Everyone is talking about Alternative Fee Arrangements (AFAs).  Some clients are demanding it; some firms market themselves as special because they will consider it; some attorneys are frankly scared of it because they think all it means is that they will be required to discount their fees.

In reality, an AFA is nothing more than a bill based on something other than the amount of time spent on a matter multiplied by the hourly rates of the attorneys doing the work.  Contingency fees are a prime example.  Fixed fees are another. There are obviously countless other "alternative" ways to structure a legal bill. Each may or may not be less than the traditional hourly rate fee. The reason for an AFA may be to reduce fees, but there may also be other reasons:

 

(1)        An AFA may provide certainty as in a fixed fee.  The ability to budget legal costs with certainty may be more important to a client than getting the lowest price.

 

(2)        An AFA may better align the interests of client and attorney.  AFAs with success fees or premiums for desired results may actually increase legal fees.  But the attorney is rewarded for obtaining the desired result in the most efficient manner.

 

(3)        An AFA may allow for the client to provide a larger volume of work. The larger volume should drive efficiencies which create a more profitable engagement for the law firm while providing an overall smaller legal budget for the client.

 

(4)        Where the assignments are repetitive or reusable, the law firm charging a fixed rate may lose on the first few engagements but then make it up in each subsequent assugnments.  Or, in a slight variation, a law firm can quote certain matters at a loss and others at a premium without having to account for hours where the client can afford more in some cases and less on others (e.g., more on a lease for a large space and less on a smaller lease even though the same amount of time and effort is required.)

 

(5)        The administrative costs involved with billing fixed fees, and with reviewing the bill from the client’s perspective, are less than that with hourly billing. And this is actually a key benefit. A lawyer and client will never need to argue about an invoice – it is settled in advance and the issue about who spent how much time on what is eliminated. The only issue is did the attorney do a good job.

 

I think in some ways the AFA movement  may be akin to the shopping center landlords converting from charging tenants their pro rata share of CAM to now charging fixed CAM. When it first started, tenants were wary thinking it was a hidden profit center for the landlord and landlords were wary of taking the risk of loss. Eventually, landlords came to realize that it decreased conflict between landlord and tenant because they were no longer arguing what was CAM and how was it measured, and didn’t need to worry about audits.  Similarly, tenants have come to see the benefit of budgeting exactly what their occupancy costs are without getting that extra reconciliation charge each year and not having to spend the time and aggravation negotiating CAM exclusions.

 

So the message is AFAs can be a great tool, and the effect on overall pricing is only one factor to consider.  They work well in many situations, not in all.  To be truly effective both the lawyer and the client need to feel fairly treated.  Like strategic business partners !

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 ?

 

 

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

 

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

 

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

 

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

 

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

 

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

Recently, 60 Minutes aired a story about Bloom Energy, a Silicon Valley  alternative energy start-up, which has developed fuel cell technology capable of taking us off of the electrical grid.  The video speaks for itself so watch it below.  As you watch it, think about how technology such as this will transform the real estate industry.  Besides the reductions in electric costs, how power is brought into a facility or development changes with this technology.  Green energy/alternative energy is only going to make us all better at what we do !

 

http://cnettv.cnet.com/av/video/cbsnews/atlantis2/player-dest.swf

Watch CBS News Videos Online

On February 3, 2010, the Board of the American Land Title Association (“ALTA”) voted to decertify the existing ALTA Endorsement Form 21-06 (Creditor’s Rights). Almost immediately, two of the largest title insurance underwriters, Fidelity National Title Group (including its subsidiaries Chicago Title, Fidelity National Title, Ticor Title, Lawyers Title, Commonwealth Land Title, Security Union Title & Alamo Title) and First American Title Insurance Company changed their underwriting policies to no longer issue the Form 21-06 or to provide any other coverage for claims arising from bankruptcy or insolvency within the insured transaction. Stewart Title Guaranty is reviewing its underwriting policy in light of the decertification by ALTA. At this time, Old Republic National Title Insurance Company will continue to issue the endorsement, however, it will now charge a financial review fee related to its due diligence prior to issuing the endorsement which is separate from the endorsement’s premium. As was the case prior to the decertification of the endorsement by the ALTA, due to the risk involved for the underwriter, the issuance of the endorsement is not guarantied and should not be expected in all cases. 

The Creditor’s Rights endorsement is often requested by lenders to provide coverage for claims arising from the insolvency or bankruptcy of a party in the transaction. It arose when the 1992 form of ALTA policy created a new exclusion from coverage for insolvency or bankruptcy in the chain of title. The 1970 form was silent on the issue. The 2006 policy, in use today, scaled the exclusion back so that it only applied to the current transaction and did not provide exclusions for bankruptcy or insolvency in the chain of title. The current loan policy excludes coverage for “[a]ny claim, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors’ rights laws, that the transaction creating the lien of the Insured Mortgage, is (a) a fraudulent conveyance or fraudulent transfer, or (b) a preferential transfer for any reason not stated in Covered Risk 13(b) of this policy.”

