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<title>business – HARP – On This. . .</title>
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<description>A Commercial Real Estate and Business Thought-board</description>
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<title>COOL PROJECTS – A Love Affair Revisited</title>
<link>http://harp-onthis.com/cool-projects-real-estate/</link>
<comments>http://harp-onthis.com/cool-projects-real-estate/#respond</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Wed, 19 May 2021 22:28:00 +0000</pubDate>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[Business]]></category>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[adaptive reuse]]></category>
<category><![CDATA[business]]></category>
<category><![CDATA[Chicago]]></category>
<category><![CDATA[closing]]></category>
<category><![CDATA[closings]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[conducting due diligence]]></category>
<category><![CDATA[cool projects]]></category>
<category><![CDATA[creative use]]></category>
<category><![CDATA[development]]></category>
<category><![CDATA[due diliigence]]></category>
<category><![CDATA[economic redevelopment]]></category>
<category><![CDATA[ICSC RECon 2015]]></category>
<category><![CDATA[industrial property]]></category>
<category><![CDATA[investment]]></category>
<category><![CDATA[keys to closing]]></category>
<category><![CDATA[purchase]]></category>
<category><![CDATA[real estate]]></category>
<category><![CDATA[redevelopment]]></category>
<category><![CDATA[transactions]]></category>
<category><![CDATA[urban infill]]></category>
<category><![CDATA[what to look for]]></category>
<guid isPermaLink="false">http://harp-onthis.com/?p=1173</guid>
<description><![CDATA[Adaptive Reuse Of Underutilized Real Estate Cool Projects – A Love Affair Revisited We are entering a new frontier for adaptive re-use. The worldwide COVID-19 pandemic has left the urban commercial landscape in tatters. Shuttered vacant commercial space is commonplace […]]]></description>
<content:encoded><![CDATA[
<h1 class="wp-block-heading"><mark style="background-color:rgba(0, 0, 0, 0)" class="has-inline-color has-vivid-cyan-blue-color"><strong>Adaptive Reuse Of Underutilized Real Estate </strong></mark></h1>
<h1 class="wp-block-heading"><mark style="background-color:rgba(0, 0, 0, 0)" class="has-inline-color has-vivid-cyan-blue-color"><strong><em>Cool Projects</em> – A Love Affair Revisited</strong></mark></h1>
<p>We are entering a new frontier for adaptive re-use. The worldwide COVID-19 pandemic has left the urban commercial landscape in tatters. Shuttered vacant commercial space is commonplace throughout cities and towns. Doors and windows are boarded-up in shopping districts and entertainment districts that were thriving as recently as February 2020. Some have become barely recognizable. </p>
<p><strong>Looking to the Future</strong></p>
<div class="wp-block-image">
<figure class="alignleft size-large is-resized"><img data-recalc-dims="1" fetchpriority="high" decoding="async" data-attachment-id="1927" data-permalink="http://harp-onthis.com/cool-projects-real-estate/old-post-office/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/old-post-office.jpg?fit=1200%2C630" data-orig-size="1200,630" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="old-post-office" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/old-post-office.jpg?fit=300%2C158" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/old-post-office.jpg?fit=1024%2C538" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/old-post-office.jpg?resize=400%2C210" alt="old post office" class="wp-image-1927" width="400" height="210" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/old-post-office.jpg?resize=1024%2C538 1024w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/old-post-office.jpg?resize=300%2C158 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/old-post-office.jpg?resize=768%2C403 768w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/old-post-office.jpg?w=1200 1200w" sizes="(max-width: 400px) 100vw, 400px" /></figure></div>
<p>What is to become of this vast inventory of vacant retail space, shuttered restaurants, empty hotels and office buildings, abandoned shopping malls, cavernous and empty theaters, stranded travel destinations, and more? Who will have the vision and courage to adapt and redevelop these properties into newly viable economic jewels? And when? </p>
<p>Make no mistake; it will happen. And it’s likely to happen much more quickly than you think. </p>
<p>While many are just beginning to peak their cautious heads out from under their COVID blankets, <em>value-add developers</em> are assembling to scoop-up valuable assets to be reimagined and repositioned for economic glory. If you believe the residential real estate market is hot, hold onto your collective hats. There are enormous profits to be made in commercial real estate and new business. These COVID-depressed sectors have struggled during the COVID shutdown, but unless the government blows it with short-sighted regulation and foolish tax policy, substantial economic revitalization is about to commence. Jobs, business opportunities, community-desired services and amenities, and great economic rewards are on the horizon. The ingenuity and creativity of value-add developers and the entrepreneurs they enable, coupled with vast amounts of available capital, are about to be unleashed in a torrent. </p>
<p>Pent-up demand is a powerful force. We are about to witness the creative power of visionary value-add developers as they reimagine and reinvent vacant and underutilized commercial space and turn it into some remarkably C<em>oo</em>l Projects. I can’t wait!</p>
<h1 class="wp-block-heading"><mark style="background-color:rgba(0, 0, 0, 0)" class="has-inline-color has-vivid-cyan-blue-color"><strong>C<em>OO</em>L PROJECTS – Real Estate Projects I <em>Love</em> to Work On. </strong></mark></h1>
<p>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.</p>
<p>And by “c<em>oo</em>l”, I don’t mean in a thermal sense – but rather in a “<em>this project is so cool</em>” sense. I am referring to real estate projects that are awesome. Real estate projects that are fun. Real estate projects that make you say “<em>Wow – what a cool project!</em>”</p>
<div class="wp-block-image">
<figure class="alignleft size-large is-resized"><img data-recalc-dims="1" decoding="async" data-attachment-id="1527" data-permalink="http://harp-onthis.com/harp-photo-sept-2019-less-than-2mb/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2019/09/Harp-Photo-Sept.-2019-less-than-2MB.png?fit=360%2C402" data-orig-size="360,402" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="Harp Photo – Sept. 2019 less than 2MB" data-image-description="" data-image-caption="<p>R. Kymn Harp</p>
" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2019/09/Harp-Photo-Sept.-2019-less-than-2MB.png?fit=269%2C300" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2019/09/Harp-Photo-Sept.-2019-less-than-2MB.png?fit=360%2C402" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2019/09/Harp-Photo-Sept.-2019-less-than-2MB.png?resize=162%2C179" alt="" class="wp-image-1527" width="162" height="179"/><figcaption class="wp-element-caption">R. Kymn Harp</figcaption></figure></div>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<h2 class="wp-block-heading"><span style="color: #008080;"><span class="has-inline-color has-vivid-cyan-blue-color"><strong>Cool Projects Test</strong></span></span></h2>
<p>Here’s a test [call it the “<span style="color: #000000;"><em>Cool Projects Test</em></span>”, if you will]:</p>
<p>Which of the following projects is more likely to end up on Kymn Harp’s list of <em>cool projects</em>?</p>
<span id="more-1173"></span>
<h5 class="wp-block-heading"><span style="color: #008080;"><em><span class="has-inline-color has-vivid-cyan-blue-color">Project Choice No. 1:</span></em></span></h5>
<p>a. Developing a stand-alone bank building on a commerical outlot?</p>
<p><em>Or</em></p>
<p>b. Converting an historic firehouse into an upscale restaurant and wine bar with take-out bakery?</p>
<h5 class="wp-block-heading"><span style="color: #008080;"><em><span class="has-inline-color has-vivid-cyan-blue-color">Project Choice No. 2:</span></em></span></h5>
<p>a. Developing a 196 unit apartment complex on a large vacant lot?</p>
<p><em>Or</em></p>
<p>b. Redeveloping a former 3-story Main Street department store into a mixed-use project with first floor restaurants, sidewalk cafés, first floor retail, a side street residential lobby, apartments on the 2nd and 3rd floors, and a rooftop sundeck and fitness center?</p>
<h5 class="wp-block-heading"><span style="color: #008080;"><em><span class="has-inline-color has-vivid-cyan-blue-color">Project Choice No. 3:</span></em></span></h5>
<p>a. Developing a stand-alone strip shopping center?</p>
<p><em>Or</em></p>
<p>b. Developing retail shops within the underutilized first floor and lower level pedway serving an existing hotel/convention center?</p>
<h5 class="wp-block-heading"><span style="color: #008080;"><em><span class="has-inline-color has-vivid-cyan-blue-color">Project Choice No. 4:</span></em></span></h5>
<p>a. Developing a multiplex movie theater?</p>
<p><em>Or</em></p>
<p>b. Converting a former multiplex movie theater into a multi-tenant, specialty entertainment center with intimate live music venues, restaurants, an art gallery, and ethnic-focused shopping boutiques to serve a growing ethnic population in the surrounding community?</p>
<h5 class="wp-block-heading"><span style="color: #008080;"><em><span class="has-inline-color has-vivid-cyan-blue-color">Project Choice No. 5:</span></em></span></h5>
<p>a. Developing a national chain pharmacy on a corner lot?</p>
<p><em>Or</em></p>
<p>b. Redeveloping a former church as a music and theatrical venue with a restaurant, music store and gift shop?</p>
<h5 class="wp-block-heading"><span style="color: #008080;"><em><span class="has-inline-color has-vivid-cyan-blue-color">Project Choice No. 6:</span></em></span></h5>
<p>a. Developing a new suburban office tower?</p>
<p><em>Or</em></p>
<p>b. Coordinating economic redevelopment of a suburban downtown business district to transform a stagnant center of town into an affluent Millennial-friendly live-work-play lifestyle environment?</p>
<h5 class="wp-block-heading"><span style="color: #008080;"><em><span class="has-inline-color has-vivid-cyan-blue-color">Project Choice No. 7:</span></em></span></h5>
<p>a. Developing an industrial/office park?</p>
<p><em>Or</em></p>
<p>b. Developing a multi-user sports and entertainment complex with restaurants, retail and parking?</p>
<p>Which Project Choices listed above qualify as “<em>cool projects</em>”? Not everyone will agree. There is no absolute, right answer. And don’t get me wrong, if a client walked through my door with any of these projects, I would be happy to jump on-board. But, the truth is that – in a perfect world, if given a choice – I would choose Project Choice “<span style="text-decoration: underline;">b</span>” every time.</p>
<p>Why? There is just something exhilarating about taking tired, underutilized or functionally obsolete properties and reinventing them as revitalized developments that make users say: “<em>WOW – what a cool project!</em>”</p>
<p>Cool projects require a lot of planning, legal insight, and specialized due diligence to make sure a successful transformation can be achieved, but the value-added turnaround can be long-lasting and well worth the effort.</p>
<p>I am always on the hunt for cool projects. I enjoy working with all my clients, but my favorite clients are investors, developers and business owners with creative vision, who can imagine the future, and make it happen.</p>
<p>Not every project I work on is a <em>cool project</em>. As a real estate lawyer, I work on the deals that clients bring me. Some projects are just good investments waiting to be built. I’m fine with that. There is nothing wrong with building projects that just serve a need. I endorse the concept, and am always glad to help, so give me a call. I am at your service.</p>
<p><em>But</em> . . ., for sure if you are contemplating a <em>cool project</em> – please stop whatever else you are doing, pick up your phone and call me. My direct line is <strong><span class="has-inline-color has-vivid-cyan-blue-color">312-456-0378</span></strong>. Let’s talk. My partners and I can help you get it done – and, I assure you, we can each have a blast doing it.</p>
<p>There is no thrill quite like the thrill of like-minds working together in sync, with skill and creativity, to move a cool project forward, from concept to completion. I would love to be part of your team.</p>
<p><em>Thanks for listening.</em></p>
<p>Be c<em>oo</em>l. </p>
<p> Be creative.</p>
<p> Call me.</p>
<p>Thanks,<br /><em>Kymn</em></p>
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<post-id xmlns="com-wordpress:feed-additions:1">1173</post-id> </item>
<item>
<title>BEYOND THE PANDEMIC – Opportunity Awaits</title>
<link>http://harp-onthis.com/beyond-the-pandemic-opportunity-awaits/</link>
<comments>http://harp-onthis.com/beyond-the-pandemic-opportunity-awaits/#respond</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Tue, 01 Dec 2020 20:55:57 +0000</pubDate>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[adaptive reuse]]></category>
<category><![CDATA[business]]></category>
<category><![CDATA[Chicago]]></category>
<category><![CDATA[Chicago attorneys]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[development]]></category>
<category><![CDATA[Illinois]]></category>
<category><![CDATA[leasing]]></category>
<category><![CDATA[real estate]]></category>
<category><![CDATA[redevelopment]]></category>
<guid isPermaLink="false">http://harp-onthis.com/?p=1589</guid>
<description><![CDATA[If experience teaches us anything, it teaches that the COVID-19 pandemic will end.  Things we enjoyed before, will be enjoyed again. People still want to shop, travel, dine-out, go to theater, attend live concerts and sporting events, marvel at fireworks […]]]></description>
<content:encoded><![CDATA[
<p>If experience teaches us anything, it teaches that the COVID-19 pandemic will end. Things we enjoyed before, will be enjoyed again. People still want to shop, travel, dine-out, go to theater, attend live concerts and sporting events, marvel at fireworks displays, celebrate family gatherings, and do all the things that enrich our lives. Demand did not simply evaporate; it remains strong. Pressure is building. Pent-up demand is rising. It is waiting to be unleashed. Are you ready?</p>
<p>Pundits speak of a “<em>new normal</em>” – but what does that even mean?</p>
<p>Not long ago, during the <em>Great Recession,</em> we heard talk of a <em>new normal</em> as well. How long did it take for that <em>new normal</em> to become a faded memory once the economy rebounded and began to expand? (Not long.)</p>
<p>Clearly, this pandemic has been devastating, with tragic loss of life, severe illness, and widespread economic devastation. New words and phrases have entered our lexicon, like asymptomatic, social distancing, bending-the-curve, intubation, N95, no-mask/no entry, quarantine, self-isolation, COVID-Lease amendments, COVID-abatements, PPP loans, sneeze-barriers, and the like. Although we learned in pre-school to “wash our hands”, we’ve gained new appreciation for this simple task since March 2020.</p>
<div class="wp-block-image">
<figure class="alignright size-full is-resized"><img data-recalc-dims="1" decoding="async" data-attachment-id="1933" data-permalink="http://harp-onthis.com/beyond-the-pandemic-opportunity-awaits/office-space/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/office-space.jpg?fit=768%2C512" data-orig-size="768,512" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="office-space" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/office-space.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/office-space.jpg?fit=768%2C512" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/office-space.jpg?resize=401%2C266" alt="office space" class="wp-image-1933" width="401" height="266" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/office-space.jpg?w=768 768w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/office-space.jpg?resize=300%2C200 300w" sizes="(max-width: 401px) 100vw, 401px" /></figure></div>
<p>Discussions now focus on a need to reconfigure health facilities, office space, restaurants, hotels, conference centers, congregate living facilities, schools, places of worship, public transportation, shopping centers, and more, to prevent the spread of infectious disease. Some claim this pandemic will cause a seismic shift away from urban living and centralized business districts, in favor of far-flung regions linked together by Zoom or other remote video-conferencing technologies.</p>
<p>But will it? </p>
<p>A growing number of medical experts believe that multiple effective vaccines and treatments will be available shortly, which could bring the COVID pandemic to an end by the third or fourth quarter of 2021. What then?</p>
<p>When COVID cases are no longer in the news, will we remain preoccupied with social distancing, isolation, remote offices, and remote meetings? Or will be get back to business as usual? Will we stay hunkered down in our suburban home-offices while our competition is out actively meeting with prospects and clients, looking for development opportunities, and doing business in person?</p>
<p>Is the central business district dead? Is urban living to be no more? Will theaters, bars, and restaurants remain closed? Navy Pier? Magnificent Mile? The restaurant and shopping scene in Chicago’s West Loop, Fulton Market, Pilsen, Greektown, Streeterville, Chinatown, Little Italy, Bronzeville, River North, and neighborhoods and suburbs beyond? Are they gone for good? </p>
<p>How long will it take before the “new normal” gives way to the “old normal” – with restaurants and banquet halls reopening, people dining out, going to live concerts, returning to the office, taking vacations, meeting in-person with customers, clients and friends, going to sporting events and live theater or the movies, spending money on leisure activities, buying urban condos, staying at downtown hotels, and doing all the things they recently enjoyed? </p>
<p>What are the implications for adaptive reuse of commercial space left vacant by this pandemic, and for commercial real estate investment and development, and for business in general? What will be in demand this next summer and fall? </p>
<p>What will be the turning point? Many of my clients are already looking past the pandemic to the next wave of opportunity. Are you? </p>
<p>How are you positioning yourself for the opportunities that are coming? Is your professional team still intact? Did they retire? Move away? Go out of business?</p>
<p>What opportunity awaits?</p>
<p> Are you ready for what comes next? Should we talk?</p>
<p><em>Thanks for listening,</em></p>
<p><em>Kymn</em></p>
<figure class="wp-block-image size-large"><img data-recalc-dims="1" loading="lazy" decoding="async" width="578" height="339" data-attachment-id="1540" data-permalink="http://harp-onthis.com/rsp-50th-anniversary/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2019/12/RSP-50th-Anniversary.jpg?fit=578%2C339" data-orig-size="578,339" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="RSP 50th Anniversary" data-image-description="" data-image-caption="<p>Celebrating 50 Years of Excellence!</p>
" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2019/12/RSP-50th-Anniversary.jpg?fit=300%2C176" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2019/12/RSP-50th-Anniversary.jpg?fit=578%2C339" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2019/12/RSP-50th-Anniversary.jpg?resize=578%2C339" alt="" class="wp-image-1540" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2019/12/RSP-50th-Anniversary.jpg?w=578 578w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2019/12/RSP-50th-Anniversary.jpg?resize=300%2C176 300w" sizes="auto, (max-width: 578px) 100vw, 578px" /><figcaption class="wp-element-caption">Celebrating 50 Years of Excellence!</figcaption></figure>
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<post-id xmlns="com-wordpress:feed-additions:1">1589</post-id> </item>
<item>
<title>A PASSION FOR (REAL ESTATE) BUSINESS</title>
<link>http://harp-onthis.com/passion-real-estate-business/</link>
<comments>http://harp-onthis.com/passion-real-estate-business/#respond</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Mon, 13 Nov 2017 21:45:41 +0000</pubDate>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[Business]]></category>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[adaptive reuse]]></category>
<category><![CDATA[business]]></category>
<category><![CDATA[Chicago]]></category>
<category><![CDATA[closing]]></category>
<category><![CDATA[closings]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[development]]></category>
<category><![CDATA[due diligence checklist]]></category>
<category><![CDATA[due diliigence]]></category>
<category><![CDATA[how to close]]></category>
<category><![CDATA[industrial property]]></category>
<category><![CDATA[investment]]></category>
<category><![CDATA[keys to closing]]></category>
<category><![CDATA[project entitlement]]></category>
<category><![CDATA[property]]></category>
<category><![CDATA[public-private partnership]]></category>
<category><![CDATA[purchase]]></category>
<category><![CDATA[site entitlement]]></category>
<category><![CDATA[transactions]]></category>
<category><![CDATA[urban infill]]></category>
<category><![CDATA[what to look for]]></category>
<guid isPermaLink="false">http://harp-onthis.com/?p=1380</guid>
<description><![CDATA[Lawyers are like most other business professionals. We want your business and we want your referrals – we just don’t always know the best way to ask for either. Take me for example. I’ve been handling commercial real estate transactions […]]]></description>
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<p>Lawyers are like most other business professionals. We want your business and we want your referrals – we just don’t always know the best way to ask for either.</p>
<div class="wp-block-image">
<figure class="alignleft"><img data-recalc-dims="1" loading="lazy" decoding="async" width="250" height="222" data-attachment-id="1379" data-permalink="http://harp-onthis.com/passion-real-estate-business/kymn_harp/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2017/11/Kymn_Harp.png?fit=250%2C222" data-orig-size="250,222" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="Kymn_Harp" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2017/11/Kymn_Harp.png?fit=250%2C222" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2017/11/Kymn_Harp.png?fit=250%2C222" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2017/11/Kymn_Harp.png?resize=250%2C222" alt="" class="wp-image-1379"/></figure></div>
<p>Take me for example. I’ve been handling commercial real estate transactions and business deals for nearly 40 years. I’ve loved (almost) every day of it, and I look forward to many more (knock on wood). My clients appreciate my insights and value the guidance I provide. Other attorneys respect what I do, and brokers and CPAs like working with me because I strive for practical solutions to efficiently and effectively get the job done. I pay close attention to learn my clients’ business objectives, then work diligently and negotiate hard to get my clients what they expect – when they expect it. That’s what lawyers do. Or at least what all lawyers should do. For any client hiring a lawyer, what else is there? Achieving client objectives and getting the deal closed on time is why lawyers exist. Deals fail, for sure, but we can never be the reason they fail. Deals that fail are a waste of everyone’s time and money. Getting the deal done, if it can be done, is our value proposition.</p>
<p>Deals are my lifeblood – my passion. They’re why I wake up every morning and get out of bed. I love this stuff. I can’t explain exactly why that is – it just is. Why do musicians practice their instruments and play? Why do scratch golfers golf? Why do competitive skiers ski? It’s our passion. We don’t know exactly why – it comes from within. And we always need more.</p>
<p>Commercial real estate deals always come first for me, but in every commercial real estate project is a business. They go hand in hand. My preference for a good real estate deal over a good business deal is a matter of only slight degree. There’s not really a number one and a number two. It’s more like #1 and #1A.</p>
