312-782-9000

ALLIANCE OF MERGER & ACQUISITION ADVISORS – Summer Conference

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

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

I am pleased to be attending the Alliance of Merger & Acquisition Advisors Summer Conference in Chicago, IL this week.  It looks to be an informative conference providing insights on middle market business opportunities. If you are attending, please contact me through LinkedIn or via rkharp@rsplaw.com.  I look forward to seeing you.

AM&AA Summer Conference

AM&AA Summer Conference

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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.

 2015 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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COMMERCIAL LANDLORD-TENANT – Part 2 – The Covenant of Quiet Enjoyment

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

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

Catherine Cook Shareholder at Robbins, Salomon & Patt, Ltd.

Catherine A. Cooke
 Robbins, Salomon & Patt, Ltd.

This is Part 2 of a multi-part series of articles discussing the duties, rights and remedies of commercial real estate tenants in Illinois. Part 1, entitled “Getting It Right” discussed the importance of clarity in lease drafting, and the potential for unintended leasehold easements for parking, and other uses.

In March 2015, the Illinois Institute for Continuing Legal Education (“IICLE”) published its 2015 Edition practice handbook entitled: Commercial Landlord-Tenant Practice. To provide best-practice guidance to all Illinois attorneys, IICLE recruits experienced attorneys with relevant knowledge to write each handbook chapter. For the 2015 Edition, IICLE asked R. Kymn Harp and Catherine A. Cooke to write the chapter entitled Tenant’s Duties, Rights and Remedies. We were, of course, pleased to oblige. Although each of us represent commercial landlords at least as often as we represent commercial tenants, a clear understanding of the duties, rights and remedies of commercial real estate tenants is critical when representing either side of the commercial lease transaction.

The following is an excerpt (slightly edited) from our chapter in the 2015 Edition. We hope you find this excerpt, and the excerpts that will follow, informative and useful. Feel free to contact IICLE  directly to purchase the entire volume.

The COVENANT OF QUIET ENJOYMENT
What Is It? — General Principles

It has long been the law in Illinois that a covenant of quite enjoyment is implied in all lease agreements. Blue Cross Ass’n v. 666 N. Lake Shore Drive Associates, 100 Ill.App.3d 647, 427 N.E.2d 270, 273, 56 Ill.Dec. 290 (1st Dist. 1981); 64 East Walton, Inc. v. Chicago Title & Trust Co., 69 Ill.App.3d 635, 387 N.E.2d 751, 755, 25 Ill.Dec. 875 (1st Dist. 1979); Berrington v. Casey, 78 Ill. 317, 319 (1875); Wade v. Halligan, 16 Ill. 507, 511 (1855).

A covenant of quiet enjoyment “promises that the tenant shall enjoy the possession of the premises in peace and without disturbance.” [Emphasis in original.] Checkers, Simon & Rosner v. Lurie Co., No. 87 C 5405, 1987 WL 18930 at *3 (N.D.Ill. Oct. 20, 1987). This does not mean, however, that no breach of the covenant of quiet enjoyment may be found in a leasehold without a finding that the lessor intended to deprive the lessee of possession. Blue Cross Ass’n, supra, 427 N.E.2d at 27. It simply means that a tenant must actually be in possession of the premises to claim a breach of the covenant of quiet enjoyment. If the tenant has already vacated the premises before the disturbance has commenced, no breach of the covenant of quiet enjoyment occurs. Checkers, Simon & Rosner, supra, 1987 WL 18930 at *3.

RSP_LogoHD (3)An implied covenant of quiet enjoyment includes, “absent a lease clause to the contrary, the right to be free of the lessors’ intentional interference with full enjoyment and use of the leased premises.” Infinity Broadcasting Corporation of Illinois v. Prudential Insurance Company of America, No. 86 C 4207, 1987 WL 6624 at *5 (N.D.Ill. Feb. 9, 1987), aff’d, 869 F.2d 1073 (7th Cir. 1989), quoting American Dairy Queen Corp. v. Brown-Port Co., 621 F.2d 255, 258 (7th Cir. 1980).

