Return of Retail Part Two

I recently speculated that retail must be back. I just attended the ICSC Idea Exchange in Columbus, Ohio and got further support for this idea.

Robert Myers, Chief Operating Officer of Philips Edison & Company, said they were now seeing increased occupancy rates in the mid 90% with positive absorption, low interest rates on lending, and high prices on sale. He also said attendance at ICSC events is up.


I met several smart ambitious young guys just getting into retail brokerage. I would not have thought this a good career path just a couple of years ago, so it is instructive to see smart guys choosing to enter the field.


I saw several new retailers looking for new locations. One of them was Fusian – think Chipotle does Sushi. Great idea and great place to eat if you haven’t tried it yet or it hasn’t come to your town yet.


Easton was jamming on a Tuesday night. Most restaurants had a wait – we ate at Cooper’s Hawk and didn’t mind the wait since we drank a couple glasses of wine. Cooper’s Hawk is another great concept. They make their own wine, which is better than you think, and the food was tremendous. But the retail stores were busy too – with a line waiting to get into Victoria’s Secret (although that may have had something to do with the fact they had a Victoria’s Secret model there).  


In fact Easton is expanding. The new Easton Gateway is well under construction. I went into the new Dick’s there which opened ahead of the Center. Must say it may be the best sporting goods store I have ever been in. 


And the mood of the conference was markedly upbeat, which in and of itself is a change.  So maybe cautious optimism is the appropriate byline.

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 !

Strip Mall Deja Vu !

 Fortune Magazine  recently published an article relating to a conversation with the CEO of Kimco Realty, Dave Henry.  Henry makes some very compelling arguments as to why strip malls and brick and mortar retail in general is here to stay for a while and why the population demographics will continue to provide ample support. Henry is not the only industry executive to have this opinion.  Many retailers and food service outlets also agree by demonstrating with their new store openings.

So, next time you drive by a strip mall which is for sale, think about how it can be re-purposed or the tenant mix can be tweaked to appeal to today's consumers.

Leasing Trends in 2013

It is now apparent that retail drives our economy. Instead of bashing indulgent consumption, it is time to embrace it. As we approach the holiday season then, it might be a good time to take note of the trends from 2013.

1.      Return to the City or Something Resembling Downtown. The new retail “centers” are increasingly not the regional mall or even the suburban lifestyle center, but rather revitalized downtown areas and neighborhoods near downtown with street level retail amid offices and apartment dwellings resembling downtown areas. The urbanization of retail has created interesting different options for consumers, and interesting lease issues for both landlords and tenants.


2.      The New King of the Hill.  It was not so long ago that Gap was the most desired retail tenant and thus had the leverage to demand incredibly favorable lease terms. Due to increased competition and merchandising challenges, Gap does not have the leverage it once had. Then it was Barnes & Noble. But now the future of the book store as a concept is in question – the video store is already obsolete. Department stores because of their credit and the amount of space they take have always had a great deal of leverage. The recent trouble of JC Penny though should cause landlords to be cautious about their department store deals. So who are the current retailers who have the most leverage? Apple for sure. American Girl would garner a lot of interest from any landlord. Top line restaurants are huge draws.  In fact, even when retail demand slowed, restaurants continued to experience growth. We still have to eat, and we apparently prefer to eat out. Upscale movie theaters, with gourmet restaurants included, are highly coveted. In terms of department stores, the sale of Saks makes them a very interesting prospect. And of course WalMart still gets whatever it wants.


3.      A New Outlet. Besides the proliferation of outlet centers, retailers have started putting their outlet stores in full line centers. Shoppers who are willing to pay top dollar, still like to get a bargain on name brands. The outlet store is no longer confined to the outlet center.


4.      Condo Centers.  Financing new centers is more complicated and harder to obtain than ever before. All new centers have an office, residential and/or hotel component. In many cases there is first floor retail below those components. Lenders are requiring that these components be isolated for financing security. The ownership could be structured as an air rights deal. But lenders seem to prefer a condominium structure leading to a renaissance of condo deals.


