was outside the original scope intended for the Landbank, it shouldn’t be difficult in the current political and economic climate to drum up support for a minor change in the law that would allow the Landbank to work to keep people in their homes. It may prove a useful tool in helping the Landbank reach its lofty goals and aiding lenders and homeowners alike in navigating through the economic downswing.

New Market Means New Legal Issues

 Thank you to Realtor Magazine: Online   for the wonderful article written by Mariwyn Evans about the new and unique challenges the real estate industry is addressing during the current economic times.  I was fortunate enough to be interviewed by Mariwyn for the article which you can read by following this link.  The article touches on landlord/tenant issues, lender/borrower issues and partnership/development entity issues as well as real estate litigation issues.  

 

No Exclusive Cable Contracts for Apartment and Condominium Projects

The U.S. Court of Appeals for the District of Columbia recently upheld a 2007 Federal Communications Commission ("FCC") order prohibiting the owner's of apartment buildings, condominiums and other multi-unit residential properties from entering into exclusive contracts for providing cable T.V. services.  The FCC relied upon Section 628(b) of the Communications Act.  The FCC's position is that to restrict a multi-unit residential project's access to only one cable provider forecloses the expansion of fiber and phone, video and internet bundling services; thereby, denying residences the benefits of increased competition, lower prices and improved content and services. Take note of this ruling when the issue arises in the multi-unit residential projects you own, manage or are developing.

Shankapotomus

It was reported this week in Crain’s Cleveland Business that the Blue Heron Golf Club in Medina County is for sale.  The golf course, only four years old and ranked in 2006 as one of the best new courses in the country, is surrounded by a residential development consisting of more than 400 home sites. 

 According to Crain’s, the broker for Blue Heron does not believe the fact that the course is on the market will negatively impact the sale of lots in the surrounding development.  He is most likely correct.  The general state of the economy is doing that job just fine on its own, thank you very much. 

Residential developers and new home builders have been two players in the market hit hardest by the current credit crisis and rising unemployment. 

 Data just released today (April 16) by the U.S. Census Bureau and HUD estimates single family building permits issued nationally in March 2009 were down 7.4% from the revised February figures, and down 42% from one year ago.  Estimates for February had been up slightly over those for January 2009.

 While March housing starts are estimated to be unchanged from those in February 2009, they were down a whopping 49.6% from March 2008 national levels.  Total single family units under construction, both nationally and in the Midwest, have declined each of the last 12 months.

 While sale rumors - - now confirmed - - may not have hurt new home sales in the adjoining subdivisions, the sale of the Blue Heron course cannot help unless the sale is to another operator intent on maintaining the property as a golf facility.  That issue can turn on what is or is not required by title covenants, documents which are often ignored by home buyers.

Park use is one alternative which could complement neighboring residential development.  The 2007 sale of Orchard Hills Golf Course to the Geauga Park District is a prime example of a golf course being converted to a use that successfully preserves the green spaces and recreational aspects of the property.  

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Mix It Up! Mixed-Use Condominium Developments Can Be Rewarding for Developers

“Mixed-use” developments, which incorporate residential units with retail or other commercial uses, have steadily gained in popularity over recent years. This is due to the fact that mixed-use developments offer advantages to developers, owners, tenants and residents when compared to traditional single-purpose developments. Many of today’s home buyers are increasingly interested in living within walking distance of amenities such as restaurants, movie theaters and shopping. From the developer’s perspective, mixed-use projects provide diversification in the product they have to offer. Commercial owners and tenants benefit from having a built-in customer base and consistent traffic through their stores due to their proximity to the residential units.

The condominium form of ownership and governance is flexible enough to accommodate a mixed-use project, though it can also be combined with other forms of ownership for even more flexibility. The overall structure must be well-planned in order to balance the sometimes competing interests of the various uses. In a residential-only development, dealing with commercial uses is easy—the developer simply prohibits them in the governing documents. In a mixed-use development, however, commercial and residential must coexist peacefully. This can be accomplished in a variety of ways, but careful planning is the key to ensure that the “balance of power” between residential and commercial is maintained. 

