Saturday, December 29, 2007

Terror Risk Insurance Act Extended

With a week left before expiration of the Terrorism Risk Insurance Act, President Bush Signs 7 Year Terror Insurance Extension, the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA). The Act extends the insurance program through the end of 2014.

The availability of terrorism insurance has been crucial for financing of buildings in New York City and other high profile buildings across the country.

Wednesday, December 26, 2007

Free Speech at the Mall

The California Supreme Court upheld the rights of protesters inside a shopping mall when it handed out its opinion on Christmas Eve for the case of Fashion Valley Mall, LLC v. National Labor Relations Board and Graphic Communications International Union, Local 432-M (D.C. Cir.Ct.App. No. 04-1411, December 24, 2007). This case found permitted protesters to boycott one of the stores in the mall.

You may be familiar with the Pruneyard ruling from 1980 (Robins v. Pruneyard Shopping Center (1979) 23 Cal.3d 899, affirmed sub nomine Pruneyard Shopping Center v. Robins (1980) 447 U.S. 74). Under this case, California law permits the exercise of speech and petitioning in private shopping centers, subject to reasonable time, place, and manner rules adopted by the property owner. Essentially, the Pruneyard Court found that the shopping mall had become a public forum, replacing the streets and sidewalks of the central business district which, had been used for purposes of assembly and protest.

The Pruneyard case involved students soliciting support for their opposition to a United Nations resolution against Zionism. The Fashion Mall case involved a group urging shoppers to boycott one of the stores in the mall. The Fashion Mall owner had crafted a series of regulations and permitting for protests. However, they did not allow for boycotts: "Prohibits . . . 5.6.2. Urging, or encouraging in any manner, customers not to purchase the merchandise or services offered by any one or more of the stores or merchants in the shopping center."

Obviously this restriction on speech in the Fashion Mall's regulations is not content-neutral and therefore subject to a higher level of scrutiny. "The Mall’s rule prohibiting speech that advocates a boycott cannot withstand strict scrutiny. The Mall’s purpose to maximize the profits of its merchants is not compelling compared to the Union’s right to free expression." The Court concludes:
"A shopping mall is a public forum in which persons may reasonably exercise their right to free speech guaranteed by article I, section 2 of the California Constitution. Shopping malls may enact and enforce reasonable regulations of the time, place and manner of such free expression to assure that these activities do not interfere with the normal business operations of the mall, but they may not prohibit certain types of speech based upon its content, such as prohibiting speech that urges a boycott of one or more of the stores in the mall."

This ruling is limited to California, as the California Supreme Court pointed out that the California state Constitution provides broader rights than the United States Constitution. But many other states also consider their state constitution to provide broader free speech rights than the United States Constitution, so the effect of this ruling may be felt by shopping malls across the country.

UPDATED: added updated link to case.

Wednesday, December 19, 2007

The Mezzanine Section is the Nose Bleed Section

The Wall Street Journal has an article in the C Section by Jennifer S. Forsyth and Kemba J. Dunham on real estate mezzanine loans: Real-Estate Investors Like View From Mezzanine Section.

If mezzanine investors think that it is a "no-lose bet" they are getting themselves in trouble. There is a higher return on mezzanine debt because it is riskier.

The senior mortgage lender will often set limitations on the ability of the mezzanine lender to foreclose on the borrower and take over control of the borrower. Typically this will include the mezzanine lender stepping into the guarantees of the now-wiped out guarantors.

Since the collateral is the equity ownership, the mezzanine lender steps into all of the liabilities of the borrower. This may mean that trade debt has piled up and other obligations may be outstanding.

Lastly, the mezzanine borrower is not going to default on the loan unless they think the value is gone. Inevitably, this means the mezzanine lender is not going to be made whole if they have to foreclose and take over the borrower.

Wednesday, December 12, 2007

REIT Stocks Continue to Tumble

On Tuesday, the MSCI US REIT Index (RMZ) dropped 5.61% to 914.85, and the SNL US REIT Equity Index plummeted 5.59% to 235.96 with five winners, 106 losers and four companies closing flat. The losses mark the worst one-day tumble for the SNL US REIT Equity Index since July 25, 1989.

By comparison, the Dow Jones Industrial Average traded down 2.14% to 13,432.77, and the S&P 500 fell 2.53% to 1,477.65. The yield on the 10-year Treasury dropped to 3.97% from Monday’s
4.15% close.

The Federal Open Market Committee voted Dec. 11 to lower its target for the federal funds rate by 25 basis points to 4.25%, noting in its monetary policy statement that “incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending.” In a news release, the FOMC stated that strains in financial markets have increased in recent weeks. The FOMC believes their latest action, combined with previous moves, “should help promote moderate growth over time.” The committee also decided, in a related action, to cut the discount rate by 25 basis points to 4.75%.

Monday, December 10, 2007

Webcasts from NAREIT Annual Convention

The NAREIT Annual Convention was held in Las Vegas on November 14-16. Webcasts of the presentations are available on the NAREIT website:

Gil Menna of Goodwin Procter LLP moderated the panel on the State of the Industry (MP3).

NAREIT is the National Association of Real Estate Investment Trusts.

Wednesday, November 28, 2007

Charities Using Limited Liability Companies to Hold Real Estate

Charities should not use a limited liability company to hold real estate in Massachusetts. Robert E. Cowden wrote an article about this in the November/December 2007 issue of the Boston Bar Journal.

The Massachusetts Appellate Tax Board ruled that even though a piece of property was owned by a single member limited liability company, whose sole member was a charitable corporation, the property did not qualify for property tax exemption. CFM Buckley/North, LLC v. Board of Assessors of the Town of Greenfield.

The Third Clause of M.G.L. c.59, s.5 provides for a property tax exemption for a charitable organization, which is defined as:

(1) a literary, benevolent, charitable or scientific institution or temperance society incorporated in the commonwealth, and (2) a trust for literary, benevolent, charitable, scientific or temperance purposes if it is established by a declaration of trust executed in the commonwealth . . . . [emphasis added]
The Appellate Tax Board found that a limited liability company is not "incorporated" and therefore does not qualify for the exemption.

On a similar note, other protections for charitable organizations may be jeopardized if they use a limited liability company to hold some of their real estate assets.

For instance, the Dover Amendment M.G.L. c.40A, s.3 provides that:
No zoning ordinance or by-law shall regulate or restrict the interior area of a single family residential building nor shall any such ordinance or by-law prohibit, regulate or restrict the use of land or structures for religious purposes or for educational purposes on land owned or leased by the commonwealth or any of its agencies, subdivisions or bodies politic or by a religious sect or denomination, or by a nonprofit educational corporation. . . .
Also the charitable liability cap in M.G.L. c.231, s.85K is applicable to:
corporation, trustees of a trust, or members of an association that said corporation, trust, or association. . . .
A limited liability company may not be able to take advantage of these protections.

Monday, November 26, 2007

Usury in Massachusetts

I ran across two articles on usury and expect we will see more as the debt markets and foreclosures continue to sort themselves out and more borrowers are faced with foreclosure.

Usury is the charging of excessive interest on a loan. Most states have a law prohibiting usury and defining what is meant by usury. Usury laws were originally targeted at loan sharks. As a result, most usury statutes make the charging of usurious interest a criminal act. They also generally allow the borrower to escape from making the excessive interest payments.

Massachusetts defines interest in excess of 20% to be the interest rate that triggers usury. M.G.L. Chapter 271, Section 49. The 20% threshold also includes any brokerage fees, recording fees, commissions, forbearance or any other amounts the borrower has to pay to the lender.

The 20% rate is prorated for shorter periods of time. Upfront fees can push an otherwise legal loan into a usury loan if it is maid off early. For example, if you have ten year loan at 18%, plus a 3% commission payable at closing, that loan is usurious if the borrower pays it off at the end of the first year.

M.G.L. Chapter 271, Section 49(a) provides for a criminal sentence of up to ten years and a fine of up to $10,000. Also, M.G.L. Chapter 271, Section 4(c) allows the court to void a usurious loan.