If the landlord breaches the covenant of quiet enjoyment, the lessee may remain in possession and claim damages for breach of lease. In such case, the measure of damages is the difference between the rental value of the premises in light of the breached covenant of quiet enjoyment and the rent that the tenant agreed to pay under the lease, together with such special damages as may have been directly and necessarily incurred by the tenant in consequence of the landlord’s wrongful act. 64 East Walton, supra, 387 N.E.2d at 755.

Although Illinois cases defining the precise scope of a covenant of quiet enjoyment are rare, BLACK’S LAW DICTIONARY, pp. 1248 – 1249 (6th ed. 1993) defines “quiet enjoyment” in connection with the landlord-tenant relationship as “the tenant’s right to freedom from serious interferences with his or her tenancy. Manzaro v. McCann, 401 Mass. 880, 519 N.E.2d 1337, 1341. (Ringing for more than one day of smoke alarms in an apartment building could be sufficient interference with the tenants’ quite enjoyment of leased premises to justify relief against the landlord.).”

HOW THE COVENANT OF QUIET ENJOYMENT MAY APPLY— CASE LAW

In Blue Cross Ass’n v. 666 N. Lake Shore Drive Associates, 100 Ill.App.3d 647, 427 N.E.2d 270, 273, 56 Ill.Dec. 290 (1st Dist. 1981), the First District Appellate Court discussed the covenant of quiet enjoyment in the lease as granting the tenant a right of quiet and peaceful possession and enjoyment of the whole premises and equated a breach of quiet enjoyment under a lease to a private nuisance. “A private nuisance in a leasehold situation is ‘an individual wrong arising from an unreasonable, unwarranted or unlawful use of one’s property producing such material annoyance, inconvenience, discomfort, or hurt that the law will presume a consequent damage.’ ” Id., quoting Great Atlantic & Pacific Tea Co. v. LaSalle National Bank, 77 Ill.App.3d 478, 395 N.E.2d 1193, 1198, 32 Ill.Dec. 812 (1st Dist. 1979).

The tenant had entered into a five-year lease on August 22, 1978, with a five-year renewal option, for approximately 53,000 square feet of the (more…)

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Commercial Landlord-Tenant Issues – PART 1 – Getting it Right

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

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

Catherine Cook Shareholder at Robbins, Salomon & Patt, Ltd.

Catherine Cooke
 Robbins, Salomon & Patt, Ltd.

In March 2015, the Illinois Institute for Continuing Legal Education (“IICLE”) published its 2015 Edition practice handbook entitled:  Commercial Landlord-Tenant Practice. To provide best-practice guidance to all Illinois attorneys, IICLE recruits experienced attorneys with relevant knowledge to write each handbook chapter. For the current edition, IICLE asked R. Kymn Harp and Catherine Cooke of Robbins, Salomon & Patt, Ltd., Chicago, Illinois, to write the chapter entitled Tenant’s Duties, Rights and Remedies. We were, of course, pleased to oblige. Although each of us represent commercial landlords at least as often as we represent commercial tenants, a clear understanding of the duties, rights and remedies of commercial real estate tenants is critical when representing either side of the commercial lease transaction.

The following is an excerpt (slightly edited) from our chapter, Tenant’s Duties, Rights and Remedies appearing in the 2015 Edition of IICLE Commercial Landlord-Tenant Practice. We hope you find this excerpt, and the excerpts that will follow, informative and useful. Feel free to contact IICLE directly to purchase the entire volume.

How Commercial Lease Issues Commonly Arise – Getting it Right

Commercial real estate leases, like virtually all documents and agreements relating to commercial real estate transactions and interests, are, to a very large extent, consistent only in their variety. In commercial real estate practice, there are few, if any, “standard form” documents or agreements. To be sure, there are provisions in commercial real estate leases that any experienced practitioner would expect to see, and there are some generally applicable legal concepts that apply, but the variety of issues that may arise — and the language used in each commercial lease — will directly and materially impact the “duties, rights, and remedies” of a tenant under any commercial lease.

