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ICSC #RECon16 – tBL “Let’s Get Social” Event

I hope to see you at ICSC RECon16 this year.

 

Please stop by The Broker List “Let’s Get Social” cocktail reception at Aria Sports Bar at 5:00 PM on Sunday, May 22, 2016. ICSC tBL Get SocialI would love to meet you and learn about your projects and what is going on in your part of the world.  Special thanks to dear friend Linda Day Harrison for organizing this event. You definitely need to meet Linda and support her team @theBrokerList!

 

The guest list is growing. This is a great opportunity to meet and greet industry leaders and to build vital business relationships. This is an OPEN EVENT. Tweet @theBrokerList to add your name to the attendance list so a name tag is waiting for you.

 

I am honored to attend, and hope you will too!

R. Kymn Harp Robbins, Salomon & Patt, Ltd.

R. Kymn Harp
Robbins, Salomon & Patt, Ltd.

RSP_LogoHD (3)

 

 

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Illinois Condominium Deconversion

RSP_LogoHD (3)Condominium deconversion is growing in popularity to enhance the value of busted condominium projects. It is not unusual for condominium projects that entered the market in the bubble years immediately before the Great Recession to have ended up as a “busted condo” project. This is a term commonly used to described condominium projects that failed when developers were unable to sell a substantial portion of the condominium units.

 

In many cases this resulted in development loans going into default and foreclosure, with bulk purchasers acquiring the developer’s units and renting them out as individual rental units.  Other times, the developers themselves were able to modify their development financing and continue to hold and rent the units themselves.

 

In either case, with residential apartment projects becoming a favored investment vehicle for some investors, finding a way to deconvert busted condo projects by terminating their status as “condominiums” and turning the whole project into a single-owner apartment project has come into favor.  This often results in a substantial increase in value to investors.

 

Section 16 of the Illinois Condominium Property Act 765 ILCS 605/16 provides the mechanism for removing a condominium project from the provisions of the act, a term colloquially referred to as “condominium deconversion”.

 

A principal challenge for condominium deconversion is that, by statute, condominium deconversion requires action by all the unit owners and the consent of the holders of all liens affecting any of the units.   765 ILCS 605/16.  In any sizable condominium project, this is a difficult hurdle to overcome.

 

Fortunately, for bulk-owners of a substantial percentage of condominium units, getting to 100% participation by all units owners is not as difficult as it may at first seem. Instead of trying to convince 100% of all unit owners to go along, or trying to purchase units from hold-out unit owners who may demand a substantial premium over the objective fair market value of their unit, there is another alternative. Bulk-owners of a substantial percentage of units may chose, instead, to undertake a two-step process to enable condominium deconversion in a much more efficient way.

 

Two-Step Process to Condominium Deconversion:

 

1.     The first step is to acquire a sufficient number of condominium units in the project to be able to implement the “forced-sale” provisions of Section 15 of the Condominium Property Act. 765 ILCS 605/15. Unless the condominium declaration or bylaws require a greater percentage (which they seldom do in residential condominium projects), this means acquiring or gaining control of only 75% of the condominium units. Since many bulk-owners already own a substantial percentage of units, and sometimes have access to additional units at bargain prices through short-sale purchases or otherwise, getting to the 75% ownership threshold may not be an insurmountable challenge.

 

Once a bulk-owner owns or controls 75% of the units (unless a greater number is required by the declaration or bylaws), the bulk-owner can vote at a meeting of unit owners called for such purpose, to sell the property as a whole.  Pursuant to Section 15, such action is binding on all unit owners, and it is thereafter the duty of all unit owners to execute and deliver such instruments and to perform all acts necessary to effect the sale; provided that a unit owner that did not vote to approve the sale has the right, for 20 days, to file a written objection. If this occurs, the objecting unit owner is still obligated to execute all documents and take all actions to effect the sale, but will be entitled to receive an amount equivalent to the value of the unit owner’s interest as determined by fair appraisal, less any unpaid assessments or charges due from such unit owner. 765 ILCS 605/15.