5.      The Lender Does Matter. Incredibly, more and more tenants are entering into leases without any SNDA. The lenders are in some cases refusing to give one at all and in others are requiring forms that cancel important lease terms. Tenants are increasingly faced with the realization that they simply cannot get an SNDA or that they may even be better off without one. Another related trend is that lenders are actually reviewing leases. We all have heard (or used the excuse) that a lease term could not be given because the landlord’s lender would not approve. Historically, that may have been more of a subterfuge than reality. But in today’s environment lenders really are reviewing usually ignored lease terms like condemnation and casualty and demanding changes.


6.      City Food. Admit it, food trucks are fun. And food trucks can offer limited menu, specialty food items that a permanent restaurant cannot offer. Food trucks are not just at random street corners any more. There are now food truck centers, and savvy suburban centers are now adding food trucks in the parking lot as an amenity and update on the old kiosk idea and having the truck pay rent. Interesting approach to keeping fresh changing restaurant options.


7.      The Web or Bricks? Sales on the web continue to grow as retailers get better and better in reaching their customers and providing a good sales experience over the web. However, most retailers have come to realize that a bricks and mortar store is a necessary part of their sales process. Consumers like to touch and feel products and like the experience of interacting with live people from time to time. This dynamic has changed how retailers lay out their store design and how they choose locations.


Do your part to help the American economy and splurge this holiday season. Think of it as patriotic.    

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.


The International Council of Shopping Centers (ICSC) has its annual law conference in San Diego next week. For any attorney involved in retail leasing, it is a must see event. The seminars are very worthwhile. I have been doing leasing for over 20 years now and still come away from each conference feeling like I learned a number of things that will directly help our clients. In addition, the conference is a great opportunity to socialize with clients and maybe more importantly opposing counsel. Having a beer with opposing counsel makes getting a deal done with them so much easier. It is easy for someone to be difficult by email to someone they have never met in person; it is much harder for someone to be difficult after you have met them and become friends. Developing a relationship with opposing counsel directly benefits our clients. Not to mention that a couple days in San Diego never hurt anyone.

I Admit it - I like to Wine

Wine is a great hobby – it combines art and science; it has a social component; it may be heart healthy; it definitely improves mental well-being. Combine good wine, with great food in a cool environment and you are asking where to sign up, right?

Cooper’s Hawk is a new retail concept that is becoming a huge draw for high end retail sites. It is a restaurant that features wine they make themselves. Picture a Napa winery with a gourmet restaurant inside. They make 48 varieties of wine (I have tried several – they are all good, but I must say I can drink the Cooper’s Hawk Red every day of the week – and sometimes do). Their Blanc de Blanc sparkling wine was actually used at the past two presidential inaugurations. They have the grapes shipped in predominantly from California to their facility in Chicago where they make and bottle their wine. They currently bottle 225,000 cases per year from their Chicago facility. The food is top shelf also. Customers who don’t even drink wine want to come because of the food.  Asian pork belly nachos, jambalaya and short rib risotto, cilantro ranch chicken and avocado sandwich... you get the idea. This is not your average brew pub fare.


A typical Cooper’s Hawk contains approximately 11,000 square feet. 15% of the space is for the wine tasting area, 20% for the bar and there is always a private dining area. They have 12

Restaurants open – all in high end shopping centers. They project two more to open in 2013 with five to open in 2014 and up to six in 2015.  Average annual gross sales for a Cooper’s Hawk have been exceeding $8.5 million. A Cooper’s Hawk is a great amenity and draw for any center.


And you can actually sign up for this. They have a wine club where you can buy their wines on a monthly basis. See the video below on how they make this concept a reality.



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.



Congratulations !

Congratulations to our friend, David LaRue, CEO of Forest City Enterprises, on his nomination as the Chairman of ICSC for 2013-2014.  We know that under David's guidance ICSC will be well served !

Next Hot Industry Sector

TRANSPORTATION, LOGISTICTS, SUPPLY CHAIN MANAGMENT,  INTERMODEL, TRUCKING, TRAINS, SHIPPING ok, you get it.  As the economy wakes up goods being moved around the country need to make their way to ports, factories and consumers.  Opportunities abound for projects and developers if they are poised to take advantage of the logistics and supply chain sectors of the Real Estate Industry.

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 !

Top 10 Reasons to go to ICSC Law Conference

The ICSC Law Conference is being held this week in Phoenix. It alternates from the West  to the East each year - this year it's out West. It is a great conference for any attorney practicing in the retail real estate industry.  Here are the top 10 reasons for attending:

10.    There is a seminar on negotiating skills, which is really a seminar on how to listen - a skill we all need to improve.


