A recent case from the Sixth Circuit Bankruptcy Appellate Panel, In re Buttermilk Towne Center, LLC, 2010 Bankr. LEXIS 4563 (BAP 6th Cir. 2010), appears to have strengthened the undersecured lender’s hand in single asset real estate Chapter 11 cases. An undersecured lender is one whose collateral is worth less than the amount the debtor owes, a common scenario in today’s market. In the Buttermilk case, the Debtor defaulted on its obligation to repurchase bonds whose proceeds had funded a significant, multimillion dollar loan. The Debtor had borrowed the money to develop a commercial center in Crescent Springs, Kentucky.  The Debtor leased the center from Crescent Springs, and paid its lease payments with rents generated by subleases with the center’s tenants. 

 

The Debtor filed a single asset real estate Chapter 11 case after defaulting, and sought bankruptcy court authority to use the rents as cash collateral to pay the Debtor’s counsel’s attorney fees.  The Debtor offered the lender a replacement lien in the rents (which constituted substantially the Debtor’s sole income source) as adequate protection. The Sixth Circuit Bankruptcy Appellate Panel ruled that the replacement liens did not constitute adequate protection of the lender’s secured claim because there was no equity cushion in the collateral, i.e., the lender was undersecured, and because the lender already had a security interest in the rents. Accordingly, the Debtor was not allowed to use rents to pay professional fees without the lender’s consent.

 

            It seems apparent that the lender’s undersecured status is a key factor in the decision.  The single asset real estate debtor cannot reorganize if it cannot use the rents unless the lender consents or the debtor owns unencumbered assets, which is not the case if the secured creditor is undersecured. So a practice pointer from the lender’s standpoint is to be prepared immediately upon the filing of a Chapter 11 case by a single asset debtor to prove through a valuation hearing that the lender is undersecured. If the lender succeeds, it can either cause the case to be dismissed or can use its leverage to obtain highly favorable terms in any attempted reorganization by the debtor. The single asset real estate debtor, on the other hand, needs to realistically evaluate its options upon default. If there is no equity in the property, the debtor’s principals are probably better advised to consider non-bankruptcy alternatives to retaining control of the property. 

Recently, representatives from our firm were invited to meet with and participate in executive level meetings at Cisco Systems headquarters in San Jose, California.  We thought we were going to spend two days playing with top secret tech toys which are being developed behind darkened windows and screens.  Although we did see some really innovative things, most of our time was spent interacting with Cisco executive team members discussing organizational strategies relating to how people collaborate and execute the organization’s mission statement.  From the moment the first session commenced we knew we were in for a transformative experience.  Perhaps the best way to describe it is that we participated in a mini MBA boot camp. Over the next several posts I will share some of the information we learned.

Does your organization have a VSE ? Vision, Strategy, Execution plan.

Vision: 5+ years out;

Strategy: 2-4 years out;

Execution 12-18 months out.

There is nothing new about strategic planning.  What was impressive about Cisco is that every operating unit, every group and every executive had their own VSE!  Think how powerful that is when your entire organization is on the same page as the top management.

 

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.

 

After 15 years of annual increases, the overall number of residential and commercial foreclosures in Ohio actually decreased by 4% in 2010 compared to 2009, according to a report by the Supreme Court of Ohio. Of course, not every county was so fortunate with   30 out of 88 counties experiencing an increase in foreclosures. Cuyahoga County, home to our Cleveland office, still leads the state in the sheer number of foreclosures although at 12,825, there were 9% fewer foreclosures than in 2009. In Franklin County, home of our Columbus office, foreclosures rose by 2%. In Hamilton County, home of our Cincinnati office, foreclosures decreased by 2%. For complete information for all 88 Ohio counties from 2001-2010, the Supreme Court’s spreadsheet is available at: http://www.supremecourt.ohio.gov/PIO/news/2011/foreclosureStats_021011.asp

A recent article in REJournals.com 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 ….it’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.  