 

Without the ability to obtain the Creditor’s Rights endorsements, lenders need to perform more of their own due diligence prior to loan closing. Transactions which deserve extra scrutiny are those (i) where less than 100% of the loan proceeds are used to purchase or refinance the property or construct the improvements; (ii) between related parties; (iii) where the consideration does not appear to be market or includes something other than cash consideration; and (iv) where the seller appears to be insolvent or a bankruptcy matter is currently pending. In cases where a lender would have previously requested the Creditor’s Rights endorsement, lenders should consider requiring, as a condition of loan closing, its borrower and borrower’s seller to execute an affidavit addressing the nature of the transaction, their solvency and the flow of funds.

When a prospective tenant speaks to a landlord about leasing space, one of the major points of discussion is usually the amount of square footage to be leased. The tenant will naturally need to rent sufficient space for the operation of its business, and the parties will often base the rent and common expense charges upon the square footage. However, although the parties may both use the term “square footage,” they may not be talking about the same thing.  As a tenant, the natural inclination is to think of square footage as the amount of space you can actually use for your business. This is often called the “usable area.” In contrast, the landlord may view square footage as the amount of space for which he can charge his tenants rent. This is referred to as the “rentable area” or “net leasable area.” 

To avoid misunderstandings, the parties need to be certain that they are talking about the same thing when discussing square footage. The Building Owners and Managers Association (BOMA) International promulgates a standard methodology to calculate both usable and rentable square footage; however, landlords are not required to use the BOMA standard and may instead use their own square footage calculation methods. As such, the parties should be aware of the following general definitions when negotiating a lease:

 

“Rentable Area” or “Net Leasable Area” is the amount of space for which the tenant will be charged rent and a proportionate share of common expenses. 

 

“Usable Area” is the amount of space the tenant can actually use for its personnel, furniture or retail operations. The Usable Area will be less than the rentable area because it will not include areas such as utility closets, stairwells and other common areas.

 

When evaluating the Rentable Area and Usable Area available in different buildings, the following terms are frequently used:

 

“Loss Factor” means the percentage of Rentable Area that is not usable. A high loss factor may indicate an inefficient design or large common areas.

 

“Load” or “Add-on” is the percentage of common area added to the Usable Area to determine the Rentable Area.      

 

Keep in mind that the precise means of calculating the Rentable Area and Usable Area may vary based on the locality or the parties involved. Therefore, it is important to set forth the basis for the calculations in the lease agreement. Having an understanding of the general definitions of these commonly used terms before negotiating a lease will help ensure landlord and tenant are speaking the same language.  In some instances it makes sense to include the electrical closet in the calculation, in other situations it does not.  Additionally, the tenant may want to reserve the right to verify the landlord’s square footage calculations to ensure the tenant is getting all the space it requires. 

 

In 2001 when Congress repealed the estate tax for the far off year of 2010, with the estate tax returning in full force in 2011, everyone assumed that Congress would act to revise the 2001 law before January 1, 2010. However, to everyone’s surprise, Congress did not act. The new year has come and gone and so has the tax—at least for now. But is this a good result? Is 2010 a “good year to die”? 

 

First, although there is no estate tax in 2010, in 2011 there is a $1,000,000 exemption and 55% tax on the remainder of the estate. 

 

Second, the estate tax could change before the end of the year. There is precedent for Congress retroactively restoring taxes that have been upheld by the courts. This means that while there is still time for Congress to do something about the estate tax repeal, what they may agree to is unknown.  

 

Third, in 2009 and 2011 the basis of an asset inherited or received will receive a step-up in basis to the value as of the date of the owner’s death (or the alternate valuation date six months later).  In 2010 there is no step-up in basis, but instead there is a carry-over of the decedent’s basis to beneficiaries. However, an estate representative can elect assets for a basis increase of up to $1,300,000 and an additional $3,000,000 of basis increase if there is a surviving spouse of the deceased. Anything exceeding those amounts is subject to carryover basis—the basis for the heir is the same as the basis for the deceased. On very large estates that may have held real estate, stock and other assets for decades, the carryover basis may be a fraction of the current fair market value of the asset which will result in a large taxable gain to the heir when the asset is sold.   

 

Fourth, most wills and trusts are currently drafted on the assumption that there is a federal estate tax. Language in trusts often refers to the exempt portion of the estate, but under the current repeal this language does not make sense since all of the estate is exempt. 