9.    It is always at a beautiful resort.


8.    Arnold Golden Gregory has a party.  So Abe Schear is buying you drinks.


7.    There are seminars on insurance coverage in retail leases. I firmly believe that if you really understand how insurance and indemnity work together in a lease, you can win every issue.


6.    Easy way to socialize with clients.


5.   There is always a great featured speaker. Might be a nationally known celebrity, or an insightful national commentator.


4.    Most opposing attorneys will be there and so you can negotiate face to face on pending leases (while not being pressured to turn around a draft immediately since everyone understands you are at ICSC and thus unable to do so).


3.    You get CLE - lots of it.


2.    There are small interactive seminars where you will learn useful information.


1.    And the number one reason to attend is that you can meet in person opposing attorneys with whom you are doing leases.  It is then much harder for that attorney to be obnoxious and difficult after you have met them face to face. 


It really is the chance to meet people you are working with in person in a relaxed setting that is the biggest benefit.


Hope to see you there ! 

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.  



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.  


Real Estate and the Final Four !

 The NCAA men's basketball tournament is consuming a lot of bandwith in everyone's offices.  Perhaps even slowing down the speed of emailing all of those contracts, leases and loan documents around the country.  Have you ever wondered if there is a connection between the real estate industry and the NCAA Tournament ?  

We found this article on line in The Orange County Register  which describes how the Jones Lang LaSalle (Irvine, CA office) has come up with a correlation between a college's office market vacancy rates and the likelihood of that college to succeed in the NCAA Tournament.  Check it out and see if your bracket compares. 

Baby Boomers Start to Retire

2011 is the year when the Baby Boomers begin to turn 65 years old.  This trend will continue for the next twenty years.  How is the Real Estate industry going to respond to this demographic reality ?  The impact on society is enormous: housing, transportation and work force issues abound.  

  • Will housing prices be suppressed as Boomers downsize their homes to match their new lifestyles and incomes ?
  • What will the impact be on government delivered social services ?
  • Will consumer spending decrease as Boomer incomes are reduced ?
  • Will medical and health industries have the resources to respond to the flood of new patients showing up in their waiting rooms ?
  • Will skilled workers stay on the job longer ?
  • Are there enough skilled workers to replace those that are retiring ?

Which of the industries real estate professionals work with will expand and which will contract ?  It seems reasonable to assume that the health care industry will expand, but how will this change impact retail, housing and transportation ?  

Crain's Chicago Business  explored all of these issues recently and presented very interesting conclusions and facts.  One of which is that in Illinois .9 people will turn 65 by 2030 for each new person added to the general population since 2000; and in Ohio the ratio is 4.3;  Iowa the ratio is 7.9.  Is this evidence of a work force drain in Ohio, Iowa and other similarly situated states ?  Does this bode well for the real estate and other industries in Illinois ?  Consider all of this as you formulate or amend your long term vision for your company, including where to expand your operations.


Grocery Store Anchored Strip Centers

A recent article in noted that the grocery store anchored strip center remains a strong performing retail category. In all geographic markets, there is an over abundance of retail space. There are several reasons for the excess space:

            1)  Developers overbuilt with the availability of easy financing.


            2)  The economy has forced many retailers to close locations or cease operations all together.


            3)  Successful retailers have decided they need less stores in each market, and can fill in the gap with internet sales.


            So why have grocery store anchored strip centers remained so strong? David Birdsall, Chief Development Officer for Phillips Edison & Company, says it is because grocery stores can not fill in the gap with internet sales. Every geographic market needs a grocery store. “So far the model for replacing the grocery store with an Internet retailer has not been found, mainly because shopping for groceries remains both a personal preference and because of cost structure's very difficult to charge a fee for the delivery of one box of pasta or a tub of butter ....for the foreseeable future this shopping center model still has viability.”


            What other concepts remain strong or have become strong? Urgent care centers seem to be a growing trend, and you certainly can’t get their service over the internet. Restaurants also report strong sales. On the other hand, the book store, which used to be a staple anchor for a life style center, may be obsolete in the near future. If not obsolete, it certainly will not be the anchor it once was.  