<p>So what’s the problem?</p>
<div class="wp-block-image">
<figure class="alignright size-full is-resized"><img data-recalc-dims="1" loading="lazy" decoding="async" width="1000" height="667" data-attachment-id="1807" data-permalink="http://harp-onthis.com/passion-real-estate-business/businesspropertyrealestateandinvestmentconceptswithinvestorandwhite/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/business-propertyreal-estate-and-investment.jpg?fit=1000%2C667" data-orig-size="1000,667" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"Shutterstock","camera":"","caption":"","created_timestamp":"0","copyright":"Copyright (c) 2021 HAKINMHAN\/Shutterstock. No use without permission.","focal_length":"0","iso":"0","shutter_speed":"0","title":"Business,Property,real,Estate,And,Investment,Concepts,With,Investor,And,White","orientation":"1"}" data-image-title="Business,Property,real,Estate,And,Investment,Concepts,With,Investor,And,White" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/business-propertyreal-estate-and-investment.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/business-propertyreal-estate-and-investment.jpg?fit=1000%2C667" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/business-propertyreal-estate-and-investment.jpg?resize=1000%2C667" alt="business property,real estate and investment" class="wp-image-1807" style="width:400px;height:267px" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/business-propertyreal-estate-and-investment.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/business-propertyreal-estate-and-investment.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/business-propertyreal-estate-and-investment.jpg?resize=768%2C512 768w" sizes="auto, (max-width: 1000px) 100vw, 1000px" /></figure></div>
<p>The problem is, a lot of people don’t know I’m available to represent them. I write books and articles on commercial real estate. I give seminars on how to structure and close business and real estate transactions. I publish a commercial real estate and business blog. People think I’m busy, or that I only handle huge deals. The truth is, I <em>am</em> busy – but never too busy to handle another deal, large or small. In the words of the late, great Lucille Ball: “<em>If you want something done, ask a busy person to do it</em>.” We all loved Lucy!</p>
<p>The most shocking question I get from prospective clients is: “<em>Would you (I) be willing to handle my (their) next business or commercial real estate deal?</em>” Are they kidding? My answer is always an emphatic “<em>yes</em>”! It’s my passion. It’s my love. It’s what I live for.</p>
<p>To be sure, I’m a business professional, and I charge for what I do, but if you have a commercial real estate deal or business deal, and need representation, I’m in. Never be shy about calling me. We’ll work out the economics. The range of deals I handle is extraordinarily diverse. For a taste, look at my blog <a href="http://www.harp-onthis.com">Harp-OnThis.com,</a> or check out my latest book, Illinois Commercial Real Estate on<a href="https://www.amazon.com/Illinois-Commercial-Real-Estate-Kymn/dp/1524535095"> Amazon.com</a> or in your local public library. I love this stuff. I need this stuff. Of course I want to represent you. When can we get started?</p>
<p>So back to my initial point: I do want your business and your business referrals. Like many other business professionals, I just don’t know the best way to go about asking for it. What do you suggest?</p>
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<title>DUE DILIGENCE CHECKLISTS for Commercial Real Estate Transactions</title>
<link>http://harp-onthis.com/due-diligence-checklists-for-commercial-real-estate-transactions-3/</link>
<comments>http://harp-onthis.com/due-diligence-checklists-for-commercial-real-estate-transactions-3/#comments</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Thu, 26 Mar 2015 00:06:49 +0000</pubDate>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[Uncategorized]]></category>
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<category><![CDATA[Chicago]]></category>
<category><![CDATA[closing]]></category>
<category><![CDATA[closings]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[conducting due diligence]]></category>
<category><![CDATA[consequences]]></category>
<category><![CDATA[development]]></category>
<category><![CDATA[due diligence checklist]]></category>
<category><![CDATA[due diliigence]]></category>
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<category><![CDATA[industrial property]]></category>
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<description><![CDATA[ 2016 Updat Are you planning to purchase, finance, develop or redevelop any of the following types of commercial real estate in the USA? A KEY element of successfully investing in commercial real estate is performing an adequate Due Diligence Investigation […]]]></description>
<content:encoded><![CDATA[<div class="wp-block-image">
<figure class="alignright"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="199" height="300" data-attachment-id="1145" data-permalink="http://harp-onthis.com/due-diligence-checklists-for-commercial-real-estate-transactions-3/harp-3_17_15-019/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?fit=2848%2C4288" data-orig-size="2848,4288" data-comments-opened="1" data-image-meta="{"aperture":"9","credit":"","camera":"NIKON D300","caption":"","created_timestamp":"1426589698","copyright":"","focal_length":"52","iso":"200","shutter_speed":"0.008","title":"","orientation":"0"}" data-image-title="Harp 3_17_15-019" data-image-description="" data-image-caption="<p>R. Kymn Harp<br />
Robbins, Salomon & Patt, Ltd.</p>
" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?fit=199%2C300" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?fit=680%2C1024" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?resize=199%2C300" alt="R. Kymn Harp Robbins, Salomon & Patt, Ltd." class="wp-image-1145" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?resize=199%2C300 199w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?resize=680%2C1024 680w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?w=2000 2000w" sizes="auto, (max-width: 199px) 100vw, 199px" /></a><figcaption class="wp-element-caption">R. Kymn Harp<br />Robbins, Salomon & Patt, Ltd.</figcaption></figure></div>
<h6 class="wp-block-heading"> <span style="color: #199ca8;">2016 Updat</span></h6>
<h2 class="wp-block-heading"><span style="color: #098f9c;">Are you planning to purchase, finance, develop or redevelop any of the following types of commercial real estate in the USA?</span></h2>
<ul class="wp-block-list">
<li>Shopping Center</li>
<li>Office building</li>
<li>Large Multifamily/Apartments/Condominium Project</li>
<li>Sports and/or Entertainment Venue</li>
<li>Mixed-Use Commercial-Residential-Office</li>
<li>Parking Lot/Parking Garage</li>
<li>Retail Store</li>
<li>Lifestyle or Enclosed Mall</li>
<li>Restaurant/Banquet Facility</li>
<li>Intermodal logistics/distribution facility</li>
<li>Medical Building</li>
<li>Gas Station</li>
<li>Manufacturing facility</li>
<li>Pharmacy</li>
<li>Special Use facility</li>
<li>Air Rights parcel</li>
<li>Subterranean parcel</li>
<li>Infrastructure improvements</li>
<li>Other commercial (non-single family, non-farm) property</li>
</ul>
<div class="wp-block-image">
<figure class="alignleft"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="300" height="109" data-attachment-id="1041" data-permalink="http://harp-onthis.com/illinois-llcs-the-asset-protection-advantage/rsp_logohd-3/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?fit=963%2C350" data-orig-size="963,350" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"1"}" data-image-title="RSP_LogoHD (3)" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?fit=300%2C109" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?fit=963%2C350" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?resize=300%2C109" alt="RSP_LogoHD (3)" class="wp-image-1041" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?resize=300%2C109 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?w=963 963w" sizes="auto, (max-width: 300px) 100vw, 300px" /></a></figure></div>
<p>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 <em>after</em> Closing.</p>
<p>The following checklists – while not all-inclusive – will help you conduct a focused and meaningful Due Diligence Investigation.</p>
<span id="more-1095"></span>
<h2 class="wp-block-heading"><span style="color: #199ca8;">BASIC DUE DILIGENCE CONCEPTS</span></h2>
<p><em>Caveat Emptor</em>: Let the Buyer beware.</p>
<p>Consumer protection laws applicable to home purchases and other consumer transactions seldom apply to commercial real estate transactions. The rule that a Buyer must examine, judge, and test for himself, applies to the purchase of all commercial real estate in the USA.</p>
<p><em>Due Diligence</em>: <span style="text-decoration: underline;">Black’s Law Dictionary</span>, West Publishing Company defines Due Diligence as follows:</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p>Such measure of prudence, activity, or assiduity, as is proper to be expected from, and ordinarily exercised by a prudent (person) under the particular circumstances; not measured by any absolute standard, but depending upon the relative facts of the specific case.</p>
</blockquote>
<p>Contract representations and warranties are <em>NOT</em> an adequate substitute for Due Diligence. A breach of a representation or warranty will simply mean you have the right to sue – which is time consuming and expensive.</p>
<p>The point of commercial real estate due diligence is to avoid transaction surprises and confirm that the property can be used and function as intended.</p>
<div class="wp-block-image">
<figure class="alignleft"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="300" height="199" data-attachment-id="614" data-permalink="http://harp-onthis.com/perfect-seller/questions-and-answers-signpost/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?fit=1699%2C1130" data-orig-size="1699,1130" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"Concept image of the six most common questions and answers on a signpost.","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"Questions and Answers signpost"}" data-image-title="Questions and Answers signpost" data-image-description="<p>Concept image of the six most common questions and answers on a signpost.</p>
" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?fit=300%2C199" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?fit=1024%2C681" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?resize=300%2C199" alt="Questions and Answers signpost" class="wp-image-614" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?resize=300%2C199 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?resize=1024%2C681 1024w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?resize=451%2C300 451w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?w=1699 1699w" sizes="auto, (max-width: 300px) 100vw, 300px" /></a></figure></div>
<p>Basic transaction due diligence will focus on the fundamental elements of any storyline: Who, What, Where, When, Why and How. These are key elements of inquiry that must be answered for any transaction, whether or not the transaction involves commercial real estate as its principal focus.</p>
<p>Property due diligence for commercial real estate will focus on four (4) primary areas of concern:</p>
<ul class="wp-block-list">
<li>Market Demand</li>
<li>Access</li>
<li>Uses</li>
<li>Finances</li>
</ul>
<p>For a detailed discussion of the four primary areas of concern, see my article: <a title="Commercial Real Estate Due Diligence – Do You Know the Four Areas of Inquiry?" href="http://harp-onthis.com/commercial-real-estate-due-diligence-do-you-know-the-four-areas-of-inquiry/" target="_blank" rel="noopener">Commercial Real Estate Due Diligence: Do You Know the Four Areas of Inquiry?</a></p>
<p>Before focusing on the four areas of concern for property due diligence, transaction due diligence requires that we consider for whom the Due Diligence Investigation is being conducted. The scope, intensity, and focus of any Due Diligence Investigation of commercial real estate will depend upon the objectives of the party for whom the investigation is being conducted. These objectives may vary depending upon whether the investigation is being conducted for the benefit of: (i) a Strategic Buyer (or long-term lessee); (ii) a Financial Buyer; (iii) a Developer (whether ground-up development, or redevelopment for adaptive reuse); or (iv) a Lender.</p>
<p>If you are a Seller, understand that to Close the transaction, your Buyer and its Lender must address all issues material to their respective objectives – some of which require information only you, as Owner, can adequately provide. If you are a Seller, please see my article: <a title="PERFECT SELLER – Selling Commercial Real Estate" href="http://harp-onthis.com/perfect-seller/" target="_blank" rel="noopener">Perfect Seller</a> for guidance.</p>
<h3 class="wp-block-heading"><span style="color: #199ca8;">GENERAL DUE DILIGENCE OBJECTIVES</span></h3>
<div class="wp-block-image">
<figure class="alignright size-full is-resized"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="1833" data-permalink="http://harp-onthis.com/due-diligence-checklists-for-commercial-real-estate-transactions-3/due-diligence-word-on-wooden-cube-isolated-on-orange-background-1/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/due-diligence-word-on-wooden-cube-isolated-on-orange-background-1.jpg?fit=1000%2C667" data-orig-size="1000,667" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="due-diligence-word-on-wooden-cube-isolated-on-orange-background-1" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/due-diligence-word-on-wooden-cube-isolated-on-orange-background-1.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/due-diligence-word-on-wooden-cube-isolated-on-orange-background-1.jpg?fit=1000%2C667" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/due-diligence-word-on-wooden-cube-isolated-on-orange-background-1.jpg?resize=400%2C267" alt="due diligence word on wooden cube isolated on orange background" class="wp-image-1833" width="400" height="267" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/due-diligence-word-on-wooden-cube-isolated-on-orange-background-1.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/due-diligence-word-on-wooden-cube-isolated-on-orange-background-1.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/due-diligence-word-on-wooden-cube-isolated-on-orange-background-1.jpg?resize=768%2C512 768w" sizes="auto, (max-width: 400px) 100vw, 400px" /></figure></div>
<p><span style="color: #000000;">(i) A <em>Strategic Buyer </em></span>(or long-term lessee) is acquiring the property for its own use, and must verify that the property is suitable for the intended use.</p>
<p>(ii) A <em>Financial Buyer</em> is acquiring the property for the expected return on investment generated by the property’s anticipated revenue stream, and must determine the amount, velocity, and durability of the revenue stream. This will likely include a consideration of credit-worthiness and market demand of long-term tenants, lease rental rates at the property compared to lease rental rates for comparable properties in the marketplace which may impact lease renewal rates, lease duration and expiration dates of all property leases to gauge exposure to mass-vacancies, tenant co-occupancy requirements and other factors that may impact the durability of the revenue stream generated by the property. A sophisticated Financial Buyer will likely calculate its yield based upon discounted cash-flows rather than the much less precise capitalization rate (“cap rate”), and will need adequate financial information to do so.</p>
<p>(iii) A <em>Developer</em> is seeking to add value by changing the character or use of the property – usually with a short-term to intermediate-term exit strategy to dispose of the property; although a Developer might plan to hold the property long-term as a Financial Buyer after development or redevelopment. The Developer must focus upon whether the planned change in character or use can be accomplished in a cost-effective manner.</p>
<p>(iv) A <em>Lender</em> is seeking to establish two basic lender criteria:</p>
<p> 1. <em>Ability to Repay</em> – The ability of the property to generate sufficient revenue to repay the loan an a timely basis; <em>and</em></p>
<p>2. <em>Sufficiency of Collateral</em> – The objective disposal value of the collateral in the event of a loan default, to assure adequate funds to repay the loan, carrying costs and costs of collection in the event forced collection becomes necessary. Particularly in light of the collapse of the commercial real estate market during the <em>Great Recession</em> of recent years, a Lender may pay particular attention to the overall loan coverage ratio, sources of equity, debt coverage ratio, and, similar to a Financial Buyer, may be concerned with the credit-worthiness and market demand of long-term tenants, lease rental rates at the property compared to lease rental rates for comparable properties in the marketplace which may impact lease renewal rates, lease duration and expiration dates of all property leases to gauge exposure to mass-vacancies, tenant co-occupancy requirements and other factors that may impact future value of the collateral.</p>
<p>The amount of diligent inquiry due to be expended (i.e.<em> due diligence</em>) to investigate any particular commercial real estate project is the amount of inquiry required to answer in the affirmative each question that must be answered yes, and to answer in the negative each question that must be answered no, to address all material concerns of the party for whom the Due Diligence Investigation is being undertaken.</p>
<p>The following Due Diligence Checklists are offered as helpful guides to assist in focusing on important issues to be considered in connection with a commercial real estate transaction.</p>
<h3 class="wp-block-heading"><span style="color: #199ca8;">I. THE PROPERTY</span></h3>
<p><span style="color: #000000;">1. Exactly what PROPERTY does the Purchaser believe it is acquiring?</span></p>
<ul class="wp-block-list">
<li>Land?</li>
<li>Building?</li>
<li>Fixtures?</li>
<li>Other Improvements?</li>
<li>Other Rights?</li>
<li>The entire fee title interest including all air rights?</li>
<li>All development rights?</li>
</ul>
<p>2. What is Purchaser’s planned use of the Property?</p>
<p>3. Does the physical condition of the Property permit use as planned?</p>
<ul class="wp-block-list">
<li>Commercially adequate access to public streets and ways?</li>
<li>Sufficient parking?</li>
<li>Structural condition of improvements?</li>
<li>Wi-fi ready with access to high speed internet?</li>
<li>Environmental contamination?
<ul class="wp-block-list">
<li>Innocent Purchaser defense vs. exemption from liability</li>
<li>All Appropriate Inquiry</li>
</ul>
</li>
</ul>
<p>4. Is there any legal restriction to Purchaser’s use of the Property as planned?</p>
<ul class="wp-block-list">
<li>Zoning?</li>
<li>Private land use controls?</li>
<li>Americans with Disabilities Act?</li>
<li>Availability of Licenses?
<ul class="wp-block-list">
<li>Liquor license?</li>
<li>Entertainment license?</li>
<li>Outdoor dining license?</li>
</ul>
</li>
<li> Drive through windows permitted?</li>
<li>Other legal restrictions or impediments?</li>
</ul>
<p>5. How much does Purchaser expect to pay for the Property?</p>
<p>6. Is there any condition on or within the Property that is likely to increase Purchaser’s effective cost to acquire or use the Property?</p>
<ul class="wp-block-list">
<li>Property owner’s assessments?</li>
<li> Real estate tax in line with value?</li>
<li>Special Assessment?</li>
<li>Required user fees for necessary amenities?</li>
<li>Drainage?</li>
<li>Access?</li>
<li>Parking?</li>
<li>Other?</li>
</ul>
<p>7. Any encroachments onto the Property, or from the Property onto other lands?</p>
<p>8. Are there any encumbrances on the Property that will not be cleared at Closing?</p>
<ul class="wp-block-list">
<li>Easements?</li>
<li>Covenants running with the land?</li>
<li>Liens or other financial servitude?</li>
<li>Leases?</li>
</ul>
<p>9. If the Property is subject to any Leases, are there any?</p>
<ul class="wp-block-list">
<li>Security Deposits?</li>
<li>Options to Extend Term?</li>
<li>Options to Purchase?</li>
<li>Rights of First Refusal?</li>
<li>Rights of First Offer?</li>
<li>Rights of Early Termination?</li>
<li>Maintenance obligations?</li>
<li>Duty of Landlord to provide utilities?</li>
<li>Real estate tax or CAM escrows?</li>
<li>Delinquent rent?</li>
<li>Prepaid rent?</li>
<li>Tenant mix/use controls?</li>
<li>Tenant co-occupancy covenants?</li>
<li>Tenant exclusives?</li>
<li>Tenant Parking requirements?</li>
<li><a title="Commercial Landlord-Tenant Issues – PART 1 – Getting it Right" href="http://harp-onthis.com/commercial-landlord-tenant-issues-part-1-getting-it-right/" target="_blank" rel="noopener">Leasehold easements?</a></li>
<li><a title="COMMERCIAL LANDLORD-TENANT – Part 2 – The Covenant of Quiet Enjoyment" href="http://harp-onthis.com/commercial-landlord-tenant-part-2-the-covenant-of-quiet-enjoyment/" target="_blank" rel="noopener">Strict covenants of quiet enjoyment?</a></li>
<li>Automatic subordination of Lease to future mortgages?</li>
<li>Other material Lease terms?</li>
</ul>
<p>10. New Construction?</p>
<ul class="wp-block-list">
<li>Availability of construction permits?</li>
<li>Site plan approvals?</li>
<li>Soil conditions?</li>
<li>Utilities?</li>
<li>Curb cuts?</li>
<li>Traffic control requirements?</li>
<li>NPDES (National Pollutant Discharge Elimination System) Permit?
<ul class="wp-block-list">
<li>Storm Water Pollution Prevention Plan required?</li>
</ul>
</li>
<li>Other governmental approvals required?</li>
</ul>
<h3 class="wp-block-heading"><span style="color: #199ca8;">II. THE SELLER</span></h3>
<p><span style="color: #000000;">1. Who is the Seller?</span></p>
<ul class="wp-block-list">
<li>Individual?</li>
<li>Trust?</li>
<li>Partnership?</li>
<li>Corporation?</li>
<li>Limited liability company?</li>
<li>Other legally existing entity?</li>
</ul>
<p>2. If other than a natural person, does the Seller validly exist and is Seller in good standing?</p>
<p>3. Does the Seller own the Property?</p>
<p>4. Does the Seller have authority to convey the Property?</p>
<ul class="wp-block-list">
<li>Board of Director approval?</li>
<li>Shareholder or Member approval?</li>
<li>Other consents?</li>
<li>If foreign individual or entity, are any special requirements applicable?
<ul class="wp-block-list">
<li>Qualification to do business in jurisdiction of Property?</li>
<li>Federal tax withholding?</li>
<li>U.S. Patriot Act compliance?</li>
<li>Bank Secrecy Act/Anti-Money Laundering Compliance?</li>
</ul>
</li>
</ul>
<p>5. Who has authority to bind the Seller?</p>
<p>6. Are sale proceeds sufficient to pay off all liens?</p>
<h3 class="wp-block-heading"><span style="color: #199ca8;"> III. THE PURCHASER</span></h3>
<p><span style="color: #000000;">1. Who is the Purchaser?</span></p>
<p>2. What is the Purchaser/Grantee’s exact legal name?</p>
<p>3. If Purchaser/Grantee is an entity, has it been validly created and is it in good standing?</p>
<ul class="wp-block-list">
<li>Articles of Incorporation – Articles of Organization or Formation?</li>
<li>Certificate of Good Standing?</li>
</ul>
<p>4. Is the Purchaser/Grantee authorized to own and operate the Property and, if applicable, finance acquisition of the Property?</p>
<ul class="wp-block-list">
<li>Board of Director approvals?</li>
<li>Shareholder or Member approvals?</li>
<li>If foreign individual or entity, are any special requirements applicable?
<ul class="wp-block-list">
<li>Qualification to do business in jurisdiction of the Property?</li>
<li>U.S. Patriot Act compliance?</li>
<li>Bank Secrecy Act/Anti-Money Laundering compliance?</li>
</ul>
</li>
</ul>
<p>5. Who is authorized to bind the Purchaser/Grantee?</p>
<h3 class="wp-block-heading"><span style="color: #199ca8;">IV. TRANSACTION STRUCTURE</span></h3>
<p><span style="color: #000000;">1. Is transaction a cash purchase?</span></p>
<p>2. Purchase with lender financing?</p>
<ul class="wp-block-list">
<li>Bank financing?</li>
<li>Insurance company financing?</li>
<li>Hard money loan?</li>
<li>Seller financing?