 

2.     Upon satisfaction of the 75% threshold for approval to convey the entire property, and conveyance of the entire property to a single identified buyer, that buyer alone – provided it has the consent of all lienholders (which, in theory should be only the buyer’s mortgagee), has the power to elect to remove the property from the provisions of the Illinois Condominium Property Act pursuant to Section 16 of Act. 765 ILCS 605/16 – a so-called condominium deconversion.

 

The forced sale provision in Section 15 of the Act establishes a mandatory legal duty for all unit owners to participate in the conveyance and execute all instruments and take all actions to accomplish the conveyance. Still, it may be reasonable to expect that some unit owners may resist – particularly if the unit is their home, and/or if the mortgage indebtedness encumbering the unit exceeds the fair market value of the unit.  In light of this practical risk, when proceeding with a condominium deconversion through forced sale, it makes sense to budget for litigation expenses, and – though not legally required – to establish a settlement reserve to fund settlement buyouts when doing so makes practical business sense.

 

Condominium deconversion and sale is growing in popularity as a substantial value-add proposition for many busted condominium projects.  It can be tricky at times, but in the right circumstance, sophisticated investors are finding the financial rewards worth the added effort.

 

Do not hesitate to contact me if I can be of assistance.

 

Thanks for listening!

Kymn

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NEW: ALTA Land Title Survey Standards

NEW ALTA LAND TITLE SURVEY STANDARDS effective February 23, 2016.

UPDATE:  Effective February 23, 2016, new minimum standard detail requirements for ALTA Land Title Surveys went into effect, replacing the previously existing 2011 Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys.

 

Note that the National Society of Professional Surveyors (NSPS) is the legal successor organization to the American Congress of Surveying and Mapping (ACSM). Accordingly, the new survey standards will be cited as the “2016 Minimum Standard Detail requirements for ALTA/NSPS Land Title Surveys.

 

Several substantive changes have been made in the updated 2016 land title survey standards. A comparison of the 2016 standards to the previous 2011 standards is highlighted on the Red-lined version (click here) showing the changes made. Among the notable changes are changes to the Table A list of Optional Survey Responsibilities and Specifications. The modifications to Table A are largely a result of the 2016 Land Title Survey standards making certain requirements mandatory instead of optional. Additional changes involve reassigned responsibilities (or at least a clarification of responsibilities) for obtaining certain information for use by surveyors in preparing a 2016 ALTA/NSPS Land Title Survey.

 

RSP_LogoHD (3)Update Purchase Agreements to Require Surveys compliant with NEW 2016 ALTA Land Title Survey Standards

 

Especially for commercial or industrial real estate purchase agreements (and financing commitments) requiring ALTA Surveys  prepared after February 23, 2016, be sure to contractually require that they be prepared in accordance the the 2016 Minimum Standard Detail requirements for ALTA/NSPS Land Title Surveys.  Be sure, also, to modify your existing contracts as they pertain to the Table A Optional Survey Responsibilities and Specifications to address the new Table A instead of the version associated with the former 2011 standards.

 

Purchasers should check with their lenders, and with the title insurance company engaged to insure title, to be certain everyone is on the same page, and that all parties understand their respective responsibilities for obtaining documents and information necessary for use by the Surveyor. Lenders and their counsel should do likewise.

 

2016 should be an interesting year for commercial real estate. Best of luck for a prosperous year!

 

Thanks,

Kymn

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COMMERCIAL LANDLORD-TENANT: Duty to Repair – Illinois Law

When something breaks in a commercial space, who is obligated to make the repair?

 

R. Kymn Harp Robbins, Salomon & Patt, Ltd.

R. Kymn Harp
Robbins, Salomon & Patt, Ltd.

Catherine Cooke Robbins, Salomon & Patt, Ltd.

Catherine Cooke
Robbins, Salomon & Patt, Ltd.

Absent a covenant in a lease obligating the landlord to make repairs, a landlord generally has no obligation to repair the leased premises, unless the landlord has actual knowledge of a defect at the time of entering into the lease and fraudulently conceals it. Baxter v. Illinois Police Federation, 63 Ill.App.3d 819, 380 N.E.2d 832, 835, 20 Ill.Dec. 623 (1st Dist. 1978); Elizondo v. Perez, 42 Ill.App.3d 313, 356 N.E.2d 112, 113, 1 Ill.Dec. 112 (1st Dist. 1976).