Another Reason To Consider a Flat Tax

Landlord's have gone to fixed CAM to reduce administrative expenses and disputes with their tenants. The government could accomplish the same by going to a flat tax - no need for complicated tax regulations that create unintended consequences; no need for intrusive audits where the government is at odds with its constituents; in fact maybe no need for the IRS. Take for example the so called "self-rental rule." The Code ( Reg. 1. 469-2(f)(6) if your are keeping score at home) provides (unfairly) that if a taxpayer owns property that it rents to a company in which it has an ownership interest, then any rental loss is passive, but any rental income is active. Really?  This means the loss in the first year cannot offset against  income in the second year.  In fact the loss can never be used at all unless the taxpayer has some passive income from an unrelated deal not involving the rental of property to any entity in which he or she has an interest. Classic case of tails, the taxpayer loses and heads, the IRS wins. 

Close Your Eyes and Imagine......

The retail industry is changing, or depending upon your current situation, the retail industry has already changed. The days of throwing up a center on every open suburban vacant parcel are long gone and likely not to return anytime soon. Just knowing how to build a retail center is no longer enough. What can you do to make a difference, promote responsible development and responsible consumer behavior?  Close your eyes and imagine a zero emission community where gasoline and diesel powered vehicles share the road with pure electric vehicles.  

How can your center differentiate itself from the pack, get loads of free press and be environmentally responsible at the same time?  Look into the future when electric vehicles are the norm and not the exception. Some say that day is not so far off. BMW intends to launch its Megacity Vehicle by 2013; Nissan intends to launch the Leaf late this year.  Electric vehicles will stop where they can plug in and recharge. A center which offers charging stations will attract shoppers; usually educated high earning shoppers which many retailers are trying to attract into their stores. Now do you get it?  

Charging stations = shoppers = quality retail tenants.

Contact your electric utility and state government to see if they will support your efforts through grants and low interest rate loans. Be creative and look for an opportunity to be a leader into the future.


Retail Trends We See

Toys R Us is leasing a large number of sites on a temporary basis: smaller stores and only for the Christmas season. Temporary leasing might be a trend to capitalize on, especially where you have vacant space in a decent geographic market.  And if you can combine it with a different, complimentary seasonal concept (ice cream or frozen yogurt? tax service?), it might eat up otherwise vacant space.
Costco is looking at former department stores for expansion locations. Costco would be a great addition to any center, even upscale ones. It has been shown that the consumer who likes Nordstrom also likes the bargains and experience at Costco. Many upscale centers have prohibitions on discount or club stores. While the prohibition may be outdated, it may nonetheless still apply.
Allowances are becoming increasing at risk. tenants are concerned about a Landlord's ability to fund in these challenging economic times and are requiring significant dollars to be paid up front or early in the process. Conversely, Tenants who are having difficulties at other locations are defaulting after receipt of allowance payments but prior to opening and so a Landlord is placed at great risk if it pays any allowance prior to opening.  If  the tenant has off set right for any non-payment, tenant can probably protect itself from a defaulting landlord.  BUT, the tenant needs to preserve this right in any SNDA it executes.  For large allowance amounts, the time to recoup may be unacceptable. In these cases, an escrow at time of delivery and payment upon opening may be better.
Book stores have issues. Long considered an ideal anchor for a life style center, the E Reader and low pricing of big box retailers make the book store a difficult retail concept.
Outlet centers are really popular. Traditional centers should capitalize and try to include outlets in part. Again, landlords should revisit the prohibited uses in effect at the center.
Let us know what are other trends you are seeing ?



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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Some Good News About Empty Big Boxes

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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Here Comes the Cavalry !!!!

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 ?


Vacant Big Box Retail Stores

The current economic downturn and the contraction of the retail sector have resulted in an increasing number of vacant “big box” retail stores in shopping centers across the country. A “big box” is a freestanding building occupied by a single retail tenant that contains between 20,000 to 200,000 square feet of space and is surrounded by a large parking area. Big box structures are designed to house large inventories in an efficient and cost-effective manner. They are constructed to the meet the specific needs of the big box tenant. Examples of big box retailers include Wal-Mart, Target, Costco, and Home Depot.

