Emerging Trends in Real Estate

The Urban land Institute's  Emerging Trends in Real Estate for 2009 came out with a picture of doom and gloom, predicting that in 2009, commercial real estate will suffer its worst year since the industry's crash of 1991-92, with a noticeable rebound unlikely until 2011 at the earliest. It also forecasts a decline of 15% to 20% in property values, on average, from their 2007 peaks, with even sharper declines coming in weaker markets.

Of the 50 markets tracked, the study found only Dallas and Houston have prospects for investment and development in 2009 that should be better than in 2008, thanks to their exposure to the energy industry. All other markets face deteriorating conditions next year, the study said.

But, the report does point out that there are opportunities to be found.


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A New Chapter for Me

Yesterday was my last day at The Firm.

It was hard to walk out the door after 13 great years. Andy Sucoff extended me an offer to join the real estate group during the summer of 1995.  It has been great working with one of the best group of real estate lawyers in the country. I was able to work on interesting and complex real estate transactions. I will miss the practice and my clients.

Don Oppenheimer transformed my practice by introducing me to knowledge management about 8 years ago. The Firm was very forward-thinking in trying to maximize the collective intelligence of its attorneys and staff. And still is. We have experienced tremendous success through the knowledge management program. It has been growing even more with The Firm's adoption of enterprise 2.0 tools as part of the knowledge management program.

I had a great time and learned a great deal during those two chapters of my career. But, a great opportunity presented itself and I had trouble ignoring it. So, now I start a new chapter.

I am taking a few days off to relax. I have some biking trips and kayaking trips lined up. Of course, you cannot rely on New England weather.

Later this month, I join Beacon Capital Partners as their Chief Compliance Officer. It is a big change in career. But I am looking forward to new challenges and opportunities.

As for Real Estate space?

It will live on.

At least for a little while longer. 

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Largest Real Estate Investment Managers

Pensions and Investments Online put together a list of the Largest Real Estate Investment Managers. The list is ranked by total worldwide real estate assets, in millions, as of June 30, 2008.

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Economic Emergency Stabilization Act of 2008

The White House and Congressional Leaders finalized the Bailout Bill: Current draft of the Economic Emergency Stabilization Act of 2008. (from the Wall Street Journal) It will be interesting to see how it progresses through the House and Senate. I expect to see a lot of salesmanship as politicians try to weave into their current political campaigns.

What does it actually do?  Read this summary from the WSJ.com: Shape of Massive Bailout Bill Starts to Develop Definition. 

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When Life Hands You Lehman, Make Lehman-Aid

Over the weekend, Lehman Brothers lost its interested buyers and got ready to file for bankruptcy. According to the New York Times, interested buyers wanted the federal backstop that was put into place for JP Morgan Chase purchase of Bear Stearns: 2 Wall St. Banks Falter; Markets Shaken.

According to the Wall Street Journal, the lack of a backstop scared off Bank of America and Barclays PLC: Ultimatum by Paulson Sparked Frantic End. Most people think various buyers will swoop in and buy individual pieces of Lehman.

On Sunday afternoon, a trading session was opened to allow firms to try to unwind their derivatives transactions with Lehman by finding other parties to step into Lehman's shoes: Lehman Risk Reduction Trading Session and Protocol Agreement.

It should be an interesting Monday and an interesting week.

Thanks to Rob Hyndman for coming up with this blog post title. I stole it from one of his Twitter Post (@rhh)

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All of these companies are clients of The Firm, but I am not aware of The Firm's participation in any of the weekend's events. If The Firm was involved, I was not. 

Opportunity Funds Overfloweth

National Real Estate Investor published a story by Joe Gose on the flow of capital into distressed property funds: Opportunity Funds OVERFLOWETH.

"Opportunity funds concentrating on distress intend to take advantage of the seized-up debt markets in a few different ways. Many funds are buying debt at a discount from investment banks stuck with billions of dollars of loans they can't securitize. Other investors believe loose underwriting and over-leveraged properties will soon lead to maturity defaults, essentially defaults that occur when a landlord can't refinance a property because it isn't worth the loan coming due or because a landlord can't come up with a slug of equity that lenders want. Those funds intend to buy up that real estate, or at least gain a position in the assets."