The best answer to most questions about what are the rights, duties, and remedies of a tenant under a commercial real estate lease is “It depends.” What does it depend on? It depends primarily on what the parties to the lease — the landlord and tenant — intended, as (presumably) reflected by the express terms and conditions of the lease. However, two common challenges frequently exist, and they apply equally to commercial tenants and commercial landlords. They are (a) poorly written lease provisions that do not clearly and definitively set forth the intention of the landlord and tenant in a way that cannot reasonably be misunderstood and (b) inclusion of perceived “standard boilerplate” provisions in a lease without fully understanding their legal or practical affect on the leased premises, the parties, and the greater project of which the leased premises may be a part. When the intent of the parties is not abundantly clear, a court may find the answer implied by the facts and circumstances.

GENERAL LEASE PRINCIPLES AND RULES OF CONSTRUCTION

A “lease” is generally described as a contract for exclusive possession of land and improvements for a term of years or other duration, usually for a specified rent or other compensation. Urban Investment & Development Co. v. Maurice L. Rothschild & Co., 25 Ill.App.3d 546, 323 N.E.2d 588, 592 (1st Dist. 1975); Feeley v. Michigan Avenue National Bank, 141 Ill.App.3d 187, 490 N.E.2d 15, 18, 141 Ill.Dec. 187 (1st Dist. 1986).

In determining the duties, rights, and remedies of a tenant under a commercial lease in Illinois, the general rules of contract construction will apply. Walgreen Co. v. American National Bank & Trust Company of Chicago, 4 Ill.App.3d 549, 281 N.E.2d 462, 465 (1st Dist. 1972); Feeley, supra, 490 N.E.2d at 18; Chicago Title & Trust Co. v. Southland Corp., 111 Ill.App.3d 67, 443 N.E.2d 294, 297, 66 Ill.Dec. 611 (1st Dist. 1982). Interpretation of a lease is a question of law when the terms are plain and unambiguous. Madigan Bros. v. Melrose Shopping Center Co., 123 Ill.App.3d 851, 463 N.E.2d 824, 828, 79 Ill.Dec. 270 (1st Dist. 1984).

“An ambiguous contract is one capable of being understood in more senses than one; an agreement obscure in meaning, through indefiniteness of expression, or having a double meaning.” Advertising Checking Bureau, Inc. v. Canal-Randolph Associates, 101 Ill.App.3d 140, 427 N.E.2d 1039, 1042, 56 Ill.Dec. 634 (1st Dist. 1991), quoting First National Bank of Chicago v. Victor Comptometer Corp., 123 Ill.App.2d 335, 260 N.E.2d 99, 102 (1st Dist. 1970). However, the mere fact that the parties to a lease “dispute” the meaning of a lease provision and assign conflicting interpretations does not render the provision “ambiguous.” McGann v. Murry, 75 Ill.App.3d 697, 393 N.E.2d 1339, 1342 – 1343, 31 Ill.Dec. 32 (3d Dist. 1979); St. George Chicago, Inc. v. George J. Murges & Associates, Ltd., 296 Ill.App.3d 285, 695 N.E.2d 503, 506 – 507, 230 Ill.Dec. 1013 (1st Dist. 1998); Ford v. Dovenmuehle Mortgage, Inc., 273 Ill.App.3d 240, 651 N.E.2d 751, 745 – 755, 209 Ill.Dec. 573 (1st Dist. 1995). Whether ambiguity exists is a question of law for the court. Advertising Checking Bureau, supra, 427 N.E.2d at 1042; Pioneer Trust & Savings Bank v. Lucky Stores, Inc., 91 Ill.App.3d 573, 414 N.E.2d 1152, 1154, 47 Ill.Dec. 36 (1st Dist. 1980).

It is well-settled in Illinois that, when construing a written lease, the court must give words their commonly accepted meaning and must construe every part with reference to all other portions of the lease “so that every part may stand, if possible, and no part of it, either in words or sentences, shall be regarded as superfluous or void if it can be prevented.” Kokenes v. Cities Service Oil Co., 24 Ill.App.3d 483, 321 N.E.2d 338, 340 (1st Dist. 1974), quoting Szulerecki v. Oppenheimer, 283 Ill. 525, 119 N.E. 643, 646 (1918). See also Southland, supra, 443 N.E.2d at 297.

