Monday, April 28, 2008

Cities are Enacting Green Building Requirements

On Earth Day, the City of Los Angeles enacted a green building ordinance. According to the Sheppard Mullin Real Estate and Construction Law Blog:
The program sets mandatory standards of sustainability for large projects. In essence, the program provides that no building permit shall be issued for projects at or above 50,000 gross square feet of floor area unless “[t]he project applicant…demonstrates that the Project meets the intent [emphasis added] of the criteria for certification at the LEED certified level.” See LAMC, Section 16.10 D.1. Formal LEED certification, however, is not required.
Boston enacted its green building ordinance last year. In January of 2007, the Boston Zoning Commission approved several amendments to the Boston Zoning Code to require all projects over 50,000 SF to be designed to meet the “certified” level.

Friday, April 25, 2008

REITs still have a Buy Rating

In another sign that the commercial real estate sector is not in the same trouble as the residential sector, many REITs still have good ratings from S&P.

According to Business week in the first quarter of 2008, the group posted a 0.8% total return, at a time when the S&P 500 index fell 9.4%. (REITs Show Strength)

Business Week put together a list of 17 REITs that have a 4- (buy) or 5-STARS (strong buy) rankings from S&P Equity Research:

Alexandria ARE
AMB Property AMB
Annaly Capital Management NLY
Developers Diversified Realty DDR
Essex Property ESS
Federal Realty FRT
First Industrial Realty FR
General Growth Properties GGP
Macerich MAC
Mack-Cali CLI
National Retail Properties NNN
ProLogis PLD
PS Business Parks PSB
Regency Centers REG
Simon Property Group SPG
Taubman Centers TCO
Weingarten Realty WRI

(Disclaimer: Some of these REITs are clients of my employer.)

Thursday, April 24, 2008

Commercial Properties Are Not Selling

Yesterday, I posted that commercial property prices are still increasing. Of course that does not mean there are many properties selling at these prices. As the Boston Business Journal reported, commercial real estate sales have ground to a halt in downtown Boston:
The city saw $57.3 million in office-building sales during the three-month period, compared to $4.3 billion a year ago. Total commercial sales -- which included offices, retail, apartments, industrial and hotel properties -- fell 97 percent to $152.6 million during the quarter, compared to $5.2 billion in the same period in 2007, according to figures from Real Capital Analytics, a real estate research firm in New York.
Sellers are sitting on the sidelines waiting for the debt markets to get back to some normalcy. Buyers are still thirsting for deals, but can't line up the debt to get the deals done. If the debt markets do not come back soon and sellers get tired of waiting, then prices will start dropping .

Wednesday, April 23, 2008

Commercial Property Prices are Still Increasing

Even though residential property prices are dropping like rocks around most of the country, commercial properties are still holding their value.

The press release on the S&P/GRA Commercial Real Estate Index shows that prices are up from a year ago.
The National composite reported annual price appreciation of 7.0%, versus January of 2007, up from the +6.7% reported in December's data, but still significantly below from this cycle’s peak of +14.5%, reported in June of 2006. . . The Northeast had the highest return over the month and has the highest annual return over the past 12 months. Each of the regions reported lower monthly returns in January December/November returns.
The raw data for the Index Values is in this Excel spreadsheet.

Triple-A Failure

There is a great article by Roger Lowenstein appearing in the Sunday New York Times Magazine: Triple-A Failure. It runs through the process for converting mortgage loans into mortgage securities.

In one example, the author is taken through the rating and structure process for a pool of 2,393 mortgages with a face value of $430 million. All of the loans were sub-prime loans originated in the early spring of 2006 by a non-bank lender. Seventy-five percent of the loans were adjustable-rate.

What I found it staggering was that 43 percent of the loan were no-doc loans. The borrowers did not provide written verification of their income. No-doc loans were originally intended as an alternative loan for small business owners (especially cash businesses) where it is difficult to put together the paperwork for showing their income. But when you here no-doc loans, you should think mortgage fraud.