<ul class="wp-block-list">
<li>Installment Agreement for Deed?</li>
<li>Seller provided mortgage?</li>
</ul>
</li>
</ul>
<p>3. <a title="Keys Rules For Section 1031 Exchanges" href="http://harp-onthis.com/keys-rules-section-1031-exchanges/" target="_blank" rel="noopener">Tax-deferred exchange pursuant to Section 1031 </a>of the Internal Revenue Code?</p>
<ul class="wp-block-list">
<li>Replacement property identified?</li>
<li>Qualified Intermediary selected?</li>
<li>Key time periods determined to comply with Section 1031 exchange rules?</li>
<li>Reverse exchange?</li>
<li>Other Section 1031 compliance issues?</li>
</ul>
<p>4. <a title="10 Things to Know About Commercial Real Estate Development Agreements" href="http://harp-onthis.com/10-things-know-commercial-real-estate-development-agreements/">Public-Private Partnerships</a> with municipal or other governmental economic incentives?</p>
<ul class="wp-block-list">
<li>Tax increment financing?</li>
<li>Sales tax revenue sharing?</li>
<li>Business district financing?</li>
<li>Special service area financing?</li>
<li>Municipal General Obligation loan?</li>
</ul>
<p>5. Third-party Source Payments?</p>
<ul class="wp-block-list">
<li>Naming rights agreements?</li>
<li>Sponsorships?</li>
<li>Concession agreements?</li>
</ul>
<h3 class="wp-block-heading"><span style="color: #199ca8;">V. PURCHASER FINANCING</span></h3>
<h4 class="wp-block-heading"><span style="color: #199ca8;">A. BUSINESS TERMS OF THE LOAN</span></h4>
<p><span style="color: #000000;">1. What loan terms have the Borrower and its Lender agreed to?</span></p>
<ul class="wp-block-list">
<li>What is the amount of the loan?</li>
<li>What is the interest rate?</li>
<li>What are the repayment terms?</li>
<li>What is the collateral?
<ul class="wp-block-list">
<li>Commercial real estate only?</li>
<li>Real estate and personal property together?</li>
<li>First lien?</li>
<li>Junior lien?</li>
</ul>
</li>
<li>Is it a single advance loan?</li>
<li>A multiple advance loan?</li>
<li>A construction loan?</li>
<li>If it is a multiple advance loan, can the principal be re-borrowed once repaid prior to maturity of the loan; making it, in effect, a revolving line of credit?</li>
<li>Are there reserve requirements?
<ul class="wp-block-list">
<li>Interest reserves?</li>
<li>Repair reserves?</li>
<li>Real estate tax reserves?</li>
<li>Insurance reserves?</li>
<li>Environmental remediation reserves?</li>
<li>Other reserves?</li>
</ul>
</li>
</ul>
<p>2. Are there requirements for Borrower to open business operating accounts with the Lender? If so, is the Borrower obligated to maintain minimum compensating balances?</p>
<p>3. Is the Borrower required to pledge business accounts as additional collateral?</p>
<p>4. Are there early repayment fees or yield maintenance requirements (each sometimes referred to as “prepayment penalties”)?</p>
<p>5. Are there repayment blackout periods during which the Borrower is not permitted to repay the loan?</p>
<p>6. Is a profit participation payment to Lender required upon disposition?</p>
<p>7. Is there a Loan Commitment fee or “good faith deposit” due upon Borrower’s acceptance of the Loan Commitment?</p>
<p>8. Is there a loan funding fee or loan brokerage fee or other loan fee due Lender or a loan broker at Closing?</p>
<p>9. Is there a Exit Fee due to Lender upon the loan being paid off?</p>
<p>10. What are the Borrower’s expense reimbursement obligations to Lender? When are they due? What is the Borrower’s obligation to pay the Lender’s expenses if the loan does not close?</p>
<h4 class="wp-block-heading"><span style="color: #199ca8;">B. DOCUMENTING THE COMMERCIAL REAL ESTATE LOAN</span></h4>
<p>Does the Purchaser/Borrower have all information necessary to comply with the Lender’s loan closing requirements?</p>
<p>Not all loan documentation requirements may be known at the outset of a transaction, although most commercial real estate loan documentation requirements are fairly typical. Some required information can be obtained only from the Seller. Production of that information to Purchaser for delivery to its lender must be required in the purchase contract.</p>
<p>As guidance to what a commercial real estate lender may require, the following sets forth a fairly typical Closing Checklist for a loan secured by commercial real estate.</p>
<h5 class="wp-block-heading"><span style="color: #199ca8;">COMMERCIAL REAL ESTATE LOAN CLOSING CHECKLIST</span></h5>
<p><span style="color: #000000;">1. Promissory Note</span></p>
<p>2. Personal Guaranties (which may be full, partial, secured, unsecured, payment guaranties, collection guaranties, so-called “<em>bad boy</em>” guaranties, or a variety of other types of guaranties as may be required by Lender)</p>
<p>3. Loan Agreement (often incorporated into the Promissory Note and/or Mortgage in lieu of being a separate document)</p>
<p>4. Mortgage (sometimes expanded to be a Mortgage, Security Agreement and Fixture Filing)</p>
<p>5. Assignment of Rents</p>
<p>6. Security Agreement</p>
<p>7. Financing Statement</p>
<p>8. Evidence of Borrower’s Existence in Good Standing, including:</p>
<ul class="wp-block-list">
<li>Certified copy of organizational documents of borrowing entity (including Articles of Incorporation, if Borrower is a corporation; Articles of Organization (or in Delaware, Articles of Formation) and a written Operating Agreement, if Borrower is a limited liability company; certified copy of trust agreement with all amendments, if Borrower is a land trust or other trust; etc.)</li>
<li>Certificate of Good Standing (if a corporation or LLC) or Certificate of Existence (if a limited partnership) or Certificate of Qualification to Transact Business (if Borrower is an entity doing business in a State other than its State of formation)</li>
</ul>
<p>9. Evidence of Borrower’s Authority to Borrow, including:</p>
<ul class="wp-block-list">
<li>Borrower’s Certificate</li>
<li>Certified resolutions</li>
<li>Incumbency Certificate</li>
</ul>
<p>10. Satisfactory Commitment for Title Insurance (which will typically require, for analysis by the Lender, copies of all documents or record appearing on Schedule B of the title commitment which are to remain after Closing), with required commercial title insurance endorsements, often including:</p>
<ul class="wp-block-list">
<li>ALTA 3.1 Zoning Endorsement modified to include parking (although, if the Property is a multi-user property, such as a retail shopping center, an ALTA 3.0 Zoning endorsement may be appropriate)</li>
<li>ALTA Comprehensive Endorsement No. 1</li>
<li>Location Endorsement (street address)</li>
<li>Access Endorsement (insuring commercially reasonable vehicular and pedestrian access to public streets and ways)</li>
<li>Contiguity Endorsement (the insured land comprises as single parcel with no gaps or gores)</li>
<li>PIN Endorsement (insuring that he identified real estate tax permanent index numbers (PIN) are the only applicable PIN numbers affecting the collateral, and that they relate solely to the real property comprising the collateral)</li>
<li>Usury Endorsement (insuring that the loan does not violate prohibitions against excessive interest charges)</li>
<li>other title insurance endorsements applicable to protect the intended use and value of the real estate collateral, as may be determined upon review of the Commitment for Title Insurance, Survey and documents of record, or arising from the existence of special issues pertaining to the transaction or the Borrower</li>
</ul>
<p>11. Current ALTA/NSPS Land Title Survey (3 sets), prepared in accordance with the 2016 (or current) Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys, with such Table A Additional Requirements as the Lender may determine necessary.</p>
<p>12. Current certified Rent Roll</p>
<p>13. Certified copy of all Leases (4 sets – 1 each for Buyer, Buyer’s attorney, Title Company, and Lender)</p>
<p>14. Lessee Estoppel Certificates</p>
<p>15. Lessee Subordination, Non-Disturbance and Attornment Agreements (sometimes referred to simply as “SNDAs”)</p>
<p>16. UCC, Judgment, Pending Litigation, Bankruptcy and Tax Lien Search Report</p>
<p>17. Appraisal – complying with Title XI of FIRREA (Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended)</p>
<p>18. Environmental Site Assessment Report (sometimes referred to as Environmental Phase I and/or Phase 2 Audit Report) prepared in accordance with ASTM Standard e1527-13 (or current)</p>
<p>19. Environmental Indemnity Agreement (signed by Borrower and Guarantors)</p>
<p>20. Site Improvements Assessment Report (sometimes an ASTM Property Condition Assessment prepared in accordance with ASTM Standard e2018-08 (or current) is required)</p>
<p>21. Evidence of Hazard Insurance naming Lender as the Mortgagee/Lender Loss Payee; and Liability Insurance naming Lender as an “<em>additional insured</em>” (sometimes listed simply as “Acord 27” and “Acord 25”, respectively); and sometimes a separate “Agreement to Provide Insurance”</p>
<p>22. Legal Opinion of Borrower’s Counsel</p>
<p>23. Credit Underwriting documents, such as signed tax returns, property operating statements, etc. as may be specified by the Lender</p>
<p>24. Compliance Agreement (sometimes also called an Errors and Omissions Agreement), whereby the Borrower agrees to correct, after Closing, errors or omissions in the loan documentation</p>
<p class="has-text-align-center"><strong><span style="color: #199ca8;">*****</span></strong></p>
<p>It is useful to become familiar with the Lender’s loan documentation requirements as early in the transaction as practical. The requirements will likely be set forth in some detail in the Lender’s Loan Commitment – which is the contract that serves as the road map for the loan transaction between Borrower and Lender. In Illinois, to be binding, the Loan Commitment must be in writing and be signed by the Lender.</p>
<p>Conducting the Due Diligence Investigation (that is to say, investigating all property and transactional concerns material to the commercial real estate transaction with all diligence due under the circumstances) can be time consuming and expensive. It can be made less so by knowing what to look for, devising a due diligence plan, and focusing on those matters that are of material concern.</p>
<p>If the loan requirements cannot be satisfied, it is better to make that determination during the contractual “<em>due diligence period</em>” – which typically provides for a so-called “<em>free out</em>” when the Borrower/Purchaser can receive the return of part or all of its earnest money deposit and avoid full liability under the purchase agreement for failure to move forward – rather than at a later date when the earnest money may be at risk of forfeiture or when other liability for failure to Close may attach.</p>
<h3 class="wp-block-heading"><span style="color: #199ca8;">CONCLUSION</span></h3>
<p>Conducting an effective Due Diligence Investigation in a commercial real estate transaction to discover all material facts and conditions affecting the Property and the transaction is of critical importance. Doing so will help identify risks which may be present in any commercial transaction, so the risks can be adequately shifted or otherwise mitigated. A properly focused investigation conducted with appropriate due diligence may disclose previously unrecognized opportunities as well as potential problems. An appropriate Due Diligence Investigation requires intentional and focused attention to all details material to the Property and to the transaction by a skilled professional, or group of professionals, who can recognize significant issues and opportunities. An investigation that is not properly focused may miss critical issues and may be overly broad and excessively expensive.</p>
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<p>Recommendation: Exercise Due Diligence.</p>
<p>We are here to help.</p>
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<post-id xmlns="com-wordpress:feed-additions:1">1095</post-id> </item>
<item>
<title>Illinois LLCs – The Asset Protection Advantage</title>
<link>http://harp-onthis.com/illinois-llcs-the-asset-protection-advantage/</link>
<comments>http://harp-onthis.com/illinois-llcs-the-asset-protection-advantage/#respond</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Wed, 25 Feb 2015 21:29:21 +0000</pubDate>
<category><![CDATA[Asset Protection]]></category>
<category><![CDATA[Business]]></category>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[White Papers]]></category>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[Advantage]]></category>
<category><![CDATA[asset protection]]></category>
<category><![CDATA[business]]></category>
<category><![CDATA[Chicago]]></category>
<category><![CDATA[choice of entity]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[corporation v. LLC]]></category>
<category><![CDATA[defense]]></category>
<category><![CDATA[development]]></category>
<category><![CDATA[enforcement actions]]></category>
<category><![CDATA[Illinois LLC]]></category>
<category><![CDATA[industrial property]]></category>
<category><![CDATA[investment]]></category>
<category><![CDATA[keys to closing]]></category>
<category><![CDATA[limited liability company]]></category>
<category><![CDATA[LLC]]></category>
<category><![CDATA[loan workouts]]></category>
<category><![CDATA[manager managed LLC]]></category>
<category><![CDATA[purchase]]></category>
<category><![CDATA[transactions]]></category>
<category><![CDATA[what to look for]]></category>
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<description><![CDATA[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 […]]]></description>
<content:encoded><![CDATA[
<h1 class="wp-block-heading">Illinois LLCs – The Asset Protection Advantage</h1>
<h2 class="wp-block-heading">A Technical Analysis</h2>
<p>Among sophisticated investors and other high-asset/high-net worth individuals and businesses, the topic of “<em>asset protection</em>” is bound to arise. As many became painfully aware during the recent <em>Great Recession</em>, bad things can happen to good people. In my article <a title="Asset Protection – Lessons Learned" href="http://harp-onthis.com/asset-protection-lessons-learned/" target="_blank" rel="noopener"><em>Asset Protection – Lessons Learned</em></a>, 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.</p>
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<p>Often, there is confusion about what the term <em>asset protection</em> 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 <em>off-shore asset protection trusts</em>. I will say, however, that under most circumstances, they don’t work for U.S. citizens residing in the U.S.A.</p>
<div class="wp-block-image">
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<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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 <em>et seq</em> (the “Illinois LLC Act”). The remarkably robust asset protection value of an Illinois limited liability company is measured by two key attributes:</p>
<p>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</p>
<p>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.</p>
<p>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.</p>
<h3 class="wp-block-heading"><span style="text-decoration: underline;">PART I</span>: Key Statutory Provisions to Consider When Drafting the Operating Agreement</h3>
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<p>A limited liability company is typically governed by two main sources of governing authority. First and foremost, the enabling statute which authorizes the creation of a limited liability company and establishes its legal characteristics. Second, the organizational documents, including, in Illinois, the Articles of Organization, and an internal document governing the limited liability company’s ownership and management, known as an “operating agreement”.</p>
<p>To gain the full asset protection value afforded to an Illinois limited liability company, it is necessary to pay close attention to the powers expressly authorized by the Illinois LLC Act, and to strategically draft the operating agreement in a manner that utilizes those asset protection benefits expressly permitted by the Illinois LLC Act.</p>
<h4 class="wp-block-heading"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="1041" data-permalink="http://harp-onthis.com/illinois-llcs-the-asset-protection-advantage/rsp_logohd-3/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?fit=963%2C350" data-orig-size="963,350" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"1"}" data-image-title="RSP_LogoHD (3)" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?fit=300%2C109" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?fit=963%2C350" class="alignleft size-medium wp-image-1041" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?resize=300%2C109" alt="RSP_LogoHD (3)" width="300" height="109" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?resize=300%2C109 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?w=963 963w" sizes="auto, (max-width: 300px) 100vw, 300px" /></a></h4>
<h4 class="wp-block-heading"> </h4>
<h4 class="wp-block-heading"> </h4>
<h4 class="wp-block-heading">A. Key Sections to Consider.</h4>
<p>Seven sections of the Illinois LLC Act are of particular interest in terms of asset protection when drafting the operating agreement. A brief summary of these sections as they pertain to this discussion is as follows:</p>
<p><strong>805 ILCS 180/15-15</strong>. The factors a manager may take into consideration in discharging its duties as manager of the LLC are set forth in this section.</p>
<p><strong>805 ILCS 180/30-1</strong>. A member of an LLC is not a co-owner of the LLC’s property and has no transferable interest in the LLC’s property. The economic interest a member owns is called a “distributional interest,” which entitles the holder thereof to receive its share of any distributions made by the LLC.</p>
<p><strong>805 ILCS 180/30-5</strong>. A transfer of a distributional interest does not entitle the holder thereof to become or exercise any rights of a member. A transfer entitles the transferee to receive, to the extent transferred, only the distributions to which the transferor would be entitled.</p>
<p><strong>805 ILCS 180/30-10</strong>. A transferee may become a member only as permitted in accordance with the terms of the LLC operating agreement. A transferee who does not become a member is not entitled to participate in the management or conduct of the LLC’s business, and may not require access to information concerning LLC transactions, or inspect or copy any LLC records.</p>
<p><strong>805 ILCS 180/30-20</strong>. Sets forth the exclusive means by which a judgment creditor of a member or transferee may satisfy a judgment out of the judgment debtor’s distributional interest in an LLC.</p>
<p><strong>805 ILCS 180/35-1</strong>. On application of a transferee, asserting equitable grounds for dissolution, an LLC may be dissolved only upon a judicial determination that it is equitable to wind up the LLC’s business.</p>
<p><strong>805 ILCS 180/35-3</strong>. An operating agreement or the articles of organization may provide a means by which a new member can spring into existence, effective as of the date the last remaining member of the LLC becomes dissociated.</p>
<h4 class="wp-block-heading">B. The Asset Protection Advantage of Illinois LLCs vs. Corporations, Generally:</h4>
<p>As a general proposition, a judgment creditor with a judgment against a corporate shareholder can attach that shareholder’s shares to satisfy the judgment. After attachment, the judgment creditor becomes the owner of the shares, with the right to vote those shares (assuming they are voting shares) on matters calling for shareholder action, including election of the board of directors, sale of assets, etc. Some protection against this outcome can be gained by means of a shareholders’ agreement that restricts transferability of shares. If there is a single shareholder, however, or if a judgment is entered against all of the shareholders, the protection afforded by a shareholder agreement may be unavailable.</p>
<p>Under the Illinois LLC Act, the rights and remedies of a judgment creditor are substantially limited.</p>
<p>Section 30-20 of the Illinois LLC Act sets forth the exclusive remedy by which a judgment creditor of an LLC member or a member’s transferee may satisfy a judgment vis-à-vis the judgment debtor’s distributional interest in an LLC. The Illinois appellate court has confirmed the enforcement regime provided in §30-20. <em>Bank of America, N.A. v. Freed</em>, 2012 IL App (1st) 110749, ¶¶37 – 42, 983 N.E.2d 509.</p>
<p>Pursuant to §30-20 of the Illinois LLC Act:</p>
<p>A court may impose a charging order on the distributional interest of the judgment debtor. 805 ILCS 180/30-20(a).</p>
<p>A charging order creates a lien on the judgment debtor’s distributional interest. 805 ILCS 180/30-20(b).</p>
<p>A court may order foreclosure of the lien at any time, but the purchaser at the foreclosure sale has only the rights of a transferee. Id.</p>
<p>Section 30-10 of the Illinois LLC Act sets forth the scope of rights of a transferee. Unless provided otherwise in the operating agreement, the transferee does not become a member of the LLC and therefore has no right to participate in management or to conduct the LLC’s business, no right to require access to information concerning LLC transactions, and no right to inspect or copy LLC records. 805 ILCS 180/30-10(d).</p>
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<h5 class="wp-block-heading">PRACTICE NOTE:</h5>
<p>Relative to a manager-managed LLC, case law confirms that the right to manage the LLC is not a property interest that can be transferred. <em>Grochocinski v. Campbell (In re Campbell)</em>, 475 B.R. 622 (Bankr. N.D.Ill. 2012). In a gratuitous comment (see 475 B.R. at 631 n.6), however, the Campbell court suggested that the result would be different if the LLC were to be member-managed. The footnote is dicta — and, while arguably a correct interpretation of Section 541(c)-1 of the Bankruptcy Code, is likely incorrect outside a bankruptcy setting, based on the express language of the Illinois LLC Act. Prudence suggests, however, that for asset protection purposes, a manager-managed LLC is preferable.</p>
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<h4 class="wp-block-heading">C. The Charging Order</h4>
<p>In a typical case, the operating agreement may very likely grant the manager of a manager-managed limited liability company the authority and discretion to determine if and when distributions will be made to interest holders. If the judgment creditor is holding only a charging order lien against the distributional interest of a member, the judgment creditor will receive nothing if no distributions are made.</p>
<p>At first glance it may appear that foreclosing on a distributional interest and acquiring the rights of the judgment debtor in the distributional interest is the logical next step if the judgment is not being satisfied pursuant to a charging order entered in accordance with 805 ILCS 180/30-20(a). It should be noted, however, that foreclosing on the charging order lien and becoming the actual owner of the distributional interest is not without risk to the judgment creditor.</p>
<p>LLCs are, with rare exceptions, taxed as partnerships, with all profits and losses passed through to the owners of distributional interests (whether they own that interest as a member or as merely a transferee). As many partners in partnerships, including many partners in law firm partnerships, are painfully aware, this attribute of partnership taxation can result in dreaded “phantom income”; that is, partnership-level income that is taxable to the partner even though no cash is distributed to the partner. This same rule of pass-through tax liability applies to virtually all LLCs. (The exception being the rare case in which an LLC makes an IRS election to be taxed as a “C” corporation.)</p>
<p>As long as a judgment creditor has only a charging order lien imposed under §30-20, the judgment creditor is merely a lienholder, not an owner of the distributional interest. Accordingly, the tax consequences of phantom income inure to the judgment debtor, who remains the owner of the distributional interest. If, however, a judgment creditor forecloses on the lien created by the charging order, as permitted under §30-20(b), the purchaser at the foreclosure sale becomes the owner of the distributional interest, with all the attendant tax consequences that flow with that ownership. If taxable profits are allocated to the distributional interest holder, but no cash distribution is actually made, the judgment creditor, as owner of the foreclosed-on distributional interest, is liable to pay taxes on the allocated profit. As a consequence, the judgment creditor may conceivably find itself in a worse financial circumstance than existed before foreclosure of its charging order lien.</p>
<h4 class="wp-block-heading">D. Authority of Manager To Withhold Distributions</h4>
<p>If the manager of a manager-managed limited liability company elects to not distribute profits, the owner of the distributional interest is exposed to the risk of incurring tax liabilities as a consequence of phantom income. For this reason, some operating agreements require distribution of available cash flow in amounts necessary cover the potential tax liability of the LLC’s members and distributional interest holders. Experience suggests this may be the exception rather than the rule.</p>
<p>Some may question whether a manager has the right, in the faithful discharge of the manager’s fiduciary duties, to withhold distributions to interest holders if cash is available. To find support, they may point to §15-3(g) of the Illinois LLC Act, through incorporation of §15-3(d), which provides that in the exercise of its duty of care to the LLC and its members, an LLC manager must exercise any rights arising under the Illinois LLC Act or under the operating agreement consistent with the obligation of good faith and fair dealing. 805 ILCS 180/15-3.</p>