 

 

It is clear, however, that when a lease provides express covenants assigning responsibilities between landlord and tenant for repair and maintenance of leased property, those covenants will supersede any implied or common-law covenants and shall determine the responsibilities and liability of the respective parties. McGann v. Murray, 75 Ill.App.3d 697, 393 N.E.2d 1339, 1342, 31 Ill.Dec. 32 (3d Dist. 1979); Hardy v. Montgomery Ward & Co., 131 Ill.App.2d 1038, 267 N.E.2d 748, 751 (5th Dist. 1971). An express covenant to repair will not be enlarged by construction. Kaufman v. Shoe Corporation of America, 24 Ill.App.2d 431, 164 N.E.2d 617, 620 (3d Dist. 1960). The ordinary meaning of the word “repair” is to fix, mend, or put together that which is torn or broken. It involves the idea of something preexisting that has been affected by decay. Sandelman v. Buckeye Realty, Inc., 216 Ill.App.3d 226, 576 N.E.2d 1038, 1040, 160 Ill.Dec. 84 (1st Dist. 1991).

 

A general covenant of a tenant to keep the premises in repair merely binds the tenant to make only ordinary repairs reasonably required to keep the premises in good condition. Quincy Mall, Inc. v. Kerasotes Showplace Theatres, LLC, 388 Ill.App.3d 820, 903 N.E.2d 887, 230, 328 Ill.Dec. 227 (4th Dist. 2009); Sandelman, supra, 576 N.E.2d at 1040. It does not make the tenant responsible for making structural repairs. Kaufman, supra, 164 N.E.2d at 620; Expert Corp. v LaSalle National Bank, 145 Ill.App.3d 665, 496 N.E.2d 3, 5, 99 Ill.Dec. 657 (1st Dist. 1986); Mandelke v. International House of Pancakes, Inc., 131 Ill.App.3d 1076, 477 N.E.2d 9, 12, 87 Ill.Dec. 408 (1st Dist. 1985).

 

Alterations or additions of a structural or substantial nature that are made necessary by extraordinary or unforeseen future events not within the contemplation of the parties at the time of lease execution are ordinarily the responsibility of the landlord. Expert Corp., supra, 496 N.E.2d at 5. Likewise, renewals or replacements that would last a lifetime rather than maintain the condition of the premises are extraordinary repairs outside the scope of a tenant’s obligations under a general covenant of repair. Sandelman, supra, 576 N.E.2d at 1040; Schultz Bros. v. Osram Sylvania Products, Inc., No. 10 C 2995, 2011 WL 4585237 at *3 (N.D.Ill. Sept. 30, 2011). When a deficiency is so substantial and unforeseen that it would be unreasonable to expect the tenant to make repairs that basically benefit not the tenant but the landlord, those repairs may be deemed structural. Baxter, supra, 380 N.E.2d at 835.

 

In order to shift to the tenant the responsibility to make structural or extraordinary repairs to the leased premises, a lease must (more…)

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Keys to Closing A Commercial Real Estate Transaction

http://www.dreamstime.com/royalty-free-stock-photography-skeleton-keys-image28661257Commercial Real Estate Closings

Anyone who thinks closing a commercial real estate transaction is a clean, easy, stress-free undertaking has never closed a commercial real estate transaction. Expect the unexpected, and be prepared to deal with it.

I may not charm your socks off with industry gossip, sports-talk or movie quotes, but give me a complex commercial real estate deal to close and I’ll get it done.

I’ve been closing commercial real estate transactions for over 35 years. I grew up in the commercial real estate business.

My father was a “land guy”. He assembled land, put in infrastructure and sold it for a profit. His mantra: “Buy by the acre, sell by the square foot.”  From an early age, he drilled into my head the need to “be a deal maker; not a deal breaker.” This was always coupled with the admonition: “If the deal doesn’t close, no one is happy.” His theory was that attorneys sometimes “kill tough deals” simply because they don’t want to be blamed if something goes wrong.