As the number of vacant big boxes increases, owners, developers, and communities are faced with the challenge of what to do with them. Big boxes have been redeveloped into libraries, community centers, charter schools, churches, museums, and civic centers. While this redevelopment is promising, churches, schools, and other public uses generally are exempt from real estate taxes and they do not generate sales taxes. Ideally, the new use of the big box space will generate sales and property taxes as the big box retailer did, but oftentimes, this is not the case. The failure of a re-use tenant to generate sales and property taxes further contributes to the already daunting fiscal challenges faced by many local communities. Lower rent tenants, such as discount retailers and grocers, are also options for reuse of vacant big box space but owners may be concerned that lower rent tenants may devalue the property.

Redeveloping vacant big boxes present special challenges to communities, owners, and prospective tenants. Leases or deed covenants may contain restrictions that may impact the ability to re-lease the property. Zoning and land use issues may impede or constrain the future use of the space. Co-tenancy clauses in leases of other tenants in a center may result in tenants abandoning a center if a big box tenant vacates its space thereby triggering a landlord default under the lease.

While creative ideas for the reuse of vacant big box spaces exist, it will take the support of local governments and communities as well as available financing to make the redevelopment of these big boxes work.

Supreme Court Rules Beach Additions Not Compensable Takings

Truckloads of sand will begin cascading across hurricane-battered beaches along the Destin and Walton County shorelines, thanks to a recent 8-0 decision by the Supreme Court. Coastal homeowners originally sued Florida arguing that the Beach Erosion Control Program (BECP) would cause the value of their homes to decline, turning their “oceanfront” property into “ocean view” property. Much to the dismay of residents, the Court ruled that the state may extend the eroded shorelines without compensating the homeowners for loss of private property.

The homeowners in Stop the Beach Renourishment v. Florida Department of Environmental Protection (#08-1151) claimed that widening the beach without compensating the residents amounted to an unlawful taking of private property for public use. Although residents believed their land was unlawfully taken, a state law permits Florida to add sand to eroding beaches. Under this law, the state is permitted to increase the size of the beach and claim ownership of the new addition. All eight justices (Justice Stevens recused himself, likely because he owns oceanfront property in Ft. Lauderdale which is also under consideration for a BECP project) agreed that such action did not constitute a compensable taking.  Justice Scalia, writing for the Court, noted that the case turned on two Florida property law principles:  “First, the State as owner of the submerged land adjacent to littoral property has the right to fill that land, so long as it does not interfere with the rights of the public and of littoral landowners. Second, if an avulsion exposes land seaward of littoral property that had previously been submerged, that land belongs to the State even if it interrupts the littoral owner’s contact with the water.” The Court concluded that since “the Florida Supreme Court’s decision did not contravene the established property rights of the petitioner’s members, Florida [did not violate] the Fifth and Fourteenth Amendments.”   

Doug Kendall, spokesman for the Constitutional Accountability Center, agreed with the decision, stating that “the Court’s ruling supports Florida’s efforts to restore eroded beaches and preserves the ability of state and local governments to respond to changing environmental conditions. It is crucially important that the government have the authority to step in to protect our beaches and coastal communities.”

While some may see this as an extension of recent Supreme Court decisions -- ala Kelo -- expanding the right of government to take private property for public use, Stop the Beach is actually a unique case that will likely have little impact on future takings jurisprudence.  It arose from distinctive circumstances addressing littoral property under a Florida statute permitting erosion control actions by the state.  And when Scalia sides with the state in a takings case, you can be sure the scope of victory is limited.

Well Done Kayla !!!

Congratulations to Kayla Ashley daughter of Jennette Ashley, one of our real estate paralegals, for the recognition of her work on behalf of the Ronald McDonald House near Cincinnati Children's Hospital. The local Fox TV affiliate Channel 19 recognized Kayla's volunteer work during their Pass the Cash spot.  Click on the link to watch.

This should be a reminder to all of us in the real estate industry that even in tough times we all need to look for opportunities to give back to the communities which support our efforts.  A little bit of kindness and consideration will go a long way ! 

Audit Those Leases

The typical co-tenancy clause provides that if occupancy at a shopping center falls below a certain level and/or certain other key tenants close, the tenant gets rent relief and at some point the right to terminate its lease. In the current retail environment, all sophisticated tenants demand some sort of co-tenancy protection.  Landlords have generally accepted the fact that they must agree to some sort of co-tenancy if they are to get the tenants they desire.

