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<title>consequences – HARP – On This. . .</title>
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<title>Your Real Estate Contract – Two Points to Consider</title>
<link>http://harp-onthis.com/1406-2/</link>
<comments>http://harp-onthis.com/1406-2/#respond</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Wed, 25 Apr 2018 19:08:10 +0000</pubDate>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[closings]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[conducting due diligence]]></category>
<category><![CDATA[consequences]]></category>
<category><![CDATA[due diliigence]]></category>
<category><![CDATA[how to close]]></category>
<category><![CDATA[investment]]></category>
<category><![CDATA[keys to closing]]></category>
<category><![CDATA[loans]]></category>
<category><![CDATA[purchase]]></category>
<category><![CDATA[real estate]]></category>
<category><![CDATA[transactions]]></category>
<category><![CDATA[what to look for]]></category>
<guid isPermaLink="false">http://harp-onthis.com/?p=1406</guid>
<description><![CDATA[Two Things You Need to Know As my readers know, I often represent real estate investors. When I draft a real estate contract I strive to make each provision absolutely clear in its meaning, and try to have it serve […]]]></description>
<content:encoded><![CDATA[
<h1 class="wp-block-heading">Two Things You Need to Know</h1>
<div class="wp-block-image size-medium wp-image-1145">
<figure class="alignleft"><img data-recalc-dims="1" fetchpriority="high" 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="" 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="(max-width: 199px) 100vw, 199px" /><figcaption class="wp-element-caption">R. Kymn Harp<br />Robbins, Salomon & Patt, Ltd.</figcaption></figure></div>
<p>As my readers know, I often represent real estate investors. When I draft a real estate contract I strive to make each provision absolutely clear in its meaning, and try to have it serve as a workable road map to closing. Occasionally a client will draft a real estate contract on its own (or have a broker draft it), and sign it without my review or input. The client will then send it to me “<em>to close the transaction</em>“. Though I counsel clients that this can be a remarkably risky practice, some clients . . . being clients . . . do as they wish and ignore my advice. Such is life.</p>
<p>When faced with closing a transaction governed by a real estate contract I did not have a hand in preparing, I do my best. It is usually not a complete disaster, but there are often misunderstandings because of provisions that are not entirely clear.</p>
<p></p>
<p></p>
<div class="wp-block-image">
<figure class="alignright size-full is-resized"><img data-recalc-dims="1" decoding="async" data-attachment-id="1766" data-permalink="http://harp-onthis.com/1406-2/real-estate-agent-delivering-sample-homes-to-customers/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/real-estate-agent-Delivering-sample-homes-to-customers.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="real-estate-agent-Delivering-sample-homes-to-customers" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/real-estate-agent-Delivering-sample-homes-to-customers.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/real-estate-agent-Delivering-sample-homes-to-customers.jpg?fit=1000%2C667" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/real-estate-agent-Delivering-sample-homes-to-customers.jpg?resize=400%2C266" alt="real estate agent Delivering sample homes to customers" class="wp-image-1766" width="400" height="266" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/real-estate-agent-Delivering-sample-homes-to-customers.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/real-estate-agent-Delivering-sample-homes-to-customers.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/real-estate-agent-Delivering-sample-homes-to-customers.jpg?resize=768%2C512 768w" sizes="(max-width: 400px) 100vw, 400px" /></figure></div>
<p>There are also situations where a provision in a real estate contract may be legally sufficient, but the seller and/or its attorney simply don’t understand the actual meaning of the provision. With a clearer provision the misunderstanding could be avoided, but the legal ramifications of certain provisions still are what they are, rather that what some imagine them to be. The following are two examples I have run into in the last week that I believe deserve comment and explanation:</p>
<p><strong>NO MORTGAGE CONTINGENCY: </strong> Contrary to the understanding by some Seller’s attorneys and their clients, the fact that a real estate contract does not include a mortgage contingency – and may even expressly state that the transaction is <em>not contingent</em> upon the Buyer obtaining a mortgage – does <strong><em>not</em></strong> mean that the Buyer is not obtaining a loan and using mortgage financing. It simply means that the Buyer’s obligation to proceed to closing under the real estate contract is not <em>contingent</em> upon the Buyer obtaining a mortgage loan.</p>
<p>Many investor Buyers have strong relationships with their lender. They know what their lender requires, and know that the property they are acquiring will qualify as collateral for a mortgage loan from their lender. Consequently, they do not make obtaining a mortgage a <em>contingency</em> to closing in the real estate contract. Be that as it may, the Buyer may still obtain a mortgage loan, and may fund the property purchase using loan proceeds.</p>
<p>This is the practical equivalent to the situation where a real estate contract does contain a mortgage contingency, but the contingency has been satisfied because the Buyer has been approved for a mortgage loan. <em>At that point</em> the contingency expires and the contract is no longer subject to a mortgage contingency. The Buyer will still be closing using its lender and the proceeds of its mortgage loan. Probably no one disputes that.</p>
<p>Likewise, in a real estate contract where there is no mortgage contingency from the beginning, the absence of a mortgage contingency does not, without more, imply at all that there will be no mortgage lender. If the parties intend to provide that a contract is to be a cash transaction with no lender, that should be expressly provided in the real estate contract. Otherwise, the mere absence of a <em>mortgage contingency</em> does not mean there will be no lender – it<i> </i>simply means the Buyer is taking the legal and financial risk that a mortgage will be obtained.</p>
<p>2. <strong>AN “AS IS” CLAUSE DOES NOT MEAN NO INSPECTION</strong>: As with the absence of a mortgage contingency clause, as discussed in point 1 above, there seems to be some confusion about what an “AS IS” provision in a real estate contract means.</p>
<p>It has recently been suggested to me by Seller’s counsel that since the Buyer is purchasing property in “<em>AS IS”</em> condition that there is no need for the Buyer to have an inspection period with the right to inspect the condition of the property. To the contrary, where a Buyer has agreed to acquire property in <em>AS IS</em> condition, it is absolutely vital for the Buyer to have an opportunity to inspect the property, with the right to terminate the transaction if the condition of the property is materially worse than the Buyer expected. The <em>AS IS</em> provision in a real estate contract simply means that the Buyer does not expect the Seller to make any repairs to the property, or expect the Seller to provide closing credits for defective conditions in the property, and that the Buyer will not come back to the Buyer after closing seeking recourse for undisclosed defects.</p>