<p>As negotiating leverage, they may also note that §35-1(5) of the Illinois LLC Act provides that:</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p>“[o]n application by a transferee of a member’s interest, a judicial determination [may be made] that it is equitable to wind up the company’s business.”</p>
</blockquote>
<p>. . . arguing that the claimed breach of the manager’s fiduciary duty to distribute available income creates a circumstance that would make it equitable to wind up the company’s business.</p>
<p>Consider, however, §15-15, which provides:</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p>“In discharging the duties of their respective positions, members and individual managers may, in considering the best long term and short term interests of the limited liability company, consider the effects of any action (including without limitation, action that may involve or relate to a change or potential change in control of the limited liability company) upon employees, suppliers, and customers of the limited liability company or its subsidiaries, communities in which offices or other establishments of the limited liability company or its subsidiaries are located, and all other pertinent factors.”</p>
</blockquote>
<p>If an LLC manager can make a plausible case that it is in the best long-term or short-term interests of the LLC to build cash reserves for reinvestment in the company to grow its business or to fund capital improvements, such case may likely serve as reasonable justification for a manager’s decision to withhold distributions of cash flow to interest holders in the faithful discharge of its duties — notwithstanding that interest holders may incur phantom income tax liability.</p>
<p>If the case can be made that the manager is acting within the scope of its authority under the operating agreement and discharging its duties in accordance with the statutory standard established by §15-15, a powerful argument would likely exist that it would be an abuse of the court’s discretion to determine that the manager’s exercise of such expressly granted authority creates an equitable ground to wind up the LLC’s business under §35-1(5).</p>
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<h5 class="wp-block-heading">PRACTICE NOTE</h5>
<p>If an LLC member is subject to claims of creditors that may mature into a charging order, consider whether an LLC operating agreement that does not grant a manager full discretion to determine whether to make distributions may be amended to grant the manager full discretion.<em> Query:</em> Does such an amendment constitute a fraudulent transfer within the meaning of the Uniform Fraudulent Transfer Act (UFTA), 740 ILCS 160/1, <em>et seq.</em>? Can a fraudulent transfer ever occur when there has been no transfer or encumbrance of an asset? If the ability to be a manager is not a property interest in a manager-managed LLC (see <em>Grochocinski v. Campbell (In re Campbell)</em>, 475 B.R. 622 (Bankr. N.D.Ill. 2012)), can amending the scope of the manager’s authority constitute the transfer or encumbrance of an asset or property interest within the meaning of the UFTA?</p>
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<h4 class="wp-block-heading">E. The Springing Member</h4>
<p>The foregoing argument notwithstanding, if the judgment debtor were to be the sole member of a manager-managed limited liability company, with the result that upon foreclosure of the charging lien under 805 ILCS 180/30-20 the judgment creditor became the sole economic interest holder as owner of 100 percent of the distributional interest, a compelling case might be made that equity requires the business of the LLC to be wound up if requested by such 100% owner.</p>
<p>But what if, after foreclosure of the charging order on 100 percent of the distributional interest of the judgment debtor, the judgment creditor was, in fact, still not the owner of 100 percent of distributional interests in the LLC? What if, as of the time the foreclosure and transfer occurred, there was another distributional interest holder — which was, in fact, the sole member? Might that make a difference in the court’s determination that it is equitable to wind up the LLC’s business?</p>
<p>Based on the hypothetical facts we have been examining (i.e., foreclosure of 100 percent of the distributional interest held by all LLC members), how could this factual twist ever come into play?</p>
<p><em>Here’s how:</em></p>
<p>Consider §35-3(c)(2) of the Illinois LLC Act, which permits the articles of organization or operating agreement to provide for a new member to, essentially, spring into existence effective as of the dissociation of the last remaining member. (Transfer of all of a member’s distributional interest is an act of dissociation. See 805 ILCS 180/35-45(3).)</p>
<p>Suppose the operating agreement provides that within six months after dissociation of the last remaining member, the manager has the right to cause the LLC to issue, say, a one-percent distributional interest in the LLC to the manager, upon contribution by the manager to the LLC of an amount equal to one percent of the aggregate balance of all capital accounts, and that upon such occurrence the manager shall be admitted as a member? Upon being admitted as a member owning a one-percent distributional interest, the manager would be the sole member, with the ability to give unanimous approval to all actions requiring approval of the members. Might that make a compelling case that the LLC remains as a fully functioning entity capable of carrying out its business purpose? Consider, particularly, if the LLC operates a business as a going concern, with employees, vendors, and community stakeholders who benefit from the LLC’s continued existence and operation. Is it likely a court will find equitable grounds to order that the business of the LLC be wound up?</p>
<p>Obviously, each case must be judged on its own merits. But once again, from the standpoint of negotiating on behalf of a judgment debtor, plausible arguments well-grounded in fact and warranted by existing law that can create doubt in the mind of a judgment creditor as to the likely success of its enforcement efforts are valuable tools in reaching a favorable settlement.</p>
<h4 class="wp-block-heading"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/IMG_01561.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="84" data-permalink="http://harp-onthis.com/illinois-llcs-the-asset-protection-advantage/img_0156-2/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/IMG_01561.jpg?fit=537%2C720" data-orig-size="537,720" data-comments-opened="1" data-image-meta="{"aperture":"2.8","credit":"","camera":"iPhone 4","caption":"","created_timestamp":"1310642963","copyright":"","focal_length":"3.85","iso":"80","shutter_speed":"0.00149925037481","title":""}" data-image-title="IMG_0156" data-image-description="<p>RKH iPhone photo – Chicago – from USFDLG offices</p>
" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/IMG_01561.jpg?fit=223%2C300" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/IMG_01561.jpg?fit=537%2C720" class=" size-medium wp-image-84 alignright" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/IMG_01561.jpg?resize=223%2C300" alt="IMG_0156" width="223" height="300" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/IMG_01561.jpg?resize=223%2C300 223w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/IMG_01561.jpg?w=537 537w" sizes="auto, (max-width: 223px) 100vw, 223px" /></a>F. How Do These LLC Provisions Aid a Commercial Real Estate Borrower?</h4>
<p>Narrowly speaking, one might wonder how everything discussed above helps in the typical commercial loan scenario in which the limited liability company is the borrower, with direct liability, and the LLC members are guarantors, also with direct liability. If the LLC members have a single project with a single loan from a single lender, the point is well taken. The lender does not need to go through the members to get to the LLC’s income and assets. It can simply enforce its judgment against the LLC, while simultaneously, if it so chooses, also pursuing the guarantor members.</p>
<p>But what if the guarantor members are active real estate investors/developers (or other investors/professionals) who don’t have just one project (or business) through one LLC and one lender, but rather have two or more projects (or businesses) through two or more separate LLCs with loans from two or more separate lenders?</p>
<p><em>EXAMPLE</em>: Consider this fact scenario:</p>
<p>Project A is owned by LLC A and financed by Lender A for $5,000,000 (Loan A).</p>
<p>Project B is owned by LLC B and financed by Lender B for $8,000,000 (Loan B).</p>
<p>The members of LLC A are X and Y, who jointly and severally guaranty Loan A.</p>
<p>The members of LLC B are X and Z, who jointly and severally guaranty Loan B.</p>
<p>LLC A and LLC B are each manager-managed LLCs, in each case managed by XYZ Management LLC, which is owned by X, Y, and Z as equal members. XYZ Management LLC is not a member of either LLC A or LLC B. XYZ Management LLC is jointly managed by X, Y, and Z.</p>
<p>Project B is doing well and has equity of $7,000,000, with annual net cash flow after debt service of $650,000, with taxable profits after depreciation of $600,000.</p>
<p>Project A is in default and facing a $3,000,000 deficiency after sale of the collateral, resulting in a personal judgment in favor of Lender A against members X and Y on their personal guaranties.</p>
<p>Assume X and Y have no other attachable assets.</p>
<p>Applying the asset protection-friendly provision of the Illinois LLC Act, (coupled with a thoughtfully structured operating agreement) what may be the likely outcome of Lender A’s efforts to enforce its judgments?</p>
<p>Lender A obtains a $5,000,000 judgment against LLC A and pursues members X and Y on their personal guaranties. After disposing of the collateral owned by LLC A for $2,000,000, Lender A obtains a $3,000,000 joint and several judgment against members X and Y on their personal guaranties.</p>
<p>Through a citation to discover assets or otherwise, Lender A learns that X is a 50-percent member of LLC B, which has net equity of $7,000,000. Lender A also learns that X and Y are members of XYZ Management LLC, each owning 33.3 percent of that LLC.</p>
<p>Lender A wishes to satisfy its $3,000,000 judgment by attaching the 50-percent membership interest of X in LLC B.</p>
<p>Pursuant to §30-20 of the Illinois LLC Act, 805 ILCS 180/30-20, Lender A’s exclusive remedy relative to the LLC interest of member X is to obtain a charging order, which is a lien against distributions payable to X. With LLC B having net cash flow after debt service of $650,000 per year, the most Lender B expects to receive is $325,000 per year, based on the 50-percent membership interest of X.</p>
<p>In fact, XYZ Management LLC (the manager of LLC A) decides to reserve $650,000 per year for capital repairs and improvements and as a reserve against possible tenant vacancies and other contingencies. XYZ Management LLC elects not to make any distributions to members. As a consequence, pursuant to Lender A’s charging order, Lender A gets nothing, because X is not entitled to receive any distributions from LLC B on its distributional interest.</p>
<p>Lender A is unhappy. Lender A contemplates foreclosing its lien on the distributional interest of X pursuant to §30-20(b). If it does so, Lender A will become the owner of the 50-percent distributional interest of X in LLC B and will be subject to taxable phantom income of $300,000 per year (50 percent of the hypothetical $600,000 per year in taxable income) as the owner of a 50-percent distributional interest. Instead of being better off, Lender A may be worse off, having incurred a substantial income tax liability.</p>
<p>As an alternative, Lender A decides to try to force a liquidation of LLC B, so that it will receive 50 percent of the hypothetical $7,000,000 in equity in the project owned and operated by LLC B. To do this, Lender A decides to pursue the interests of X and Y in XYZ Management LLC. Since X and Y each owns 33.3 percent of XYZ Management LLC, Lender A assumes it can take control of XYZ Management LLC by obtaining a charging order on the interests of X and Y in XYZ Management LLC and then acquiring 66.6 percent via foreclosure of its charging order lien pursuant to §30-20(b).</p>
<p>Lender A contemplates that by acquiring the ownership interests of two out of three members of XYZ Management LLC, including the interests of two out three of its managers, Lender A will control XYZ Management LLC and, through that control, will be the manager of LLC B and can direct a sale or liquidation of LLC B’s assets.</p>
<p>Unfortunately for Lender A, it discovers that by foreclosing on the interests of X and Y in XYZ Management LLC, Lender A acquires, pursuant to §30-20(b), only the interests of a transferee, with no right to vote as a member and no right to participate in management of XYZ Management LLC per §30-10(d). Therefore, Lender A still has no management authority with respect to LLC B.</p>
<p>Query: Based on the foregoing hypothetical facts and likely outcome of its enforcement efforts, might the lender be willing to consider settlement with X and Y for less than full payment?</p>
<h4 class="wp-block-heading">G. What Is the Defaulted Borrower’s Exit Strategy?</h4>
<p>Asset protection can be more an “art” than a science. There is no magic formula for success in protecting the assets and income of commercial real estate borrowers when a loan goes bad, but there are effective strategies that can help facilitate settlement upon favorable terms that may avoid catastrophic financial ruin.</p>
<div class="wp-block-image">
<figure class="alignleft"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_28551060.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="206" height="300" data-attachment-id="518" data-permalink="http://harp-onthis.com/the-little-known-two-year-rule-for-employment-restrictive-covenants-illinois/httpwww-dreamstime-comstock-photo-confused-business-man-thinking-wich-way-to-go-image28551060/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_28551060.jpg?fit=1437%2C2087" data-orig-size="1437,2087" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"(c) Feedough | Dreamstime.com","focal_length":"0","iso":"0","shutter_speed":"0","title":"http:\/\/www.dreamstime.com\/stock-photo-confused-business-man-thinking-wich-way-to-go-image28551060"}" data-image-title="http://www.dreamstime.com/stock-photo-confused-business-man-thinking-wich-way-to-go-image28551060" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_28551060.jpg?fit=206%2C300" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_28551060.jpg?fit=705%2C1024" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_28551060.jpg?resize=206%2C300" alt="http://www.dreamstime.com/stock-photo-confused-business-man-thinking-wich-way-to-go-image28551060" class="wp-image-518" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_28551060.jpg?resize=206%2C300 206w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_28551060.jpg?resize=705%2C1024 705w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_28551060.jpg?w=1437 1437w" sizes="auto, (max-width: 206px) 100vw, 206px" /></a></figure></div>
<p>A principal objective of asset protection — and even most defensive efforts on behalf of a commercial real estate borrower in the event of default on a commercial real estate loan — is typically to motivate the lender to settle on favorable terms. What terms a borrower or guarantor may consider favorable depends on the facts and circumstances of the particular case.</p>
<p>Often, the favorable outcome being sought is a release of the loan guarantors from personal liability on their loan guaranties. This may require the payment of some money by the guarantors, but ideally substantially less that the full exposure on the personal guaranty.</p>
<p>Generally, the lender is seeking to maximize its recovery. If it can recover the entire indebtedness and costs of collection, the lender will seek full recovery. If full recovery becomes doubtful, however, most lenders will settle for an approximation of what the lender reasonably expects it will net through continued forced collection efforts. The lender’s objective of maximizing recovery has been expressly incorporated into financial institution supervisory guidance through the joint financial regulators’ <em>Policy Statement on Prudent Commercial Real Estate Loan Workouts</em>, <a href="http://www.fdic.gov/news/news/financial/2009/fil09061a1.pdf" target="_blank" rel="noopener">www.fdic.gov/news/news/financial/2009/fil09061a1.pdf</a>.</p>
<p>Weighing the costs of recovery against the amount of recovery likely to be obtained is a relevant factor for lenders to consider in maximizing their recovery. Money has “time value” as well. The more quickly money is recovered, the more value it has. The fact that a judgment may be accruing interest at nine percent per annum, or that the borrower and its guarantors are liable to pay costs of collection, including reasonable attorneys’ fees, becomes fairly meaningless if the borrower and guarantors have no assets or income from which the lender can readily recover its claim. If the borrower and/or guarantors are properly positioned to borrow funds from friends or family to pay even a modest settlement that is equivalent to, or slightly exceeds, what the lender can readily recover through forced collection efforts, settlement is a plausible outcome.</p>
<p>The more difficult and doubtful collection efforts become, the more likely one may be to obtain favorable settlement terms.</p>
<h4 class="wp-block-heading">H. Timing Consideration for Asset Protection</h4>
<p>Asset protection strategies are most effective when planned far in advance. Transfers of assets into a limited liability company or other asset protection-friendly vehicle can come too late if not completed well in advance of financial difficulties. The statute of limitations for a transfer constituting a fraudulent transfer is four years. 740 ILCS 160/10. Fortunately for most commercial real estate borrowers, Illinois business owners and Illinois licensed professionals, no transfer may be necessary for them to avail themselves of the asset protection advantages of an Illinois LLC since most commercial real estate projects financed in the past several years, and most Illinois based businesses, and many Illinois licensed professions, have been owned from the outset in an Illinois LLC. Creative amendment to an existing operating agreement may be sufficient to increase the level of asset protection.</p>
<p>Planning ahead is the ideal solution — but sometimes you just have to take what the statute gives you. For Illinois LLCs, the Illinois LLC Act actually gives quite a lot.</p>
<h3 class="wp-block-heading"><span style="text-decoration: underline;">PART II</span>: Immunity from Liability of Members and Managers</h3>
<p>In Part I of this article, we discussed the key sections of the Illinois LLC Act which protect the LLC, its business, and other members, if any, by limiting recovery <em>vis-à-vis</em> the LLC of a judgment entered against an LLC member.</p>
<p>Of equal or greater value is 805 ILCS 180/10-10, as interpreted and sustained in Dass v. Yale, 2013 IL App (1st) 122520; 3 N.E.3d 858.</p>
<p>A. <strong>805 ILCS 180/10-10</strong> provides, as follows:</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p>“(a) Except as otherwise provided in subsection (d) of this Section, the debts, obligations and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company. A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager.</p>
<p>(b) (Blank)</p>
<p>(c) The failure of a limited liability company to observe the usual company formalities or requirements relating to the exercise of company powers or management of its business is not a ground for imposing personal liability on the members of managers for liabilities of the company.</p>
<p>(d) All or specified members of a limited liability company are liable in their capacity as members for all or specified debts, obligations, or liabilities of the company if:</p>
<p>(1) a provision to that effect is contained in the articles of organization; and</p>
<p>(2) a member so liable has consented in writing to the adoption of the provision or to be bound by the provisions.”</p>
</blockquote>
<h4 class="wp-block-heading"><strong>B. <em>Dass v. Yale</em></strong>, 2013 IL App (1st) 122520; 3 N.E.3d 858, cert. denied.</h4>
<p>In <em>Dass v. Yale</em>, the plaintiff claimed that Yale, the sole managing member of Wolcott LLC, an Illinois limited liability company, defrauded the plaintiff in connection with the sale of a condominium unit by making false representations plaintiff claimed constituted, <em>inter alia</em>, common law fraud. <em>See id</em>., ¶ 2.</p>
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<p>Yale moved to dismiss the claims against him, asserting he was insulated from liability under Section 10-10 of the Illinois LLC Act. The plaintiff objected, claiming the legislature never intended Section 10-10 of the Illinois LLC Act to shield limited liability company members or managers who commit fraud. The trial court disagreed, and sided with defendant Yale, finding that members and managers are immune from liability under Section 10-10 of the Illinois LLC Act and granted Yale’s motion to dismiss. <em>Id.</em> ¶ 3. The plaintiff appealed.</p>
<p>The Appellate Court noted that plaintiff Dass was not asserting a right to pierce the LLC entity veil, using any recognized piercing test (which will be discussed in Part II – C, below), but rather was asserting liability of Yale based, essentially, upon the general notion (as incorporated in the legislative comments to Section 303 of the Uniform Limited Liability Company Act (the “Uniform Act”)) that an agent, even while acting on behalf of a principal, is jointly and severally liable for tortious conduct committed by the agent. Id. ¶¶ 36, 40. Arguing that Section 10-10 of the Illinois LLC Act is substantively similar to Section 303 of the Uniform Act, plaintiff Dass asserted that Yale should be liable for the claimed fraud (or, at least, should have to answer for the claim, rather than be dismissed pursuant to Yale’s motion to dismiss).</p>
<p>The Appellate Court also noted that Section 303 of the Uniform Act and the comments accompanying Section 303 may normally be persuasive authority in interpreting Section 10-10 of the Illinois LLC Act due to similar language used in each, even though neither Section 303 nor the comments are formally a part of the Illinois LLC Act. Id., ¶¶ 40-41.Taking into consideration of the history of the Illinois LLC Act and other cases interpreting the history, however, the Appellate Court determined that the trial court was correct in finding that Yale is shielded from liability. The court stated:</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p>“Indeed, examining the history of the LLC Act itself demonstrates that the trial court was correct in interpreting section 10-10 to shield Yale from liability. The current language of section 10-10 has been in effect since January 1, 1998. See Pub. Act. 90-0424 (eff. Jan. 1, 1998). Prior to that, section 10-10 read:</p>
<p>(a) A member of a limited liability company shall be personally liable for any act, debt, obligation or liability of the limited liability company or another member or manager to the extent that a shareholder of an Illinois business corporation is liable in an analogous circumstance under Illinois law.</p>
<p>(b) A manager of a limited liability company shall be personally liable for any act, debt, obligation or liability of the limited liability company or another member or manager to the extent that a shareholder of an Illinois business corporation is liable in an analogous circumstance under Illinois law. 805 ILCS 180/10-10 (West 1996).</p>
<p>Generally, a change to the unambiguous language of a statute creates a rebuttable presumption that the amendment was intended to change the law. Here, the language of the LLC Act was changed by removing language explicitly providing for personal liability. As we noted in <em>Puleo,</em> “[a]s we have not found any legislative commentary regarding that amendment, we presume that by removing the noted statutory language, the legislature meant to shield a member or manager of an LLC from personal liability.” <em>Dass</em>, 2013 IL App (1st) 122520, ¶ 41 (internal citations omitted).”</p>
</blockquote>
<p>The court also noted that “the express language of section 10-10 (currently) provides that ‘the debts, obligations, and liabilities of a limited liability company, <em>whether arising in contract, tort, or otherwise</em>, are solely the liabilities of the company.’ We see no reason why the reasoning of <em>Puleo</em> and <em>Carollo</em>, which focused on the language of the LLC Act and its amendment, would not apply to a liability arising in tort, as in the case at bar, when such a scenario is expressly contemplated by the language of section 10-10. Accordingly, we affirm the trial court’s dismissal of plaintiffs’ complaint.” <em>Id</em>. ¶ 44 (emphasis in original) (internal citations omitted).</p>
<p>The plaintiff petitioned the Illinois Supreme Court for leave to appeal, which was denied on March 26, 2014. 2014 WL 1385161, 5 N.E.3d 1123 (Ill. Mar. 26, 2014). Thus, the decision stands as the binding law of Illinois.</p>
<h4 class="wp-block-heading">C. Piercing the LLC Entity Veil</h4>
<p>In a footnote, the Appellate Court in <em>Dass v. Yale</em> stated as follows: “We note that <em>Puleo</em> was somewhat limited in <em>Westmeyer v. Flynn</em>, 382 Ill. App. 3d 952, 960, 321 Ill. Dec. 406, 889 N.E.2d 671 (2008), where we found that section 10-10 did not bar actions involving piercing the</p>
