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

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.) 

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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 ?

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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. 

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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.   

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

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

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

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

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

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

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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

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

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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.
 

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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.  

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