<p>Having a provision in an real estate contract providing for an inspection period during which the Buyer can thoroughly inspect the property and terminate the contract within that period if the property is physically deficient is not at all inconsistent with a provision that the Buyer is agreeing to acquire the property in <em>AS IS</em> condition. The need to inspect is a matter of due diligence for the Buyer. If the Buyer inspects the property (or fails to inspect the property) and does not exercise its right to terminate within the inspection period provided in the real estate contract, <em>then</em> the Buyer is bound to close regardless of the condition of the property – with the possible exception of additional damage occurring to the property after the contract date, or at least after expiration of the inspection period.</p>
<div class="wp-block-image">
<figure class="alignleft"><img data-recalc-dims="1" decoding="async" width="300" height="109" data-attachment-id="283" data-permalink="http://harp-onthis.com/about/rsp_logofull_2pms/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/04/RSP_LogoFull_2PMS.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":""}" data-image-title="RSP_LogoFull_2PMS" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/04/RSP_LogoFull_2PMS.jpg?fit=300%2C109" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/04/RSP_LogoFull_2PMS.jpg?fit=963%2C350" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/04/RSP_LogoFull_2PMS.jpg?resize=300%2C109" alt="" class="wp-image-283" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/04/RSP_LogoFull_2PMS.jpg?resize=300%2C109 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/04/RSP_LogoFull_2PMS.jpg?resize=500%2C181 500w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/04/RSP_LogoFull_2PMS.jpg?w=963 963w" sizes="(max-width: 300px) 100vw, 300px" /></figure></div>
<p>These are simple points, but they are misunderstood more frequently than one would hope or expect. To avoid needless misunderstandings, careful and meticulous drafting is a solution. But still . . . this is not rocket science.</p>
<p>Thanks for listening. . .</p>
<p>Kymn</p>
]]></content:encoded>
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<post-id xmlns="com-wordpress:feed-additions:1">1406</post-id> </item>
<item>
<title>EXERCISING REAL ESTATE OPTIONS</title>
<link>http://harp-onthis.com/exercising-real-estate-options/</link>
<comments>http://harp-onthis.com/exercising-real-estate-options/#respond</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Mon, 09 Apr 2018 22:46:21 +0000</pubDate>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[Landlord-Tenant]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[consequences]]></category>
<category><![CDATA[exercise of option]]></category>
<category><![CDATA[lease option]]></category>
<category><![CDATA[option to extend]]></category>
<category><![CDATA[Option to purchase]]></category>
<category><![CDATA[real estate option]]></category>
<guid isPermaLink="false">http://harp-onthis.com/?p=1387</guid>
<description><![CDATA[WHEN EXERCISING REAL ESTATE OPTIONS – Strict Compliance is Your Only Option Options affecting real estate are commonly found in two circumstances: options to purchase real estate and options to extend the term of a lease. A recent decision by […]]]></description>
<content:encoded><![CDATA[
<h1 class="wp-block-heading">WHEN EXERCISING REAL ESTATE OPTIONS – Strict Compliance is Your Only Option</h1>
<div class="wp-block-image">
<figure class="alignleft"><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="" 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" /></figure></div>
<p>Options affecting real estate are commonly found in two circumstances: options to purchase real estate and options to extend the term of a lease. A recent decision by the Illinois Appellate Court filed February 28, 2018 in the case of <a href="http://www.illinoiscourts.gov/Opinions/AppellateCourt/2018/1stDistrict/1171222.pdf"><em>Michigan Wacker Associates, LLC v. Casdan</em>, 2018 IL App (1st) 171222</a> concerns an option to extend the term of a lease, but its reasoning is instructive for real estate options generally. Strict compliance is required.</p>
<h2 class="wp-block-heading">The Option to Extend Lease</h2>
<p>In <em>Casdan</em>, the lease had an initial term ending December 31, 2011, but provided for two additional options to extend the lease, stating as follows:</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p>“Tenant shall have the option to extend the term of this Lease for two additional five (5) year periods . . . the First Extension Option (expiring December 31, 2016) . . . and the Second Extension Option, (expiring December 31, 2021). The option to renew shall be exercised with respect to the entire Demised Premises only and shall be exerciseable by Tenant delivering the Extension Notice to Landlord, in the case of the First Extension Option, on or prior to January 1, 2011, and in the case of the Second Extension Option, on or prior to January 1, 2016, in all cases, time being of the essence.”</p>
</blockquote>
<h2 class="wp-block-heading">Required Notice</h2>
<p>The lease also contained a provision governing notices that provided, in part, that “Except as otherwise expressly provided in this Lease, any . . . notices . . . or other communications given or required to be given under this Lease . . . shall be deemed sufficiently given or rendered only if in writing . . . sent by registered or certified mail (return receipt requested) addressed to the Landlord at Landlord’s address set forth in this Lease . . .; or to such other address as . . . Landlord . . . may designate as its new address for such purpose by notice given to the other in accordance with the provisions of this Article 27.”</p>
<p>The lease also provided that landlord could waive strict performance of a lease term only by executing a written instrument to that effect and, even then, the waiver of one breach would not result in the waiver of subsequent breaches.</p>
<h2 class="wp-block-heading">Imprecise Exercise</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="1775" data-permalink="http://harp-onthis.com/exercising-real-estate-options/realestateagentmakeofferforcoupleselectshousingoptions/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/real-estate-agent-make-offer-for-couple-selects-housing-options.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 fizkes\/Shutterstock. No use without permission.","focal_length":"0","iso":"0","shutter_speed":"0","title":"Real,Estate,Agent,Make,Offer,For,Couple,Selects,Housing,Options,","orientation":"1"}" data-image-title="Real,Estate,Agent,Make,Offer,For,Couple,Selects,Housing,Options," data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/real-estate-agent-make-offer-for-couple-selects-housing-options.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/real-estate-agent-make-offer-for-couple-selects-housing-options.jpg?fit=1000%2C667" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/real-estate-agent-make-offer-for-couple-selects-housing-options.jpg?resize=400%2C267" alt="real estate agent make offer for couple selects housing options" class="wp-image-1775" width="400" height="267" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/real-estate-agent-make-offer-for-couple-selects-housing-options.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/real-estate-agent-make-offer-for-couple-selects-housing-options.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/real-estate-agent-make-offer-for-couple-selects-housing-options.jpg?resize=768%2C512 768w" sizes="auto, (max-width: 400px) 100vw, 400px" /></figure></div>