It will be interesting to see if the capital markets come back into time to avoid a commercial real estate crash.  The loose underwriting standards we saw eighteen months ago are gone (for the foreseeable future). But most commercial property owners have enough cash flow to pay the monthly debt payments.

The problem will come at maturity. Commercial property owners may have a hard time rounding mortgage debt to replace the maturing debt. It was the short maturity on Mr. Macklowe's debt that forced him to sell the GM Building. More commercial property owners are going to be faced with mortgage debt maturity. Will there be mortgage debt there to replace it?

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Blockshopper

Blockshopper.com is trying to make news out of residential transactions. The site has launched in Chicago, St. Louis, South Florida and Las Vegas, trolling the listing services and registries of deed to find what notable people are doing with their real estate.

According to Law.com, some lawyers at Jones Day are not happy that their real estate purchases are making headlines: Lawyers Shrink From Web Real Estate Spotlight. They have sued Blockshopper. Of course, that is just more publicity for Blockshopper. Not free publicity since they will need to pay the lawyers.

Will the suit go anywhere? I thought real estate records were public documents and open for anyone to see. So what is the problem?


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Floor Area Ratio and Residential Property

Floor Area Ratio has longed been used as a way regulate building density under zoning laws.  The owner of the property can choose to build a short building on most of the property or a taller building on less of the property.

Although Floor Area Ratio has been used to regulate commercial properties, there was some uncertainty as to whether you could use it for single family residential property in Massachusetts. Floor Area Ratio restrictions is one way to limit McMansions.

In the case of 81 Spooner Road LLC v. Town of Brookline (SJC-10104), the Massachusetts Supreme Judicial Court ruled that towns and cities can use Floor Area Ratio to regulate the density of single-family residential properties.

The uncertainty comes from M.G.L. c.40A, §3 that provides in part:

 "No zoning ordinance or by-law shall regulate or restrict the interior area of a single family residential building . . . provided, however, that such . . . structures may be subject to reasonable regulations concerning the bulk and height of structures and determining yard sizes, lot area, setbacks, open space, parking and building coverage requirements. . . ."

A property owner challenged the Town of Brookline's imposition of a 0.3 Floor Area Ratio on a single family house the owner proposed to build on a vacant lot.

The Massachusetts Supreme Judicial Court ruled in part:

"that regulation of single-family residences pursuant to the authority in the proviso of G. L. c. 40A, § 3, second par., including bulk regulation by floor-to-area ratio, is a proper exercise of the zoning power, provided the effect of such regulation on the interior area of such structures is incidental.  Although the town's bylaw requires consideration of gross floor area of single-family residences for purposes of calculating floor-to-area ratio, this is not a prohibited direct regulation of interior area.  Its effect is only incidental."

It looks like Massachusetts cities and towns can use Floor Area Ratio to limit McMansions from sprouting up, with over-sized houses growing in existing neighborhoods.

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Massachusetts City and Town ByLaws

Here is collection of bylaws and ordinances available online for Massachusetts:

Abington
Acton
Adams
Agawam
Amesbury (Zoning)
Amherst
Andover
Arlington
Ashburnham
Ashby
Ashby (Zoning)
Ashland
Attleboro (Zoning)
Auburn
Barnstable
Barnstable (Zoning)
Barre
Becket
Becket (Zoning)
Bedford
Bedford (Zoning)
Belchertown
Bellingham
Bellingham (Zoning)
Belmont
Belmont (Zoning)
Billerica
Billerica (Zoning)
Blackstone (Zoning)
Bolton
Boston
Boston (Zoning)
Bourne
Bourne (Zoning)
Boxborough
Boxborough (Zoning)
Boxford
Boxford (Zoning)
Brewster
Brewster (Zoning)
Bridgewater (Zoning)
Brookline
Burlington
Burlington (Zoning)
Cambridge
Canton
Canton (Zoning)
Carlisle
Carver
Carver (Zoning)
Charlton
Charlton (Zoning)
Chatham
Chelmsford
Chelsea
Chelsea (Zoning)
Chester (Zoning)
Chicopee
Chilmark
Clinton
Cohasset
Concord
Concord (Zoning)
Cummington
Cummington (Zoning)
Danvers
Dartmouth
Dartmouth (Wetland)
Dartmouth (Zoning)
Dedham
Deerfield
Dennis
Dighton
Douglas
Dover
Dudley
Dunstable
Dunstable (Zoning)
Duxbury
Eastham (Zoning)
Easton (Zoning)
Essex
Everett
Fairhaven (Zoning)
Fall River
Falmouth
Fitchburg
Foxborough (Zoning)
Framingham
Framingham (Zoning)
Franklin
Gardner (Zoning)
Gill
Gill (Zoning)
Georgetown
Gloucester
Gloucester (Zoning)
Goshen (Zoning)
Grafton (Zoning)
Great Barrington
Great Barrington (Zoning)
Greenfield (Zoning)
Groton

Hamilton (Zoning)
Hampden
Hampden (Zoning)
Hanover
Hanover (Zoning)
Hanson
Hanson (Zoning)
Harvard
Hatfield
Haverhill
Hingham
Holden
Holland
Holliston
Holyoke
Hopedale
Hopkinton
Hudson
Hull (Zoning)
Ipswich (Zoning)
Kingston
Kingston (Zoning)
Lancaster (Zoning)
Lanesborough (Zoning)
Lee (Zoning)
Lenox
Leominster
Lexington
Lincoln
Littleton
Longmeadow
Lowell (Zoning)
Ludlow
Ludlow (Zoning)
Lynnfield (Zoning)
Malden
Manchester-by-the Sea
Manchester-by-the-Sea (Zoning)
Marblehead
Marion
Marlborough (Zoning)
Marshfield
Mashpee
Mashpee (Zoning)
Mattapoisett
Maynard
Maynard (Zoning)
Medfield
Medford
Medway
Medway (Zoning)
Melrose
Mendon
Middleton
Milford (Zoning)
Millbury
Millbury (Zoning)
Millis
Millis (Zoning)
Millville
Milton (Zoning)
Monson (Zoning)
Montague (Zoning)
Nahant
Nantucket
Natick
Natick (Zoning)
Needham
New Bedford
New Bedford (Zoning)
New Marlborough
Newbury
Newbury (Zoning)
Newburyport
Newton
Norfolk
North Andover
North Andover (Zoning)
North Attleborough
North Reading (Zoning)
Northampton
Northborough
Northborough (Zoning)
Northbridge
Northbridge (Zoning)
Northfield
Norwell (Zoning)
Norwood
Norwood (Zoning)
Oak Bluffs (Zoning)
Orange
Orleans
Otis
Palmer
Palmer (Zoning)
Paxton
Peabody
Peabody (Zoning)
Pelham
Pepperell (Zoning)
Petersham
Phillipston
Phillipston (Zoning)
Pittsfield
Plymouth
Plympton
Plympton (Zoning)
Princeton
Princeton (Zoning)
Provincetown