Massachusetts has two exceptions to usury. The first is the regulated lender exception in M.G.L. Chapter 271, Section 49(e). Under this exception, the usury statute does not apply to "any lender subject to control, regulation or examination by any state or federal regulatory agency" or to "any loan the rate of interest for which is regulated under any other provision of general or special law or regulations." This means that banks, credit unions and most conventional lenders are not subject to usury in Massachusetts. However, CMBS originators and investment funds may not fall under this exception.

The second exception is by use of a "leg-breaker letter." Under M.G.L. Chapter 271, Section 49(d), you can charge usurious interest as long as you send a letter to the Attorney General with the lender's and borrower's name and accurate address. This notification is good for two years.

The leg-breaker exception is very easy to comply with. I was surprised to see stories about usury in Massachusetts.

Both stories are about a loan for the development of a 186 home community and godf course in Dracut. Massachusetts Lawyers weekly reported the story: Release Won't Shield Lender from Usury Claim of Borrower subscription). It reports a story about LR5-A Limited Partnership v. Meadow Creek, LLC, et al. (Massachusetts Lawyers Weekly subscription), with a decision coming out of the Business Litigation Session of the Superior Court. The decision found that a release or waiver of claims for usury is not effective. Usury is a public policy law and cannot be waived by the parties. The case was also reported in the Boston Globe: Usury lawsuit names Harvard, Princeton, and Yale Endowments.

The borrower made notes with an interest rate in excess of 20%. The decision from the Superior Court says it was a 21% interest rate. The Boston Globe story says one of the loans was 42%. The lender was an investment fund set up by Realty Financial Partners. The lender was a non-conventional lender and therefore could not benefit from the regulated lender exception to the usury law. They should have filed a leg-breaker letter. The decision was silent on whether the filed a letter. The Boston Globe story reports that two notices were filed, but that one was filed too early (before the lending partnership was formed) and the second filed too late (after the loan was made).

The borrower goes on to charge the limited partners of the lender violated usury and is trying to bring a claim against them directly. This seems foolhardy from a legal perspective. But it apparently worked from a public relations perspective because he got his name in the paper

The problem I have with the application of the usury laws in commercial financing is that they merely give the borrower an opportunity to wiggle out from their bargain. According to the story, the borrower thought they could quickly obtain development rights and then refinance the loan with a conventional lender at a lesser interest rate. He failed and the lender had to foreclose on the property. The borrower must have thought the interest rate was acceptable at closing. Now that the deal went south, he is trying to apply the law retroactively to get himself out of his bargain.

Disclosure: Realty Financial Partners is a client of my firm.

Wednesday, November 14, 2007

Transactions-Based Index for the Third Quarter

The MIT Center for Real Estate has just released the results from the third quarter of 2007: Transactions-Based Index (TBI)

The results from the quarter are highlighted by a total return of negative 1.7%
for all properties, including a decline of 2.5% in asset prices. The demand side
of the market showed a 3.37% decrease in reservation prices, while our estimate
of growth in supply side reservation prices (property owners) was negative 1.6%.
Among individual property type sectors, price growth was strongest in apartments
(+5.9%), and weakest in industrial (-2.7%).

Tuesday, November 13, 2007

Delay in Implementing New Mortgage Regulations

As Jay Fitzgerald of the Boston Herald reports: Companies may drop home loans

The mortgage industry does not like the new mortgage regulations proposed by the Attorney General. As I posted on this summer, these new predatory lending regulations under 93A are well intentioned but vaguely drafted: (15) Lender Must Believe the Borrower Can Repay, (16) No Documentation Loans, (17) Loans Not in the Borrower's Interest, (18) Prohibiting Discrimination.

As a result, the Attorney General announced that the regulations will not implemented this week. The new date is January 2.

Tuesday, November 6, 2007

Christmas Tree Farms and Premises Liability

As I have seen the Christmas holiday decorations starting go up already, I thought it appropriate to post about Christmas trees. The case of MacFadyen v. Maki popped up in Massachusetts Lawyers Weekly in a decision from the Massachusetts Appeals Court.

Ellen S. MacFadyen injured her elbow when she tripped over a snow-covered tree stump while selecting a Christmas tree at the Star of the East Christmas Tree Farm, owned and operated by Robert L. Maki. Mr. Maki cited M.G.L. c. 128, § 2E, as an affirmative defense to the plaintiff's claims of negligence and gross negligence.

M.G.L. c. 128, § 2E states:
No owner, operator, or employee of a farm who allows any person to enter said farm for the purpose of agricultural harvesting, including the cutting of Christmas trees under a so-called “pick-your-own” agreement shall be liable for injuries or death to persons, or damage to property, resulting from the conduct of such operation in the absence of wilful, wanton, or reckless conduct on the part of said owner, operator, or employee.

Said owner or operator of said farm shall post and maintain signs which contain the warning notice specified herein. Such signs shall be placed in a location visible to persons allowed to enter said farm for the purpose of agricultural harvesting. The warning notice shall appear on a sign in black letters, with each letter to be a minimum of one inch in height and shall contain the following notice:


Under section 2E of chapter 128 of the General Laws the owner, operator, or any employees of this farm, shall not be liable for injury or death of persons, or damage to property, resulting out of the conduct of this “pick-your-own” harvesting activity in the absence of wilful, wanton, or reckless conduct.
Unfortunately, Mr. Maki did not post a sign with that warning.

So, the Massachusetts Appeals Court held that "an owner of a tree farm must post a warning sign in accordance with G. L. c. 128, § 2E, in order to avail himself of the protection of the statute."

If you own or operate a pick-your-own Christmas tree farm, make sure you have your warning sign posted and that the warning matches that statute.

If you are going to a pick-your-own Christmas tree farm, watch where you are walking.

Monday, November 5, 2007

Why Green Building Has Staying Power

National Real Estate Investor has an article by Beth Mattson-Teig: Why Green Building Has Staying Power.

I found it interesting that 84% of corporate users expect to own or lease a green building five years from now with only 52% currently owning or leasing a green building with corporate users expecting the amount of green facilities they own or lease to more than double from 9% to 21%.

For green building to stay, two factors need to come into play: costs and market demand.

As long as green building is more expensive than conventional building, developers and operators will stay with conventional methods. Tax breaks and financial incentives can reduce the price differential and encourage green building.

Once there is more market demand, then developers and operators will pay more attention. If tenants are willing to pay more for a green building, then the price differential will be affected as well. A developer and operator will be more more willing to take on the premium cost of green building if the tenants will also carry part of the burden. The survey mentioned in the article indicates that the market demand is there and is growing.

The big problem with green building is that it is hard to retrofit existing buildings to green standards. Building a brand new building, instead of rehabilitating an existing building leads to a greater consumption of resources. It is hard to turn any existing tower building into a green building. But by being in a central business district close to public transportation and encouraging the use of public transportation you can reduce the environmental impact of the building. I have not seen any studies, but I would guess that more resources are consumed driving to a building than the building itself.

Putting up a new building in the suburbs means tearing down the trees and biomass that was on the site. The parking lot leads to more runoff and damage to aquifers. The new materials need to be harvested, manufactured and transported. That means more mining and more energy consumption.

I am all for green building and assessing the impact on the environment. I think more resources need to be focused on retrofitting existing, centrally-located buildings, with an emphasis on public transportation, biking and lower impact means of commuting.