<p>On November 9, 2010, the tenant, through its attorney, sent a written extension notice to extend the lease term for the First Extension Option via Federal Express rather than via registered mail or certified mail as provided under the express terms of the lease. Landlord did not dispute the notice and treated the notice as having effectively extended the term of the lease to December 31, 2016.</p>
<p>Subsequently, the tenant claims to have effectively exercised the Second Extension Option to extend the term to December 31, 2021. On August 16, 2012, tenant, again through its attorney, emailed landlord raising matters tenant “would like to discuss”, and included the following statement: “We are now in the first of two (2) five (5) year options. Tenant would like to exercise the second option now, so we don’t have to do this again as soon. . .”</p>
<p>There were additional proposals and suggestions in the email that create issues concerning the definiteness of the purported exercise of the Second Extension Option, but for purposes of the court’s ruling in <em>Casdan</em>, it is unnecessary to address that concern.</p>
<h2 class="wp-block-heading">Claim That Landlord Received <em>Actual</em> <em>Notice</em></h2>
<p>Tenant’s position was that through various conversations and emails occurring prior to January 1, 2016, landlord received <em>actual notice</em> of tenant’s exercise of the Second Extension Option. Before and after January 1, 2016, tenant made clear to landlord that tenant wanted to remain in the Demised Premises, make various leasehold improvements, and renew the lease. Further, because the landlord had accepted notice of exercise of the First Extension Option by means other than as strictly provided under the terms of the lease, landlord could not insist upon strict adherence to the terms of the lease for exercise of the Second Extension Option.</p>
<h2 class="wp-block-heading">The Trial Court Ruled in Tenant’s Favor</h2>
<p>Following a hearing, the trial court entered summary judgment in tenant’s favor, finding that the August 16, 2012 email was a clear and unambiguous exercise of the Second Extension Option.</p>
<h2 class="wp-block-heading">The Appellate Court Reversed</h2>
<p>On appeal, the trial court’s summary judgment ruling was reviewed <em>de novo</em>, with the appellate court noting that “we review the court’s judgment, not its reasoning,” and <em>reversed </em>the trial court’s judgment in favor of tenant.</p>
<h2 class="wp-block-heading">The Appellate Court’s Reasoning</h2>
<p>In explaining its decision, the <em>Casdan</em> court stated as follows (<em>omissions from text are not noted</em>):</p>
<p>Our supreme court’s seminal decision in <em>Dikeman v. Sunday Creek Coal Co.</em>, 184 Ill. 546 (1900), remains the leading authority on option matters. The contractually mandated time for performance is generally an essential term of a contract. Unless that term is waived, an option is lost due to untimeliness. Discussing the nature of the option before it, <em>Dikeman </em>stated “[the] agreement was purely a privilege given to the lessee without any corresponding right or privilege of the lessor, and the only stipulation was that the right should be exercised at a certain time.” <em>Id.</em> at 551.</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p>Since <em>Dikeman</em>, courts have generally required strict compliance with options. See <em>T.C.T. Building Partnership v. Tandy Corp</em>. 323 Ill. App. 3d, 114, 115, 119-120 (2001) (treating the method for exercising an option as a condition precedent requiring strict compliance). Strict compliance is dictated not only by precedent, but by the needs of commercial transactions and fairness. Options to cancel or extend commercial leases are invaluable to a lessee, and a lessor generally does not receive consideration for the lessor’s agreement to be bound by an exercise of the option. Thus, a lessor may insist on a writing to further certainty as the lessor foregoes other opportunities to lease the space.</p>
<p>Consequently, actual or oral notice is insufficient to exercise an option where a party has failed to provide timely notice. Furthermore, cases finding actual notice to be sufficient outside the options context have no bearing on notice in option cases.</p>
<p>In addition, tenant does not dispute that it failed to strictly comply with the method of notice prescribed by the lease. Instead, tenant argues that actual notice is a sufficient substitute for the lease requirements and landlord waived strict compliance with the requisite method of notice.</p>
<p><em>Dikeman </em>and its progeny clearly defeat tenant’s assertion that actual notice is sufficient.</p>
<p><em>See Casdan</em>, 2018 IL App (1st) 171222, ¶¶ 33-37.</p>
</blockquote>
<h2 class="wp-block-heading">Key Lesson Learned . . .</h2>
<p>One of the key lessons to be learned from <em>Michigan Wacker Associates, LLC v. Casdan</em> is that exercising an option – any option – is not a casual undertaking. Strict compliance with the method of exercise specified in the option instrument is essential. It must be specific, certain, and unconditional. It must also be timely, and the method of notice of exercise must strictly adhere to the notice requirements of the option instrument. Even actual notice of an attempted exercise of an option will not suffice if strict compliance with the method of exercise is not observed.</p>
<p><em>Thanks for listening . . .</em></p>
<p><em>Kymn</em></p>
]]></content:encoded>
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<post-id xmlns="com-wordpress:feed-additions:1">1387</post-id> </item>
<item>
<title>THE CLIENT CONUNDRUM</title>
<link>http://harp-onthis.com/the-client-conundrum/</link>
<comments>http://harp-onthis.com/the-client-conundrum/#respond</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Mon, 06 Nov 2017 18:55:30 +0000</pubDate>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[Asset Protection]]></category>
<category><![CDATA[Business]]></category>
<category><![CDATA[client]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[conducting due diligence]]></category>
<category><![CDATA[consequences]]></category>
<category><![CDATA[development]]></category>
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<description><![CDATA[A mistake lawyers make is treating all clients the same. It’s a mistake shared by other professions as well. They’re not all the same. The issues clients face, and the solutions they deserve, are as varied as life itself. With […]]]></description>
<content:encoded><![CDATA[
<p>A mistake lawyers make is treating all clients the same. It’s a mistake shared by other professions as well. They’re not all the same. The issues clients face, and the solutions they deserve, are as varied as life itself.</p>
<div class="wp-block-image size-medium wp-image-1145">
<figure class="alignleft"><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="" 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" /><figcaption class="wp-element-caption">R. Kymn Harp<br />Robbins, Salomon & Patt, Ltd.</figcaption></figure></div>