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<figure class="alignright"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="199" height="300" data-attachment-id="1145" data-permalink="http://harp-onthis.com/due-diligence-checklists-for-commercial-real-estate-transactions-3/harp-3_17_15-019/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?fit=2848%2C4288" data-orig-size="2848,4288" data-comments-opened="1" data-image-meta="{"aperture":"9","credit":"","camera":"NIKON D300","caption":"","created_timestamp":"1426589698","copyright":"","focal_length":"52","iso":"200","shutter_speed":"0.008","title":"","orientation":"0"}" data-image-title="Harp 3_17_15-019" data-image-description="" data-image-caption="<p>R. Kymn Harp<br />
Robbins, Salomon & Patt, Ltd.</p>
" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?fit=199%2C300" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?fit=680%2C1024" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?resize=199%2C300" alt="R. Kymn Harp Robbins, Salomon & Patt, Ltd." class="wp-image-1145" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?resize=199%2C300 199w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?resize=680%2C1024 680w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?w=2000 2000w" sizes="auto, (max-width: 199px) 100vw, 199px" /></a><figcaption class="wp-element-caption">R. Kymn Harp<br />Robbins, Salomon & Patt, Ltd.</figcaption></figure></div>
<p>corporate veil. However, in the case at bar, there has been no claim that the corporate veil should be pierced.” <em>Dass</em>, 2013 IL App (1st) 122520, at n. 7.</p>
<p>With that footnote, it is at least appropriate to consider the circumstances under which the entity veil of an Illinois limited liability company might properly be pierced.</p>
<p>With one significant exception, Illinois limited liability companies are subject to the same piercing rules as Illinois corporations. <em>Buckley v. Abuzir</em>, 2014 IL App (1st) 130469; 8 N.E.3d 1166; <em>Denmar Builders, Inc. v. Suhadolnik (In re Suhadolnik)</em>, No. 08-A-7116, 2009 WL 2591338, at *4 (Bankr. C.D. Ill. Aug. 20, 2009).</p>
<p>Illinois courts have developed fairly uniform rules on the subject of veil-piercing. “Courts may pierce the corporate veil, where to corporation is so organized and controlled by another entity that maintaining the fiction of separate entities would sanction fraud or promote injustice. <em>Buckley</em>, 2014 IL App (1st) 130469, ¶ 12. A party seeking to pierce the corporate veil must make a substantial showing that one corporation is a dummy or a sham for another.” <em>Id.; In re Estate of Wallen</em>, 262 Ill. App. 3d 61, 68 (2d Dist. 1994).</p>
<p>Illinois courts will pierce the corporate veil when the following two-part test is satisfied: “(1) where there is such a unity of interest and ownership that the separate personalities of the corporation and the parties who compose it no longer exist; and (2) circumstances are such that adherence to the fiction of a separate corporation would promote injustice or inequitable circumstances. <em>Tower Investors LLC v. 111 East Chestnut Consultants, Inc</em>., 371 Ill. App. 3d 1019, 1033-34 (1st Dist. 2007).</p>
<p>The first part of the test generally refers to the failure of the corporation to observe corporate formalities. The second part of the test looks to whether circumstances exist that would effectively sanction fraud if the veil is not pierced.</p>
<p>The first part of the two-part test for veil piercing does not apply to limited liability companies under the Illinois LLC Act, by reason of the express language of 805 ILCS 180/10-10(c), which provides “The failure of a limited liability company to observe the usual company formalities or requirements relating to the exercise of company powers or management of its business is not a ground for imposing personal liability on the members or managers for liabilities of the company.” Id.</p>
<p>Note, however, that “while the Act provides specifically that the failure to observe corporate formalities is not a ground for imposing personal liability on the members of an LLC, it does not bar other bases for corporate veil piercing, such as alter ego, fraud or undercapitalization.” <em>Westmeyer v. Flynn</em>, 382 Ill. App. 3d 952, 960 (1st Dist. 2008); <em>Denmar Builders, Inc.</em>, 2009 WL 2591338, at *4; I<em>n re Polo Builders, Inc.</em>, 388 B.R. 338, 384 (Bankr. N.D. Ill. 2008).</p>
<p>An in-depth discussion of the overall topic of LLC veil piercing is beyond the scope of this article. Generally speaking, however, it is not as simple as some attorneys seem to think. Under proper circumstances, however, piercing may be allowed.</p>
<p>Enlightening discussions of the topic of veil piercing can be found in cases such as: <em>Judson Atkinson Candies, Inc. v. Latini-Hohberger Dhimantec</em>, 529 F.3d 371 (7th Cir. 2008); <em>Buckley v. Abuzir,</em> 2014 IL App (1st) 130469; and <em>On Command Video v. Roti</em>, 705 F.3d 267 (7th Cir. 2013). As a general proposition, however, merely losing money, failing in business, or depleting available capital through the ordinary course of business operations will not be a sufficient basis to pierce the entity veil to get to the assets of LLC members or managers. A party seeking to pierce the entity veil must make a substantial showing that the entity is a sham or was used to intentionally mislead or defraud in circumstances that would promote injustice. Mere inability of an LLC to satisfy or pay its liabilities, without more, is not enough. See On Command Video, 705 F.3d at 272; <em>In re Estate of Wallen</em>, 262 Ill. App. 3d at 68; Buckley, 2014 IL App (1st) 130469; 8 N.E.3d 1166; and <em>Tower Investors LLC</em>, 371 Ill. App. 3d at 1033-34.</p>
<h5 class="wp-block-heading">*<em>Publishing Note</em>: Parts of this article first appeared in the Commercial Real Estate handbook published by the Illinois Institute for Continuing Legal Education as part of the author’s 2013 chapter supplement [Chapter 4.S.] to “<em>Commercial Real Estate Financing from the Borrower’s Perspective</em>”.</h5>
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<title>Asset Protection – Lessons Learned</title>
<link>http://harp-onthis.com/asset-protection-lessons-learned/</link>
<comments>http://harp-onthis.com/asset-protection-lessons-learned/#comments</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Thu, 18 Sep 2014 11:10:19 +0000</pubDate>
<category><![CDATA[Asset Protection]]></category>
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<description><![CDATA[“The best time to plant a tree was twenty years ago.         The second best time is today.” Chinese proverb For over 35 years, I have represented commercial real estate investors, developers and business owners. Most of that time has […]]]></description>
<content:encoded><![CDATA[
<h4 class="wp-block-heading"><em>“The best time to plant a tree was twenty years ago.</em></h4>
<h4 class="wp-block-heading"><em> The second best time is today.”</em></h4>
<p><em>Chinese proverb</em></p>
<div class="wp-block-image">
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<p>For over 35 years, I have represented commercial real estate investors, developers and business owners. Most of that time has been spent helping them acquire, finance, expand, develop, manage and grow their assets and businesses. For the past 5 to 6 years, as we have struggled through the <i>Great Recession</i>, a huge amount of my time has been spent helping clients <i>keep</i> their assets.</p>
<p>Growing up, I was steeped in the practical view that it is not so much what you acquire that counts, but, rather, what you keep. My parents and grandparents were not in the real estate business to make <i>others </i>wealthy. They were playing real life Monopoly<span style="font-size: small;">®</span>. They played to win. It was less about money for money’s sake than it was </p>
<span id="more-58"></span>
<p>a means of keeping score. Invest. Reinvest. Expand the bottom line. Control your losses. And keep what you acquire.</p>
<p>A key concern was always asset protection. Perhaps this was a byproduct of my grandfather’s experiences during the <i>Great Depression</i>. He did well, while others around him lost everything. A theme underpinning virtually all investment strategies was to structure our business affairs into risk remote compartments, so that if bad things happened to one project, or with one business, the damage could be contained. My father would compare it to the structure of his ship in the Navy during World War II. If the hull was damaged, water tight bulkheads could contain the damage to avoid jeopardizing the entire ship.</p>
<p>This brings to light one of the great misconceptions about asset protection. A sizable number of people start with the belief that the objective of asset protection is to prevent all creditors from ever getting any of their assets or income. Realistically, it doesn’t work that way. Not even if you use an offshore asset protection trust or other advanced asset protection devices. To even approach making that happen, you would have to create such a tangled weave of trusts and limited liability entities, and give up so much control, that you would never be able to conduct your business or live your life as a functioning human being. It would be immensely expensive, and it still wouldn’t protect <i>everything</i>.</p>
<div class="wp-block-image">
<figure class="alignright size-large is-resized"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="1918" data-permalink="http://harp-onthis.com/asset-protection-lessons-learned/assetmanagementwordscloudonscreen-financialandbusinessconcept/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/asset-protection-scaled.jpg?fit=2560%2C1707" data-orig-size="2560,1707" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"Shutterstock","camera":"","caption":"","created_timestamp":"0","copyright":"Copyright (c) 2018 Wright Studio\/Shutterstock. No use without permission.","focal_length":"0","iso":"0","shutter_speed":"0","title":"Asset,Management,Words,Cloud,On,Screen.,Financial,And,Business,Concept.","orientation":"1"}" data-image-title="Asset,Management,Words,Cloud,On,Screen.,Financial,And,Business,Concept." data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/asset-protection-scaled.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/asset-protection-scaled.jpg?fit=1024%2C683" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/asset-protection.jpg?resize=401%2C267" alt="asset protection" class="wp-image-1918" width="401" height="267" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/asset-protection-scaled.jpg?resize=1024%2C683 1024w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/asset-protection-scaled.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/asset-protection-scaled.jpg?resize=768%2C512 768w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/asset-protection-scaled.jpg?resize=1536%2C1024 1536w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/asset-protection-scaled.jpg?resize=2048%2C1365 2048w" sizes="auto, (max-width: 401px) 100vw, 401px" /></figure></div>
<p>Asset protection need not be particularly complicated or expensive. Basic asset protection strategies can be implemented that do not get in the way of your business or everyday life. Although advanced asset protection planning can utilize off-shore trusts and off-shore bank accounts, those tools and techniques are the exception rather than the rule. They are available if the situation warrants, but for most people there is seldom a legitimate reason to go to such extremes.</p>
<p>Sadly, a significant number of commercial real estate investors and business owners, and many of their lawyers and accountants, pay almost no attention to even basic asset protection strategies. This was never more obvious, and unfortunate, than during the <i>Great Recession</i> we have been working through over the past five to six years. Otherwise sophisticated and historically successful commercial real estate investors, developers and business owners have lost virtually everything. What makes this even more tragic is that, with even modest asset protection planning, many of these catastrophic financial disasters could have been averted.</p>
<p>Clients of mine who planned ahead by structuring their affairs for asset protection have survived this recession and are generally well positioned to move forward to take advantage of emerging opportunities as the economy improves. Many who did not are faced with starting over.</p>
<p>Why not think ahead to protect your assets? You are under no legal obligation to structure your financial affairs in a way that makes it easier for banks and other creditors to take virtually everything you own. Your obligation is to your family, and to yourself, to make sure your life’s work and life’s savings are not lost in the event of financial calamity.</p>
<p>A key point about asset protection is that, to be effective, it must be done well in advance. Once the proverbial <i>fan</i> has been hit, it is likely too late. There may still be some modestly effective strategies to be employed to minimize damage, but real asset protection with powerfully effective outcomes starts when there are no (or, at least, very few) storm clouds on the horizon.</p>
<p>Once you are in financial trouble, it is often too late. Transfers of assets for less than fair value can be set aside as a preference in bankruptcy, or as a fraudulent transfer. The “fraud” in “fraudulent transfer” is not traditional fraud. It is simply the transfer of an asset for less than fair value for the principal purpose of avoiding creditors.</p>
<p>In Illinois, the statute of limitations for fraudulent transfers is four years. This means attempts to transfer assets for less than fair value can be attacked and set aside for four years after the transfer is made. For Medicaid, the look-back period is five years. Early adoption and implementation of even a simple asset protection plan can avoid these attacks.</p>
<p>One of the simplest examples of asset protection: If you are married and own a home with your spouse in Illinois or Indiana, and in most other states, there is virtually no excuse for not owning the home as <i>tenants by the entireties</i> to protect your home from claims of creditors of only one spouse. This is particularly true if one spouse is engaged in business or professional activities with a high risk of liability (business owner, investor, developer, doctor, entrepreneur, etc.), while the other is not. Remarkably, I discovered while defending real estate developers and investors in loan workout and loan settlement efforts over the past few years that not even this modest asset protection tool is always in place. It would have cost nothing. Instead, its absence cost some families their homes.</p>
<p>Beyond these fundamental considerations, there are many others. A common mistake made by business owners is that they will sometimes form a corporation or limited liability company with the intent to protect themselves from personal liability, but then place virtually all of their business assets in a single company, or in a subsidiary of a high risk operating company. If a judgment is entered against the company, all of the business assets may be lost.</p>
<p>Whenever practical, business operations posing a risk of liability should be separated from asset ownership. Assets can and should typically be owned by a low-risk (preferably tax-advantaged) entity and leased or licensed to the higher risk operating company. The best, and least expensive, time to implement this structure is when you acquire the asset or business. Ownership of the low-risk company should likewise be held by a low-risk owner – perhaps a spouse, adult child, trust or holding company. The asset protection plan can, and often should, be part of a more comprehensive estate plan.</p>
<p>Similarly, real estate investments and business ownership structures are often not adequately designed to militate against the risk of liability arising from loan and lease guaranties or other sources of liability to individual sponsors or principals.</p>
<p>There is much that can be done to protect your assets. Many techniques present tax advantages as well. Exactly what can be done depends upon your particular circumstances and when you begin. The best time to begin would have been several years ago. The second best time to begin is now. It is foolish to leave your hard earned assets needlessly exposed to creditor claims when even basic asset protection planning can protect them.</p>
<p>War stories abound of commercial real estate investors and business owners who have lost fortunes, large and small, because they did not plan ahead. Perhaps they thought they were smart enough to be able to avoid financial catastrophes like we have experienced over the past several years. Or they thought they had large enough incomes or net worth to withstand economic adversity or unexpected liability. Or they believed they had such great relationships with their banks or other lenders that obtaining loan extensions or new working capital lines of credit would never be a problem. I’ve head most of the “reasons” – but none of them matter when your assets are being attached by hungry creditors. When you go from being worth millions, to having huge unsatisfied deficiency judgments entered against you, the <i>reasons</i> for not protecting your assets, and your family’s future, ring hollow.</p>
<p>The past five to six years, in particular, have been an asset protection laboratory. Theory has been tested. We have seen many examples of even basic asset protection techniques that work, and have seen, unfortunately, what happens when little or no asset protection planning took place.</p>
<p>If your real estate investments and commercial activities are worth your time and energy – particularly if you dedicate most of your adult life away from your family working to make them succeed – then they are worth protecting. It is much more cost effective to develop and implement an asset protection plan “<i>as you go</i>“, rather than waiting until you decide your estate is “<i>big enough to protect</i>“. At that point, it may be too late, it will certainly be more expensive, and will very likely be less effective. Often, asset protection <i>as you go</i> will cost no more to do right than you spend doing it wrong.</p>
<p>Over the next several years a lot of rebuilding will take place. Literally, in the form of new and redeveloped commercial real estate projects and business enterprises, and figuratively, as previously successful real estate professionals and business owners rebuild their financial lives. Do not make the same mistakes this time around as were made by many in the past. Plan ahead. Build-in basic asset protection strategies in every business structure you devise. Don’t wait another twenty years. Depending upon your age, you may not get a <i>third</i> chance.</p>
<p>Thanks for listening . . .</p>
<p>Kymn</p>
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<title>Information Providers – Can We Sue Them If They’re Wrong?</title>
<link>http://harp-onthis.com/information-providers-can-we-sue-them-if-theyre-wrong/</link>
<comments>http://harp-onthis.com/information-providers-can-we-sue-them-if-theyre-wrong/#comments</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Sat, 23 Aug 2014 14:05:49 +0000</pubDate>
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<description><![CDATA[Of Course We Can Sue Them . . . But Can We Hold Them Liable? No one knows everything. It’s a simple fact of life. Often, businesses turn to other businesses and professionals to obtain needed information. The range of commercial information […]]]></description>
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<h2 class="wp-block-heading">Of Course We Can Sue Them . . . But Can We Hold Them Liable?</h2>
<p>No one knows everything. It’s a simple fact of life. Often, businesses turn to other businesses and professionals to obtain needed information. The range of commercial <em>information providers</em> assisting business owners and real estate investors, developers and lenders gather and analyse information is vast.</p>
<div class="wp-block-image">
<figure class="alignleft"><a href="http://www.rsplaw.com/diana-psarras/" rel="noopener"><img data-recalc-dims="1" loading="lazy" decoding="async" width="229" height="300" data-attachment-id="326" data-permalink="http://harp-onthis.com/information-providers-can-we-sue-them-if-theyre-wrong/diana-psarras/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/04/Diana-Psarras.jpg?fit=1569%2C2047" data-orig-size="1569,2047" data-comments-opened="1" data-image-meta="{"aperture":"2.8","credit":"","camera":"iPhone 4","caption":"","created_timestamp":"1342714276","copyright":"","focal_length":"3.85","iso":"125","shutter_speed":"0.0666666666667","title":""}" data-image-title="Diana H. Psarras" data-image-description="" data-image-caption="<p>Diana H. Psarras<br />
Business & Trust Litigation, Shareholder -Robbins, Salomon & Patt, Ltd.</p>
" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/04/Diana-Psarras.jpg?fit=229%2C300" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/04/Diana-Psarras.jpg?fit=784%2C1024" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/04/Diana-Psarras.jpg?resize=229%2C300" alt="Diana H. Psarras Business & Trust Litigation, Shareholder -Robbins, Salomon & Patt, Ltd." class="wp-image-326" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/04/Diana-Psarras.jpg?resize=229%2C300 229w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/04/Diana-Psarras.jpg?resize=784%2C1024 784w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/04/Diana-Psarras.jpg?w=1569 1569w" sizes="auto, (max-width: 229px) 100vw, 229px" /></a><figcaption class="wp-element-caption">Diana H. Psarras<br />Business & Trust Litigation, Shareholder, Robbins, Salomon & Patt, Ltd.</figcaption></figure></div>
<p><em>The question is:</em> Do we have a legal right to rely on the information they provide? What if the information is wrong? What if we rely on that incorrect information and suffer a loss? Is the information provider liable?</p>
<p>It could be anything from hiring an appraiser to appraise a property to support a commercial loan; hiring a lab to analyze nutrition and caloric content of food products; or engaging a financial consultant to evaluate a company’s assets and liabilities as part of a business acquisition or merger; or seeking out a lending institution to provide information regarding the creditworthiness of a potential borrower. We might hire a structural engineer to evaluate the structural integrity of a building or bridge or other structure; or engage a surveyor to determine the scope and size of a parcel of land, or the location of easements and improvements located on the property, or the existence of rights of way to access the property; or we might retain a person or business holding itself out as a “due diligence” expert to investigate the essential facts necessary to enable us to determine whether to proceed with a particular transaction or project. The list of commercial information providers we rely upon to conduct our affairs is nearly endless.</p>
<p>Another simple fact of life is that people can and do make mistakes. They misinterpret information. Misstate the facts. Fail to discover and disclose all material information necessary to make information they have provided sufficient to enable informed action and decision-making.</p>
<div class="wp-block-image">
<figure class="alignright size-full is-resized"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="1866" data-permalink="http://harp-onthis.com/information-providers-can-we-sue-them-if-theyre-wrong/banker-telling-to-client-regarding-bank-services-make-recommendations-and-consulting/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/banker-telling-to-client-regarding-bank-services-make-recommendations-and-consulting.jpg?fit=1000%2C667" data-orig-size="1000,667" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="banker-telling-to-client-regarding-bank-services-make-recommendations-and-consulting" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/banker-telling-to-client-regarding-bank-services-make-recommendations-and-consulting.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/banker-telling-to-client-regarding-bank-services-make-recommendations-and-consulting.jpg?fit=1000%2C667" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/banker-telling-to-client-regarding-bank-services-make-recommendations-and-consulting.jpg?resize=400%2C267" alt="banker telling to client regarding bank services make recommendations and consulting" class="wp-image-1866" width="400" height="267" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/banker-telling-to-client-regarding-bank-services-make-recommendations-and-consulting.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/banker-telling-to-client-regarding-bank-services-make-recommendations-and-consulting.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/banker-telling-to-client-regarding-bank-services-make-recommendations-and-consulting.jpg?resize=768%2C512 768w" sizes="auto, (max-width: 400px) 100vw, 400px" /></figure></div>
<p>What happens when your information provider gives you bad information and you suffer a loss as a result? Do you have any recourse? What if </p>
<span id="more-325"></span>
<p>the bad information was simply a mistake? The information provider unintentionally got it wrong, rather than intentionally mislead you? The information provider may not have intended to cause you harm – but you have suffered a loss nonetheless. Is the information provider liable?</p>
<p>If the information provider supplies that information in the course of its business, knowing that you may rely upon it, the answer may very likely be “<em>YES</em>”.</p>