 

Fifth, the tax rate for lifetime gifts has been lowered from 45% to 35%. But again, it is unclear if Congress will change this tax rate if they patch the estate tax. That makes this year a year of uncertainty for lifetime gifts as well, although the $1,000,000 lifetime gift exemption is still in effect.

 

Be careful not to assume that your assets (e.g. cash, securities, business interests, real estate, retirement accounts and the face value of life insurance policies) fall below the exemption. Now is the time to review your family’s assets, your beneficiary designations and your estate planning no matter the current value of your estate.  Check back here periodically for updates on this issue as Congress is expected to act sooner or later.

Long before ‘billable hour" accounting became the norm in law firms, lawyers would price projects based upon what was fair to both the client and the lawyer.  That is not to say that billings based on time is unfair, only that it can be unpredictable.  Billable hour accounting dictates accountability which is and will remain a reality for all law firms now and into the foreseeable future. However, trying times demand flexibility from both the client and the lawyer. Clients, both entrepreneurial and institutional, desire certainty from their vendors to permit accurate project budgeting. Lawyers and law firms understand that to be and remain relavent to their clients and potential clients they must remain or become a client’s "business partner, " add value and be perceived by their clients as a "well worth the expense."

Litigation matters have been priced by lawyers using contingency and success fees for many years. Rarely, do we see transactional matters priced using such tools. However, alternative fee arrangements such as tiered fixed fees, capped fees and blended rate fees all based upon size and complexity of transactions are being offered by law firms more frequently.  Law firms desire to build and maintain client loyalty. An alternative fee arrangement can be one tool in the law firm tool box to generate client loyalty and deliver legal services in a cost efficient manner; but, alternative fee arrangements are not appropriate for every client and every situation.

Successful alternative fee arrangements: (i) dictate that the client and the lawyer share intimate information about the proposed assignment, goals of each and their cost structures; (ii) should represent the client’s valuation of the matter compared to the reasonable fee to the lawyer structured to take advantage of the law firm’s resources and efficiencies; and (iii) should not be static arrangements.  In other words, be structured to change as the assignments and relationship changes.  

Look for the business partner who is the "value proposition" which will enable the achievement of the goals of the business plan and with a "long term" perspective on relationships.
 

Representatives Ken Yuko and Brian Williams recently introduced House Bill 408, which would create a condominium “super lien” in Ohio. Ohio condominium associations currently have the right to lien a condominium owner’s unit for unpaid assessments; however, that lien almost always sits behind the first mortgage lien. When the unit is foreclosed upon and sold at sheriff’s sale, the association often finds that the sale proceeds all go to the first mortgage holder and the association is unable to collect what it is owed despite having filed a lien. Condominium associations have argued that their right to collect past due assessments deserves priority over the first mortgage because the association uses those assessments to keep up the entire condominium property, thereby protecting the collateral of the first mortgage holders. Thus, the associations have argued, it’s unfair for the first mortgagee to take all the sale proceeds and leave the remaining owners to make up for the lost assessments. To address this problem, some states have adopted “super lien” legislation, which allows a condominium association to collect up to six months of assessments from foreclosure proceeds before any other liens on the unit are paid. Not surprisingly, most mortgage lenders are opposed to these super liens. We will follow this legislation and keep our readers apprised of the latest developments.

Ohio is one of the few remaining states that still enforce cognovit provisions in promissory notes and other loan documents. A cognovit provision allows a creditor to take judgment immediately against a borrower upon the borrower’s default without having to endure the time, expense, and risk of a lawsuit. Cognovit provisions are only enforceable in commercial transactions.

Recent Ohio case authority has addressed the problems that occur when a lender seeks to take a cognovit judgment for principal amounts owed under loan documents and attorney’s fees, when the attorney fees are not yet liquidated, i.e., established in a definite amount. In one recent case, the lender sought a cognovit judgment in the amount of the note plus "reasonable attorney fees." As is commonplace, the judgment debtor, who had guaranteed corporate obligations, challenged the cognovit judgment. 

In that case, the cognovit judgment was not a final, appealable order because it did not fix a figure for attorney fees. The judgment debtor would probably have been better off not forcing the issue by filing motions and appeals. Instead, they should have either sat still or challenged the lender to execute on the judgment, since Ohio law provides that a lender cannot execute on a judgment that is not a final order.

 

The take away point is that it is better practice for the lender to split the fixed portion of the obligation (i.e. the promissory note or guaranty obligation) and the attorney fees into two separate orders, if the lender does not wish to assign a definite amount of attorney fees when the lender takes judgment. The judgment on the promissory note or guaranty should also state that there is no just reason for delay, per Ohio Civil Rule 54(B). The lender can then present the judgment entry for the attorney fee portion once the amount of the fees is fixed. Whether you are a borrower or a lender watch your cognovits and continue to police your loans !