<p>With the rise of technology and the commoditization of legal services, nuance can be lost. Precise solutions to particular problems may be neglected while cookie-cutter boilerplate is offered as a cheap substitute. Not that all boilerplate and technology is bad – they can provide huge benefits when applied correctly. But just as a mass-produced size 9 leather dress shoe may be ideal for some, it is of little comfort or use to an athlete with a size 10 foot.</p>
<p>Automation is a cost-saver, no doubt. But is it a reasonable substitute for thoughtful analysis and tailor-made solutions to client specific problems?</p>
<p></p>
<p></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="1810" data-permalink="http://harp-onthis.com/the-client-conundrum/malematurecaucasianceobusinessmanleaderwithdiversecoworkersteam/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/executive-managers-group-at-meeting.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) 2022 Ground Picture\/Shutterstock. No use without permission.","focal_length":"0","iso":"0","shutter_speed":"0","title":"Male,Mature,Caucasian,Ceo,Businessman,Leader,With,Diverse,Coworkers,Team,","orientation":"1"}" data-image-title="Male,Mature,Caucasian,Ceo,Businessman,Leader,With,Diverse,Coworkers,Team," data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/executive-managers-group-at-meeting.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/executive-managers-group-at-meeting.jpg?fit=1000%2C667" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/executive-managers-group-at-meeting.jpg?resize=400%2C267" alt="executive managers group at meeting" class="wp-image-1810" width="400" height="267" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/executive-managers-group-at-meeting.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/executive-managers-group-at-meeting.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/executive-managers-group-at-meeting.jpg?resize=768%2C512 768w" sizes="auto, (max-width: 400px) 100vw, 400px" /></figure></div>
<p>There may be areas of life where commoditized legal services represent a reasonable tradeoff. Perhaps consumers engaged in everyday transactions are adequately-served by inexpensive one-size fits all solutions. Even a consumer buying a home – often touted as the largest single transaction most consumers will make in their lifetime – may be well-served by inexpensive boilerplate solutions on most occasions. In the world of consumer transactions and consumer finance, there is a protective overlay of consumer protection laws and oversight that will often fill in the gaps left by a one-size fits all approach.</p>
<p>But what about most commercial transactions? Buying or starting a business? Investing in commercial or industrial real estate? Raising capital from third parties? Entering into a partnership agreement or limited liability company operating agreement for a commercial venture where someone else is in control, and uses or controls your money – or where you use or control someone else’s money? Are these circumstances where one-size solutions and documentation make sense?</p>
<p>How do you protect yourself if something goes wrong? Experience shows something can always go wrong. And when things go wrong in a commercial transaction, expensive lawsuits often follow.</p>
<p>Business people consider themselves to be intelligent, reasonable beings. When they invest in a business or real estate project they expect it will succeed. If they thought otherwise, they would not make the investment. That would be foolish, and they know for certain that they’re not foolish. If it fails, they conclude it had be someone’s fault – but it certainly wasn’t theirs. They must have been duped. Information must have been withheld. They must have been lied to or cheated. The other party must at least be incompetent if not downright crooked.</p>
<p>You may laugh, but that’s often how it happens. You may be one hundred percent competent and above-board. You may have understood and discussed the risks to the point where you are certain that your partners or investors understand the risks as well – but if you’re the promoter of the failed business or investment, or you’re in charge of making management decisions – you should expect to find yourself staring down the business end of a double-barreled lawsuit claiming the loss is your fault – even if you lost money as well, and even if nothing you did or could have done resulted in the loss. Changing economic circumstances, business and lifestyle trends, and other factors far beyond your control may be the reason for the loss, but you will be blamed. How do to protect yourself?</p>
<p>Suppose you’re on the other side. What if you’re the investor or partner asked to invest? What do you look for? What do you require? How do you protect yourself?</p>
<p>Clients are not all the same. Commercial transactions are not all the same. The risks and benefits of each investment and business venture are not all the same. The solutions and documentation of each transaction cannot, therefore, be all the same.</p>
<p>If clients are engaged in serious business, serious attention is required. Both the attorney and the client need to understand this. Once a deal goes bad, it’s too late to go back and redo what should have been done at the outset.</p>
<p>Will doing it right up front cost more?</p>
<p>Probably.</p>
<p>Will it be worth it if things go poorly?</p>
<p>You bet.</p>
<p>Should clients buy a size 9 shoe for their size 10 foot?</p>
<p><em>Thanks for listening. . .</em></p>
<p><em>Kymn </em></p>
]]></content:encoded>
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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>
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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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<title>COMMERCIAL LANDLORD-TENANT – Part 2 – The Covenant of Quiet Enjoyment</title>
<link>http://harp-onthis.com/commercial-landlord-tenant-part-2-the-covenant-of-quiet-enjoyment/</link>
<comments>http://harp-onthis.com/commercial-landlord-tenant-part-2-the-covenant-of-quiet-enjoyment/#comments</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Mon, 23 Mar 2015 11:00:24 +0000</pubDate>
<category><![CDATA[Business]]></category>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[Landlord-Tenant]]></category>
<category><![CDATA[White Papers]]></category>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[adaptive reuse]]></category>
<category><![CDATA[closing]]></category>
<category><![CDATA[closings]]></category>
<category><![CDATA[commercial landlord tenant]]></category>
<category><![CDATA[commercial lease]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[commercial tenant rights]]></category>
<category><![CDATA[conducting due diligence]]></category>
<category><![CDATA[consequences]]></category>
<category><![CDATA[default]]></category>
<category><![CDATA[development]]></category>
<category><![CDATA[due diligence checklist]]></category>
<category><![CDATA[due diliigence]]></category>
<category><![CDATA[enforcement actions]]></category>
<category><![CDATA[investment]]></category>
<category><![CDATA[keys to closing]]></category>
<category><![CDATA[purchase]]></category>
<category><![CDATA[quiet enjoyment]]></category>
<category><![CDATA[real estate]]></category>
<category><![CDATA[urban infill]]></category>
<category><![CDATA[what to look for]]></category>
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<description><![CDATA[This is Part 2 of a multi-part series of articles discussing the duties, rights and remedies of commercial real estate tenants in Illinois. Part 1, entitled “Getting It Right” discussed the importance of clarity in lease drafting, and the potential […]]]></description>