Wednesday, October 24, 2007

Corporations Should Not Own Real Estate in Massachusetts

When a corporation sells real estate in Massachusetts there is the always the concern of whether there will be a three year, inchoate lien on the real estate. Under Massachusetts General Law Chapter 62C, Section 51:
At least five days prior to the sale or transfer. . . of all or substantially all of the assets situated in the commonwealth of a domestic or foreign business corporation, except in cases where a waiver shall be given as hereinafter provided, the corporation or any person in interest shall notify the commissioner in writing of the proposed sale or transfer, and of the price, terms and conditions thereof, and of the character and location of the assets and cause to be filed with the commissioner all such tax returns as may be necessary to determine the taxes due and to become due and payable to the commonwealth to and including the date of such sale or transfer, and shall pay to the commonwealth all such taxes owing to said date of sale or transfer. . . In the event of a failure to notify the commissioner and so to file such return or returns and pay such taxes at or before the time of such sale or transfer, the commonwealth shall have for its exclusive benefit a lien upon all of the assets of the corporation in the commonwealth effective immediately prior to such sale or transfer to the extent necessary to satisfy said taxes. Said lien shall terminate not later than three years after the date of said sale or transfer and until such termination may be enforced under and in accordance . . . .
If the real estate is not substantially all of the assets of the corporation in Massachusetts, you can just put a statement in the deed: "This deed is not a sale of all or substantially all of the assets of the corporation in the Commonwealth of Massachusetts."

But if that is not true and the sale of the real estate is all or substantially all of the assets of the corporation in Massachusetts, you need to get a waiver of the tax lien.

You can apply for a Certificate of Good Standing or Tax Compliance from the Massachusetts Department of Revenue. But the process can take weeks, if not months, for the DOR to issue the certificate.

It is quick and easy to set up a single member limited liability company to take title to the property. The corporation can be that single member.

Thursday, October 18, 2007

Looking ahead to 2008

According to the Urban Land Institutes's Emerging Trends Report it will be A Not So Great 2008, as reported in the National Real Estate Investor.

This report is a poll of 600 real estate experts. 78% thought there would be more stringent underwriting standards ahead (only 78%?) and there will be rising capitalization rates. They still expect the commercial real estate market to outperform the return from stocks and bonds.

The report also targets the top markets to watch:
  • New York. Ranked as the hottest commercial real estate market in the country. Low vacancy rates and skyrocketing pricing.
  • Seattle. Growth controls and geographic barriers have led to concentrated high-density, mixed-use development, which has drawn residents to new downtown neighborhoods. Seattle has become a 24-hour city on Asian commerce routes. It has a highly diversified economy.
  • Washington D.C. The government never stops and provides a cushion for real estate owners against abrupt downturns.
  • Los Angeles. High prices have driven some business and residents to seek shelter in lower cost states. The Orange County office market has softened. The office market in West LA has never been better. LA/Long Beach remains the nation’s top port, but transportation routes are clogged, creating a hindrance to trade.
  • San Francisco. Technology businesses are thriving and taking up lots of space. View space is once again commanding over $100 per square foot, even as supply creeps upward.
  • Boston. As the greater Boston market rebounds from the “tech wreck” of the early 2000s, it is seeing resurgence in its offices. New industries, such as professional services firms and bio-tech companies, are beginning to recycle space left vacant by corporate headquarter departures in the recent past. But questions remain about the depth of Boston’s tenant population, causing investors to keep a close and wary eye on the market.
  • San Diego. San Diego is a leading indicator for a market correction. Office turnover and out-migration of prime business centers to Del Mar and Oceanside have left San Diego’s downtown looking for new growth opportunities.
  • Denver. The only non-coastal city in the top tier, Denver has retooled its downtown to create an “urban burb,” a hip and exciting urban core in the midst of a sprawling suburban area, connected to downtown via a light-rail transit.

Tuesday, October 16, 2007

Massachusetts Document Recording Standards

Massachusetts is finally jumping on the formatting standard bandwagon. The registries had originally planned to implement the requirement on January 1, 2007. Now the new deadline is January 1, 2008.

Documents recorded after January 1, 2008 must meet the following requirements:

1. Be on white paper of sufficient weight to reproduce in registry scanners.

2. All document pages and attachments must be on paper that is no larger than 8.5 inches by 14 inches.

3. Printing on one side only; double-sided pages will not be accepted.

4. Documents that contain printing, writing or other markings must be sufficiently dark in appearance to be legibly reproduced on standard registry scanners.

5. All printing and writing on a document must be of sufficient size to be legibly reproduced on standard registry scanners.

6. Margins on all sides of all document pages must be of sufficient size to be legibly reproduced on standard registry scanners.

7. The first page of all documents must contain a “recording information area” in the upper right hand corner measuring three inches from the top edge of the document and three inches from the right edge of the document that is free from all writing or printing.

8. Documents that do not comply with Formatting Standard 7 above may still be recorded when attached to an official registry Document Cover Sheet or through the use of some other method adopted by the registry.

I was surprised that the registrars did not set more bright-line tests like half inch margins. I am also surprised that they are taking legal sized documents.

Thanks to Dick Howe of the Essex South Registry of Deeds for pointing this out.

Friday, October 5, 2007

A CMBS and CDO Primer

Parke Chapman wrote a primer in the National Real Estate Investor on CMBS, CDO and the commercial debt markets.

Some highlights:

Q: What led to the formation of the first commercial real estate CDO in 1999?
A: Commercial real estate CDOs were a major innovation in part driven by the need to diversify risk after the 1998 Russian financial crisis sparked a global liquidity crunch. Unlike CMBS, which adhere to strict rules on the type and quality of collateral, the commercial real estate CDO market allowed lenders and investors to introduce a debt vehicle with more flexibility. What this means is that commercial real estate CDO managers can swap collateral out of the pool, making these highly managed pools of debt.
Q: What types of loans back CMBS and commercial real estate CDOs?
A: Two key differences center on the fixed- and floating-rate nature of the collateral. Commercial real estate CDOs are typically backed by floating-rate loans whereas CMBS collateral is backed by first-mortgage loans. A commercial real estate CDO can be backed by all sorts of collateral. CMBS, preferred equity and construction loans are commonly held by commercial real estate CDOs. REIT bonds and various other types of exotic debt such as second-lien loans and unsecured debt can get lumped into these pools.

Wednesday, October 3, 2007

Guarantee Liability with Mezzanine Loans and Mortgages

With mezzanine financing, there is a potential guarantee liability to the principals of the developer that they may not foresee. The issue arises in a financing that has a mortgage loan with springing guarantees combined with a mezzanine loan secured by a pledge of interests in the mortgage borrower.

Generally, the principals of a mortgage borrower give a bad boy springing guarantee to the mortgage lender. The principals agree to be personally liable for the mortgage loan if the borrower declares bankruptcy or does other "bad" things. Principals of the borrower give these guarantees because they control the borrower and have an economic interest in the borrower. They are essentially agreeing that in exchange for a non-recourse loan, they will not fight the lender's efforts to take the collateral if the loan defaults.

The problem arises when the mezzanine lender forecloses on the pledge of interests in the mortgage borrower. After foreclosure, the mezzanine lender controls the mortgage borrower. Meanwhile, the springing guarantor has lost its economic interest in and management control of the mortgage borrower, but still has the liability under the guarantee for "bad acts" of the mortgage borrower.

If there is a mezzanine loan that goes into default, followed by a foreclosure by the mezzanine lender, the mezzanine lender controls the borrower, not the guarantor. The mezzanine lender can then threaten to bankrupt the mortgage borrower and trigger the personal liability for the mortgage debt. In the end, the guarantor may be forced to repay the mezzanine lender on its loan; in effect, the mezzanine loan had become a recourse obligation.

Mezzanine borrowers/bad boy guarantors should require the mezzanine lenders to obtain either (i) a release of the bad boy guarantor from the mortgage lender (usually by replacing the bad boy guarantee with one from the mezzanine lender) or (ii) an appropriate indemnity from the mezzanine lender for liability under the bad boy guarantee that the mezzanine lender creates post foreclosure. In each case, this should be a condition to permitting the foreclosure of the mezzanine position.

Tuesday, October 2, 2007

Housing Authority Has Stronger Powers to Evict For Criminal Behavior of Tenants

In Boston Housing Authority v. Garcia (SJC-09753) (August 17, 2007), the Massachusetts Supreme Judicial Court clarified the position after United States Supreme Court's ruling in Department of Hous. & Urban Dev. v. Rucker, 535 U.S. 125, 130 (2002).