In construing a lease, the instrument is to be considered as a whole and the primary object is to derive the intent of the parties. However, a contract must be enforced as written, and when the terms of a lease are clear and unambiguous, they will be given their natural and ordinary meaning. Gerardi v. Vaal, 169 Ill.App.3d 818, 523 N.E.2d 1327, 1331, 120 Ill.Dec. 416 (3d Dist. 1988).

The foregoing sounds pretty straightforward, but unless attorneys and their clients draft leases with a comprehensive understanding of the interplay between particularly drafted provisions and every other part of the lease — including so-called “standard boilerplate” provisions — they may find themselves surprised by what they have “agreed to.”

PRACTICE POINTER

 Drafting a commercial real estate lease is similar to drafting any other commercial document, except that the meaning and intent of contractual lease provisions are colored by an extensive body of underlying real property law that has developed over the centuries.

A commercial real estate lease should say what the parties mean and mean what it says. Words have meaning; phrases have meaning; each provision has meaning. The interplay of words, phrases, and all provisions in a lease will help determine the meaning of each other word, phrase, or provision. See Kokenes, supra, 321 N.E.2d at 340; Szulerecki, supra, 119 N.E. at 646.

PRACTICE POINTER

 Be sure the words and phrases you use mean what your client believes they mean before proceeding.

 If there are provisions of a commercial real estate lease you do not fully understand — including provisions you believe are “standard boilerplate” provisions — you need to learn what they mean and how they affect other parts of the lease, and your client’s rights, duties and remedies, before advising your client to proceed.

The following discussion highlights some areas in which the rights, duties, and remedies of the commercial real estate tenant (and, by mirror image, the landlord) appear not to have been what one or the other party thought they were. (more…)

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Illinois LLCs – The Asset Protection Advantage

Illinois LLCs – The Asset Protection Advantage

A Technical Analysis

Among sophisticated investors and other high-asset/high-net worth individuals and businesses, the topic of “asset protection” is bound to arise. As many became painfully aware during the recent Great Recession, bad things can happen to good people. In my article Asset Protection – Lessons Learned, I discussed how properly structuring one’s holdings could have prevented, or at least mitigated, much of the financial devastation and anguish experienced by business owners, investors, real estate developers, doctors and others caught off-guard by the drastic economic collapse of 2007-2010.

RSP_LogoFull_2PMSOften, there is confusion about what the term asset protection really means. Some imagine a shadowy network of off-shore trusts and secret bank accounts in foreign lands set up by unscrupulous characters to cheat innocent creditors. This is simply not true. In this article I will not debate the claimed pros and cons of secret bank accounts and so-called off-shore asset protection trusts. I will say, however, that under most circumstances, they don’t work for U.S. citizens residing in the U.S.A.

Legitimate asset protection is nothing more or less than properly ordering one’s business and financial affairs in a way that does not unnecessarily expose all assets to claims of creditors.

The right of persons and businesses to limit their liability and exposure of their assets to claims of creditors is the well settled in the U.S.A. The United States of America, and each individual state, has a plethora of laws authorizing and recognizing the legitimacy of corporations and other limited liability entities as a means by which an investor can segregate assets and limit exposure to liability.

No person has a legal or moral obligation to structure his or her affairs in a way that makes it easy for a creditor of one business or professional enterprise to attach assets of the investor not committed to that enterprise. This protection may be impinged if the person or business engages in conduct tantamount to fraud, but actions explicitly authorized by applicable statute can hardly be characterized as being fraudulent. Fraud is an intentional tort requiring, among other elements, intentional breach of a duty owed to the person claimed to be harmed. If a statute expressly authorizes conduct, it implicitly, if not explicitly, negates any duty to act in a manner contrary to that authorized by the statute.