<content:encoded><![CDATA[
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p></p>
</blockquote>
<div class="wp-block-image">
<figure class="alignleft is-resized"><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" style="width:175px;height:245px" 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>
<div class="wp-block-image">
<figure class="alignleft"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/03/Catherine-Cooke-Shareholder-at-RSP.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="175" height="245" data-attachment-id="1051" data-permalink="http://harp-onthis.com/commercial-landlord-tenant-issues-part-1-getting-it-right/catherine-cooke-shareholder-at-rsp/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/03/Catherine-Cooke-Shareholder-at-RSP.jpg?fit=175%2C245" data-orig-size="175,245" data-comments-opened="1" data-image-meta="{"aperture":"9","credit":"","camera":"NIKON D7000","caption":"","created_timestamp":"1367319064","copyright":"","focal_length":"98","iso":"125","shutter_speed":"0.008","title":"","orientation":"1"}" data-image-title="Catherine Cooke" data-image-description="" data-image-caption="<p>Catherine Cooke<br />
Robbins, Salomon & Patt, Ltd.</p>
" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/03/Catherine-Cooke-Shareholder-at-RSP.jpg?fit=175%2C245" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/03/Catherine-Cooke-Shareholder-at-RSP.jpg?fit=175%2C245" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/03/Catherine-Cooke-Shareholder-at-RSP.jpg?resize=175%2C245" alt="Catherine Cook Shareholder at Robbins, Salomon & Patt, Ltd." class="wp-image-1051"/></a><figcaption class="wp-element-caption">Catherine A. Cooke<br /> Robbins, Salomon & Patt, Ltd.</figcaption></figure></div>
<p><em>This is Part 2 of a multi-part series of articles discussing the duties, rights and remedies of commercial real estate tenants in Illinois. <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">Part 1, entitled “Getting It Right”</a> discussed the importance of clarity in lease drafting, and the potential for unintended leasehold easements for parking, and other uses.</em></p>
<p><em>In March 2015, the Illinois Institute for Continuing Legal Education (“IICLE”) published its 2015 Edition practice handbook entitled: Commercial Landlord-Tenant Practice. To provide best-practice guidance to all Illinois attorneys, IICLE recruits experienced attorneys with relevant knowledge to write each handbook chapter. For the 2015 Edition, IICLE asked R. Kymn Harp and Catherine A. Cooke to write the chapter entitled Tenant’s Duties, Rights and Remedies. We were, of course, pleased to oblige. Although each of us represent commercial landlords at least as often as we represent commercial tenants, a clear understanding of the duties, rights and remedies of commercial real estate tenants is critical when representing either side of the commercial lease transaction. </em></p>
<p><em>The following is an excerpt (slightly edited) from our chapter in the 2015 Edition. We hope you find this excerpt, and the excerpts that will follow, informative and useful. Feel free to contact IICLE directly to purchase the entire volume.</em></p>
<h2 class="wp-block-heading"><span style="color: #1897ab;">The COVENANT OF QUIET ENJOYMENT </span><br /><span style="color: #1897ab;">What Is It? — General Principles</span></h2>
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<p>It has long been the law in Illinois that a covenant of quite enjoyment is implied in all lease agreements. <em>Blue Cross Ass’n v. 666 N. Lake Shore Drive Associates</em>, 100 Ill.App.3d 647, 427 N.E.2d 270, 273, 56 Ill.Dec. 290 (1st Dist. 1981); <em>64 East Walton, Inc. v. Chicago Title & Trust Co</em>., 69 Ill.App.3d 635, 387 N.E.2d 751, 755, 25 Ill.Dec. 875 (1st Dist. 1979); <em>Berrington v. Casey</em>, 78 Ill. 317, 319 (1875); <em>Wade v. Halligan</em>, 16 Ill. 507, 511 (1855).</p>
<p>A covenant of quiet enjoyment “promises that the tenant shall enjoy the possession of the premises in peace and without disturbance.” [Emphasis in original.] <em>Checkers, Simon & Rosner v. Lurie Co</em>., No. 87 C 5405, 1987 WL 18930 at *3 (N.D.Ill. Oct. 20, 1987). This does not mean, however, that no breach of the covenant of quiet enjoyment may be found in a leasehold without a finding that the lessor intended to deprive the lessee of possession. <em>Blue Cross Ass’n, supra</em>, 427 N.E.2d at 27. It simply means that a tenant must actually be in possession of the premises to claim a breach of the covenant of quiet enjoyment. If the tenant has already vacated the premises before the disturbance has commenced, no breach of the covenant of quiet enjoyment occurs. <em>Checkers, Simon & Rosner, supra</em>, 1987 WL 18930 at *3.</p>
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<p>An implied covenant of quiet enjoyment includes, “absent a lease clause to the contrary, the right to be free of the lessors’ intentional interference with full enjoyment and use of the leased premises.” <em>Infinity Broadcasting Corporation of Illinois v. Prudential Insurance Company of America</em>, No. 86 C 4207, 1987 WL 6624 at *5 (N.D.Ill. Feb. 9, 1987), aff’d, 869 F.2d 1073 (7th Cir. 1989), quoting <em>American Dairy Queen Corp. v. Brown-Port Co</em>., 621 F.2d 255, 258 (7th Cir. 1980).</p>
<p>If the landlord breaches the covenant of quiet enjoyment, the lessee may remain in possession and claim damages for breach of lease. In such case, the measure of damages is the difference between the rental value of the premises in light of the breached covenant of quiet enjoyment and the rent that the tenant agreed to pay under the lease, together with such special damages as may have been directly and necessarily incurred by the tenant in consequence of the landlord’s wrongful act. <em>64 East Walton, supra</em>, 387 N.E.2d at 755.</p>
<p>Although Illinois cases defining the precise scope of a covenant of quiet enjoyment are rare, BLACK’S LAW DICTIONARY, pp. 1248 – 1249 (6th ed. 1993) defines “quiet enjoyment” in connection with the landlord-tenant relationship as “the tenant’s right to freedom from serious interferences with his or her tenancy. <em>Manzaro v. McCann</em>, 401 Mass. 880, 519 N.E.2d 1337, 1341. (Ringing for more than one day of smoke alarms in an apartment building could be sufficient interference with the tenants’ quite enjoyment of leased premises to justify relief against the landlord.).”</p>
<h2 class="wp-block-heading"><span style="color: #1897ab;">HOW THE COVENANT OF QUIET ENJOYMENT MAY APPLY— CASE LAW</span></h2>
<p>In <em>Blue Cross Ass’n v. 666 N. Lake Shore Drive Associates</em>, 100 Ill.App.3d 647, 427 N.E.2d 270, 273, 56 Ill.Dec. 290 (1st Dist. 1981), the First District Appellate Court discussed the covenant of quiet enjoyment in the lease as granting the tenant a right of quiet and peaceful possession and enjoyment of the whole premises and equated a breach of quiet enjoyment under a lease to a private nuisance. “A private nuisance in a leasehold situation is ‘an individual wrong arising from an unreasonable, unwarranted or unlawful use of one’s property producing such material annoyance, inconvenience, discomfort, or hurt that the law will presume a consequent damage.’ ” Id., quoting <em>Great Atlantic & Pacific Tea Co. v. LaSalle National Bank</em>, 77 Ill.App.3d 478, 395 N.E.2d 1193, 1198, 32 Ill.Dec. 812 (1st Dist. 1979).</p>