Rucker provided that Federal housing law, 42 U.S.C. § 1437d (1)(6) (2000), "unambiguously" requires lease terms "that vest local public housing authorities with the discretion to evict tenants for the drug-related activity of household members and guests whether or not the tenant knew, or should have known, about the activity."

In the Garcia case, a Housing Court judge ruled "that the innocent tenant defense was no longer available under Massachusetts law to Doris Garcia, a BHA tenant, in light of the Rucker decision, and declined to admit evidence that she could not have foreseen or prevented the criminal conduct of two of her sons. " The SJC agreed with the "Housing Court judge that Federal housing law preempts Massachusetts law that would otherwise permit a public housing tenant to defeat a lease termination based on the acts of a household member, by establishing that he or she could not have foreseen or prevented the misconduct."

"The stated public housing policy of the United States is to "promote the goal of providing decent and affordable housing for all citizens through the efforts and encouragement of Federal, State, and local governments, and by the independent and collective actions of private citizens, organizations, and the private sector." 42 U.S.C. § 1437 (a)(4) (2000). Consistent with this policy, Congress enacted the Anti-Drug Abuse Act of 1988, with the objective of reducing drug-related crime in public housing and ensuring "public and other federally assisted low- income housing that is decent, safe, and free from illegal drugs." Rucker, supra at 134, quoting 42 U.S.C. § 11901 (1) (1994). Specifically, Congress (through 42 U.S.C. § 1437d [1][6], and HUD (through its implementing regulations) have required that housing authorities use clauses in their leases that permit the termination of a tenant's lease for crimes committed by household members, even where a tenant had no knowledge of and was not at fault for a household member's criminal activity.(12) As the Rucker Court noted, the lodging of such discretionary authority with the housing authorities is integral to the accomplishment of the congressional objective because "[s]trict liability maximizes deterrence and eases enforcement difficulties." Rucker, supra, citing Pacific Mut. Life Ins. Co. v. Haslip, 499 U.S. 1, 14 (1991).(13)"

"With respect to the application of the requirement of cause in this case, the lease signed by Garcia permits eviction for the drug-related criminal activity of household members regardless of the tenant's knowledge or ability to prevent the conduct. The judge found that Garcia's sons were members of Garcia's household at the time each engaged in drug-related criminal activity prohibited by the terms of the lease. Consequently, the judge found that Garcia had violated her lease."

Saturday, September 29, 2007

The Right to Exclude as a Property Right

Jerry L. Anderson (Drake University Law School) has posted Comparative Perspectives on Property Rights: The Right to Exclude on SSRN. I found it fascinating article on a comparison of the right to exclude others from your property as a very American property right that has its limitations here and is not as true world-wide.

I was familiar with the Loretto v. Teleprompter Manhattan CATV Corp. It was one of the few Supreme Court Takings cases that is straight-forward in its rule and application. If the government forces you to allow someone to place something on your property, no matter how minor, this is a taking and requires compensation.

Professor Anderson compares this to Britain's Countryside and Rights of Way Act of 2000, which declares private land that contains mountain, moor, heath or down to be "open country" on which the public is free to enter. Madonna had an issue with the public entering her 1000 acre estate in South Wiltshire. It seems her American sensibility of the keeping people off your land does carry across the Atlantic when she adopted her British accent.

The one part of the article that threw me off was Professor Anderson's attempt to link American obesity to the lack of access. "Perhaps the right to exclude also plays a role, by increasing the difficulty of walking from one place to another and by placing some of the most inviting territory for a hike off limits. Would it make a difference if you could start a hike by simply hiking across the fields near your house, rather than having to drive to a park or nature preserve many miles away?"

Thanks to Ben Barros at the Property Prof Blog for pointing out this article.

Thursday, September 27, 2007

REIT Joint Ventures Unfazed By Credit Market Tumult

According to this article in Retail Traffic Magazine, REIT Joint Ventures Unfazed By Credit Market Tumult.

I have done a fair amount of work with REITs acting as private equity managers, leveraging their portfolio with institutional investors rather than public equity.

As Andy Sucoff points out, the REIT typically puts up 15% or 20% of the equity plus a promote for beating a target IRR. They also use higher leverage ratios than they do in their portfolio to maximize the return.

Thursday, September 20, 2007

Exceptions to Limited Liability

Last week I noted the story and decision of City of Springfield Code Enforcement v. Concerned Citizens for Springfield, Inc., et al. in which Housing Court Judge William H. Abrashkin ordered the individual manager (Shalom Segelman) of the property owning limited liability company to pay $1.3 million in relocation costs for the tenants in the sub-standard apartment complex.

After reviewing the case, it is not clear whether the judge was piercing the liability shield of the LLC or carving an exception to the liability shield.

M.G.L. C. 156C s. 22 provides that no ". . . member or manager of a limited liability company shall be personally liable, directly or indirectly, including, without limitation, by way of indemnification, contribution, assessment or otherwise, for any such debt, obligation or liability of the limited liability company solely by reason of being a member or acting as a manager of the limited liability company." This is the liability shield for a limited liability company.

Judge Abrashkin looks to the definition of owner under the State Sanitary Code (105 CMR 400) that imposes obligations on the owner. The code has a very broad definition of owner:

"Owner means every person who alone or severally with others:
(1) has legal title to any dwelling, dwelling unit, mobile dwelling unit, or parcel of land,vacant or otherwise, including a mobile home park; or
(2) has care, charge or control of any dwelling, dwelling unit, mobile dwelling unit or parcel of land, vacant or otherwise, including a mobile home park, in any capacity including but not limited to agent, executor, executrix, administrator, administratrix, trustee or guardian of the estate of the holder of legal title; or
(3) is a mortgagee in possession of any such property; or
(4) is an agent, trustee or other person appointed by the courts and vested with possession or control of any such property; or
(5) is an officer or trustee of the association of unit owners of a condominium.

Each such person is bound to comply with the provisions of these minimum standards as if he were the owner. Owner also means every person who operates a rooming house."
My reading of Judge Abrashkin's decision is that this definition of owner is an exception to the liability shield of M.G.L. C. 156C s. 22.

I disagree with a statement in the Judge's analysis: "Had this complex gone in the other direction Mr. Segelman would, rightly, have insisted upon reaping the rewards. With the benefits go the burden, and this one falls unavoidably, upon Mr. Segelman."

One the basic paradigm's of investing in real estate (and any business) is being able to limit your losses. If I went out and bought a share of Boston Properties, Inc. (BXP) I would pay the $104.37 that it costs (as of this morning). I have unlimited upside. The stock could triple in value and pay out enormous dividends. My downside is limited to the $104.37 that I paid for the share. As a shareholder, I would never expect to get a bill to contribute more capital to Boston Properties because one of their buildings is in disrepair.

I expect the same treatment if I were an individual investor in a limited liability company that directly owned an apartment building. I know my initial capital is at risk, but I should not have to put additional capital in (unless I agreed to under the limited liability company agreement). I could lose all of my investment. But I should not have to lose more than my investment.

That being said, there are some exceptions to this liability shield. In real estate, there is CERCLA's ability to look through entity for liability due to environmental contamination. (You can read this article by Daniel M. Darragh of Buchanan Ingersoll & Rooney PC on Indirect Owner/Operator Liability Under CERCLA). There is also the equitable remedy of piercing the corporate veil.

In his order, Judge Abrashkin did not discuss any of the factors for piercing the corporate veil. So I am left to assume that the Massachusetts state sanitary code is an exception to the limited liability of an entity.

Monday, September 17, 2007

Reasonable Efforts versus Best Efforts

Ken Adams, author of A Manual of style for Contract Drafting, published this article in The Practical Lawyer: Understanding Best Efforts and Its Variants.

I particularly liked his chart of the different "effort" phrases used in contracts filed with the SEC in 2004:

Tuesday, September 11, 2007

Piercing the Corporate Veil of a Real Estate Investor

The Housing Court just came down with a troubling decision, piercing the corporate veil of a real estate investor: City of Springfield Code Enforcement v. Concerned Citizens for Springfield, Inc., et al., (Lawyers Weekly No. 17-005-07). It is only a Housing Court decision so it is not binding law in the Commonwealth.