Quincy
Randolph
Raynham (Zoning)
Reading
Rehoboth
Revere
Richmond
Rochester (Zoning)
Rockland
Rockport
Rockport (Zoning)
Rowley
Rowley (Zoning)
Royalston
Salem
Salisbury
Salisbury (Zoning)
Sandwich
Saugus
Scituate
Seekonk
Sharon
Sharon (Zoning)
Sheffield
Sheffield (Zoning)
Shelburne
Shelburne (Zoning)
Sherborn (Zoning)
Shirley (Zoning)
Shrewsbury
Shutesbury (Zoning)
Somerville
Southampton
Southborough
Southborough (Zoning)
Southbridge
Southwick
Spencer
Spencer (Zoning)
Springfield
Sterling
Sterling (Zoning)
Stockbridge
Stockbridge (Zoning)
Stoneham
Stow
Stow (Zoning)
Sturbridge
Sudbury
Sunderland (Zoning)
Sutton
Sutton (Zoning)
Swampscott
Taunton (Zoning)
Templeton
Tewksbury (Zoning)
Tisbury
Tisbury (Zoning)
Tolland
Topsfield
Topsfield (Zoning)
Townsend
Truro
Truro (Zoning)
Tyringham
Upton (Zoning)
Uxbridge
Walpole (Zoning)
Waltham
Wareham
Watertown (Zoning)
Wayland
Wellesley
Wellesley (Zoning)
Wellfleet
Wendell (Zoning)
West Boylston
West Newbury
West Springfield
West Springfield (Zoning)
West Tisbury (Zoning)
Westborough (Zoning)
Westfield
Westfield (Zoning)
Westford
Westminster
Weston
Westwood
Westwood (Zoning)
Weymouth
Wilbraham
Wilbraham (Zoning)
Williamsburg
Williamsburg (Zoning)
Williamstown
Wilmington
Wilmington (Zoning)
Winchendon
Winchester
Winthrop
Woburn
Worcester
Worthington
Wrentham (Zoning)
Yarmouth
Yarmouth (Zoning)


From Massachusetts Law Updates, produced by the Massachusetts Trial Court Libraries: Massachusetts Town and City Bylaws.

Disclaimers

New Law Liberalizes REIT Provisions

Last week, President Bush signed the Housing and Economic Recovery Act of 2008 [html] [pdf] into law. You have heard about all of the programs designed to stimulate the housing market and to deal with Fannie Mae and Freddie Mac. Summary of the “Housing and Economic Recovery Act of 2008" [.pdf] from the Senate Banking Committee.

The Act also contained some changes to the REIT limitations. From Goodwin Procter's Client Alert, New Law Liberalizes REIT Provisions [.pdf]:

The Act shortens the prohibited transactions safe harbor holding period from four years to two. Unless the safe harbor applies, a REIT is potentially subject to a tax equal to 100% of the net income derived from a prohibited transaction (i.e., a sale of property held primarily for sale to customers in the ordinary course of business, or “dealer property”). The prohibited transaction safe harbor used to apply to a sale of real property if, among other requirements, (i) the REIT held the property for at least four years for the production of rental income, and (ii) the aggregate expenditures made by the REIT during the four-year period preceding the date of sale that were includible in the basis of the property (i.e., capital expenditures) did not exceed 30% of the net selling price of the property. The Act shortens both the minimum holding period under the safe harbor and the period during which the limit on capital expenditures applies from four years to two. This provides REITs with significantly more flexibility to dispose of properties without risk of the 100% tax being imposed, provided the other requirements of the safe harbor are met.

An additional requirement for a sale to qualify for the prohibited transactions safe harbor was that the REIT must not have made more than seven sales of property during the applicable tax year, or, that the aggregate tax bases of the properties sold during the taxable year must not have exceeded 10% of the aggregate tax bases of all of the assets of the REIT as of the beginning of the taxable year. The Act changes the 10% limitation so that a REIT can measure its sales based on either tax basis or fair market value, at the REIT’s annual election. This change also applies to sales made on or after July 31, 2008, although IRS guidance will be required to implement this change for 2008.

The Act increases the REIT asset test limitation with respect to securities of taxable REIT subsidiaries from 20% to 25% of the REIT’s assets.

The Act extends the “related party rent” exception that permits leases between REITs and their TRSs for lodging facilities to qualify as “rents from real property” to cover healthcare facilities. Now, a TRS can rent a healthcare facility from its parent REIT without disqualifying the rents paid to the parent REIT for purposes of the 75% and 95% income tests, provided that the healthcare facility is managed and operated by an independent contractor and not the TRS itself.

The Act broadens the REIT income tests with respect to foreign currency exchange gain. Under existing IRS guidance, certain foreign currency gain was treated as qualified income in certain circumstances. Effective July 31, 2008, certain foreign currency gain attributable to real estate income, real estate assets or to certain indebtedness attributable to the REIT’s real estate assets is excluded from the 75% and 95% income tests, and other passive foreign currency gain is excluded from the 95% income test.


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