<p>The tenant had entered into a five-year lease on August 22, 1978, with a five-year renewal option, for approximately 53,000 square feet of the </p>
<span id="more-1065"></span>
<p>15th floor of the building located at 666 North Lake Shore Drive in Chicago. The lease stated that the premises were to be used for computer installation and general office space, and the tenant expended in excess of $2,000,000 in leasehold improvements, installed approximately $6,000,000 in computer equipment, and was fully operational in August 1980.</p>
<p>In April 1979, the building was purchased by a new owner for the purpose of converting it to a mixed-use residential, commercial, and office facility. In August 1979, the new owner advised the tenant that the renovation program required alternations in the plaintiff’s leasehold in the form of physical penetrations for installation of plumbing, ventilation, and electrical risers to service the condominium and office areas on floors above and below the tenant’s leased premises. The tenant refused to permit penetrations into the plaintiff’s leased space. Notwithstanding the tenant’s refusal, the landlord proceeded with construction and penetrated the tenant’s space for installation of the risers in accordance with the landlord’s renovation plans. The tenant sued to obtain a preliminary injunction, but the trial court declined to issue injunctive relief. The tenant appealed.</p>
<p>On appeal, the appellate court reversed the trial court, stating: “Paragraph 42A of the lease expressly grants (tenant) the right of quiet and peaceful possession and enjoyment. The meaning of this clause is not controverted. (Tenant) had a right to seek injunctive relief for its breach when the conduct of (landlord) substantially interfered with (tenants’) use and enjoyment of the premises.” 427 N.E.2d at 273.</p>
<h2 class="wp-block-heading"><span style="color: #1897ab;">PRIVATE NUISANCE DISTINGUISHED</span></h2>
<p>Similar to breach of the covenant of quiet enjoyment is the tort of maintaining a nuisance. In <em>Great Atlantic & Pacific Tea Co. v. LaSalle National Bank</em>, 77 Ill.App.3d 478, 395 N.E.2d 1193, 1198, 32 Ill.Dec. 81 (1st Dist. 1979), the First District Appellate Court stated:</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p>A private nuisance is a nontrespassory invasion of another’s interest in the private use and enjoyment of land. . . . It is an individual wrong arising from an unreasonable, unwarranted or unlawful use of one’s property producing such material annoyance, inconvenience, discomfort, or hurt that the law will presume consequent damage. . . . What is an unreasonable use of one’s property under the circumstances, is determined by weighing the following factors:</p>
<p>(a) The extent of the harm involved;</p>
<p>(b) the character of the harm involved;</p>
<p>(c) the social value that the law attaches to the type of use or enjoyment invaded;</p>
<p>(d) the suitability of the particular use or enjoyment invaded to the character of the locality; and</p>
<p>(e) the burden on the person harmed or avoiding the harm.</p>
<p>. . . The weight that each factor is accorded is relative to the circumstances of the case.” [Citations omitted.]
</blockquote>
<h2 class="wp-block-heading"><span style="color: #1897ab;">SCOPE OF INVASION</span></h2>
<p>Although <em>Blue Cross Ass’n, supra</em>, involved a physical invasion of the tenant’s space, physical invasion is not necessarily required. A tenant has a right to the full use and enjoyment of the leased premises without the landlord’s intentional interference, absent a lease clause to the contrary. Infinity Broadcasting, supra. By equating a breach of the covenant of quiet enjoyment to a private nuisance, the Illinois Appellate Court, in <em>Blue Cross Ass’n, supra</em>, inferred that the breach could be a nontrespassory invasion into the tenant’s leased premises.</p>
<p><span style="color: #1897ab;"><strong>Query:</strong></span> Do the following activities by a landlord constitute a breach of the covenant of quiet enjoyment, absent an express lease clause permitting these activities, if the activities cause material annoyance, inconvenience, discomfort or hurt to the commercial tenant?</p>
<p><strong><span style="color: #1897ab;">√</span></strong> Loud construction on adjacent or nearby premises during normal business hours?</p>
<p><strong><span style="color: #1897ab;">√</span></strong> Prolonged disruption of elevator service or other access to the premises during normal business hours?</p>
<p><strong><span style="color: #1897ab;">√</span></strong> Failure to maintain working HVAC suitable to the tenant’s commercially reasonable use of the leased premises?</p>
<p><span style="color: #1897ab;"> </span><strong><span style="color: #1897ab;">PRACTICE POINTER</span></strong></p>
<p><span style="color: #1897ab;">A landlord in a multi-tenant building would be wise to include as part of the landlord’s “standard boilerplate” provisions, a modified covenant of quiet enjoyment granting landlord the right to reasonably penetrate the leased premises as necessary, appropriate or convenient to install and maintain plumbing, electrical, telecommunications, fire suppression, HVAC and other components and systems as determined by landlord, in landlord’s sole discretion, to be necessary, useful or convenient to the preparation, use and/or occupancy of other portions of the building, and to conduct construction activities in adjacent or nearby premises, and to temporarily modify the means and/or configuration of access to the premises for safety or convenience, so long as such activities do not unreasonably interfere with commercially reasonable use of the leased premises by tenant for the purposes for which the premises are leased. If the landlord fails to include such a provision, the tenant may have to right to stop landlord’s work.</span></p>
<h2 class="wp-block-heading"><span style="color: #1897ab;">LIGHT AND AIR</span></h2>
<p>The covenant of quiet enjoyment does not guarantee a tenant a right to unobstructed light and air. In <em>Keating v. Springer</em>, 146 Ill. 481, 34 N.E. 805, 807 (1893), the Illinois Supreme Court held that “a landlord will not be liable for obstructing his tenant’s windows by building on an adjacent [lot], in the absence of any covenant or agreement in the lease forbidding him to do so.”</p>
<p>Similarly, in <em>Baird v. Hanna</em>, 328 Ill. 436, 159 N.E. 793, 794 (1927), the Illinois Supreme Court held that “the simplest rule, and that best suited to a country like the United States, in which changes are continually taking place in the ownership and in the use of lands, is that no easement of light can be acquired without the express grant of an interest in, or covenant relating to, the lands over which the right is claimed.”</p>
<h2 class="wp-block-heading"><span style="color: #1897ab;">TELEVISION AND RADIO SIGNALS</span></h2>
<p>A claimed right to unobstructed transmission of television and radio signals has been held to the same standard and analysis as a claimed right to unobstructed light and air. While not actually a landlord-tenant case, <em>People ex rel. Hoogasian v. Sears, Roebuck & Co</em>., 52 Ill.2d 301, 287 N.E.2d 677 (1972), is instructive in its clarification that claimed easements for television and radio signals will be governed by the same analysis as claimed easements for light and air.</p>