However, mortgage lenders need to carefully consider the co-tenancy provisions also because they affect the value of their collateral, and of course if they are foreclosing it is likely that there is a co-tenancy failure. Obviously, a lender prefers no co-tenancy clauses in the leases. However, the challenge is that without them, there is no project in the first instance. But, the lender should carefully review all co-tenancy clauses so at least it knows the risk involved before taking any action.



Since early 2009, Housing prices have stabilized and valuations and affordability of homes have improved. This stabilization is primarily attributed to government housing policies, such as the home buyer tax credit, the federal government’s purchase of mortgage-based securities, and temporary mortgage modifications through the Home Affordable Mortgage Program. However, many economists believe that the housing market will experience another down turn in 2010 and into 2011 because of excess supply, increasing mortgage delinquencies, and the expiration of the temporary government housing policies which provided the housing market with a much needed boost.

The average listing price for homes in Cincinnati is down for the first week in June but not significantly. The median sales price in Cincinnati is up 2.3% over last year and the number of home sales increased 5.1%.

In my neighborhood, many homes are currently listed. While this is to be expected during the busy summer months, there is an excess supply of available homes, which is contributing to the depressed valuations. There is movement, however. The market appears to have picked up. Homes are selling. Some of them are selling quickly and at close to asking price (although asking price is still much lower than the peaks we experienced in the first half of 2006). Other homes, however, are languishing on the market for months in spite of aggressive reductions in price.

It is still a buyer’s market. Sellers are expected to have their homes updated, in top condition, and staged if they want to sell. Sellers often provide incentives to buyers such as home warranties and the payment of closing costs to further entice buyers. It is likely to remain a buyer’s market for quite some time.

Overall, the economic recovery appears to be moderating. The US economy faces several challenges in 2010 and 2011: weakness in labor and high unemployment, fiscal challenges at the state and local levels, vacant homes and unused industrial capacity, limited credit, uncertainty from the European crisis, slower growth, and further declines in housing prices. We have a way to go before things will improve.  If you are a buyer the market remains favorable; if you are a seller be flexible and open minded as your first offer might be your best offer !

Roll Up Your Pants !!!!

According to FEMA the National Flood Insurance Program is no longer in effect.  See the post from the FEMA website below and on this link:

"The NFIP will not be reauthorized by Congress by midnight of May 31, 2010. Therefore, the Program will experience a hiatus – a period without authority to:

  • issue new policies for which application and premium payment dates are on or after June 1, 2010, or
  • issue increased coverage on existing policies for which endorsement and premium payment dates are on or after June 1, 2010, or
  • issue renewal policies for which the renewal premium is received by the company on or after June 1, 2010, and after the end of the 30-day renewal grace period, until Congress reauthorizes the Program.

While awaiting Congressional reauthorization, FEMA is issuing the guidance contained in the attached bulletin (PDF 92KB, TXT 21KB). Within this bulletin, is a set of Frequently Asked Questions concerning NFIP authorization to help you in communicating with your insurance agents and policyholders.

The hiatus period is expected to end soon. We will inform you when the NFIP is again authorized to sell new policies, issue increase coverage on existing policies, or issue renewal policies."

If you currently own real property in or around an insurable flood zone you should contact your insurance carrier to determine what sort of coverage you now have, especially in light of the fact that hurricane season is about to commence !

Don't Be Anyone's Lunch !

I often think of an African proverb shared by Kip Reader, Managing Partner of Ulmer & Berne:

Every morning in Africa, a gazelle wakes up. It knows it must run faster than the fastest lion or it will be killed. Every morning a lion wakes up. It knows it must outrun the slowest gazelle or it will starve to death. It doesn’t matter whether you are a lion or a gazelle.  When the sun comes up, you better start running.
I leave it to you to decide whether you are a lion or gazelle, because regardless of in which industry you work, the proverb has great meaning.  Whether you are hunting for new clients, new tenants, new retail space, new buyers, new investment opportunities, new employees, new engagements, new whatever - you name it, you are competing with others looking for the same new opportunity.  So, the trick is to be the fastest lion or gazelle every day - stay ahead of your competitors. Particularly good advice as we all navigate through the current economic challenges.