Friday, April 18, 2008

Banks Are Keeping More Loans on Their Books

Mark Gongloff reports in that U.S. commercial banks are keeping more of the loans they make on their balance sheets.
Total assets at U.S. commercial banks swelled to $11.12 trillion in early April, up from $9.94 trillion a year ago, according to Federal Reserve data that are updated every Friday. Last month, the growth rate of bank assets hit its fastest growth pace in 28 years.
As Mark states, one of the problems that occurred in the CMBS market was that lenders were not keeping an interest in the loans they originated. They were just producing the paper to package into a stream of CMBS offerings. Banks forgot that they were making loans and that the loans would have to be managed.

Prior to the CMBS, when negotiating documents, the "no" response was that the change would reduce the value of the paper. I was not hearing that it would affect the lender's ability to manage the loan.

W Midtown Atlanta

In August of 2006, I represented an investor working with the Noble Investment Group with their acquisition of the Sheraton Colony Square in Atlanta. The plan was to renovate the hotel and convert it to the W Hotel Midtown Atlanta.

Noble has a link to a virtual tour of the hotel on the home page of the Noble website. (The link is on the top right corner of the picture). Noble also has a case study on Major Renovation of the Sheraton Colony Square to W Hotel Midtown - Atlanta, GA.

Proposed New Tax Requirement on Real Estate Sales

The current draft of the Fiscal Year 2009 Massachusetts House Budget proposes a new obligation on real estate sales. Section 11 of H4000 Outside Sections (7L Sections) would impose a new requirement on non-resident taxpayers being obligated to make an estimated tax payment at the time of the sale of real estate in Massachusetts.
SECTION 11. Chapter 62B of the General Laws is hereby amended by inserting after section 13 the following section:-

Section 13A. The commissioner may require a taxpayer, or a person paying, crediting or allocating an amount to a taxpayer, to make estimated tax payments on amounts the taxpayer is reasonably likely to receive. The commissioner may require a minimum estimated tax payment and may require payment on or before the date of receipt of income. The commissioner may, for example, exercise this authority to require a nonresident taxpayer to estimate and pay, on or before the time of sale, the income tax liability on the gain from the sale or transfer of real property in the commonwealth. The commissioner may issue regulations governing the administration of this section. In the event of a sale, transfer or disposition of property, a lien in the amount of any required estimated payment shall arise with regard to the property, to the extent provided by regulation, if such a required estimated tax payment is not timely made.
It is strange that Massachusetts is setting this up as a payment of estimated taxes, rather than a withholding requirement. Many other states have withholding requirements: California, Maine, Oregon, South Carolina, Vermont, (This was not meant to be an exhaustive list; just some examples that came up in a Google search.)

Thursday, April 17, 2008

Martin Kimmel

I was sad to hear that Matin Kimmel passed away. He was the "Kim" of Kimco Realty and Milton Copper was the "co".

According to the New York Times, Martin S. Kimmel, 92, Co-Founder of Retail Real Estate Firm, Dies:

Starting with a “mundane pedestrian strip” on Coral Way in Miami with a Zayre discount store and two other stores, Mr. Cooper said, the company has built a portfolio that now includes about 1,900 properties in the United States, Canada, Mexico, Chile and Brazil — approximately 1,100 of them strip shopping centers. The value of the common stock of Kimco, based in New Hyde Park, N.Y., was $286 million in 1991; today it is about $10.2 billion.

With that first shopping strip under construction, “Cooper and Kimmel quickly learned the tricks of the local real estate game,” a 1998 article in Institutional Investor magazine said. “Kimmel would follow utility trucks to find out where new power lines were being laid,” an early sign of new residential development.

Kimco Realty is a client of The Firm.

Monday, April 14, 2008

Wachovia and Lender Woes

As is reporting, Wachovia Swings to Loss, Plans to Raise Capital.

I noticed that Wachovia was retreating from some its lending relationships. The retreat made little sense because they were good borrowers with very solid sponsors. I assumed that Wachovia was trying to preserve capital. That turned out to be true as Wachovia admitted that they are trying to sell stock to raise another $7 billion in capital.