<p>A person who engages in the business of supplying information for the guidance of others is liable for economic damages if the information is incorrect or so incomplete as to be misleading. This is true whether the information provider knew it was wrong or not. Illinois law recognizes that, in general, information providers have a duty to provide complete and accurate information to the intended recipients of the information. If that duty is breached, and you sustain a loss because the information received was inaccurate or misleading, you may be able to recover damages from the party that provided the inaccurate information. The legal theory that gives you the right to sue and recover your damages is “negligent misrepresentation”.</p>
<h2 class="wp-block-heading">What is negligent misrepresentation?</h2>
<p>To prevail on a claim for negligent misrepresentation, you must plead and then prove that the information provider:</p>
<ol class="wp-block-list">
<li>made a false statement of material fact;</li>
<li>was careless in ascertaining the truth of the statement;</li>
<li>made the statement with the intention that you would act in reliance on it;</li>
<li>you must have acted in reliance on the truthfulness of the statement;</li>
<li>you must have incurred damage or loss as a result of such reliance; and</li>
<li>the information provider must have been under a duty to communicate accurate information.</li>
</ol>
<h2 class="wp-block-heading">What is Fraudulent Misrepresentation?</h2>
<p>Negligent misrepresentation is a stone’s throw away from fraudulent misrepresentation, differing in the important element of the intent of the information provider. To make a valid claim for “fraudulent misrepresentation”, the information provider must have known that the false statement was untrue, or must have acted in reckless disregard of its duty to ascertain and report the truth. To be liable, however, it is not necessary for the information provider to commit fraudulent misrepresentation. An information provider may be liable even if it was merely negligent in providing incorrect information.</p>
<h2 class="wp-block-heading">An Information Provider Can Be Liable For Even Negligent Misrepresentation</h2>
<p>Carelessness or negligence in ascertaining the truth of the erroneous statement is sufficient to render the information provider liable. The information provider doesn’t have to intend to offer bad information; just being careless in doing so is a sufficient basis to become liable. The information provider may have genuinely believed it to be true, but if it is untrue and the information provider was careless or negligent in determining the accuracy of the statement, the information provider may be liable to you for damages you sustain in reliance upon the faulty statement.</p>
<h3 class="wp-block-heading">Liability for Failure to Provide Full Information</h3>
<p>Liability of the information provider may even result from failure to provide full information. If a statement of “fact” fails to include other information that is reasonably necessary to prevent that statement from being misleading, this failure to provide adequate information may also result in liability to the information provider.</p>
<h2 class="wp-block-heading">Information Providers Have A Duty To Provide Full and Accurate Information</h2>
<p>Where does the duty arise from?</p>
<p>The duty owed by information providers may arise in different ways. It could be a “<em>fiduciary duty</em>” or a “<em>contractual duty</em>”, or a duty imposed by law.</p>
<ul class="wp-block-list">
<li>A fiduciary duty can arise as a matter of law – attorney/client, trustee/beneficiary, corporate officer/corporation, etc., or can arise based on special circumstances of a parties’ relationship with another, wherein one party places trust and confidence in another so that the latter, after accepting the trust and confidence, gains superiority and influence over the former.</li>
<li>A contractual duty may arise by the terms of a written or oral contract, or may arise as a consequence of custom and practice.</li>
<li>Duties imposed by law may arise by statute, regulation, custom and practice, or at common law.</li>
</ul>
<p>The duty of information providers to provide complete and accurate information can stem from one or more of the above.</p>
<h2 class="wp-block-heading">What does this mean in the real world and to whom who does this apply?</h2>
<p>The type or scope of information to be provided may arise via contract, but the duty of an information provider to make sure the information provided is accurate is a duty implied in law and arises separate and apart from the contract. For example, if you contract with an information provider to provide information that will be used by you in your trade or business, that information provider owes you a duty to provide information that is accurate, and not misleading, even if there is no provision in your contract expressly requiring it to do so.</p>
<h3 class="wp-block-heading">Real world examples:</h3>
<p><em>Example A:</em> Illinois courts have held that a bank providing credit information about a borrower to a potential lender was an information provider who had a duty to provide accurate information. The bank, in its ordinary course of business, was supplying information for the guidance of another which it knew would be relying on the information in making its lending decision. In the case before the Court, the bank gave inaccurate credit information about the prospective borrower, which was relied upon by the lender. The information providing bank was held liable for damages.</p>
<p><em>Example B:</em> Illinois courts have held that a seller’s real estate broker ordinarily has no duty to a prospective buyer to independently substantiate the seller’s representations of fact concerning a property. The seller’s broker is not hired by the buyer to provide information upon which the buyer will be making a home-purchase decision, so the broker has no duty to the buyer. Consequently, it has been held that the buyer has no valid claim against the broker for carelessly providing inaccurate information. However, the broker is not permitted to knowingly provide erroneous information. If the broker knows the information provided is not accurate, but supplies it anyway, the broker may be liable to the buyer for fraudulent misrepresentation.</p>
<p><em>Example C:</em> Illinois courts have held that a title company hired to perform a judgment and lien search had a duty to provide accurate information to the customer in its judgment and lien search report. This duty existed even though (or, perhaps, because) the title company was not asked to insure its search results or provide the customer with a full abstract of title. In the case under consideration, the report failed to disclose a mortgage recorded against the property. Had the customer (a lender) been able to prove it relied on the judgment and lien search to its detriment, the title company may likely have been held liable for negligent representation in providing inaccurate information. The customer was not able to prove reliance, however, and the case was dismissed.</p>
<p>Note that in Example C, above, the title company was asked merely to search the public records and provide information as to the existence or non-existence of judgments or liens. The title company was not asked to provide title insurance.</p>
<p>Title companies are tricky because, at first glance, it would seem that one of the main aspects of a title company’s business is to provide information about real property titles that customers use to make buying or lending decisions. However, the type of service being performed by the title company is an important factor. Illinois courts have held that when issuing a commitment for title insurance (a “title commitment”), the title company is not an information provider, but rather a provider of title insurance products. Because the essential characteristic of a title commitment is an agreement to provide insurance against the risk that a claim will be made against title which is inconsistent with the status of title as insured by the title commitment (and subsequently issued title policy), the title company issuing the title commitment is in the business of selling an insurance product, rather than being an information provider. It is therefore not bound by the information provider duty to provide accurate information. The undertaking of the title insurance company is to pay a claim under the terms of its title insurance policy for any loss incurred by reason of the status of title not being as insured. Information provided in conjunction with an independently useful product, rather than being provided for the sole purpose of informing, is not within the scope of the duty of information providers to provide accurate information.</p>
<p><em>Example D:</em> A recent trend in litigation has mortgagors suing lenders and the lender’s designated appraisers for negligent misrepresentation in providing inflated appraisals. At least one recent Illinois case has held that the mortgagor sufficiently plead that the appraiser and the lender were information providers who had a duty to convey accurate information concerning the value of the property because they knew the mortgagor would reasonably rely upon the appraisal report in making her decision to accept the mortgage. The sole purpose of the appraisal is to provide information as to the value of the property.</p>
<p>To some, this may seem like a stretch, but it points out that claims of liability based upon negligent misrepresentation can be a powerful tool in the hands of creative and knowledgeable lawyers.</p>
<h2 class="wp-block-heading">What does this all mean?</h2>
<p>It means that if you rely upon information provided by others as part of their trade or business, you may be able to hold them liable if the information they provide is inaccurate or incomplete and, as a consequence, you suffer a loss.</p>
<p>Conversely, if you are an information provider, it means you had better act diligently in assuring the accuracy and completeness of information you provide to others.</p>
<p>In either case – damages may be recoverable. Liability is recognized by Illinois courts. Inaccurate information, whether given or withheld, intentionally or through negligence, may enable the person or business that justifiably relies upon that information to recover damages.</p>
<p><em>The claim is real.</em></p>
<p>Thank you for reading my post.</p>
<p><em>Diana H. Psarras</em></p>
<p> </p>
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<title>Cities Shooting Economic Development in the Foot</title>
<link>http://harp-onthis.com/cities-shooting-economic-development-in-the-foot/</link>
<comments>http://harp-onthis.com/cities-shooting-economic-development-in-the-foot/#comments</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Mon, 18 Aug 2014 11:10:55 +0000</pubDate>
<category><![CDATA[Commercial Real Estate]]></category>
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<description><![CDATA[NOTICE TO MUNICIPALITIES:  If you want economic development, ACT LIKE IT! Sometimes, municipalities can be their own worst enemies when it comes to economic development. At best, things they sometimes do, or don’t do, evidence disinterest, if not incompetence. Alternatively, […]]]></description>
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<h1 class="wp-block-heading"><b>NOTICE TO MUNICIPALITIES: If you want economic development, ACT LIKE IT!</b></h1>
<p>Sometimes, municipalities can be their own worst enemies when it comes to economic development. At best, things they sometimes do, or don’t do, evidence disinterest, if not incompetence. Alternatively, it may evidence a breach of trust to the community and local taxpayers.</p>
<h2 class="wp-block-heading"><b><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstime_m_22231888.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="521" data-permalink="http://harp-onthis.com/cities-shooting-economic-development-in-the-foot/httpwww-dreamstime-comroyalty-free-stock-photos-city-development-image22231888/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstime_m_22231888.jpg?fit=2098%2C1428" data-orig-size="2098,1428" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"(c) Djapart | Dreamstime.com","focal_length":"0","iso":"0","shutter_speed":"0","title":"http:\/\/www.dreamstime.com\/royalty-free-stock-photos-city-development-image22231888"}" data-image-title="http://www.dreamstime.com/royalty-free-stock-photos-city-development-image22231888" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstime_m_22231888.jpg?fit=300%2C204" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstime_m_22231888.jpg?fit=1024%2C696" class="alignleft size-medium wp-image-521" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstime_m_22231888.jpg?resize=300%2C204" alt="http://www.dreamstime.com/royalty-free-stock-photos-city-development-image22231888" width="300" height="204" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstime_m_22231888.jpg?resize=300%2C204 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstime_m_22231888.jpg?resize=1024%2C696 1024w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstime_m_22231888.jpg?resize=440%2C300 440w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstime_m_22231888.jpg?w=2000 2000w" sizes="auto, (max-width: 300px) 100vw, 300px" /></a>Here’s the situation:</b></h2>
<p>Recently, in representing developers before a variety of municipal governments, I have been struck by the Jekyll and Hyde approach many have when in comes to economic development. Often, the city, town or village will have a fully staffed economic development department. It may pay hundreds of thousands of dollars per year, if not millions of dollars per year, to pay economic development staff salaries and to cover associated overhead. It will allocate or approve millions of dollars per year in economic development grants, tax incentives, tax increment financing, real estate tax abatements, sales tax revenue sharing, and other economic incentives to encourage investors and developers to bring private development to the city to create jobs, remove blight, increase land values and otherwise improve the quality of life of the community. These are all proper uses of public economic development funds.</p>
<h2 class="wp-block-heading"><b>Then what?</b></h2>
<p>As is necessary, the developer has its architect submit plans to the municipal building department for review and approval to obtain a building permit. There is nothing controversial about that, right? But then, in a remarkably high number of circumstances, the permitting process proceeds at only glacial speed.</p>
<p>How long should it take to review plans and specifications for a modest sized project that will bring jobs and economic opportunity to the city? The city has already confirmed that it wants the project by granting development incentives to the developer for the project. When the developer’s architect is moving forward as quickly as practical to obtain the building permit, should it take the municipal building department 9 to 10 months to issue a building permit on a modest sized structure? I’m not talking about a building the size of Trump Tower – I’m referring to buildings of less than 30,000 square feet. How long is reasonable? Is a building permit review process that takes 9 to 10 months necessary or reasonable? How is that promoting economic development?</p>
<p>And once the building permit is issued, and work begins – how often should work have to stop because city building inspectors fail to show up for scheduled inspections?</p>
<p>Private investors and developers cannot afford – literally – to sit around and wait extended periods of time to move a project to completion. Market conditions change. The cost and availability of money changes. Commercial tenants choose other options.</p>
<h2 class="wp-block-heading"><b>The Point?</b></h2>
<p>The point here is that municipalities need to get their act together if they want to promote economic development in their communities. Not all cities, towns and villages are guilty of dragging their feet or sending mixed messages, but there are many more than you may think. For developers, time really is money.</p>
<p>It is counterproductive – and more than a bit silly – for local governments to “<i>give away</i>” economic incentives to promote economic development, and then have their building departments drag their municipal feet in facilitating completion of the project. Economic development staff and their building department siblings need to get on the same page and follow the same agenda if a municipality truly wants to promote economic development.</p>
<h2 class="wp-block-heading"><b>Promoting Economic Development</b></h2>
<div class="wp-block-image">
<figure class="alignright size-full is-resized"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="1944" data-permalink="http://harp-onthis.com/cities-shooting-economic-development-in-the-foot/handsholdingtreesgrowingoncoins-csr-sustainable/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/hands-holding-trees-growing-on-coins.jpg?fit=1000%2C665" data-orig-size="1000,665" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"Shutterstock","camera":"","caption":"","created_timestamp":"0","copyright":"Copyright (c) 2016 wk1003mike\/Shutterstock. No use without permission.","focal_length":"0","iso":"0","shutter_speed":"0","title":"Hands,Holding,Trees,Growing,On,Coins,\/,Csr,\/,Sustainable","orientation":"0"}" data-image-title="Hands,Holding,Trees,Growing,On,Coins,/,Csr,/,Sustainable" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/hands-holding-trees-growing-on-coins.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/hands-holding-trees-growing-on-coins.jpg?fit=1000%2C665" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/hands-holding-trees-growing-on-coins.jpg?resize=400%2C266" alt="hands holding trees growing on coins" class="wp-image-1944" width="400" height="266" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/hands-holding-trees-growing-on-coins.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/hands-holding-trees-growing-on-coins.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/hands-holding-trees-growing-on-coins.jpg?resize=768%2C511 768w" sizes="auto, (max-width: 400px) 100vw, 400px" /></figure></div>
<p>Promoting economic development is not merely a matter of handing out economic incentives. That can be useful – and sometimes necessary – to promote economic development in your community, but it is not the whole story. To get the economic development engine running, local governments need to take a holistic approach that fully embraces and encourages desired economic development. It needs to walk the walk. It needs to expedite services to facilitate development. It needs to get its collective act together – in all municipal departments – to genuinely do what is in the best economic interests of the community.</p>
<p>Commercial developers and their prospective commercial tenants and users have choices as to where to invest their money to build new projects that promote economic growth. Most development opportunities are regional, if not national or global. If your town will not do all it can reasonably do to truly promote economic development in a meaningful way, some other town likely will.</p>
<p>This is not a threat – it is a practical reality. If you are in local government and genuinely want economic development, I suggest, with all due respect, that you act like it.</p>
<p><em>Thanks for listening.</em></p>
<p><em>Kymn</em></p>
]]></content:encoded>
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<title>ICSC RECon 2014 – SPOTLIGHT: MONEE, ILLINOIS</title>
<link>http://harp-onthis.com/icsc-recon-2014-spotlight-monee-illinois/</link>
<comments>http://harp-onthis.com/icsc-recon-2014-spotlight-monee-illinois/#comments</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Tue, 20 May 2014 03:01:07 +0000</pubDate>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[business]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[conducting due diligence]]></category>
<category><![CDATA[development]]></category>
<category><![CDATA[Grocery]]></category>
<category><![CDATA[Illinois]]></category>
<category><![CDATA[keys to closing]]></category>
<category><![CDATA[Monee]]></category>
<category><![CDATA[public-private partnership]]></category>
<category><![CDATA[Sales tax revenue sharing]]></category>
<category><![CDATA[site entitlement]]></category>
<category><![CDATA[site selection]]></category>
<category><![CDATA[tax abatement]]></category>
<category><![CDATA[TIF]]></category>
<category><![CDATA[transactions]]></category>
<category><![CDATA[urban infill]]></category>
<category><![CDATA[what to look for]]></category>
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<description><![CDATA[ICSC RECon 2014 is in full swing as the largest retail real estate convention in the world. Every year, retail owners, investors, developers, lenders and other commercial real estate professionals converge on Las Vegas, NV to network, discover, promote their […]]]></description>
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<p>ICSC RECon 2014 is in full swing as the largest retail real estate convention in the world. Every year, retail owners, investors, developers, lenders and other commercial real estate professionals converge on Las Vegas, NV to network, discover, promote their projects, look for development opportunities and make new deals. This year is no exception. There are an estimated 33,000 real estate professionals in attendance for this action-packed three day convention at the Las Vegas Convention Center.</p>
<div class="wp-block-image">
<figure class="alignleft"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_20348789.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="300" height="300" data-attachment-id="522" data-permalink="http://harp-onthis.com/commercial-real-estate-development-life-lessons-and-residential-neighbors/httpwww-dreamstime-comroyalty-free-stock-images-building-future-city-image20348789/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_20348789.jpg?fit=1732%2C1732" data-orig-size="1732,1732" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"(c) Kakigori | Dreamstime.com","focal_length":"0","iso":"0","shutter_speed":"0","title":"http:\/\/www.dreamstime.com\/royalty-free-stock-images-building-future-city-image20348789"}" data-image-title="http://www.dreamstime.com/royalty-free-stock-images-building-future-city-image20348789" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_20348789.jpg?fit=300%2C300" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_20348789.jpg?fit=1024%2C1024" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_20348789.jpg?resize=300%2C300" alt="http://www.dreamstime.com/royalty-free-stock-images-building-future-city-image20348789" class="wp-image-522" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_20348789.jpg?resize=300%2C300 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_20348789.jpg?resize=150%2C150 150w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_20348789.jpg?resize=1024%2C1024 1024w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_20348789.jpg?w=1732 1732w" sizes="auto, (max-width: 300px) 100vw, 300px" /></a></figure></div>
<p>Once again this year, members of the International Council of Shopping Centers are recognizing and acknowledging the need for public-private partnerships with local communities to promote economic development. The extremely difficult economic conditions over the past several years have taken a toll on communities and developers alike. Now, more than ever, they need each other to facilitate mutually beneficial development.</p>
<p>To help local governments establish and promote much needed permanent, beneficial economic changes for their communities, ICSC in cooperation with other development groups and agencies continues to </p>
<span id="more-790"></span>
<p>work cooperatively with local communities. To this end, in 2011, ICSC published a handbook entitled <em>Retail 1-2-3</em> to introduce the basic questions a community must ask itself prior to establishing a plan to attract new commercial businesses. While there is much to consider, key factors include communities knowing what they need, setting priorities, and taking realistic and intentional efforts to accomplish their development objectives.</p>
<h1 class="wp-block-heading">SPOTLIGHT: <em>MONEE, ILLINOIS – “WE NEED A GROCERY STORE”</em></h1>
<div class="wp-block-image">
<figure class="alignright size-full is-resized"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="1950" data-permalink="http://harp-onthis.com/icsc-recon-2014-spotlight-monee-illinois/supermarketaislewithemptyredshoppingcart/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/supermarket-aisle-with-empty-red-shopping-cart.jpg?fit=1000%2C563" data-orig-size="1000,563" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"Shutterstock","camera":"","caption":"","created_timestamp":"0","copyright":"Copyright (c) 2020 non c\/Shutterstock. No use without permission.","focal_length":"0","iso":"0","shutter_speed":"0","title":"Supermarket,Aisle,With,Empty,Red,Shopping,Cart.","orientation":"1"}" data-image-title="Supermarket,Aisle,With,Empty,Red,Shopping,Cart." data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/supermarket-aisle-with-empty-red-shopping-cart.jpg?fit=300%2C169" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/supermarket-aisle-with-empty-red-shopping-cart.jpg?fit=1000%2C563" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/supermarket-aisle-with-empty-red-shopping-cart.jpg?resize=400%2C225" alt="supermarket aisle with empty red shopping cart" class="wp-image-1950" width="400" height="225" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/supermarket-aisle-with-empty-red-shopping-cart.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/supermarket-aisle-with-empty-red-shopping-cart.jpg?resize=300%2C169 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/supermarket-aisle-with-empty-red-shopping-cart.jpg?resize=768%2C432 768w" sizes="auto, (max-width: 400px) 100vw, 400px" /></figure></div>