A key point to understand is that commercial real estate Closings do not “just happen”; they are made to happen. There is a time-proven method for successfully Closing commercial real estate transactions. That method requires adherence to the four KEYS TO CLOSING outlined below: (more…)

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Illinois Commercial Condominiums – The Inactive Association Challenge

RESALE DISCLOSURE CHALLENGES – When the Commercial Condominium Association is “Inactive”

  • Section 18.3 of the Illinois Condominium Property Act provides that a unit owners’ association will be responsible for the overall administration of the property through its duly elected board of managers. 765 ILCS 605/18.3.
  • Section 19 of the Illinois Condominium Property Act sets forth a specific set of records that the board of managers of every association is required to maintain. 765 ILCS 605/19.
  • Section 22.1 of the Illinois Condominium Property Act provides that “in the event of any resale of a condominium unit by a unit owner other than the developer such owner shall obtain from the board of managers and shall make available for inspection to the prospective purchaser, upon demand . . .” a fairly comprehensive list of condominium instruments, and other documents and information, concerning the makeup and financial condition of the owners association, insurance coverage, litigation, reserves, assessments, and the like.  765 ILCS 605/22.1.

 

RSP_LogoHD (3)Remarkably, perhaps as an aftermath of the Great Recession during which resales of commercial condominiums were infrequent, it is not rare to find that the owners association for a commercial condominium has become inactive or only slightly active. Record keeping and budgeting may have become ‘streamlined”, addressing little more than collecting minimal assessments to pay insurance premiums on common elements. The owner’s association may have no formal budget, no capital reserves, extreme deferred maintenance, scant, if any, record of meetings of the board of managers, and no centralized or organized record keeping system beyond a box in a filing cabinet in the back-office of one of the unit owners.

 

Because of the infrequency of unit transfers in recent years, and the possible inexperience of a record-keeper who may have gotten the record-keeping job by default – when the last remaining board member left following foreclosure of his or her unit during the Great Recession – obtaining and providing the resale disclosure documents and information required by §22.1 can be a challenge.

 

This challenge presents practical problems for the unit seller, unit buyer and the unit buyer’s proposed mortgagee when attempting to resell a commercial condominium unit. Not the least of these problems is delay and frustration in moving toward closing – which may ultimately sour a prospective buyer and its lender, and lead the buyer to back away from acquiring the unit at all.

 

Deferred maintenance of common elements affecting any unit in the condominium association could have an adverse financial impact on all unit owners.  For example, if a commercial or industrial condominium association is comprised of multiple commercial/industrial buildings, a required roof replacement, foundation repair, or other structural repair for any of the buildings, or a recognized environmental condition in the common areas, could be expensive, with the cost shared among all unit owners. Accordingly, when investigating the condition of a commercial/industrial condominium unit being considered for acquisition, due diligence may require having all common elements in the association inspected, rather than merely looking at the unit being considered for acquisition. This may be more expensive and may take more time than might ordinarily be expected when purchasing a stand-alone building that is not a condominium unit.

 

PRACTICE TIP

Consider when drafting a purchase agreement under these circumstances, who should bear the cost of inspecting all common elements in the association? Ordinarily the cost of “due diligence” is a buyer’s expense. But if extraordinary inspections of association common elements beyond the specific unit being acquired is required in the exercise of due diligence because the selling unit owner did not demand that the owners’ association be operated by a board of managers in compliance with the Illinois Condominium Property Act, should the buyer bear this extraordinary expense, or should the seller?

 

There is no easy solution for this challenge, especially for a buyer planning to purchase a unit in one of these inactive associations. The best advice may be to become proactive – whether as an existing unit owner or upon becoming a new unit owner, to reactivate and invigorate the owners’ association and its board of managers, and to take steps to run the owners association in a businesslike manner, in compliance with the Illinois Condominium Property Act.

 

Generally speaking, owners of commercial condominiums are business people. They should demand that the association be run like they would run any business or investment property they invest in, if they expect to be successful.

 

If you have a viable solution to this challenge, please comment with your insights and practical suggestions.

 

Thank you in advance for participating in this discussion.