According the article in Massachusetts Lawyers Weekly (sub reqd.), Housing Court Judge William H. Abrashkin ordered the individual manager of the property owning limited liability company to pay $1.3 million in relocation costs for the tenants in the sub-standard apartment complex.

This is a horrific case from a human perspective and a legal perspective. The property manager, Shalom Segelman, is being charged with failing to maintain the property forcing his tenants to live in sub-standard conditions. Since he owned 192 of the 211 units in the Longhill Gardens Condominium complex, his failure to fund common repairs also forced the tenants in the other 19 units to live in sub-standard conditions. Mr. Segelman served jail time for civil contempt for failing to set aside funds for repairs.

From the legal perspective, I hate to hear that the liability shield of a limited liability company has been pierced. Massachusetts has an old and slightly out of date limited liability company statute. [It was one of the last states to allow for a single member limited liability company.] I would hate to find out that our courts are trashing the entity liability shield offered by them.

I will find out more when a copy of the case shows up.

UPDATE: Mr. Segelman's lawyer pointed out that he was not found criminally neglect. He was found to be in civil contempt. I have edited the third paragraph from the original post.

Monday, September 10, 2007

Discharging Old Mortgages

When browsing through Massachusetts Lawyers Weekly, I came across Kowalczyk, et al. v. Estate of Smiarowski (Lawyers Weekly No. 14-087-07) (6 pages) (Sands, J.) (Land Court) (Misc. Case No. 245456) (July 31, 2007) (subscription required).

It cited M.G.L.c.240, section 15, which provides for a discharge of a mortgage that is 20 years past its expiration date. I had not run across this statute before, but it looks like a useful method to discharge old mortgages. The 20 years is a long time frame. With a typical 10 year commercial mortgage or 30 year residential mortgage, the old, undischarged mortgage would have to be very old to fall under the statute.

M.G.L.c.240, section 15 states:
(b) If the record title of land or of easements or rights in land is encumbered by an undischarged mortgage or a mortgage not properly or legally discharged of record, and the mortgagor or the mortgagor’s heirs, successors or assigns do not have actual or direct evidence of full payment or satisfaction of the mortgage but the mortgagor, or the mortgagor’s heirs, successors or assigns have been in uninterrupted possession of the land or exercising the rights in easements or other rights in the land, either: (1) in the case of a successor or assign who is a bona fide purchaser for value or who is an heir, successor or assign of the bona fide purchaser for value, for any period of 20 years after the recording of a deed from the mortgagor or his heirs or devisees to the bona fide purchaser, which deed did not evidence that title was taken subject to the mortgage or that the purchaser assumed or agreed to pay the mortgage; or (2) in the case of the mortgagor, or the mortgagor’s heirs, devisees or successors by operation of law, for any period of 1 year after the expiration of the time limited in the mortgage for the full performance of the condition thereof, or for any period of 20 years after the date of a mortgage not given to secure the payment of money or a debt but to secure the mortgagee against a contingent liability which has so ceased to exist that no person will be prejudiced by the discharge thereof, the mortgagor, or the mortgagor’s heirs, successors or assigns, or any person exercising the rights in easements or any person described in section 11, may file a petition in the land court or, except in the case of registered land, in the superior court for the county in which the land is located; and if, after such notice by publication or otherwise as the court orders, no evidence is offered of a payment on account of the debt secured by the mortgage within the relevant period of uninterrupted possession or of any other act within the time in recognition of its existence as a valid mortgage, or if the court finds that the contingent liability has ceased to exist and that the mortgage ought to be discharged, it may enter a decree discharging the mortgage, which decree, when duly recorded in the registry of deeds for the county or district where the land lies or, in the case of registered land, when duly noted on the memorandum of encumbrances of the relevant certificate of title, shall operate as a discharge of the mortgage and no action to enforce a title under the mortgage shall thereafter be maintained.

Friday, September 7, 2007

Real Estate Development From Beginning to End in Massachusetts

I will speaking as part of the seminar: Real Estate Development From Beginning to End in Massachusetts in Dedham on November 16, 2007.


8:30 am – 9:30 am Site Selection and General Due Diligence

Matthew J. Lawlor, Esq.
9:30 am – 10:30 am Due Diligence – Land Use and Environmental Matters

Patrick M. Butler, Esq.

10:30 am – 10:40 am Break

10:40 am – 12:00 pm Site Acquisition: Negotiating and Drafting the Purchase Agreement

Matthew J. Lawlor, Esq.

12:00 pm – 1:00 pm Lunch (On Your Own)

1:00 pm – 2:30 pm Financing Your Acquisition and Construction

Douglas E. Cornelius, Esq.

  • Structuring the Capital

  • Choice of Entities

  • Mortgage Loans

  • Loan Application, Negotiating the Term Sheet and Mortgage Loan Documents

  • Converting to a Permanent Loan

  • Mezzanine Loans

  • Joint Ventures

2:30 pm – 2:40 pm Break

2:40 pm – 3:30 pm Comprehensive Regulatory Strategy: Expediting the Permitting Process

Patrick M. Butler, Esq.

3:30 pm – 4:10 pm Project Planning and Permitting Process

Patrick M. Butler, Esq.

4:10 pm – 4:30 pm Questions and Answers

Patrick M. Butler, Esq., Douglas E. Cornelius, Esq., and Matthew J. Lawlor, Esq.

Wednesday, September 5, 2007

Merideth & Grew Restructuring

From a press release that came out today:

Meredith & Grew announced today that it has completed the sale of an 80% interest in the firm to FirstService Corporation, a NASDAQ-listed, diversified property services company headquartered in Toronto, Ontario. The transaction is effective September 1, 2007. The existing Meredith & Grew shareholders in the firm will retain a 20% interest. The terms of the transaction were not disclosed.


Meredith & Grew also announced that effective immediately, Thomas J. Hynes, Jr. and Kevin C. Phelan have been appointed Chairman, and President of the firm, respectively. Additionally, Ronald K. Perry has been named Head of Meredith & Grew’s Brokerage Group, which includes the Boston Brokerage, Suburban Brokerage and Retail Brokerage teams.

Secured Real Estate Mezzanine Lending

I just received a copy of an article by James D. Pendergast, Senior Vice President and the General Counsel of the U.C.C. Division of the First American Corporation: Secured Real Estate Mezzanine Lending (with Form).

Mr. Pendergast proposes that a mezzanine lender have their borrower opt into Article 8 of the U.C.C. and have the equity interest in the borrower entity be certificated. This will have the pledge equity interest be a security for purposes of Article 8 and investment property for Article 9. Therefore control of the certificates will be the best method of perfection, trumping a perfection by filing a financing statement.

He also advocates having the borrower deliver an irrevocable proxy granting the lender the right to vote the pledged equity interest in all matters related to Article 8 of the U.C.C. This would be a defense against the borrower opting back out of Article 8. At a minimum, the organizational documents of the borrower should prohibit the borrower from opting-out of Article 8.

He further advocates having the mezzanine lender file a financing statement under Article 9 of the U.C.C. against the pledged equity interest. This would put a future lender on notice that there is an adverse claim against the borrower and prevent this future lender from trumping the mezzanine lender (if the borrower is up to some shenanigans).

As an employee of U.C.C. insurance company, he of course advocates that the mezzanine lender obtain U.C.C. insurance.

None of this should be new information to anyone who engages in mezzanine lending or borrowing. I liked Mr. Pendergast's approach of showing the pros and cons of each position. He also walks through the steps a sneaky borrower might take.

Saturday, September 1, 2007

New Predatory Lending Regulations - (18) Prohibiting Discrimination

The Attorney General is proposing new regulations under the Consumer Protection Act (M.G.L. 93A). The new regulations add new prohibited activities as provisions (15), (16), (17) and (18) under 940 C.M.R 8.06.