<p>I had the pleasure this year of meeting with Mayor Jay Farquhar, of Monee, Illinois, on the ICSC Leasing Floor, in the Cities of the World exhibition area. Mayor Farquhar and Monee Village Clerk, Wayne Haser, are aggressively promoting the Village of Monee and its economic development needs.</p>
<p>Monee, Illinois, a southern suburb of Chicago, is in Will County, Illinois, the fastest growing county in Illinois and one of the fastest growing counties in the United States. There are currently 670,000 consumers, and 240,000 homes within a 15 mile radius. Median household income exceeds $67,000. Median age is 37.5 years. The Village is near the planned South Suburban Airport and is served by Interstate 57 and U.S. Highway 50 as major thoroughfares. Over 48,000 vehicles pass through Monee every day.</p>
<p>Yet . . . , Monee has no grocery store within its municipal boundaries. The nearest major grocer is approximately 18 miles away. This is an inconvenience for community residents, and is a major opportunity for a grocery store developer/operator.</p>
<p>Attracting a grocery store to Monee, Illinois is a primary economic development objective of the Village. So much so that the Village of Monee has acquired and set aside a five (5) acre corner lot, specifically reserved for grocery store development. Economic development incentives are available to make this an ideal location for a win-win public private partnership for the community and a willing grocery store developer.</p>
<p>Grocery store development is not the only economic development Monee is seeking to attract. Monee has identified a large tract of land available for new retail development, and has compiled information on existing inventories of retail space available for retail users seeking to locate or expand in Monee. For the right kinds of development, Monee has expressed a willingness to come to the bargaining table to facilitate mutually beneficial development opportunities.</p>
<p>It was a pleasure speaking with Mayor Farquhar because of his genuine interest in attracting new development to Monee. He seemed sensitive to the economic realities faced by developers and expressed a willingness for the Village of Monee to join as an economic development facilitator in a well-structured public-private partnership to get it done.</p>
<p>As readers of this blog are aware, I have occasionally been critical of municipalities for the Jekyll and Hyde approach sometimes taken with respect to economic development. You may recall my post <a title="Cities Shooting Economic Development in the Foot" href="http://harp-onthis.com/commercial-real-estate/cities-shooting-economic-development-in-the-foot/" target="_blank" rel="noopener"><em>Cities Shooting Economic Development in the Foot</em></a>. I cannot guaranty that this won’t be the case in Monee, Illinois, but all indications are that Monee is a development friendly environment with a Mayor that “gets it”. After all, Monee, Illinois did send its Mayor and Village Clerk on a mission to ICSC RECon 2014 to snare a grocery store and promote community economic development. Check out <a title="Village of Monee, IL Retail" href="http://www.villageofmonee.org/retail" target="_blank" rel="noopener">www.VillageofMonee.org/RETAIL</a>.</p>
<p>If you are a grocery store developer, it may make sense to consider this opportunity in Monee, Illinois.</p>
<p>Thanks for listening. If I can help, let me know.</p>
<p><em>Kymn</em></p>
]]></content:encoded>
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<post-id xmlns="com-wordpress:feed-additions:1">790</post-id> </item>
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<title>DUE DILIGENCE CHECKLISTS – for Commercial Real Estate Transactions</title>
<link>http://harp-onthis.com/due-diligence-checklists-for-commercial-real-estate-transactions/</link>
<comments>http://harp-onthis.com/due-diligence-checklists-for-commercial-real-estate-transactions/#comments</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Tue, 26 Nov 2013 14:10:51 +0000</pubDate>
<category><![CDATA[Business]]></category>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[lending]]></category>
<category><![CDATA[White Papers]]></category>
<category><![CDATA[bank]]></category>
<category><![CDATA[business]]></category>
<category><![CDATA[closings]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[conducting due diligence]]></category>
<category><![CDATA[development]]></category>
<category><![CDATA[due diligence checklist]]></category>
<category><![CDATA[due diliigence]]></category>
<category><![CDATA[how to close]]></category>
<category><![CDATA[industrial property]]></category>
<category><![CDATA[investment]]></category>
<category><![CDATA[lenders]]></category>
<category><![CDATA[loans]]></category>
<category><![CDATA[purchase]]></category>
<category><![CDATA[site entitlement]]></category>
<category><![CDATA[transactions]]></category>
<category><![CDATA[urban infill]]></category>
<category><![CDATA[what to look for]]></category>
<guid isPermaLink="false">http://harp-onthis.com/?p=35</guid>
<description><![CDATA[Are you planning to purchase, finance or develop any of the following types of Commercial or Industrial Real Estate? A KEY element to successfully investing in commercial or industrial real estate is performing an adequate Due Diligence Investigation prior to […]]]></description>
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<h2 class="wp-block-heading">Are you planning to purchase, finance or develop any of the following types of Commercial or Industrial Real Estate?</h2>
<ul class="wp-block-list">
<li>• Shopping Center?</li>
<li>• Office Building?</li>
<li>• Large Multifamily residential?</li>
<li>• Parking Lot/Parking garage?</li>
<li>• Retail Store?</li>
<li>• Mixed-Use?</li>
<li>• Restaurant/Banquet property?</li>
<li>• Sports and Entertainment Venue?</li>
<li>• Intermodal Logistics Terminal?</li>
<li>• Medical Building?</li>
<li>• Gas Station?</li>
<li>• Distribution Center?</li>
<li>• Manufacturing facility?</li>
<li>• Pharmacy?</li>
<li>• Special Use facility ?</li>
<li>• Other?</li>
</ul>
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<figure class="alignleft"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="300" height="109" data-attachment-id="1041" data-permalink="http://harp-onthis.com/illinois-llcs-the-asset-protection-advantage/rsp_logohd-3/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?fit=963%2C350" data-orig-size="963,350" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"1"}" data-image-title="RSP_LogoHD (3)" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?fit=300%2C109" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?fit=963%2C350" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?resize=300%2C109" alt="RSP_LogoHD (3)" class="wp-image-1041" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?resize=300%2C109 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?w=963 963w" sizes="auto, (max-width: 300px) 100vw, 300px" /></a></figure></div>
<p>A KEY element to successfully investing in commercial or industrial real estate is performing an adequate Due Diligence Investigation prior to becoming legally bound to acquire the property. An adequate Due Diligence Investigation will assure awareness of all material facts relevant to the intended use or disposition of the property after closing.</p>
<p> The following checklists will help you conduct a focused and meaningful Due Diligence Investigation.</p>
<h2 class="wp-block-heading"> BASIC DUE DILIGENCE CONCEPTS</h2>
<h3 class="wp-block-heading"> Caveat Emptor: Let the Buyer beware.</h3>
<p>Consumer protection laws applicable to home purchases seldom apply to commercial real estate transactions. The rule that a Buyer must examine, judge, and test for himself, applies to the purchase of commercial real estate.</p>
<h3 class="wp-block-heading">Due Diligence:</h3>
<p>“Such a measure of prudence, activity, or assiduity, as is proper to be expected from, and ordinarily exercised by, a reasonable and prudent (person) under the particular circumstances; not measured by any absolute standard, but depending upon the relative facts of the special case.” Black’s Law Dictionary; West Publishing Company.</p>
<p>Contractual representations and warranties are NOT a substitute for Due Diligence. Breach of representations and warranties = Litigation, time and $$$$$.</p>
<p>The point of commercial real estate due diligence is to avoid transaction surprises and confirm the Property can be used as intended.</p>
<h2 class="has-text-align-center wp-block-heading"> WHAT DILIGENCE IS DUE?</h2>
<div class="wp-block-image">
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<p>The scope, intensity and focus of any Due Diligence Investigation of commercial or industrial real estate depends upon the objectives of the party for whom the investigation is conducted. These objectives may vary depending upon whether the investigation is conducted for the benefit of: (i) a Strategic Buyer (or long-term lessee); (ii) a Financial Buyer; (iii) a Developer; or (iv) a Lender.</p>
<p>If you are a Seller, understand that to close the transaction your Buyer and its Lender must address all issues material to their respective objectives – some of which require information only you, as Owner, can adequately provide.</p>
<h3 class="wp-block-heading">GENERAL OBJECTIVES:</h3>
<p> (i) A “Strategic Buyer” (or long-term lessee) is acquiring the property for its own use and must verify that the property is suitable for that intended use.</p>
<p> (ii) A “Financial Buyer” is acquiring the property for the expected return on investment generated by the property’s anticipated revenue stream, and must determine the amount, velocity and durability of the revenue stream. A sophisticated Financial Buyer will likely calculate its yield based upon discounted cash-flows rather than the much less precise capitalization rate (“Cap. Rate”), and will need adequate financial information to do so.</p>
<p> (iii) A “Developer” is seeking to add value by changing the character or use of the property – usually with a short-term to intermediate-term exit strategy to dispose of the property; although, a Developer might plan to hold the property long term as a Financial Buyer after development or redevelopment. The Developer must focus on whether the planned change in character or use can be accomplished in a cost-effective manner.</p>
<p> (iv) A “Lender” is seeking to establish two basic lending criteria:</p>
<p> (1) “<em>Ability to Repay</em>” – The ability of the property to generate sufficient revenue to repay the loan on a timely basis; <em>and</em></p>
<p> (2) “<em>Sufficiency of Collateral</em>” – The objective disposal value of the collateral in the event of a loan default, to assure adequate funds to repay the loan, carrying costs and costs of collection in the event forced collection becomes necessary.</p>
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" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?fit=300%2C199" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?fit=1024%2C681" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?resize=300%2C199" alt="Questions and Answers signpost" class="wp-image-614" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?resize=300%2C199 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?resize=1024%2C681 1024w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?resize=451%2C300 451w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?w=1699 1699w" sizes="auto, (max-width: 300px) 100vw, 300px" /></a></figure></div>
<p>The amount of diligent inquiry due to be expended (i.e. “Due Diligence”) to investigate any particular commercial or industrial real estate project is the amount of inquiry required to answer each of the following questions to the extent relevant to the objectives of the party conducting the investigation:</p>
<h2 class="wp-block-heading">I. THE PROPERTY:</h2>
<p> 1. Exactly what PROPERTY does Purchaser believe it is acquiring?</p>
<p>• Land?</p>
<p>• Building?</p>
<p>• Fixtures?</p>
<p>• Other Improvements?</p>
<p>• Other Rights?</p>
<p>• The entire fee title interest including all air rights and subterranean rights?</p>
<p>• All development rights?</p>
<p> 2. What is Purchaser’s planned use of the Property?</p>
<p> 3. Does the physical condition of the Property permit use as planned?</p>
<p>• Commercially adequate access to public streets and ways?</p>
<p>• Sufficient parking?</p>
<p>• Structural condition of improvements?</p>
<p>• Environmental contamination?</p>
<p>• Innocent Purchaser defense vs. exemption from liability</p>
<p>• All Appropriate Inquiry</p>
<p> 4. Is there any legal restriction to Purchaser’s use of the Property as planned?</p>
<p>• Zoning?</p>
<p>• Private land use controls?</p>
<p>• Americans with Disabilities Act?</p>
<p>• Availability of licenses?</p>
<p>• Liquor license?</p>
<p>• Entertainment license?</p>
<p>• Outdoor dining license?</p>
<p>• Drive through windows permitted?</p>
<p>• Other impediments?</p>
<p> 5. How much does Purchaser expect to pay for the property?</p>
<p> 6. Is there any condition on or within the Property that is likely to increase Purchaser’s effective cost to acquire or use the Property?</p>
<p>• Property owner’s assessments?</p>
<p>• Real estate tax in line with value?</p>
<p>• Special Assessment?</p>
<p>• Required user fees for necessary amenities?</p>
<p>• Drainage?</p>
<p>• Access?</p>
<p>• Parking?</p>
<p>• Other?</p>
<p> 7. Any encroachments onto the Property, or from the Property onto other lands?</p>
<p> 8. Are there any encumbrances on the Property that will not be cleared at Closing?</p>
<p>• Easements?</p>
<p>• Covenants Running with the Land?</p>
<p>• Liens or other financial servitudes?</p>
<p>• Leases?</p>
<p>9. If the Property is subject to any Leases, are there any:</p>
<p>• Security Deposits?</p>
<p>• Options to Extend Term?</p>
<p>• Options to Purchase?</p>
<p>• Rights of First Refusal?</p>
<p>• Rights of First Offer?</p>
<p>• Maintenance Obligations?</p>
<p>• Duty of Landlord to provide utilities?</p>
<p>• Real estate tax or CAM escrows?</p>
<p>• Delinquent rent?</p>
<p>• Pre-Paid rent?</p>
<p>• Tenant mix/use controls?</p>
<p>• Tenant exclusives?</p>
<p>• Tenant parking requirements?</p>
<p>• Automatic subordination of Lease to future mortgages?</p>
<p>• Other material Lease terms?</p>
<p>10. New Construction?</p>
<p>• Availability of construction permits?</p>
<p>• Soil conditions?</p>
<p>• Utilities?</p>
<p>• NPDES (National Pollutant Discharge Elimination System) Permit?</p>
<p>• Permit required if earth is disturbed on one acre or more of land.</p>
<p>• If applicable, Storm Water Pollution Prevention Plan (SWPPP) is required.</p>
<h2 class="wp-block-heading">II. THE SELLER:</h2>
<p>1. Who is the Seller?</p>
<p>• Individual?</p>
<p>• Trust?</p>
<p>• Partnership?</p>
<p>• Corporation?</p>
<p>• Limited Liability Company?</p>
<p>• Other legally existing entity?</p>
<p>2. If other than natural person, does Seller validly exist and is Seller in good standing?</p>
<p>3. Does the Seller own the Property?</p>
<p>4. Does Seller have authority to convey the Property?</p>
<p>• Board of Director Approvals?</p>
<p>• Shareholder or Member approval?</p>
<p>• Other consents?</p>
<p>• If foreign individual or entity, are any special requirements applicable?</p>
<p>• Qualification to do business in jurisdiction of Property?</p>
<p>• Federal Tax Withholding?</p>
<p>• US Patriot Act compliance?</p>
<p>5. Who has authority to bind Seller?</p>
<p>6. Are sale proceeds sufficient to pay off all liens?</p>
<h2 class="wp-block-heading">III. THE PURCHASER:</h2>
<p>1. Who is the Purchaser?</p>
<p>2. What is the Purchaser/Grantee’s exact legal name?</p>
<p>3. If Purchaser/Grantee is an entity, has it been validly created and is it in good standing?</p>
<p>• Articles or Incorporation – Articles of Organization</p>
<p>• Certificate of Good Standing</p>
<p>4. Is Purchaser/Grantee authorized to own and operate the Property and, if applicable, finance acquisition of the Property?</p>
<p>• Board of Director Approvals?</p>
<p>• Shareholder or Member approval?</p>
<p>• If foreign individual or entity, are any special requirements applicable?</p>
<p>• Qualification to do business in jurisdiction of the Property?</p>
<p>• US Patriot Act compliance?</p>
<p>• Bank Secrecy Act/Anti-Money Laundering compliance?</p>
<p>5. Who is authorized to bind the Purchaser/Grantee?</p>
<h2 class="wp-block-heading">IV. PURCHASER FINANCING:</h2>
<h3 class="wp-block-heading">A. BUSINESS TERMS OF THE LOAN:</h3>
<p>1. What loan terms have the Borrower and its Lender agreed to?</p>
<p>• What is the amount of the loan?</p>
<p>• What is the interest rate?</p>
<p>• What are the repayment terms?</p>
<p>• What is the collateral?</p>
<p>• Commercial real estate only?</p>
<p>• Real estate and personal property together?</p>
<p>• First lien?</p>
<p>• A junior lien?</p>
<p>• Is it a single advance loan?</p>
<p>• A multiple advance loan?</p>
<p>• A construction loan?</p>
<p>• If it is a multiple advance loan, can the principal be re-borrowed once repaid prior to maturity of the loan; making it, in effect, a revolving line of credit?</p>
<p>• Are there reserve requirements?</p>
<p>• Interest reserves?</p>
<p>• Repair reserves?</p>
<p>• Real estate tax reserves?</p>
<p>• Insurance reserves?</p>
<p>• Environmental remediation reserves?</p>
<p>• Other reserves?</p>
<p>2. Are there requirements for Borrower to open business operating accounts with the Lender? If so, is the Borrower obligated to maintain minimum compensating balances?</p>
<p>3. Is the Borrower required to pledge business accounts as additional collateral?</p>
<p>4. Are there early repayment fees or yield maintenance requirements (each sometimes referred to as “pre-payment penalties”)?</p>
<p>5. Are there repayment blackout periods during which Borrower is not permitted to repay the loan?</p>
<p>6. Is a profit participation payment to Lender required upon disposition?</p>
<p>7. Is there a Loan Commitment fee or “good faith deposit” due upon Borrower’s acceptance of the Loan Commitment?</p>
<p>8. Is there a loan funding fee or loan brokerage fee or other loan fee due Lender or a loan broker at closing?</p>
<p>9. What are the Borrower’s expense reimbursement obligations to Lender? When are they due? What is the Borrower’s obligation to pay Lender’s expenses if the loan does not close?</p>
<h3 class="wp-block-heading">B. DOCUMENTING THE COMMERCIAL REAL ESTATE LOAN</h3>
<p>Does Purchaser have all information necessary to comply with the Lender’s loan closing requirements?</p>
<p>Not all loan documentation requirements may be known at the outset of a transaction, although most commercial real estate loan documentation requirements are fairly typical. Some required information can be obtained only from the Seller. Production of that information to Purchaser for delivery to its lender must be required in the purchase contract.</p>
<p>As guidance to what a commercial real estate lender may require, the following sets forth a typical Closing Checklist for a loan secured by commercial real estate.</p>
<h2 class="wp-block-heading">Commercial Real Estate Loan Closing Checklist</h2>
<p>1. Promissory Note</p>
<p>2. Personal Guaranties (which may be full, partial, secured, unsecured, payment guaranties, collection guaranties or a variety of other types of guarantees as may be required by Lender)</p>
<p>3. Loan Agreement (often incorporated into the Promissory Note and/or Mortgage in lieu of being a separate document)</p>
<p>4. Mortgage (sometimes expanded to be a Mortgage, Security Agreement and Fixture Filing)</p>
<p>5. Assignment of Rents and Leases.</p>
<p>6. Security Agreement</p>
<p>7. Financing Statement (sometimes referred to as a “UCC-1”, or “Initial Filing”).</p>
<p>8. Evidence of Borrower’s Existence In Good Standing; including :</p>
<p>(a) Certified copy of organizational documents of borrowing entity (including Articles of Incorporation, if Borrower is a corporation; Articles of Organization and written Operating Agreement, if Borrower is a limited liability company; certified copy of trust agreement with all amendments, if Borrower is a land trust or other trust; etc.)</p>
<p>(b) Certificate of Good Standing (if a corporation or LLC) or Certificate of Existence (if a limited partnership) or Certificate of Qualification to Transact Business (if Borrower is an entity doing business in a State other than its State of formation)</p>
<p>9. Evidence of Borrower’s Authority to Borrow; including:</p>
<p>(a) Borrower’s Certificate</p>
<p>(b) Certified Resolutions</p>
<p>(c) Incumbency Certificate</p>
<p>10. Satisfactory Commitment for Title Insurance (which will typically require, for analysis by the Lender, copies of all documents of record appearing on Schedule B of the title commitment which are to remain after closing), with required commercial title insurance endorsements, often including:</p>
<p>(a) ALTA 3.1 Zoning Endorsement modified to include parking [although if the property is a multi-user property, such as a retail shopping center, an ALTA 3.0 Zoning Endorsement may be appropriate]
<p>(b) ALTA Comprehensive Endorsement 1</p>
<p>(c) Location Endorsement (street address)</p>
<p>(d) Access Endorsement (vehicular access to public streets and ways)</p>
<p>(e) Contiguity Endorsement (the insured land comprises a single parcel with no gaps or gores)</p>
<p>(f) PIN Endorsement (insuring that the identified real estate tax permanent index numbers are the only applicable PIN numbers affecting the collateral and that they relate solely to the real property comprising the collateral)</p>
<p>(g) Usury Endorsement (insuring that the loan does not violate any prohibitions against excessive interest charges)</p>
<p>(h) other title insurance endorsements applicable to protect the intended use and value of the col- lateral, as may be determined upon review of the Commitment for Title Insurance and Survey or arising from the existence of special issues pertaining to the transaction or the Borrower.</p>
<p>11. Current ALTA/ACSM Land Title Survey (3 sets), prepared in accordance with the 2011 (or current) Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys</p>
<p>12. Current Rent Roll</p>
<p>13. Certified copy of all Leases (4 sets – 1 each for Buyer, Buyer’s attorney, Title Company and Lender)</p>
<p>14. Lessee Estoppel Certificates</p>
<p>15. Lessee Subordination, Non-Disturbance and Attornment Agreements [sometimes referred to simply as “SNDAs”]
<p>16. UCC, Judgment, Pending Litigation, Bankruptcy and Tax Lien Search Report</p>
<p>17. Appraisal -complying with Title XI of FIRREA (Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended)</p>
<p>18. Environmental Site Assessment Report (sometimes referred to as Environmental Phase I and/or Phase 2 Audit Reports)</p>
<p>19. Environmental Indemnity Agreement (signed by Borrower and guarantors)</p>
<p>20. Site Improvements Inspection Report</p>
<p>21. Evidence of Hazard Insurance naming Lender as the Mortgagee/Lender Loss Payee; and Liability Insurance naming Lender as an “additional insured” (sometimes listed as simply “Acord 27 and Acord 25, respectively)</p>
<p>22. Legal Opinion of Borrower’s Attorney</p>
<p>23. Credit Underwriting documents, such as signed tax returns, property operating statements, etc. as may be specified by Lender</p>
<p>24. Compliance Agreement (sometimes also called an Errors and Omissions Agreement), whereby the Borrower agrees to correct, after closing, errors or omissions in loan documentation.</p>
<p class="has-text-align-center">* * * * *</p>
<p>It is useful to become familiar with the Lender’s loan documentation requirements as early in the transaction as practical. The requirements will likely be set forth with some detail in the lender’s Loan Commitment – which is typically much more detailed than most loan commitments issued in residential transactions.</p>
<p>Conducting the Due Diligence Investigation in a commercial real estate transaction can be time consuming and expensive in all events.</p>
<p>If the loan requirements cannot be satisfied, it is better to make that determination during the contractual “due diligence period” – which typically provides for a so-called “free out” – rather than at a later date when the earnest money may be at risk of forfeiture or when other liability for failure to close may attach.</p>
<h3 class="wp-block-heading">CONCLUSION</h3>
<p>Conducting an effective Due Diligence Investigation in a commercial or industrial real estate transaction to discover all material facts and conditions affecting the Property and the transaction is of critical importance.</p>
<p>Unlike owner occupied residential real estate, when a house can nearly always be occupied as the purchaser’s home, commercial and industrial real estate acquired for business use or for investment is impacted by numerous factors that may limit its use and value.</p>
<p>The existence of these factors and their impact on a Purchaser’s ability to use the Property as intended can only be discovered through diligent and focused investigation and attention to detail.</p>
<p>Exercise Due Diligence.</p>
<p>If you need assistance, please ask for help.</p>
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<item>
<title>Dancing with Gorillas – Roulette – and CRE Litigation</title>
<link>http://harp-onthis.com/dancing-gorillas-roulette-cre-litigation/</link>
<comments>http://harp-onthis.com/dancing-gorillas-roulette-cre-litigation/#comments</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Wed, 25 Sep 2013 22:38:09 +0000</pubDate>
<category><![CDATA[Business]]></category>
<category><![CDATA[Commercial Real Estate]]></category>