<p>In <em>Hoogasian</em>, certain villages in the Chicago area sued to enjoin Sears from constructing the high-rise office building that became known as “Sears Tower” (now Willis Tower), contending that the tower would distort television reception and depress real estate values, and therefore constitute a nuisance. The Illinois Supreme Court upheld dismissal of the case, determining that the same standard applicable to light and air applies to television and radio signals, and applied the general rule that a landowner has no legal right to the free flow of light and air across the adjoining land of his or her neighbor. See also <em>Infinity Broadcasting Corporation of Illinois v. Prudential Insurance Company of America</em>, No. 86 C 4207, 1987 WL 6624 at *5 (N.D.Ill. Feb. 9, 1987), aff’d, 869 F.2d 1073 (7th Cir. 1989).</p>
<h2 class="wp-block-heading"><span style="color: #1897ab;">DAMAGES FOR BREACH OF THE COVENANT OF QUIET ENJOYMENT</span></h2>
<p>In <em>64 East Walton, Inc. v. Chicago Title & Trust Co</em>., 69 Ill.App.3d 635, 387 N.E.2d 751, 25 Ill.Dec. 875 (1st Dist. 1979), the landlord did not contest that there was a breach of the covenant of quiet enjoyment but did contest the amount of damages awarded. In analyzing the scope of damages a tenant could recover for breach of the covenant of quiet enjoyment, the court stated:</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p>The relevant law, although by no means plentiful, is clear. A covenant of quiet enjoyment is implied in all lease agreements. . . . If the lessor breaches the covenant, the lessee may remain in possession and thus be liable for rent but still maintain an action for damages. . . . The measure of damages in such a case is the difference between the rental value of the premises involved and the rent which the lessee has agreed to pay, together with such special damages as may have directly and necessarily occasioned to the lessee by the lessor’s wrongful act. . . . Thus, we must examine the wrongful acts of defendant and determine whether they directly and necessarily occasioned the damages awarded, keeping in mind that a trial court’s assessment of damages will be set aside only if it is manifestly erroneous. (Citations omitted.) 387 N.E.2d at 755.</p>
</blockquote>
<p><strong><span style="color: #1897ab;">PRACTICE POINTER</span></strong></p>
<p><span style="color: #1897ab;">Generally speaking, a breach of a covenant of quiet enjoyment is a breach of a contractual covenant contained (or implied) in a lease, constituting a cause of action against a landlord. If the “material annoyance, inconvenience, discomfort, or hurt” is caused by a nearby property owner or cotenant, the proper cause of action against such adjacent property owner or cotenant is likely “maintaining a private nuisance” rather than a breach of any covenant of quiet enjoyment, since, under those circumstances, there is no privity of contract through which a “covenant” of any sort might arise.</span></p>
<h2 class="wp-block-heading"><span style="color: #1897ab;">LESSON LEARNED</span></h2>
<p>The covenant of quiet enjoyment, while implied in all leases, is a covenant often expressly stated in the so-called “standard boilerplate” provisions of a commercial lease. As a contract covenant, it can be modified and adapted to the needs of the landlord and tenant by appropriate and careful drafting. Had the landlord in Blue Cross Ass’n, supra, included in the lease appropriate language granting it the right to enter upon and penetrate the tenant’s space for the purpose of installing plumbing, ventilation and electrical risers as determined by landlord to be reasonably necessary for the build-out and use of other portions of the building, no breach of the covenant of quiet enjoyment would have likely occurred. As noted by the court, a breach of the covenant of quiet enjoyment requires an intentional interference with a tenant’s full enjoyment and use of the leased premises which interference is unreasonable, unwarranted or unlawful. If the lease had included a suitable clause or provision expressly permitting the landlord to penetrate a portion of the leased space to install plumbing, ventilation, electrical risers and other systems to serve other portions of the building, no breach of the covenant of quiet enjoyment would have occurred.</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<h2 class="wp-block-heading"><span style="color: #1897ab;">AUTHOR’S NOTE</span></h2>
<p>If you are a property owner/developer planning to reconfigure a multi-tenant commercial property, or planning an adaptive reuse of commercial property encumbered with existing leases, proper due diligence requires a close examination of existing leases to confirm your rights to implement your development plan. If there is a risk of violating the covenant of quiet enjoyment, a strategy to mitigate that risk should be developed as part of the overall development plan. Otherwise, you may find yourself unable to proceed with your development plan, as existing commercial tenants enjoin implementation to your potential extreme financial detriment.</p>
</blockquote>
<p><em>Thanks for listening,</em><br /><em>R. Kymn Harp and Catherine A. Cooke</em></p>
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<h3 class="wp-block-heading"><span style="color: #1897ab;"><em>COMING UP . . .</em></span></h3>
<p>In Part 3 of this series, we will discuss <span style="color: #1897ab;"><em><strong>Constructive Eviction</strong></em></span>—including the rights and remedies available to a commercial tenant who is constructively evicted by its landlord.</p>
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<title>Commercial Landlord-Tenant Issues – PART 1 – Getting it Right</title>
<link>http://harp-onthis.com/commercial-landlord-tenant-issues-part-1-getting-it-right/</link>
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<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Thu, 12 Mar 2015 22:37:49 +0000</pubDate>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[Landlord-Tenant]]></category>
<category><![CDATA[White Papers]]></category>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[commercial landlord]]></category>
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<category><![CDATA[commercial leases]]></category>
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<category><![CDATA[commercial tenants]]></category>
<category><![CDATA[conducting due diligence]]></category>
<category><![CDATA[consequences]]></category>
<category><![CDATA[development]]></category>
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<category><![CDATA[lease rights]]></category>
<category><![CDATA[real estate]]></category>
<category><![CDATA[rights to parking]]></category>
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<description><![CDATA[In March 2015, the Illinois Institute for Continuing Legal Education (“IICLE”) published its 2015 Edition practice handbook entitled: Commercial Landlord-Tenant Practice. To provide best-practice guidance to all Illinois attorneys, IICLE recruits experienced attorneys with relevant knowledge to write each handbook […]]]></description>
<content:encoded><![CDATA[<div class="wp-block-image">
<figure class="alignleft is-resized"><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" style="width:175px;height:245px" 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>
<div class="wp-block-image">
