We have made a concerted effort in this Blog to keep on message for the Real Estate, Retail, Finance and Construction industries.  However, periodically we see the need to go off topic. Lately the flow of unwanted email has become so outrageous that I and several of my partners are actively UN SUBSCRIBING from these solicitations.  During the course of writing this post I have received 6 unwanted emails in my inbox from companies selling books, seminars, services, loans, property, you name it.  This unwanted constant distraction is an impediment to getting things done.  I view those who blast out these emails negatively.  Their products and services might be valuable, but the message and method of delivery gets in the way.  I now subscribe to the Seth Godin method of "permission marketing."  Take control of your inbox and take control of your day !

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 While the prohibition may be outdated, it may nonetheless still apply.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

 

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. 

 

 

Continue Reading ELIMINATING OFF-BALANCE-SHEET ACCOUNTING OF LEASES

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.

 

 

Continue Reading Some Good News About Empty Big Boxes

The Situation:

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

      

 

 

Continue Reading Necessity for Fair Housing Act Compliance Amplified by Recent Court Rulings

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 ?

  

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

 
Before considering whether to "go green" on a given project or to bid a public job that is required to be LEED certified, owners/developers, architects, and contractors alike should conduct a "cost-benefit" analysis.  Many projects "pay for themselves" through tax credits and cost-savings throughout the life of the green building, but it is a delicate, niche process with slim margins.  Perhaps the most prominent difference between conventional construction and green building is the integrative approach, which is required for LEED certification.  Conventional construction is a linear process: first, there is an owner/developer with an idea, the architect then designs the idea, and the contractors follow the architect’s plans to construct the idea.  With green building’s integrative approach, all major players get together during the pre-design phase of a project to discuss the level of LEED certification they can achieve (LEED Certified, LEED Silver, LEED Gold, or LEED Platinum) and how they can best work with one-another to achieve or surpass that goal. 
 
The integrative approach to green building is a special process that poses its own considerations.  These considerations can be spelled-out in AIA contracts with special provisions requiring "green meetings."  Although every green project is different, "green meetings" are excellent starting blocks for obtaining LEED  certification.  For more information on green building, go to www.usgbc.org; for more information regarding "green meetings," go to http://www.aia.org/aiaucmp/groups/aia/documents/pdf/aiab082635.pdf.      

 

 The Situation:

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

FHA Coverage:

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

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


 

Continue Reading Necessity for Fair Housing Act Compliance Amplified by Recent Court Rulings

With the current housing crisis, more individuals are voluntarily choosing to cease payments on their mortgages. This scheme, known as “strategic default,” is most common where the mortgage balance exceeds the home value. The phenomenon has fueled a rigorous debate, with some arguing it is immoral to default on a mortgage which is still affordable, and others taking the position that for some homeowners the “benefits” of willingly defaulting outweigh the consequences. 

A cost-benefit analysis as to whether a homeowner should strategically default is not as simple as it seems. Initially, a borrower’s credit score can plummet as much as 160 points. Although a foreclosure will stay on a credit score for seven years, its impact will lessen with time. Another risk depends on whether a homeowner resides in a non-recourse or recourse state. Non-recourse states forbid lenders to pursue borrowers for the money owed which exceeds the value of the home. Recourse states allow lenders to sue borrowers; yet, the overwhelming amount of foreclosures has lenders scrambling to stay afloat without the problem of pursuing defaulting homeowners. Finally, many defaulting homeowners wonder if they will be able to buy a home again. With a poor credit score, it can be difficult to buy a house. But financial institutions across the nation specialize in “mortgage repair” which targets homeowners who have recently defaulted on a mortgage.

Even with the uptick in the current crisis, it is surprising how few homeowners choose to default strategically. Luigi Zingales, author of “The Menace of Strategic Default” in a recent issue of the City Journal, argues this is due to moral implications: “the idea that people would walk away from their homes when they can still afford to pay the mortgage is unfounded. What does prevent people from strategic default, it seems, is their sense of what’s right.” Zingales feels social norms have a direct impact on whether an individual chooses to default or not; i.e. knowing someone who has done it makes you more likely to do it.  

On June 10, in response to the wave of mortgage defaults (strategic or otherwise), a Federal Housing Administration (FHA) reform bill passed the U.S. House of Representatives with a 406 to 4 vote. The FHA Reform Act (H.R. 5072), among other goals, seeks to withdrawal FHA approval from lenders with abnormally high default rates.  The bill has organizational support from those such as Robert E. Story, Jr., Chairman of the Mortgage Bankers Association, who hopes the bill “will allow FHA to address lender enforcement without discouraging responsible lenders from participating.”

Although homeowners may individually benefit from strategically defaulting, it raises an additional obstacle to the recovery of the broader housing market.  When a neighbor defaults, home values in the vicinity plummet and mortgage prices increase as lenders cover default costs. Yet, what is to prevent an individual owner making a rational financial decision that it is better to breach than continue paying on a mortgage balance that substantially outweighs home value?  Perhaps the idea of opportunistic, or willful, breach has trickled down to the American consumer.