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<description><![CDATA[The Time to Decide – Commercial Real Estate Litigation A sage once said, “The time to worry about where the ball will drop is before the wheel is spun”.  He was speaking about roulette, of course, but the wisdom of […]]]></description>
<content:encoded><![CDATA[
<h1 class="wp-block-heading">The Time to Decide – Commercial Real Estate Litigation</h1>
<div class="wp-block-image">
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< ![endif]--><span style="font-size: 11.0pt;">A sage once said, “<i>The time to worry about where the ball will drop is before the wheel is spun</i>”.<span style="mso-spacerun: yes;"> </span>He was speaking about roulette, of course, but the wisdom of these words has much broader application.<span style="mso-spacerun: yes;"> </span>The point is, worry about the outcome before you place the bet, when you can still do something about it.</span></p>
<p><span style="font-size: 11.0pt;">Commercial litigation, especially commercial real estate litigation, is in some respects like roulette. Once your lawsuit is filed, the wheel is spinning.<span style="mso-spacerun: yes;"> </span>Unlike roulette, you may still have a measure of control over the outcome — but you are in it until the ball drops.<span style="mso-spacerun: yes;"> </span></span></p>
<p><span style="font-size: 11.0pt;">In CRE litigation there is seldom an insurance company prepared to write a check.<span style="mso-spacerun: yes;"> </span>There is a substantial risk the case will proceed to trial.<span style="mso-spacerun: yes;"> </span>There is no guaranty you will collect anything – especially if payment of money is not the relief you seek. Consequently, there is very little chance your attorney will accept your commercial dispute on a contingent fee basis. A third of nothing is still nothing.<span style="mso-spacerun: yes;"> </span></span></p>
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<p><span style="font-size: 11.0pt;">Lawyers handling commercial litigation are not your partners. Commercial litigators charge by the hour.<span style="mso-spacerun: yes;"> </span>Except in rare cases where you can negotiate a hybrid fee arrangement, you will assume the entire financial risk – not your lawyer. Your lawyer is serving as your paid professional advocate; a hired gun, so to speak. </span></p>
<p><span style="font-size: 11.0pt;">As long as you are willing and able to pay your lawyer to apply his or her skill and training to your cause, your lawyer is bound to represent you with zeal and vigor. If you do not pay, you should expect your lawyer to stop work.<span style="mso-spacerun: yes;"> </span>The fact that the practice of law is a profession does not make it a charitable enterprise. It is both a profession and a business.<span style="mso-spacerun: yes;"> </span>There is no moral or ethical imperative for a lawyer to work without pay while advocating a commercial dispute.<span style="mso-spacerun: yes;"> </span>CRE litigation is business litigation – and the business being advanced is yours. </span><wp-block data-block="core/more"></wp-block></p>
<p><span style="font-size: 11.0pt;">I am not a big fan of commercial litigation. It is expensive for my clients and distracts them from their core business.<span style="mso-spacerun: yes;"> </span>It is in their core business where they make money.<span style="mso-spacerun: yes;"> </span>It is because of their core business that I am their lawyer.<span style="mso-spacerun: yes;"> </span>Still, if you are going to litigate, then commit to litigate. Do not file a lawsuit unless you intend to see it through and win. </span></p>
<p><span style="font-size: 11.0pt;">If you know anything about law firm profitability, it may surprise you to hear me say I am not a huge fan of litigation. Lawsuits can be very profitable for lawyers. Lawsuits are labor intensive and can take on a life of their own.<span style="mso-spacerun: yes;"> </span>Huge legal fees can be run up in a hurry.<span style="mso-spacerun: yes;"> </span>If that is how you determine to spend your money then, by all means, call me.<span style="mso-spacerun: yes;"> </span>My law firm has an outstanding group of litigators.<span style="mso-spacerun: yes;"> </span>In commercial litigation, including CRE litigation, we combine our transactional knowledge with litigation prowess and are unsurpassed. I just think you ought to make an informed and seriously calculated decision before you decide to spend your money in this way. </span></p>
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<figure class="alignleft"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Dancing-Gorilla-image-iStock-license.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="199" height="300" data-attachment-id="612" data-permalink="http://harp-onthis.com/dancing-gorillas-roulette-cre-litigation/dancing-gorilla-image-istock-license/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Dancing-Gorilla-image-iStock-license-e1380147240490.jpg?fit=1131%2C1698" data-orig-size="1131,1698" data-comments-opened="1" data-image-meta="{"aperture":"7.1","credit":"Rich Legg","camera":"Canon EOS 5D Mark III","caption":"","created_timestamp":"1370978971","copyright":"\u00a9 Rich Legg","focal_length":"73","iso":"100","shutter_speed":"0.008","title":""}" data-image-title="Dancing Gorilla image [iStock license]" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Dancing-Gorilla-image-iStock-license-e1380147240490.jpg?fit=199%2C300" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Dancing-Gorilla-image-iStock-license-e1380147240490.jpg?fit=682%2C1024" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Dancing-Gorilla-image-iStock-license.jpg?resize=199%2C300" alt="Dancing Gorilla image [iStock license]" class="wp-image-612"/></a></figure></div>
<p><span style="font-size: 11.0pt;">It is virtually impossible to predict with accuracy how much a lawsuit will cost.<span style="mso-spacerun: yes;"> </span>Typically, it will cost much more than you imagine. This is because, unlike a business or real estate transaction you can choose to walk away from if it ceases to make economic sense, lawsuits, once filed, are not so easy to escape.<span style="mso-spacerun: yes;"> </span>It’s like choosing to dance with an 800 pound gorilla.<span style="mso-spacerun: yes;"> </span>As the joke goes, “When do you stop?<span style="mso-spacerun: yes;"> </span>When the gorilla decides to stop.”<span style="mso-spacerun: yes;"> </span>Once you have filed a lawsuit, or have taken a position in a dispute that will lead to your adversary filing a lawsuit, you have reached the dance floor and may very well find yourself cheek to cheek with an 800 pound gorilla. </span></p>
<p><span style="font-size: 11.0pt;">Don’t get me wrong.<span style="mso-spacerun: yes;"> </span>There are times when litigation is necessary and appropriate.<span style="mso-spacerun: yes;"> </span>There are times when an adversary is so brazenly interfering with your business or trampling on your rights and interests that the benefits of litigation will far exceed your costs.<span style="mso-spacerun: yes;"> </span>There are times when litigation is your only reasonable choice.<span style="mso-spacerun: yes;"> </span></span></p>
<p><span style="font-size: 11.0pt;">In making the decision to proceed, however, understand the tangible and intangible costs.<span style="mso-spacerun: yes;"> </span>Attorneys’ fees may run into tens of thousands of dollars, and in a complicated case perhaps even into the hundreds of thousands of dollars. The litigation may also distract you from your core business and subject you to significant emotional strain and sleepless nights.<span style="mso-spacerun: yes;"> </span>Do not underestimate these add-on intangible costs.<span style="mso-spacerun: yes;"> </span></span></p>
<p><span style="font-size: 11.0pt;">If you are going to litigate, be sure to hire a<span style="mso-spacerun: yes;"> </span>lawyer experienced in the type of litigation you intend to<span style="mso-spacerun: yes;"> </span>pursue.<span style="mso-spacerun: yes;"> </span>Litigation strategy is based on game theory.<span style="mso-spacerun: yes;"> </span>Each move you make must anticipate your adversary’s next several moves. Your strategy and its implementation must be designed to win and be agile enough to adapt to changing circumstances if your adversary moves forward in an unanticipated way.<span style="mso-spacerun: yes;"> </span>Knowledge is power.</span></p>
<p><span style="font-size: 11.0pt;">Part of what makes litigation emotionally draining is a lack of understanding about how the process works.<span style="mso-spacerun: yes;"> </span>It is not as mysterious as clients sometimes seem to believe. </span></p>
<p><i style="mso-bidi-font-style: normal;"><span style="font-size: 11.0pt;">The bones of litigation are this</span></i><span style="font-size: 11.0pt;">:<span style="mso-spacerun: yes;"> </span>You and your adversary are in disagreement. You are convinced your position is superior.<span style="mso-spacerun: yes;"> </span>Your adversary is convinced its position is superior. You are unable to reach a compromise that works for you both.<span style="mso-spacerun: yes;"> </span>Filing a lawsuit is a decision to let someone else decide.<span style="mso-spacerun: yes;"> </span></span></p>
<p><span style="font-size: 11.0pt;">The litigation process is a process of gathering useful information to support your position and to undermine your opponent’s position. Your adversary is engaged in the same process. Some of this information is applicable law. Much of the information is supporting facts. Ultimately, you will each present your compiled information to an independent decision maker.<span style="mso-spacerun: yes;"> </span>A judge or jury will decide. </span></p>
<p><span style="font-size: 11.0pt;">If you are going to litigate, the decision to do so should be based upon a sober determination of the benefits likely to be achieved, the costs of obtaining those benefits, and your likelihood of success.<span style="mso-spacerun: yes;"> </span>You may have the greatest case in the world; your lawyer may tell you it will be a “<i style="mso-bidi-font-style: normal;">slam dunk</i>”; but if it is going to cost you more than you reasonably expect to gain – measuring both tangible and intangible costs – at least consider the choice of not proceeding. The decision to proceed or not to proceed is yours. It is very much a business decision.<span style="mso-spacerun: yes;"> </span></span></p>
<p><span style="font-size: 11.0pt;">In making the decision to litigate, use the same skills of economic analysis you use to make real estate investment decisions. If you know it will cost you $2,000,000 to develop and market a project, but your likely return is only $1,500,000, would you proceed?<span style="mso-spacerun: yes;"> </span>If your disputed claim is for $50,000 but it will cost you $60,000 to $100,000 to collect, should you proceed?<span style="mso-spacerun: yes;"> </span>The answer may depend upon other factors as well but, all else being equal, the rational economic choice is obvious.</span></p>
<p><span style="font-size: 11.0pt;">Too often lawsuits are filed as an emotional response to a perceived slight rather than being based upon an objective determination that the lawsuit is in your best economic interest. Do not let elevated testosterone levels get in the way of making a rational economic decision.<span style="mso-spacerun: yes;"> </span>The<span style="mso-spacerun: yes;"> </span>lawsuit is likely to continue long after your passions have faded.<span style="mso-spacerun: yes;"> </span>By that time, you may be wrapped in the arms of that 800 pound gorilla.<span style="mso-spacerun: yes;"> </span>If you have not made the decision to litigate based upon legitimate and dispassionate commercial considerations, you may find that your only way out is to settle on highly unfavorable terms.<span style="mso-spacerun: yes;"> </span>This will not help you prosper.</span></p>
<p><span style="font-size: 11.0pt;">A common mistake clients make is to assume that if a dispute is over only $10,000 to $50,000, the attorneys’ fees for pursuing or defending the case will be proportionately less than if the lawsuit involved $100,000 to $1,000,000.<span style="mso-spacerun: yes;"> </span>This is not necessarily so.<span style="mso-spacerun: yes;"> </span>The amount of time it takes to prove your case has very little to do with the amount in dispute. <span style="mso-spacerun: yes;"> </span>The facts and issues, and the response of your adversary, determine the amount of time involved.<span style="mso-spacerun: yes;"> </span>Since commercial litigation is typically billed by the hour, more time means higher attorneys’ fees regardless of the amount in dispute.<span style="mso-spacerun: yes;"> </span>This reality should be taken into consideration when deciding to file suit, and likewise when considering an offer of settlement.</span></p>
<p><span style="font-size: 11.0pt;">Some protection may be provided by the documents if they provide for the successful party to recover attorneys’ fees and costs from the unsuccessful party. But note: (i) you had better be sure you will be the successful party, or you may end up paying your adversary’s attorneys’ fees as well as your own; and (ii) you should consider whether a judgment against this particular defendant is likely to be collected.<span style="mso-spacerun: yes;"> </span>If the defendant is on the verge of bankruptcy, or otherwise insolvent, obtaining a judgment that includes all of your attorneys’ fees will do you little good.<span style="mso-spacerun: yes;"> </span>You will have just spent more money that will not be collectible.<span style="mso-spacerun: yes;"> </span>As the saying goes: “<i style="mso-bidi-font-style: normal;">When you find yourself in a hole – stop digging</i>.”</span></p>
<p><span style="font-size: 11.0pt;">Remember.<span style="mso-spacerun: yes;"> </span>The commercial dispute forming the basis of your lawsuit is yours, not your attorney’s.<span style="mso-spacerun: yes;"> </span>Your attorney’s business is to represent you as your skilled professional advocate. Attorneys are bound to zealously advocate for your success, but they can not guaranty success and collection. </span></p>
<p><span style="font-size: 11.0pt;">Deciding to file a lawsuit in a commercial dispute should be like deciding to get a kidney transplant.<span style="mso-spacerun: yes;"> </span>It should be a decision that is not entered into lightly, and should be made only if the benefits to be obtained are greater than the burdens the procedure will entail. If you decide on a new kidney and go under the knife, be prepared to see it through. If, after the procedure has begun and your kidney has been removed, you change you mind and decide against a transplant, your decision is a bit too late.<span style="mso-spacerun: yes;"> </span>The time to make that decision was before you got on the operating table.</span></p>
<p><span style="font-size: 11.0pt;">I am not saying you should never file a lawsuit.<span style="mso-spacerun: yes;"> </span>Each circumstance merits its own evaluation. What I am saying is that the time to decide is <i>before </i>the suit is filed.<span style="mso-spacerun: yes;"> </span>Once filed, be prepared to do what must be done to win.<span style="mso-spacerun: yes;"> </span>It is too late to un-spin the wheel.</span></p>
<p><span style="font-size: 11.0pt;"><span style="mso-tab-count: 7;"> </span><em>Thanks for listening,</em></span></p>
<p><em><span style="font-size: 11pt;"> Kymn</span></em></p>
<p><span style="font-size: 11.0pt;"> </span></p>
<p><span style="font-size: 11.0pt;"> </span></p>
<p> </p>
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<title>The “little known” Two-Year Rule for Employment Restrictive Covenants – Illinois</title>
<link>http://harp-onthis.com/the-little-known-two-year-rule-for-employment-restrictive-covenants-illinois/</link>
<comments>http://harp-onthis.com/the-little-known-two-year-rule-for-employment-restrictive-covenants-illinois/#respond</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Thu, 27 Jun 2013 22:58:57 +0000</pubDate>
<category><![CDATA[Business]]></category>
<category><![CDATA[Commercial Real Estate]]></category>
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<category><![CDATA[employer]]></category>
<category><![CDATA[employment]]></category>
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<category><![CDATA[restrictive covenants]]></category>
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<description><![CDATA[Employment Restrictive Covenants The issue of enforceability of employment restrictive covenants comes up often in business, including the business of commercial real estate. A common scenario is as follows:  A person goes to work for a company and is required […]]]></description>
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<h2 class="wp-block-heading"><b>Employment Restrictive Covenants</b></h2>
<p>The issue of enforceability of employment restrictive covenants comes up often in business, including the business of commercial real estate.</p>
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<p>A common scenario is as follows: A person goes to work for a company and is required to sign a Noncompetition and Nonsolicitation Agreement. Typically, it will say something like “<i>during the term of employment, and for a period of one year after termination of employment, the employee will not compete with or solicit any customer or vendor of the employer</i>.” Sometimes the Noncompetition/Nonsolicitation Agreement is required to be signed as a condition of being hired. Other times the employer will tell an employee who is already employed that signing the Noncompetition/Nonsolicitation Agreement is a condition to continued employment.</p>
<h2 class="wp-block-heading"><b>Are Employment Noncompetition/Nonsolicitation Agreements enforceable in Illinois?</b></h2>
<p>As a general proposition, Noncompetition/Nonsolicitation Agreements are enforceable in Illinois, as long as they satisfy a three-pronged test: They: (1) must be no greater in scope and duration than is required for the protection of a legitimate business interest of the employer-promisee; (2) must not impose undue hardship on the employee-promisor, and (3) must not be injurious to the public.</p>
<p>In a decision filed December 1, 2011, the Illinois Supreme Court shook up the Illinois employment bar by overruling an extensive line of cases that had narrowed the three-pronged test described above to a two-pronged test created by Appellate Court decision in 1973. In a case referred to as the <i>Kolar </i>decision, (<i>Nationwide Advertising Service, Inc. v. Kolar</i>, 14 Ill. Ap. 3d 522 (1973), the <i>Kolar</i> court held that an employment restrictive covenant was valid if there were (i) a near permanent customer relationship with the employer, and (ii) the employee had gained confidential information through its employment. The Illinois Supreme Court emphasized in its December 2011 opinion that the <i>Kolar</i> test is not valid. (<i>Reliable Fire Equipment Company vs. Arredondo</i> 2011 IL 111871). The Illinois Supreme Court, instead, reaffirmed the <i>legitimate business interest</i> test, and clarified that “<i>whether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case. Factors to be considered in the analysis include, but are not limited to, the near-permanence of customer relationships, the employee’s acquisition of confidential information through his employment, and time and place restrictions. No factor carries any more weight than any other, but rather its importance will depend on the specific facts and circumstances of the individual case</i>.”</p>
<p>For the most part, the Illinois employer’s bar hailed the <i>Arrendondo</i> decision as a victory, believing it gave employers a broader basis for enforcing employment restrictive covenants. Ironically, many attorney’s representing primarily employees were encouraged by the <i>Arrendondo</i> decision as well, believing it gives employees more room to challenge enforceability by challenging, factually, whether a “<i>legitimate business interest</i>” is at stake.</p>
<h2 class="wp-block-heading"><b>“Little Known” Two-Year Rule for Employment Restrictive Covenants – Illinois</b></h2>
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<figure class="alignright size-full is-resized"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="1897" data-permalink="http://harp-onthis.com/the-little-known-two-year-rule-for-employment-restrictive-covenants-illinois/thelawshouldknowtheconceptbusinessentrepreneurwomanread/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/read-the-rules-of-business-that-her-does-business.jpg?fit=1000%2C667" data-orig-size="1000,667" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"Shutterstock","camera":"","caption":"","created_timestamp":"0","copyright":"Copyright (c) 2018 Jirapong Manustrong\/Shutterstock. No use without permission.","focal_length":"0","iso":"0","shutter_speed":"0","title":"The,Law,Should,Know,The,Concept,,Business,Entrepreneur,Woman,,Read","orientation":"1"}" data-image-title="The,Law,Should,Know,The,Concept,,Business,Entrepreneur,Woman,,Read" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/read-the-rules-of-business-that-her-does-business.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/read-the-rules-of-business-that-her-does-business.jpg?fit=1000%2C667" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/read-the-rules-of-business-that-her-does-business.jpg?resize=400%2C267" alt="read the rules of business that her does business" class="wp-image-1897" width="400" height="267" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/read-the-rules-of-business-that-her-does-business.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/read-the-rules-of-business-that-her-does-business.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/read-the-rules-of-business-that-her-does-business.jpg?resize=768%2C512 768w" sizes="auto, (max-width: 400px) 100vw, 400px" /></figure></div>
<p>While the foregoing is all well and good, a fundamental concept of law is that employment </p>
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<p>restrictive covenants are creatures of contract. Employment restrictive covenants exist, and are enforceable, only if created by valid contract. If there is no valid contract, there is no enforceable restrictive covenant.</p>
<p>Basic contact law requires three elements as a condition to contract formation: (i) offer, (ii) acceptance, and (iii) adequate consideration.</p>
<p>Irrespective of what we learned in law school about “peppercorns” being adequate consideration, it is precisely the <i>consideration</i> aspect of contact formation that renders many employment restrictive covenants unenforceable.</p>
<p>By Appellate Court decision handed down on June 24, 2013, we are “<i>reminded</i>” of a body of Illinois case law that renders many employment restrictive covenants unenforceable by employers of Illinois-based employees. With internal citations and extraneous text omitted for this post, the First District Appellate Court [<i>Fifield and Enterprise Financial Group, Inc. vs. Premier Dealer Services, Inc</i>., 2013 IL App (1<sup>st</sup>) 120327] held as follows:</p>
<p><i>“Postemployment restrictive covenants </i>[i.e. restrictive covenants that purport to apply after employment ends]<i> are carefully scrutinized by Illinois courts because they operate as partial restrictions on trade. In order for a restrictive covenant to be valid and enforceable, the terms of the covenant must be reasonable. However, before even considering whether a restrictive covenant is reasonable, the court must make two determinations: (1) whether the restrictive covenant is ancillary to a valid contract; and (2) whether the restrictive covenant is supported by adequate consideration.”</i></p>
<p><i>“Under Illinois law, continued employment for a substantial period of time beyond the threat of discharge is sufficient consideration to support a restrictive covenant in an employment agreement. Illinois courts analyze the adequacy of consideration in the context of post-employment restrictive covenants because it has recognized that a promise of continued employment may be an illusory benefit where the employment is at-will. Generally, Illinois courts have held that continued employment for two years or more constitutes adequate consideration. The restrictive covenant will not be enforced unless there is adequate consideration given.”</i></p>
[The Court noted that it makes no difference whether the restrictive covenant is required as a condition to being hired, or required as a condition of continued employment.]
<p><i>“Illinois courts have repeatedly held that there must be at least two years or more of continued employment to constitute adequate consideration in support of a restrictive covenant. The rule is maintained even if the employee resigns on his own instead of being terminated.”</i></p>
<h2 class="wp-block-heading"><b> What Does This Mean?</b></h2>
<p>In a nutshell, it means that in a typical employment restrictive covenant situation [as distinguished from a special circumstance where a restrictive covenant may be entered into as part of a business sale], the restrictive covenant will likely be <i>unenforceable</i> in Illinois unless the employee continues working for the employer for at least two years after the restrictive covenant is signed.</p>
<p>I’ll bet most employers – and their attorneys – don’t know that.</p>
<p>Like it or not – that is the current state of the law in Illinois.</p>
<p>For run-of-the-mill employment arrangements, it is an unavoidable reality. In special circumstances, where binding an employee to an enforceable restrictive covenant is of critical importance, a proper solution will take creativity to assure adequate consideration to support enforceability.</p>
<p>Thanks for listening,</p>
<p>Kymn</p>
<p> </p>
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