Where Are The Buyers ???

 According to Steve Timmel of Grubb & Ellis West Shell  94% of the Cincinnati area office/industrial deals completed in the last 36 months have been to buyers from outside the Greater Cincinnati area.  This statistic is astounding !  What is it about the Greater Cincinnati commercial real estate market which is so attractive to out of state buyers and investors ?  Could the stability of the economy and lack of large swings have something to do with it ?  After what we have all been through in the last 24 months a commercial/industrial market such as Greater Cincinnati is like a breath of fresh air.  The new normal to coin a phrase ! 

Mixed Use Centers - How Do You Allocate CAM?

Almost all new build shopping centers are mixed use - they include some combination of office and residential in addition to the retail space. Elizabeth Hamilton, in house Real Estate Counsel at Office Depot, recently reminded me of the special problem this presents in allocating CAM, taxes and insurance. Some portion of each must be allocated to the office and residential components, but should it be on a strict per square foot basis for all users?  Taxes and insurance should be allocated among all users equally on a per square foot basis.  This means the dominator of the fraction defining a tenant's pro rata share should include all retail, office and residential space. (Of course, creating separate parcels eliminates or reduces the problem.) 

CAM may be more complicated. The operating expenses attributable solely to the office component (such as the maintenance of an elevator or lobby area) should be allocated only to the office tenants, meaning that those costs should be deducted from the CAM allocated to the retail tenants. But then should the balance be spread over all tenants, retail and office? Retail tenants use more CAM than office tenants so that may not really be fair. Some landlords analyze it item by item to allocate between office and retail tenants. Some simply figure out what the market rate for office is and deduct that off the top. Others deduct based on a per square foot or percentage reduction and a general application of how they think CAM should be allocated. In any of these methods, the denominator of the fraction is just the retail area (because the aggregate CAM is reduced before the fraction is applied.)
The key here is to recognize the issue and have the Landlord explain how it allocates each item and then to make sure the Lease reflects this methodology. There is definite room for disagreement as to how to allocate, but the actual cost difference is probably not material. However, is this not another reason why fixed CAM is better?


An interesting situation  has come up several times just recently (these issues come in droves – after never confronting the issue for a really long time, all of a sudden you get the same issue coming up again and again):

  • Tenant relocates to new space in the same center; 
  • Landlord and Tenant amend existing lease to provide new space, rent and term; 
  • Tenant entered into memorandum of lease and SNDA when it executed original lease; 
  • There is a new loan with new lender in place at the time of the relocation; and
  • Tenant enters into an amendment to the memorandum of lease at time of relocation. 

Who holds the senior interest – the tenant or the new lender?


If it is the same center, with the legal description of the center attached to original memorandum of lease, and the new lender consents to lease amendment, I believe the tenant should have senior interest.


If the tenant executed an entirely new lease rather than an amendment to the existing lease, would the analysis differ? It should not, otherwise form would trump substance.


A lender who consents in any way to a lease or amendment should not be able to terminate that lease upon foreclosure (unless of course if the tenant is in default).  Great minds differ on issues such as this, but law and equities lien in our direction.  What do you think ?

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. 


We Are All Our Brother & Sister's Keeper (Lessons of Right & Wrong)

Our good friend, Abe Schear, Chairman of the Leasing Practice Group at Arnall Golden Gregory in Atlanta, pens a newsletter called Baseball Digest(able).    Abe's January issue is a powerful piece of insightful writing which merits all of our attention.   Since many of the deals in the real estate industry occur as a result of the reputation and faith we all have in each other based upon mutual experience, we are all put in the position of being an "enabler" at some time or another.  Therefor, it is in all of our best interest to head the lessons which Abe so aptly points out.   Abe has graciously given us permission to reprint the newsletter below.   Thank you Abe.


New Year’s Musings

Having just returned from Berlin where Linda and I spent four nights over the year end holidays, numerous reflections come to mind.  First, and somewhat surprising to me, there is so much to see I’d like to go back in the summer when the weather is more temperate and there is more than eight hours of day light.  Second, what is it about us Americans that wholly rejects timely and clean bus and train service?  The public transportation in Berlin was beyond wonderful – clean, efficient, affordable and it went most everywhere we wanted to go.  Third, most of Berlin appears to have come to grips with its history, good and bad, and the city is full of contemplative art and youthful energy. 