This article presents a technical analysis of certain asset protection attributes of an Illinois limited liability company expressly authorized by the Illinois Limited Liability Company Act, 805 ILCS 180/1-1 et seq (the “Illinois LLC Act”). The remarkably robust asset protection value of an Illinois limited liability company is measured by two key attributes:

1. The ability, expressly authorized by the Illinois LLC Act, to include in an LLC operating agreement provisions that protect the limited liability company and its business and assets from claims owed to others by members of the LLC – an attribute that creates a huge advantage vs. a corporation, as discussed in Part I, below; and

2. Enhanced protection of Members and Managers from liability for debts, contracts and torts incurred by the LLC, or resulting from acts or omissions of a Member or Manager while acting on behalf of the LLC, to an extent measurably greater than the protection afforded officers, directors and shareholders of a corporation.

Although one might reasonably expect that the order in which these key attributes are discussed would be reversed, the Part I discussion precedes the Part II discussion because the matters to be discussed in Part I are best considered at the outset, when the operating agreement is being drafted; while the matters discussed in Part II will most directly apply later, once a judgment creditor is seeking to enforce its judgment.

PART I: Key Statutory Provisions to Consider When Drafting the Operating Agreement

(more…)

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POP QUIZ! — Commercial Real Estate Due Diligence

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

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

I read once that if you took all the lawyers in the world and laid them end to end along the equator — it would be a good idea to leave them there.

That’s what I read. What do you suppose that means?

I have written before about the need to exercise due diligence when purchasing commercial real estate. The need to investigate, before Closing, every significant aspect of the property you are acquiring. The importance of evaluating each commercial real estate transaction with a mindset that once the Closing occurs, there is no going back. The Seller has your money and is gone. If post-Closing problems arise, Seller’s contract representations and warranties will, at best, mean expensive litigation. CAVEAT EMPTOR! [“Let the buyer beware!”]

Paying extra attention at the beginning of a commercial real estate transaction to “get it right” can save tens of thousands of dollars versus when a deal goes bad. It’s like the old Fram® oil filter slogan during the 1970’s: “You can pay me now – or pay me later”. In commercial real estate, however, “later” may be too late.

Buying commercial real estate is NOT like buying a home. It is not. It is not. It is NOT.

In Illinois, and many other states, virtually every residential real estate closing requires a lawyer for the buyer and a lawyer for the seller. This is probably smart. It is good consumer protection.

The “problem” this causes, however, is that every lawyer handling residential real estate transactions considers himself or herself a “real estate lawyer”, capable of handling any real estate transaction that may arise.

We learned in law school that there are only two kinds of property: real estate and personal property. Therefore – we intuit – if we are competent to handle a residential real estate closing, we must be competent to handle a commercial real estate closing. They are each “real estate”, right?

ANSWER: Yes, they are each real estate. No, they are not the same.

The legal issues and risks in a commercial real estate transaction are remarkably different from the legal issues and risks in a residential real estate transaction. Most are not even remotely similar. Attorneys concentrating their practice handling residential real estate closings do not face the same issues as attorneys concentrating their practice in commercial real estate.

It is a matter of experience. You either know the issues and risks inherent in commercial real estate transactions – and know how to deal with them – or you don’t.

A key point to remember is that the myriad consumer protection laws that protect residential home buyers have no application to – and provide no protection for – buyers of commercial real estate.

Competent commercial real estate practice requires focused and concentrated investigation of all issues material to the transaction by someone who knows what they are looking for. In short, it requires the experienced exercise of due diligence.

I admit – the exercise of due diligence is not cheap, but the failure to exercise due diligence can create a financial disaster for the commercial real estate investor. Don’t be “penny wise and pound foolish”. If you are buying a home, hire an attorney who regularly represents home buyers. If you are buying commercial real estate, hire an attorney who regularly represents commercial real estate buyers.

Years ago I stopped handling residential real estate transactions. As an active commercial real estate attorney, even I hire residential real estate counsel for my own home purchases. I do that because residential real estate practice is fundamentally different from commercial real estate.