 

One of the most important considerations in developing the ownership and governance structure is the physical layout of the development.  For example, will residential and commercial uses be located in the same building? If so, the developer and design professionals must pay close attention to access, noise and light issues, trash disposal and parking, among other issues. If the residential and commercial uses are located in separate buildings, the same issues often exist, but usually to a lesser degree. In a high-rise mixed use development, the parcel may sometimes be “horizontally subdivided” so that two separate condominiums can be created, one stacked on the other. Or, the ground level parcel may be a fee parcel used for a hotel, retail shops or other purposes with a residential condominium created from the upper parcel. In either case, a variety of easements for access, support and utilities will be required. Once the basic organizational structure of the development has been determined, the governing documents—usually consisting of one or more declarations, codes of regulations or reciprocal easement agreements—must be meticulously drafted to provide the easements, covenants and restrictions necessary for the successful operation of the development. 

 

Financing for a mixed-use development can also be complex, as funds often come from a mix of public and private sources, each with its own lending standards and requirements. Lenders may require that one or more portions of the project be held under separate ownership to minimize the risk of default. This is another factor to consider when planning the ownership structure of the various project components and the content of the governing documents.

 

Is mixed-use development just a short-term trend or is it here to stay? The International Council of Shopping Centers recently held a conference on mixed-use developments at which one leading developer told participants that mixed-use developments have gone from “novelty to normality” and that “[i]t’s been established that all of the other components—apartments, hotel, office—do better in concert with the retail component.” As the economy recovers and new real estate development projects take flight, expect to see mixed-use developments at the forefront.

The Next Target Residential Market

Courtesy of Stone Works Development LLC (www.villagesofriveroaks.com)The impact the aging baby boomer class affectionately known as “Boomers” is having on many segments of the economy has been discussed in the media for some time now.  As life expectancy expands the type of home the “Boomer” wants to live in needs to fit their life style and physical demands.  A recent article in the Chicago Tribune entitled What Boomers Really Want in Housing describes some of the wants and dislikes of the Boomers as determined by the Consumer Preference Survey of the National Association of Home Builders.  For instance, there is a preference for single-level homes with three bedrooms and higher end finish levels.  Anything that reminds a Boomer that they are aging is out; such as grab bars in bathrooms. 

The opportunities the Boomers present to the development industry are enormous since this segment of the population has accumulated buying power, even in a down economy, as the result of decades of working and saving.  Eriech Horvath of Stone Works Development LLC, an Epcon community builder, explained that the Boomer/buyer wants access to recreation/golf courses, shopping, restaurants and medical facilities.  Horvath described his company’s “single style” one floor homes which contain many of the amenities of custom homes, but as maintenance free as possible; which is a major “want” of the Boomer class.  So, if there is a take away from all of this it is that if you are planning a town house style community, you might consider adding into the mix “Boomer” type housing stock. 

Introduction to China's Real Estate Ownership System

In the past 20 years or so, China’s real estate market has experienced phenomenal growth. Hundreds of skyscrapers bursted into the sky during the two decades and many more are coming. This dramatically changed the landscape of many cities in China. All these skyscrapers and other real estate developments are built on a unique land ownership system. The system is still in its primary state of formation, thus uncertainties exist in many crucial areas. In 2007, the first Property Law of People's Republic of China was enacted and clarified some of the uncertainties but it is far from eliminating them all. Many land ownership issues are still left undefined. The following is an overview of some aspects of China’s unique system. 

In China a private party cannot “own” land. All land is either “owned” by the State or by the Collectives. The State owns most of urban area land (i.e. commercial land) and the Collectives are the owners of most rural land (i.e. farm land). Under the current system, even though the land itself can not be transferred, the State may pass the right to use its land to private parties through the granting of “Granted Land Use Right” (“GLUR”) or “Allocated Land Use Right” (“ALUR”). In contrast, Collectives are not allowed to transfer the use right of the land they own. Collectives’ land must be converted from Collective ownership into State ownership before the use right of the land can be transferred. There are efforts, including legislative and administrative, to “free” the land owned by Collectives.  The general purpose behind these efforts is to give farmers more “property right” to energize the rural economy in China. 

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So You Think Tax Credits Are Boring ?

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. 

Who Knew Being Green Could Be So Easy !

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. 

Cyclical Nature of the Real Estate Industry

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.