I think there will be a few more banks looking to raise capital in the next few months. Many banks just blew their risk analysis. There is a great piece by Adam Davidson on NPR: Why Risk Models Failed to Spot the Credit Crisis.
"Every big bank has a risk management team whose job it is to keep the banks out of trouble. The teams use complex computers to guide the banks away from financial danger. But as the global credit crisis shows, those models failed to keep many major U.S. and foreign financial firms from making bad bets on mortgages."

The Case for Exotic Notes in Commercial Real Estate Transactions

Fran Mastroianni of Goodwin Procter LLP, published a story in Real Estate Investment & Finance: The Case for Exotic Notes in Commercial Real Estate Transactions.

"PIK (payment-in-kind) Notes and Toggle Notes, which began as alternative debt instruments with safety valve features attractive to the real estate industry, became a life jacket keeping overly aggressive financially engineered deals afloat. Their use has temporarily retreated but their intrinsic value as sophisticated real estate finance tools almost guarantees that they will reemerge as the debt crisis subsides."

Friday, April 4, 2008

Massachusetts Tree Law

I had previously posted about the Massachusetts Rule on Tree Liability. Last month, the Massachusetts Appeals Court generated some new law on trees in the case of Glavin v. Eckman 71 Mass. App. Ct. 313 (2008).

To improve their own view of the ocean, Eckman cut down ten mature oak trees on the property of their neighbor, Glavin, without the permission of Glavin. Glavin brought a claim under M.G. L. c. 242, § 7.
"A person who without license wilfully cuts down, carries away, girdles or otherwise destroys trees, timber, wood or underwood on the land of another shall be liable to the owner in tort for three times the amount of the damages assessed therefor; but if it is found that the defendant had good reason to believe that the land on which the trespass was committed was his own or that he was otherwise lawfully authorized to do the acts complained of, he shall be liable for single damages only."
The jury found in favor of the neighbor and awarded $30,000 in damages , which the judge trebled since it was readily apparent the the trees were not on Eckman's property.

The interesting part of this case and the decision was the damage award. The $30,000 award was for the restoration costs. Eckman argued that the award should have been for the timber value of the trees or the diminution in value of Glavin's property without the trees.
"A plaintiff may opt for either the value of the timber cut or the diminution in value of his property as the measure of damages under the statute, . . . and when the latter measure does not fairly measure his damages, he may permissibly opt for restoration cost damages."
From the Massachusetts Trial Court Libraries is a site with Massachusetts Law About Neighbors and Trees.

Wednesday, April 2, 2008

Avvo Lawyer Ratings Come To Massachusetts

The controversial has come to Boston (and the rest of Massachusetts). I have heard about the reviews and the law suits filed. It looks like the early rating system had some problems with gathering information and weighting the information that Avvo was able to find. As of April 2, they have added Massachusetts.

Since I am a lawyer in Massachusetts, I figured I would check out my profile: Doug Cornelius on Avvo.
At first, I achieved the "No Concern Rating." There is a process for claiming your profile. After doing that, I got a 6.2 out of 10. That did not seem very good. So I added some publications, speaking engagements, employment, etc. That got me up to a 6.5.

According to their description of how the ratings work, if you add more information to your profile then your numerical rating should increase.

So I decided to go on a hunt for the highest rated real estate lawyers in Boston. Michael Leon comes out on top, with Robert Fishman, second and Beth Mitchell in third place. All three have a perfect rating of 10.

I checked out some other prominent lawyers here in in the firm:
I could not find anyone else in the firm with a numerical rating and I got a bit bored after seeing the lack of information. As of this morning only 149 lawyers in Boston had a rating above 9. With 2896 having a rating above 1. There is a distinct lack of information and utility in the numerical rating.

Of course, today is just the first day here in Massachusetts. I will have to check back to see what happens.