The new prohibited activity in item (18) of the proposed regulations prohibits a lender from discriminating among similar borrowers. "It is an unfair or deceptive act or practice for a lender (a) to use a pricing model for its mortgage loans which treats borrowers with similar credit criteria and bona fide qualification criteria differently; or (b) to make a mortgage loan when any or all of the cost features of the mortgage loan are based on criteria other than the borrower’s credit and other bona fide qualification criteria."

Although this regulation has a good purpose in preventing lenders from discriminating among borrowers, no two borrowers or properties are the same. The regulation gives no safe harbor for a lender to show that it is not discriminating.

Friday, August 31, 2007

New Predatory Lending Regulations - (17) Loans Not in the Borrower's Interest

The Attorney General is proposing new regulations under the Consumer Protection Act (M.G.L. 93A). The new regulations add new prohibited activities as provisions (15), (16), (17) and (18) under 940 C.M.R 8.06.

The new prohibited activity under item (17) makes it a "deceptive act or practice for a mortgage broker to process, make or arrange a loan that is not in the borrower's interest." It goes on to require the broker to disclose when the financial interest of the broker conflicts with the financial interest of the borrower. If the broker is going to get paid more if the borrower gets a loan with a higher interest rate, the broker needs to disclose the conflict and not help with the loan. The regulation further provides that the broker cannot disclaim a fiduciary duty to the borrower.

I surprised that the regulation requires the mortgage broker to have a fiduciary for the borrower. I think the mortgage broker is acting as an agent for their lenders, not as an agent of the borrower.

I think this regulation, if enacted, will leave mortgage brokers scratching their head as to how to operate. How can they determine if a loan is in a borrower's interest?

Thursday, August 30, 2007

New Predatory Lending Regulations - (16) No Documentation Loans

The Attorney General is proposing new regulations under the Consumer Protection Act (M.G.L. 93A). The new regulations add new prohibited activities as provisions (15), (16), (17) and (18) under 940 C.M.R 8.06.

The proposed prohibited activity in (16) limits the mortgage lender's ability to make no-documentation or limited documentation loans. These types of loans were targeted at borrowers who had trouble documenting all of their income. Typically this type of borrower would be an independent contractor or small business owner. [CNN.Money background article]

On the dark side, I believe these borrowers were typically a contractor or business owner who did not do a good job tracking all of the cash they received and was hiding income from the taxman. I also think these loans were used for a borrower trying to get more of a mortgage than they would ordinarily be able to get using typical underwriting standards. The borrower would state that they had more income than they actually did. I never saw a good reason for this type of loan to exist other than to cheat the lender or the taxman.

The Washington Post does not paint a pretty picture on the use of these loans: The Lowdown on Low-Doc Loans.

Although the new regulation does not prohibit this type of loan, the regulation makes them very unappealing to lenders. The lender must deliver a statement with the borrower's income and a disclosure that the loan will be at a higher interest rate because of the "no-doc" option. Also, the lender needs to verify the employment and income when the stated income is "not reasonable for the occupation or experience of the borrower.. . ."

I do not know how a lender is supposed to determine what a reasonable income is for a person in a particular occupation with a particular level of experience. Effectively, a lender is leaving itself wide open for a claim under 93A if makes no-doc or limited doc loans in Massachusetts.

Wednesday, August 29, 2007

New Predatory Lending Regulations - (15) Lender Must Believe the Borrower Can Repay

The Attorney General is proposing new regulations under the Consumer Protection Act (M.G.L. 93A). The new regulations add new prohibited activities as provisions (15), (16), (17) and (18) under 940 C.M.R 8.06.

The new (15) provides in part: "It is an unfair or deceptive act or practice for a . . . lender to . . . make a mortgage loan unless the . . . lender . . . reasonably believes at the time the loan is expected to be made that the borrower will be able to repay the loan based upon a consideration of the borrower’s income, assets, obligations, employment status, credit history, and financial resources, not limited to the borrower’s equity in the dwelling which secures repayment of the loan. . . ."

The problem with this new prohibited activity is the lack of a benchmark for a lender to rely on. The challenge from the borrower under (15) will almost always come after the person has gone into default and is scrambling to prevent foreclosure. How can the lender prove that they reasonably believed the borrower could repay the loan when it turns out that the borrower could not.

How much of their income should a borrower reasonably be expected to expend on their mortgage and still be expected to be able to repay the loan? Certainly a loan with monthly payments in excess of 100% of a borrowers net monthly income would be a violation of this new provision. But I am not sure where the percentage hits the tipping point to become reasonably expected to be able to repay. 90%? 75%? 50%? 25%?

I think the borrower should be the party that determines if they will be able to repay the loan.

Tuesday, August 28, 2007

Summary of Proposed Predatory Lending Regulations

The Attorney General is proposing new regulations under the Consumer Protection Act (M.G.L. 93A).

The Attorney General summarized wants to enact the new regulations to:

· Prohibit mortgage brokers or lenders from making a loan if they do not have a
reasonable belief that the borrower is able to repay the loan.
· Restrict the abuse of no-documentation or “stated income” loans by requiring that the mortgage broker or lender disclose how the interest rates or other charges will increase under a “no-doc” loan, and obtain the borrower’s signed statement of income in order to process those types of loans.
· Prohibit mortgage brokers from arranging or processing loans that are not in the borrower’s interest, and prohibit brokers from brokering loans if their financial interests conflict with the borrower’s.
· Prohibit mortgage lenders from steering borrowers to loan products that are more costly than those that the borrower qualifies for, and prohibits lenders from discriminating between similarly qualified borrowers.

These new regulations are an update of regulations from 1992 when the last big mortgage crisis affected the Commonwealth. The regulations apply to all residential mortgages, except open end home equity lines of credit.

The update adds new prohibited activities as provisions (15), (16), (17) and (18) under 940 C.M.R 8.06.

I have a lot of concern about knee-jerk reactions to mortgage crisis. One person's predatory lending is another person's provider of an opportunity to invest in real estate.

Predatory Lending Regulations and Hearing Schedule

The Massachusetts Attorney General is reacting to the current sub-prime mortgage lending situation by proposing several new regulations under M.G.L. 93A

A copy of the proposed regulations can be found here.

The hearing schedule for the proposed regulations is as follows:

Monday, September, 17, 2007, 11:00 a.m.
Worcester Regional Chamber of Commerce
339 Main Street
Worcester, MA 01608

Tuesday, September 18, 2007, 11:00 a.m.
Brockton District Court, Rotunda Hearing Room
215 Main Street
Brockton, MA 02301

Wednesday, September 19, 2007, 10:00 a.m.
Office of the Attorney General
1350 Main Street, 3rd Floor Conference Room
Springfield, MA 01103

Thursday, September 20, 2007, 10:00 a.m.
The State House - Gardner Auditorium
Boston, MA 02108

Monday, August 20, 2007

Relocation Of An Easement

I must have missed this case when it came out in 2004, but Massachusetts has changed the law on the ability to relocate an easement that burdens your property. Now the property owner has an ability to relocate an easement on their property.

In the case of M.P.M. Builders, LLC v. Dwyer, 442 Mass. 87 (2004), the Massachusetts Supreme Judicial Court adopted the American Law Institute's "modern rule" on the relocation of easements in the Restatement (Third) of Property (Servitudes) Section 4.8(3) (2000). The owner of property subject to an easement can relocate the location of the easement without the consent of the easement holder, subject to certain conditions.

The law Massachusetts is the minority position. The majority of states require mutual consent to change the location of an easement.

Section 4.8(3) provides that:
Unless expressly denied by the terms of an easement, the owner of the servient
estate is entitled to make reasonable changes to the location or dimension of an
easement, at the servient owner's expense, to permit normal use or development
of the servient estate, but only if the changes do not (a) significantly lessen
the utility of the easement, (b) increase the burden on the owner of the
easement in its use and enjoyment, or (c) frustrate the purpose for which the
easement was created.