 

Kymn

 

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ICSC RECon2015 Takeaway: A Tale of Two Shows

A Tale of Two Shows

ICSC RECon2015 is done. While it was not a reflection of the best of times, nor of the worst of times, there was a distinct dichotomy between the Big Money Interests and the rest of the industry.

I spoke with a number of developers, brokers, attorneys, and intermediaries claiming to be active in the Big Money Interests side of our industry. The side made up of mega-REITS and CMBS financed power centers anchored by super-tenants such as Neiman Marcus, Macy’s, Bloomindale’s, Nordstrom’s and the like. The side claiming to be putting together billion dollar private equity funds to finance massive acquisitions and million square foot developments in hot urban and suburban markets around the country, using incomprehensible amounts of other people’s money. The side claiming there is a huge volume of untapped capital coming into the market and that, within a year or two, the commercial real estate market will be hotter than it was before the crash in 2008 and that the crash will be little more than a thankfully forgotten memory.

R. Kymn Harp Robbins, Salomon & Patt, Ltd.

R. Kymn Harp
Robbins, Salomon & Patt, Ltd.

I say they claim these things to be true only because I don’t know for sure whether what they are saying is what they are actually experiencing, or whether they are merely dreaming wistful dreams. What they describe is not my world. I represent the other guys.

I also spoke with a number of people working on much smaller projects. Projects typically in the $3 million to $20 million range, or less. Projects using the developer’s own money, and using financing obtained through local or regional banks. Projects where every dollar spent is a dollar that matters. This is my world. These are the people I represent.

For them, times are still challenging. To them, the focus is on reinventing or repositioning one or more existing properties or urban business centers, large or small, into projects that are profitable and sustainable. These are the value-add developers, the property turn-around specialists, or simply the savvy investors with a vision for a transformative urban or suburban project that may be the missing ingredient to energize a struggling community. These are the property owners focused on finding, attracting and retaining the right mix of retail or service tenants to serve the changing demographics and psychographics of an underserved area’s actual target market. These are the investors, developers and property owners who are doing what is necessary; doing what is affordable; or, perhaps, doing what they can, to fill that last 5% of their center so they can realize a profit. These are the investors, developers and property owners working with community leaders, thinking about the aggregate effect of their project and nearby projects on the local community, and how they can work together with municipal economic development staff, chambers of commerce, and area business leaders to create critical mass to transform an area challenged by insufficient retail, office, or residential options into a thriving business district to satisfy local needs, make a profit and enhance surrounding property values.

Thankfully, ICSC RECon2015 recognized this segment of our industry in a serious, meaningful, and helpful way. The offering of educational programs directed to people working in this space was spectacular. The speakers were knowledgeable, creative and informative. I applaud the ICSC program planners for recognizing that this is a vital segment of our industry that is oftentimes overlooked in favor of the Big Money Interests.

The commercial real estate industry as a whole is remarkably diverse and decentralized. The small to medium sized investors, developers, and owners-operators who make up the bulk of the commercial real estate industry need our help. They need our expertise. They need local community and industry involvement. They need sophisticated, yet cost-conscious services that provide genuine value to help them and our communities succeed.

Special thanks to ICSC for doing its part to serve this segment of the commercial real estate industry.

Thanks for listening.
Kymn

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COOL PROJECTS – Real Estate

COOL PROJECTS
Real Estate Projects I Love to Work On.

I love cool real estate projects. Cool projects are why I became a lawyer. Cool projects are why I come to the office each day. Cool real estate projects are why I did not become an astrophysicist (well, one reason – although, that might have been cool too). Cool projects are the reason I live, smile, dance, breath, scour the earth for new deals, jump for joy.

And by “cool”, I don’t mean in a thermal sense – but rather in a “this project is so cool” sense. I am referring to real estate projects that are awesome. Real estate projects that are fun. Real estate projects that make you say “Wow – what a cool project!

R. Kymn Harp Robbins, Salomon & Patt, Ltd.

R. Kymn Harp
Robbins, Salomon & Patt, Ltd.

Cool projects don’t need to be costly projects in major urban centers – although those can be cool too. I’m talking about projects that are creative. Projects that require vision and imagination. Projects that take something mundane and turn it into something special.