Tuesday, April 1, 2008

REsource magazine

The latest issue of Goodwin Procter's REsource magazine has been released. Here are the articles in this issue:

Green Building: Now on Firm Footing
by Rachael Simonoff Wexler and Shahrzad Mostofi
Green building is no longer the passion of a few; it is the new standard for commercial and residential developments alike. Green design is an undisputed selling point, remarkably enhancing commercial and residential project value. Green building practices reduce the tremendous impact that building design, construction, and maintenance have on both people and nature. The concept of environmentally friendly real estate is so ubiquitous today that green can be used to describe building without concern that readers will think it refers to the color of a structure.
Negotiating in a See-Saw Market
by Andrew Kirsh
In today’s market, however, the number of real estate transactions that make economic sense is dwindling. Fewer buyers are able to obtain adequate financing due to the recent credit crunch. Thus, an imbalance between seller supply and buyer demand now exists in the real estate market. The negotiating pendulum long thought to be stuck at the top of the seller’s side is finally returning to an even position. The return of balance due to the changing market should allow buyers to negotiate more favorably certain hot button issues concerning due diligence, deposit, as-is and release provisions, representations and warranties, and seller remedies.
Turn Down Service: Key Aspects of Hotel Real Estate Due Diligence
by Christopher Barker and Benjamin Tschann
Investors know the importance of conducting thorough due diligence in the acquisition of real estate assets. Generally speaking, the due diligence tasks for completed and stabilized projects are the same regardless of the type of assets to be acquired. For those evaluating hotel assets, however, the due diligence tasks are greater, and these expanded investigations are crucial to understanding not only the real estate being acquired, but the business that comes with it. For hotel assets, apart from the due diligence associated with tax structuring issues that arise if tax-exempt entities or REITs are involved, there are four main categories of additional due diligence required to evaluate both the real estate and the business: (i) branding; (ii) hotel management; (iii) employment matters; and (iv) operating licenses and permits. Each area must be evaluated for financial as well as legal consequences.
Issues in Joint Venture Capitalization
by Dean Pappas and Hamilton Tran
As the allocation of global investment capital to real estate has increased in recent years, joint ventures between capital partners and developer partners have become commonplace in real estate transactions, making joint venture agreements familiar real estate documents. Familiar as they may be, however, many joint venture agreements overlook or do not adequately address critical issues that often arise during the joint venture relationship. One basic but significant provision found in joint venture agreements is capitalization – the funding of the venture by its partners. Capitalization will become even more significant in the current volatile real estate and credit markets as traditional debt financing becomes scarcer and the infusion of equity may be the only means to sustain joint ventures.
Real Difficult: Structuring Investments in Real Estate
by Christopher Price and Rishi Sehgal
The existence of publicly traded real estate investment trusts (REITs) and the proliferation of commingled real estate investment funds has made investing in institutional-quality real estate increasingly mainstream and available to a
wider class of investors. Fund sponsors in particular, through the use of creative structuring, have been able to access a diverse array of capital sources and have given real estate a prominent seat at the capital markets table. To attract capital from investors as diverse as governmental and corporate pension plans, U.S. and overseas insurance companies, university endowments, private foundations,
and sovereign wealth funds acting on behalf of foreign governments, fund sponsors typically use a variety of structures including “blocker entities” and private REITs to marry their capital with their investment strategy by accounting for investors’ tax and regulatory requirements. While the goal is to attract the greatest amount of capital into their funds, the tradeoffs sponsors face are less flexibility, greater complexity, and increased costs when actually making investments.

Back to Work

After spending the month of March home with my daughter on paternity leave, I am back in the office.

A lot of changes have happened in the real estate industry, but it looks like the players in the debt markets are still trying to figure out what assets they have before they start making money available for real estate.

Bear Stearns was a big player in the origination and securitization of Commercial Mortgage Backed Securities. It was not surprising that the company took a hit from the debt markets, but is was stunning to see them disappear over the course of a weekend.

The residential market has continued to collapse after the bubble popped. It was interesting to see infomercials switch from "Make money in real estate with no money down!" to "Make money in real estate from buying foreclosed properties!"

Now that I am back, I have a backlog of posts and will return to regular posting.