Maybe I do harp on the need for competent counsel experienced in commercial real estate transactions. I genuinely believe it. I believe it is essential. I believe if you are going to invest in commercial real estate, you must apply your critical thinking skills and be smart.

RSP_LogoHD (3)

POP QUIZ:

Here’s a simple test of YOUR critical thinking skills:

Please read the following Scenarios and answer the questions TRUE or FALSE: (more…)

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STRATEGIES FOR ASSESSING COMMERCIAL TENANT CREDIT

David Resnick, Attorney Robbins, Salomon & Patt, Ltd.

David Resnick, Attorney
Robbins, Salomon & Patt, Ltd.

GUEST BLOG BY DAVID RESNICK of ROBBINS, SALOMON & PATT, LTD.

When considering a lease, tenants are usually focused on the location, size and quality of the leased space, and perform some minimal diligence on the landlord and property manager to ensure fair treatment over the course of the term. Landlords have a more difficult task,however. A prospective tenant, and most importantly, that tenant’s ability to pay rent, is often unknown to the landlord. In recent years, real estate professionals have witnessed expansion in the array of users of commercial space and at the same time, property owners have been compelled to seek out new types of tenants. Increasing numbers of start-ups and new ventures are seeking to lease space, many of which are backed by various types of equity financing. As a result of these changes, landlords should be particularly vigilant in understanding how their tenants make money, as well as the financial identities of the parties backstopping the obligations of those tenants.

Analyze Tenant Credit

Landlords should always analyze tenant credit in the context of the lease. After all, the success of leased real estate, as well as the property owner’s ability to borrow against that asset, is dependent upon the stability of its tenants. While rent is the primary economic factor in any lease transaction, other factors such as term (including rights of extension), area of the premises (including rights of expansion and rights of first refusal on additional space) and the scope of tenant improvements create the platform upon which a tenant’s credit can be evaluated. For example, substantial build-out (regardless of who pays for it) that may inhibit the re-letting the space following a default. Therefore, landlords should be mindful of the tenant’s capacity to pay its construction obligations, which capacity is usually encapsulated in the tenant’s credit and litigation history.

A proper underwriting of a tenant’s credit requires a thorough understanding of that tenant’s business. A prudent landlord will pay attention not only to the tenant’s sources of revenue, but to the market upon which the tenant relies and the business plan upon which the tenant charts its future success. What are the contours of the business model? Is the revenue sustainable? What is the plan for future growth? Has the tenant gone through restructuring or been forced to lay off personnel? Landlords can avoid doing business with troubled or unstable tenants by performing background, lien and litigation searches on the tenant parties as part of the underwriting process. This kind of diligence can usually be completed in a short time-frame at a reasonable cost, and may save substantial time and money if the landlord is forced to evict a tenant it should have known to be at increased risk of default.

Technology has given rise to new products which enhance the process of underwriting tenant credit. For example, the Chicago firm (RE)Meter has created the first “credit score” for commercial tenants, which captures and synthesizes proposed lease transaction terms and basic tenant financial information with exclusive data maintained by a number of federal agencies, including the U.S. Census Bureau, the Department of Labor and the Internal Revenue Service ((RE)Meter is the first firm to access IRS information in this context). The end product, called the TIL Report, can be completed in a mere 15 minutes and offers landlords a sector- and market-specific analysis of its prospective tenants, reflecting a number of detailed metrics including growth trends, profitability and rent per employee. Innovations like these have altered the landscape of tenant underwriting and will enable landlords to make more prudent decisions when marketing space and assessing the risk of potential tenants.

Tenant Credit Enhancements

Conventionally, several mechanisms exist to enhance the credit of a prospective tenant who fails on its own to meet the underwriting criteria of the landlord. The first and foremost of these is the security deposit, which is posted by the tenant in the form of cash or letter of credit and held by the landlord for all or part of the duration of the lease. The deposit may be applied by the landlord towards unpaid amounts payable under the lease like rent, proportionate common area expenses or taxes, or reimbursement of amounts expended to repair damage to the premises. A stronger credit tenant may receive the benefit of a return of all or part of the deposit held by landlord over time, provided the tenant has not defaulted.