            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.

The Associated General Contractors of America’s and Navigant’s recent industry-wide survey "Finds More Construction Firms Plan to Hire than Lay Off in 2011."  Read the AGC article with more links to state-specific data for the industry-wide Survey.  Included are numbers for Illinois and Ohio.  Survey results in both Illinois and Ohio indicate that the construction market should begin to grow again in 2012.  Hopefully, that prediction comes true a year early.       

Thanks to our friend, Norm Khoury of Cassidy Turley, for sharing the 2011 Handbook of Living a Balanced Life.  The start of the year is a good time to remind us of these thoughts.  

Health:

1.       Drink plenty of water.

2.       Eat breakfast like a king, lunch like a prince and dinner

          like a beggar.

3.       Eat more foods that grow on trees and plants and eat less

          food that is manufactured in plants.

4.       Live with the 3 E’s — Energy, Enthusiasm and Empathy

5.       Make time to pray.

6.       Play more games

7.       Read more books than you did in 2010.

8.       Sit in silence for at least 10 minutes each day

9.       Sleep for 7 hours.

10.     Take a 30 minute walk daily. And while you walk, smile!

Personality:

11.    Don’t compare your life to others. You have no idea what their

         journey is all about.

12.    Eliminate negative thoughts and things you cannot control.

         Instead invest your energy in the positive and in the present moment.

13.    Don’t over do. Know your limits.

14.    Don’t take yourself so seriously. No one else does.

15.    Don’t waste your precious energy on gossip.

16.    Dream more while you are awake!

17.    Envy is a waste of time. You already have all you need.

18.    Forget issues of the past. Don’t remind your partner of his/her

         mistakes of the past. That will ruin your present happiness.

19.    Life is too short to waste time hating anyone. Don’t hate others.

20.    Make peace with your past so it won’t spoil the present.

21.    No one is in charge of your happiness except you.

22.    Realize that life is a school and you are here to learn. Problems are part of the curriculum; they appear and fade away but the lessons you learn last a lifetime.

23.    Smile and laugh more.

24.    You don’t have to win every argument. Agree to disagree.



Continue Reading Off Topic: 2011 Handbook of Living a Balanced Life

Jones Lang LaSalle seems to think so.  We hope that they are right.  As reported by Bloomberg JLL is forecasting a 25% increase in hotel/hospitality industry activity in the 2011.  The drivers are REIT money and foreign investors looking for investments which can still be acquired at reasonable discounts while the U.S. economy recovers from its troubles.  Business travel is up and all signs are indicating that the hotel/hospitality/travel industry is stabilizing.  Foreign investors usually consider first tier metropolitan areas for investment, but they should not discount the opportunities in the second tier metropolitan areas.

A federal lawsuit in New York that involves Racketeer Influenced Corrupt Organizations Act ("RICO") claims is one of the latest developments in the United States Green Building Council’s ("USGBC") development and administration of the LEED™ building ratings system.  The lawsuit appears highly contentious to say the least.  Plaintiffs Henry Gifford and Gifford Fuel Saving, Inc. initiated a class action lawsuit against USGBC, USGBC’s founders (David Gottfried and Richard Fedrizzi), and the designer (Rob Watson) of the Leadership in Energy and Environmental Design ("LEED™") green building ratings system.  The alleged class members include consumers and taxpayers whose dollars have been used to obtain LEED™ certification. 

 

The lawsuit paints LEED™ as a farce that is not based on supportable science.  Plaintiffs set forth six claims: (1) violation of the Sherman Antitrust Act for an alleged fraudulent monopoly of the green building market; (2) violation of the Lanham Act for alleged unfair competition by deceptive marketing; (3) deceptive trade practices and (4) false advertising for alleged misrepresentations and concealments in advertising; (5) RICO claims for defendants’ alleged deceptive scheme; and (6) unjust enrichment for alleged fraudulently induced profits.  

 

We will update the blog as we receive more information concerning this lawsuit.