Some people think I only like huge projects. To be honest, I do like huge projects, but largely because the huge projects I have worked on also happened to be cool projects.

Redevelopment of the commercial portions of Marina City in downtown Chicago was a cool project. Ground-up development of Sears Centre Arena in Hoffman Estates, Illinois was a cool project. Work on various mixed-use projects around the Midwest and upstate New York have been cool projects. But so has been the much smaller development of an 8,000 square foot microbrewery in the historic Motor Row District of Chicago using TIF financing; development of countless restaurant and entertainment venues throughout the Midwest; conversion of a multi-story industrial building into a high-tech office center; conversion of an outdated office building into a stylish, luxury hotel; adaptive reuse of outdated retail strip centers, bank buildings, city and suburban office buildings, bowling alleys, warehouses, industrial buildings, gas stations, and various small to medium sized special purpose buildings into modern, fully functional jewels – reinvented to provide much needed retail and service amenities for local neighborhoods and communities. It is not the size of the project that makes it cool – or the cost – it is the concept, imagination and creative challenge involved that makes the difference. At least for me.

Cool Projects Test

Here’s a test [call it the “Cool Projects Test”, if you will]:

Which of the following projects is more likely to end up on Kymn Harp’s list of cool projects? (more…)

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“SMALL DEAL” DUE DILIGENCE

A misconception abounds in commercial real estate. I am partly to blame. I didn’t mean to add to this false belief, but I recognize that I have.

RSP_LogoHD (3)While writing articles and presenting seminars on due diligence for commercial real estate transactions, my colleagues and I who focus on due diligence as a topic of continuing education tend to overstate the case as it applies to any single transaction. We tend to make our hypothetical project or transaction so complex and so filled with due diligence potholes that we can sometimes obscure what really happens in most commercial real estate transactions. Our audience – whether they be readers or live seminar attendees – can understandably find their eyes glazing over and may conclude that the scenario being addressed has no connection to their life or their deals. They have never seen a project or transaction so convoluted or complex, and don’t expect that they ever will.

In truth – no one does. In practice, commercial real estate due diligence is not that hard. It is not that complex. It need not be that expensive.

I have been asked to discuss “small deal due diligence”. I generally try to avoid using the term “small deal” when describing commercial real estate projects or transactions, because to our clients no deal is small when it involves their money or business. To some, (more…)

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DUE DILIGENCE CHECKLISTS for Commercial Real Estate Transactions

R. Kymn Harp Robbins, Salomon & Patt, Ltd.

R. Kymn Harp
Robbins, Salomon & Patt, Ltd.

 2016 Update:

Are you planning to purchase, finance, develop or redevelop any of the following types of commercial real estate in the USA?

  • Shopping Center
  • Office building
  • Large Multifamily/Apartments/Condominium Project
  • Sports and/or Entertainment Venue
  • Mixed-Use Commercial-Residential-Office
  • Parking Lot/Parking Garage
  • Retail Store
  • Lifestyle or Enclosed Mall
  • Restaurant/Banquet Facility
  • Intermodal logistics/distribution facility
  • Medical Building
  • Gas Station
  • Manufacturing facility
  • Pharmacy
  • Special Use facility
  • Air Rights parcel
  • Subterranean parcel
  • Infrastructure improvements
  • Other commercial (non-single family, non-farm) property

RSP_LogoHD (3)A KEY element of successfully investing in commercial real estate is performing an adequate Due Diligence Investigation prior to becoming legally bound to acquire or finance the property.  Conducting a Due Diligence Investigation is important not just to enable you to walk away from the transaction, if necessary, but even more importantly to enable you to discover obstacles and opportunities presented by the property that can be addressed prior to closing, to enable the transaction to proceed in a manner most beneficial to your overall objective. An adequate Due Diligence Investigation will assure awareness of all material facts relevant to the intended use or disposition of the property after closing. This is a critical point. The ultimate objective is not just to get to Closing – but rather to confirm that the property can be used or developed as intended after Closing.

The following checklists – while not all-inclusive – will help you conduct a focused and meaningful Due Diligence Investigation. (more…)

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