Security Deposits

While cash security deposits have historically been the industry standard in commercial leasing, landlords are increasingly requiring letter of credit security deposits instead. For many landlords, the benefits of cash on hand are overshadowed by the security of an obligation issued by a third-party bank, particularly when the landlord is able to draw on the letter of credit following a default without notice to or consent by the tenant. Letters of credit also may bear advantages to the landlord following a bankruptcy by the tenant, as the obligation of the issuing bank to pay on the letter of credit is independent of the tenant’s obligations under the lease. However, some courts have found that letter of credit security deposits are part of the tenant’s bankruptcy estate and thus subject to the cap on a landlord’s claim for damages under Section 502(b)(6) of the United States Bankruptcy Code.

Lease Guaranties

Guaranties are a common alternative for securing the credit of a commercial tenant. In the context of commercial leasing, a guaranty is a legally enforceable undertaking by a third party to fulfill the payment or performance obligations of the tenant under a lease. A guaranty may be given by an entity, such as a corporate parent or affiliate, or an individual, such as a majority owner or other key principal of the tenant. To most effectively backstop the credit of the tenant, a guaranty should be a guaranty of payment as opposed to a guaranty of performance. This distinction ensures that the landlord will not be forced to exhaust its remedies against the tenant before pursuing enforcement of the guaranty. Rather, the landlord may pursue the tenant and guarantor simultaneously for unpaid amounts under the lease.

Once a landlord has determined that it will require a guaranty to secure the tenant’s obligations under the lease, what should the landlord look for in evaluating potential guarantors? The most straightforward factor, notwithstanding whether the proposed guarantor is an individual or an entity, is cash on hand and other liquid assets. In satisfaction of the landlord’s inquiry, an guarantors may produce income tax returns, bank statements, financial statements, balance sheets or other evidence of personal holdings. The review process for publicly traded companies is simplified in that pertinent financial information is publicly available. Of course, testing for liquidity has its flaws. There exists no iron-clad protection against fraud, and disclosures only present a snapshot of a party’s credit at the time of the test as opposed to a forecast of future liquidity and stability. A review of tenant and guarantor financial information, as well as credit reports for collections, pledging of material assets or opening of new lines of credit, should be performed at regular intervals throughout the term of the lease.

Financial Disclosure Challenges

Financial disclosures may be problematic or some privately-held concerns. Particularly in the modern era of start-up firms financed by venture capital and private equity interests, tenants and proposed guarantors may be limited by investor confidentiality. With this in mind, parties to a lease should clarify in the lease or guaranty the form of any future disclosures to be made. Tenants and guarantors may resist delivering full-fledged audited financial statements in favor of reduced balance sheets or nominal form of profit and loss statement. Depending on the profile of the market and building, landlords may be willing to accept less than full disclosure if the statements deliver a reasonable picture of the financial health of the party delivering them.

Tenant Stability and Performance Incentives

As lease term and the disclosure provisions are negotiated, tenants may push the landlord for a variety of concessions that effectively incentivize and reward tenant stability. Perhaps the most common examples of this request are limitations on the security deposit, pledged assets or the liability under or the term of the guaranty. Limitations like these can take a variety of forms, from a fixed term to a cap on the guarantor’s liability based upon a fixed dollar-figure or factor of rent payable under the lease, to an automatic reduction of either the security deposit or the cap on the guarantor’s liability over time. In each instance, the landlord should be cognizant of the hurdles the tenant party must overcome to receive the benefit of these limitations, none more important than the uninterrupted timely payment of rent without default.

Tenant Credit is a Key to Successful Lease Performance

In light of the crises our industry has withstood in recent years, a landlord’s exuberance in welcoming new tenants is understandable. But in the current era of increasing economic growth, landlords should adopt a cautious approach in understanding and monitoring the business of their tenants. No landlord can predict with certainty the success or failure of its tenants; however, perhaps now more than ever, a thorough and complete examination of tenant credit is essential to the financial success of any leased real estate.

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