If you are getting the benefit of a new easement in Massachusetts, you should make sure that the easement may only be relocated with mutual consent of the parties. This will allow you to control the relocation and frustrate the relocation if necessary. If you are getting the benefit of the easement, you probably do not want to have that language, so you some possibility of relocated the easement for future development of your property.

The Land Court case of Moses et al v. Cohen et al. (Mass. Land Ct. Jan. 12, 2007) highlighted the ability of the easement holder to block relocation by inserting language into the easement that requires the holder's consent for relocation. It also pointed out that you should clarify the purposes of the easement so that those purposes can be considered in deciding of the relocation is appropriate. For example, if the easement is not just for access, but to preserve a view or prevent erosion.

There is a great article on the topic in the Massachusetts Bar Association Section Review publication by E. Christopher Kehoe and Timothy C. Twardowski of Robinson & Cole LLP

Friday, August 17, 2007

1031 Exchange Do's and Don'ts

Rochelle Stone, of Starker Services Inc., wrote this article in the National Real Estate Investor: 1031 Exchange Do's and Don'ts.

She points out the importance of the 1031 qualified intermediary, especially one that won't commingle your funds. She point out the theft of client's funds by Southwest Exchange. $83 million went missing earlier this year, presumably into the pockets of the McGhan family.

Safeguards for the Paperless Registry of Deeds

Dick Howe of the Middlesex North Registry of Deeds in Lowell wrote about the safeguards being put in place as the real estate records are transitioning to from book-based to paperless: Paperless Safeguards.

His objective is to make "every single documents of any relevance in the possession of the registry to be fully available electronically." In the current market of cheap electronic storage and hard drives, he could "easily load the entire electronic contents of the registry into [a] backpack and still have room for a notebook computer."

It sounds like he is getting some pushback from examiners about the conversion. Rightfully, their first concern should be about the sanctity of the public record. People and businesses invest billions of dollars into real estate and rely on the registry to confirm who owns the real estate and any limitation on the rights to the real estate.

My guess is that examiners are also concerned about the jobs. By making records more accessible and easier to search, it becomes less important to have a good examiner working in the registry.

"If some of the energy now being expended on trying to retain a 19th century, paper based way of doing things was diverted to developing imaginative ways of using our electronic records, the business of title examination would become both more efficient and more precise, but that’s just my opinion."

Thursday, August 16, 2007

Galactic Suite Hotel

Get ready to make your reservations. The Galactic Suite Space Resort is planning its first accommodations by 2012. [Company News] They expect to start selling tickets in 2008.

For 3 million Euros you get 18 weeks of preparation on a Caribbean island, the flight into space and three nights in the orbital hotel. During the stay you get to participate in space experiments. (Its not clear whether you are the subject of the experiments.)

As far-fetched as this may sound, the company reportedly received $3 billion in backing from a space enthusiast to build the hotel. That backer must be one of the 40,000 people in the world who could afford to stay at the hotel.

Vintage Wine Trust

I just ran across this real estate company: Vintage Wine Trust. They are the only Real Estate Investment Trust to focus solely on the wine grape industry. They work with vineyard and winery owners to structure sale-leaseback financing of their real estate.
Interesting to see a sale leaseback company focused on a specific industry.

Wednesday, August 15, 2007

New Uniform Act on Limited Liability Companies

The ABA approved the new Uniform Act on Limited Liability Companies [Press Release] updating the 1996 Act. Limited Liability Companies still dominate the ownership structures of real estate assets.

Here are the highlights:
1. In the 2006 Act, the operating agreement determines whether a company is manager-managed or member-managed. In the 1996 Act the kind of management is determined in the certificate of organization. If the agreement is silent, the company is a member-managed company by default. Leaving this decision to the agreement allows the company to determine and re-determine its management structure more flexibly. A third-party creditor may seek affirmation of a manager’s or a member’s authority before doing business with the company and practice indicates does so without checking the official record for the certificate. In addition, certificates of authority may be filed to provide notice that only certain members or managers in a company are entitled to do business on behalf of the company.

2. There is no requirement that a company’s operating agreement be in writing in either the 1996 or 2006 Act. However, the definitions “record” and “signature” establish that any statute of frauds requirement within the 2006 Act may be satisfied with electronic records and signatures. The 1996 Act does not recognize electronic records or signatures.

3. A member may not transfer his or her membership in a company, unless the operating agreement makes it possible. The only interest that may be transferred is called the “distributional interest” in the 1996 Act and the “transferable interest” in the 2006 Act. In the 2006 Act, a “transferable interest” is generally any right to distributions that a member has under the operating agreement. The operating agreement may impose restrictions on a right to transfer. However, the certificate of organization may provide that a “transferable interest” is freely transferable under the 2006 Act. If it does, the transferable interest may be certificated in the same manner any investment security is, and is likely to be a security under Article 8 of the Uniform Commercial Code.

4. In both the 1996 and the 2006 Acts, members owe a duty of care to each other. The duty in the 1996 Act is to refrain from conduct that is grossly negligent or reckless conduct, intentional misconduct or knowing violation of law. In the 2006 Act, the standard is ordinary care (care that a person in a like position would reasonably exercise) subject to the business judgment rule.

5. Under both the 1996 and 2006 Acts, the operating agreement governs the relationships between members and members and managers (if any). The 1996 Act, however, provides that the duty of loyalty and the duty of care may not be eliminated in the operating agreement. But the operating agreement may specify those acts and transactions that do not violate the duty of loyalty, so long as not manifestly unreasonable. In the 2006 Act, the operating agreement may eliminate the duty of loyalty or duty of care, provided that eliminating them is not “manifestly unreasonable.” The agreement may not authorize intentional misconduct or knowing violations of law, as well.

6. The 1996 Act does not expressly address the issue of indemnification of members or managers, but the 2006 Act does. It provides for indemnification as a statutory matter. But the operating agreement may alter the right to indemnification, and may limit damages to the company and members for any breach except for breach of the duty of loyalty or for a financial benefit received to which the member or manager is not entitled.

7. The 1996 Act makes no provision for companies that are initially organized without members. There must be at least one member upon filing the certificate of organization. In the 2006 Act, a member does not necessarily need to be named at least 90 days from the day the certificate is filed. There is a limited ability, therefore, to create what are called “shelf” companies.

8. One issue that especially vexes limited liability company law is the rights creditors of members have in the assets of the company. The 1996 Act restricts creditors’ interests to a member’s distributional interest and provides a judgment creditor with a “charging order” as the only method of executing against that interest. The resultant lien may be foreclosed and sold in a judicial foreclosure sale. The 2006 Act further requires a finding: that payment may not be made within a reasonable time, before a court orders foreclosure of the lien. This finding is not required in the 1996 Act. In addition, the 2006 Act makes it absolutely clear that a purchase in a foreclosure sale does not make the purchaser a member.

9. In the 1996 Act dissociation (resigning from membership) of a member by express will triggers an obligation to buy the interest of that member in an at-will or term company. Failure to buy may subject the company to a judicial dissolution and winding up of the business. The 2006 Act provides no obligation to buy out a dissociating member, nor a ground based upon failure of a buyout for judicial dissolution. The company has greater stability under the 2006 Act, notwithstanding any dissociation of a member.

10. The 1996 Act provides members with the right to file a derivative action on behalf of a company alleging certain kinds of misfeasance on the part of the company by its management. Under the 2006 Act, the company may form a “litigation committee” to investigate claims asserted in a derivative action. This stays the litigation while the committee does its investigation. The objective of the investigation is to determine if the litigation is for the good of the company. The litigation committee ultimately reports to the court with a recommendation to continue with the plaintiff or the committee as plaintiff, or to settle, or to dismiss.

11. The 1996 Act allows no right of direct action against the company on behalf of a member as a plaintiff. The 2006 Act provides for direct action.

This link will take you to a copy of the Act.
This link is to a copy of the Act in Word.

Tuesday, August 14, 2007

Teaching the Rule Against Perpetuities?

Professor Ilya Somin, George Mason University School of Law, is thinking of not teaching the Rule Against Perpetuities: Should We Teach Law Students the Rule Against Perpetuities?