There is, in fact, a sculpture in a small park near the original site of an old synagogue where Jewish men were separated from their mostly non-Jewish wives and children near the end of World War II.  Their wives and their families protested night after night, blocking streets and creating a stir the Nazis neither expected nor wished to see gather wider support.  While these courageous women were not successful in completely stemming the tragic transport of these men and others to the concentration camps, their voices were heard, and the transport was slowed.  The part of the sculpture which comes to mind sits directly across the park from the memorial to these heroic women.  It depicts a man sitting idly on a park bench looking away from the other pieces, a man who wants to appear to know nothing, will do nothing, feels nothing, and cares for nothing and no one but  himself.  Our guide referred to him as the “ambivalent stranger”.
This “know nothing – do nothing” concern affects all of us around the world.  As we look at the tabloid-friendly Tiger Woods situation (or the never-ending baseball steroid matter for that regard), regardless of what Tiger did, what Tiger took, where Tiger took it and who he got it from, does anyone seriously believe that there was not a bevy of enablers, people as self serving and cold as the statue, who knew better but said nothing and did less?

For instance, is it remotely possible that Tiger’s caddy, his agent, his so called friends and representatives of his sponsors, did not know what was going on which led to this very sad fall from grace?  Under what pretense did they think that they were being Tiger’s friend?  Were these people simply protecting their own meal ticket?  Is there no circumstance when doing right is more important than making money?

Business, naturally enough, raises this quandary every day in the ethics and morals of our work. What is right and what is not?  When do we lend a hand and when do we turn our backs?  When do we take a moment to comfort and when do we fail to be a friend?

These issues are particularly important as we enter a new year.  Sport is, of course, a daily lesson about rules and teamwork and fair play.  Sport is a reflection on our society and on us – we follow sports that we care about and, as we do, we often learn a lot about ourselves.  As we set our goals for the new year, we routinely look at our productivity – hours worked, time billed, money earned – or whatever our productivity measures may be. We set goals to be better parents and better children, to go to our houses of worship more often, to do more volunteer work.  Perhaps we should ask ourselves what we would have done had we been in Tiger’s inner circle.  Would we have had the courage to try to correct the situation?  Would we have lied about not knowing anything?  Would we have done all we could to save our paycheck?

I have some idea how I would have reacted had I been in that inner circle, but there is no doubt that many of these people wish or will wish that they had taken the nobler path and will ask themselves why they didn’t act when there was opportunity.  I know that none of us want to be memorialized as a “know nothing, do nothing” person – not for ourselves nor for our families.   






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.  

New "Green" Landscape Ratings Established

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.         

Retail Developer, Investor, Lender and Retailer Must Read

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 !

Chinese Drywall Has Damaged Their Homes and Health, Some U.S. Homeowners Claim, but Can They Make the Chinese Manufacturers Pay?

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.

Ulmer & Berne LLP Real Estate Practice Ranked 1st in Ohio; 8th in the Midwest

We are pleased to announce that Midwest Real Estate News magazine named the Firm eighth on its list of 2009 Top 25 Midwest Real Estate Law Firms – Best of the Best. Ulmer & Berne was once again ranked first in the state of Ohio.

Midwest Real Estate News is one of the region’s leaders in commercial real estate coverage. According to the publication, each year hundreds of surveys are submitted by law firms from across the Midwest (a 14-state region) to the magazine for consideration. Only those law firms that completed a high enough number of transactions and provided top-notch client service while doing so earned one of the coveted rankings.

In the 14-state region alone, Ulmer & Berne completed over 670 transactions with 90 of those transactions valued at above $5 million in 2008. Areas of transaction included commercial, industrial, shopping centers, land, office buildings and multifamily housing.



The Stimulus Plan - Will it Help Retail?

The Stimulus Plan is supposed to create jobs. In the retail sector, jobs will be created only if consumers start spending again. Some of you may remember the eighties when consumers were able to deduct credit card interest from taxable income. With the need to motivate consumers to spend, reinstituting this kind of tax credit should be part of the plan.  The tax credit would apply only if consumers spend.  This kind of direct assistance would seem to be more effective than building water parks.