"In legal circles, the RAP is virtually a byword for abstruse complexity,
and is traditionally one of the most hated parts of the law school curriculum.
Forcing law students to learn it is almost a form of hazing, much like making
them learn the Blue Book."

Monday, August 13, 2007

Rotating Skyscraper

Not content with having the tallest building, now Dubai wants a building that spins.

Plans are underway for a 68- story combination hotel, apartment and office tower. Each floor can turn separately, so the building will be changing shape.

It looks great in this video, with the shape undulating. It looks like crap in the picture on Each floor would take 90 minutes to rotate.

This is actually the second spinning building planned for Dubai. The first is a mere 30 story 200 unit condominium tower that rotates once per week.

Construction is scheduled to begin in June, 2008.

Friday, August 10, 2007

Turning a Debt into A Personal Guaranty

In the case of Orix Financial Services, Inc. v. Leclair (S.D.N.Y. Feb 26, 2007) the court found that under Rhode Island law, an individual who assumes to be acting for a corporation without authority to do so is liable for all debts arising from the action.

Mr. Leclair defaulted under his obligation under a note. The maker of the note was "Brian Leclair DBA T and D Excavating Co." Unfortunately for Mr. Leclair, the charter for T and D had beeen revoked two year prior to the execution of the note.

Under R.I. Gen. laws Section 7-1.2-1801: "All individuals who assume to act as a corporation without authority so to do are jointly and severally liable for all debts and liabilities incurred or arising as a result of that action."

Thursday, August 9, 2007

Debt Market Update - LIBOR Upswing

I got this update from Chatham Financial this morning:

As many of you may have already heard, 1M LIBOR opened up 19bps this morning. This is, of course, a very sudden change particularly after a very stable year of LIBOR trading in the low 5.30's. This market movement demonstrates the reaction of many dealer banks after BNP Paribas halted withdraws from 3 funds that hold US subprime mortgage investments and NIBC (a Dutch bank) announced US$189mm in actual losses. This is the first significant news of US subprime markets impacting European banks. The European Central Bank, responding to an urgent demand for cash from banks affected by the subprime mortgage collapse in the U.S., loaned $130.2 billion (EUR 94.8bn) to assuage a credit crunch. For your reference, below is a current chart of some of the numbers that you may be interested in. As always, please feel free to call Chatham to discuss further.

Chatham Financial
235 Whitehorse Lane
Kennett Square, PA 19348
T: 610.925.3120
F: 610.925.3125

Tuesday, August 7, 2007

Debt Markets Continue to Implode

Real Estate Finance and Investment is reporting that five securitizations worth at least $4.8 billion have been pulled from the market in the last week.

So far this does not seem to have much impact on pricing of commercial real estate. Surely, less debt is available and the pricing is less favorable, but there is still gobs of capital dedicated to real estate that are looking for investments. Highly leveraged deals and buyers relying on lots of debt are running into trouble. is reporting that the parties have extended the closing for the Tischman Speyer / Lehman acquisition of Archstone-Smith.

The debt markets are continuing to crush the residential real estate market. American Home Mortgage Investment has gone belly-up, National City has stopped offering some products through brokers and now jumbo loans are running into trouble: Mortgage Fears Drive Up Rates on Jumbo Loans ( $$).

The problem with the jumbo loans is that they cannot be purchased and guarantied by Fannie Mae or Freddie Mac. That limts the resale value of the debt and the securitizations of the loans.

Thursday, August 2, 2007

Building the Tallest Building

Younan Properties seems to think it can build the tallest building in the world: Younan Vows To Build Tallest Building. Of course they have not selected a city or a site to build on yet. Nor does it appear that they have the financing to build it.

It was a good way to get your name in the paper.

Meanwhile, my gas money has allowed Emaar Properties of Dubai to build the Burj Dubai Tower.

It is still under construction, but on July 24 the had steel up to 512.1 meters making it the world's tallest building. But they are still going and expect to reach a height of 700 meters. The tower is scheduled to open late next year.

According to the website for the tower, the goal "is not simply to be the world's highest building. It's to embody the world's highest aspirations."

Prior to the Burj Dubai, the world's tallest building was Taiwan's Taipei 101. It is a mere 508 meters tall.

Saturday, July 28, 2007

Acceleration Clause Upheld For Lease Default

The Massachusetts Supreme Judicial Court allowed a commercial landlord to enforce a liquidated damages clause against a tenant for non-payment of rent in Cummings Properties, LLC vs. National Communications Corporation (SJC Docket 09778. July 17, 2007).

The tenant had argued that the liquidated damages clause was unenforceable under Commissioner of Insurance v. Massachusetts Acc Co., 310 Mass. 769 (1942). That case barred enforcement of a liquidated damages provision that, by the terms of the lease, could apply to both trivial as well as material breaches.

A contract provision that clearly and reasonably establishing liquidated damages should be enforced so long as it is not so disproportionate to anticipated damages as to constitute a penalty. If, at the time the contract was made, actual damages were difficult to ascertain and the sum agreed on by the parties as liquidated damages represents a reasonable forecast of damages expected to occur in the event of a breach, it will usually be enforced. TAL Fin. Corp. v. CSC Consulting, Inc., 446 Mass. 422 (2006).

A rent acceleration clause, in which a defaulting lessee is required to pay the lessor the entire amount of the remaining rent due under the lease, may constitute an enforceable liquidated damages provision so long as it is not a penalty.

The SJC modified "their holding in Commissioner of Ins. to the extent that in the case of a commercial agreement between sophisticated parties containing a liquidated damages provision applicable to breaches of multiple covenants, it may be presumed that the parties intended the provision to apply only to those material breaches for which it may properly be enforced. This modification is consistent with the goal of resolving disputes "efficiently by making it unnecessary to wait until actual damages from a breach are proved" and helps to eliminate uncertainty and costly litigation. Kelly v. Marx, 428 Mass. 877, 881 (1999). It is also consistent with the intention of the parties in the present case as expressed in the language they agreed to in the liquidated damages and severability clauses of the lease."

Monday, July 23, 2007

Trustee of Nominee Trust Not Liable Under Lead Paint Suit

The Massachusetts Appeals Court ruled in the case of BELLEMARE vs. CLERMONT that the trustee of a nominee trust is not an "owner" of the property under the Childhood Lead Poisoning Prevention and Control Law (MGL c. 111 s. 189A et seq.).

Under a nominee trust in Massachusetts, the trustee may only act at the direction of the beneficiaries of the trust. The trustee has no independent authority. The trustee is better thought of as an agent of the beneficiary of the trust. As an agent, the trustee holds bare legal title.

In 1993, the legislature added the definition of "owner" to the Section 189A:

“Owner”, any person who alone or jointly or severally with others (i) has legal title to any premises; (ii) has charge or control of any premises as an agent who has authority to expend money for compliance with the state sanitary code, executor, administrator, trustee or guardian of the estate or the holder of legal title; (iii) is an estate or trust of which such premises is a part, or the grantor or beneficiary of such an estate or trust; or (iv) is the association of unit owners of a condominium or cooperative, which shall be considered an owner solely with respect to common areas and exterior surfaces and fixtures of such condominium or cooperative; provided, however, that the term “owner” shall not include a secured lender except to the extent provided in section one hundred and ninety-seven D.

Prior to 1993, there was no definition of owner in the statute. The plaintiffs were harmed prior to 1993.

Even though the current version of the statute would indicate that a trustee of a nominee trust could be held liable, the Court held that the definition of "owner" should "not be read out of context and employed to impose liability on one who is effectively an agent for a principal; who possesses "only the barest incidents of ownership," Morrison v. Lennett, 415 Mass. at 861; and who neither controls the property nor benefits from its ownership." The Court rejected a literal reading of the statute because it produces an absurd result.

The plaintiff should have filed suit against the trustee and the beneficiary of the trust. The trustee would be dismissed from the suit, but could be compelled to reveal the identity of the benficiary of the trust.