<figure class="alignleft"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/03/Catherine-Cooke-Shareholder-at-RSP.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="175" height="245" data-attachment-id="1051" data-permalink="http://harp-onthis.com/commercial-landlord-tenant-issues-part-1-getting-it-right/catherine-cooke-shareholder-at-rsp/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/03/Catherine-Cooke-Shareholder-at-RSP.jpg?fit=175%2C245" data-orig-size="175,245" data-comments-opened="1" data-image-meta="{"aperture":"9","credit":"","camera":"NIKON D7000","caption":"","created_timestamp":"1367319064","copyright":"","focal_length":"98","iso":"125","shutter_speed":"0.008","title":"","orientation":"1"}" data-image-title="Catherine Cooke" data-image-description="" data-image-caption="<p>Catherine Cooke<br />
Robbins, Salomon & Patt, Ltd.</p>
" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/03/Catherine-Cooke-Shareholder-at-RSP.jpg?fit=175%2C245" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/03/Catherine-Cooke-Shareholder-at-RSP.jpg?fit=175%2C245" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/03/Catherine-Cooke-Shareholder-at-RSP.jpg?resize=175%2C245" alt="Catherine Cook Shareholder at Robbins, Salomon & Patt, Ltd." class="wp-image-1051"/></a><figcaption class="wp-element-caption">Catherine Cooke<br /> Robbins, Salomon & Patt, Ltd.</figcaption></figure></div>
<p><em>In March 2015, the Illinois Institute for Continuing Legal Education (“IICLE”) published its 2015 Edition practice handbook entitled: <strong>Commercial Landlord-Tenant Practice.</strong> To provide best-practice guidance to all Illinois attorneys, IICLE recruits experienced attorneys with relevant knowledge to write each handbook chapter. For the current edition, IICLE asked R. Kymn Harp and Catherine Cooke of Robbins, Salomon & Patt, Ltd., Chicago, Illinois, to write the chapter entitled Tenant’s Duties, Rights and Remedies. We were, of course, pleased to oblige. Although each of us represent commercial landlords at least as often as we represent commercial tenants, a clear understanding of the duties, rights and remedies of commercial real estate tenants is critical when representing either side of the commercial lease transaction.</em></p>
<p><em>The following is an excerpt (slightly edited) from our chapter, Tenant’s Duties, Rights and Remedies appearing in the 2015 Edition of IICLE <strong>Commercial Landlord-Tenant Practice</strong>. We hope you find this excerpt, and the excerpts that will follow, informative and useful. Feel free to contact IICLE directly to purchase the entire volume.</em></p>
<h2 class="wp-block-heading">How Commercial Lease Issues Commonly Arise – Getting it Right</h2>
<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="1839" data-permalink="http://harp-onthis.com/commercial-landlord-tenant-issues-part-1-getting-it-right/successfuldealrealestateleaseorhomepurchaseconceptbuyer/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/successful-deal-Real-estate-lease-or-home-purchase.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) 2022 CrizzyStudio\/Shutterstock. No use without permission.","focal_length":"0","iso":"0","shutter_speed":"0","title":"Successful,Deal,Real,Estate,Lease,Or,Home,Purchase,Concept,Buyer","orientation":"1"}" data-image-title="Successful,Deal,Real,Estate,Lease,Or,Home,Purchase,Concept,Buyer" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/successful-deal-Real-estate-lease-or-home-purchase.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/successful-deal-Real-estate-lease-or-home-purchase.jpg?fit=1000%2C667" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/successful-deal-Real-estate-lease-or-home-purchase.jpg?resize=1000%2C667" alt="successful deal Real estate lease or home purchase" class="wp-image-1839" style="width:400px;height:267px" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/successful-deal-Real-estate-lease-or-home-purchase.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/successful-deal-Real-estate-lease-or-home-purchase.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/successful-deal-Real-estate-lease-or-home-purchase.jpg?resize=768%2C512 768w" sizes="auto, (max-width: 1000px) 100vw, 1000px" /></figure></div>
<p>Commercial real estate leases, like virtually all documents and agreements relating to commercial real estate transactions and interests, are, to a very large extent, consistent only in their variety. In commercial real estate practice, there are few, if any, “standard form” documents or agreements. To be sure, there are provisions in commercial real estate leases that any experienced practitioner would expect to see, and there are some generally applicable legal concepts that apply, but the variety of issues that may arise — and the language used in each commercial lease — will directly and materially impact the “duties, rights, and remedies” of a tenant under any commercial lease.</p>
<p>The best answer to most questions about what are the rights, duties, and remedies of a tenant under a commercial real estate lease is “It depends.” What does it depend on? It depends primarily on what the parties to the lease — the landlord and tenant — intended, as (presumably) reflected by the express terms and conditions of the lease. However, two common challenges frequently exist, and they apply equally to commercial tenants and commercial landlords. They are (a) poorly written lease provisions that do not clearly and definitively set forth the intention of the landlord and tenant in a way that cannot reasonably be misunderstood and (b) inclusion of perceived “standard boilerplate” provisions in a lease without fully understanding their legal or practical affect on the leased premises, the parties, and the greater project of which the leased premises may be a part. When the intent of the parties is not abundantly clear, a court may find the answer implied by the facts and circumstances.</p>
<h2 class="wp-block-heading">GENERAL LEASE PRINCIPLES AND RULES OF CONSTRUCTION</h2>
<p>A “lease” is generally described as a contract for exclusive possession of land and improvements for a term of years or other duration, usually for a specified rent or other compensation. <em>Urban Investment & Development Co. v. Maurice L. Rothschild & Co</em>., 25 Ill.App.3d 546, 323 N.E.2d 588, 592 (1st Dist. 1975); <em>Feeley v. Michigan Avenue National Bank</em>, 141 Ill.App.3d 187, 490 N.E.2d 15, 18, 141 Ill.Dec. 187 (1st Dist. 1986).</p>
<p>In determining the duties, rights, and remedies of a tenant under a commercial lease in Illinois, the general rules of contract construction will apply. <em>Walgreen Co. v. American National Bank & Trust Company of Chicago</em>, 4 Ill.App.3d 549, 281 N.E.2d 462, 465 (1st Dist. 1972); <em>Feeley, supra</em>, 490 N.E.2d at 18; <em>Chicago Title & Trust Co. v. Southland Corp</em>., 111 Ill.App.3d 67, 443 N.E.2d 294, 297, 66 Ill.Dec. 611 (1st Dist. 1982). Interpretation of a lease is a question of law when the terms are plain and unambiguous. <em>Madigan Bros. v. Melrose Shopping Center Co</em>., 123 Ill.App.3d 851, 463 N.E.2d 824, 828, 79 Ill.Dec. 270 (1st Dist. 1984).</p>
<p>“An ambiguous contract is one capable of being understood in more senses than one; an agreement obscure in meaning, through indefiniteness of expression, or having a double meaning.” <em>Advertising Checking Bureau, Inc. v. Canal-Randolph Associates</em>, 101 Ill.App.3d 140, 427 N.E.2d 1039, 1042, 56 Ill.Dec. 634 (1st Dist. 1991), quoting <em>First National Bank of Chicago v. Victor Comptometer Corp</em>., 123 Ill.App.2d 335, 260 N.E.2d 99, 102 (1st Dist. 1970). However, the mere fact that the parties to a lease “dispute” the meaning of a lease provision and assign conflicting interpretations does not render the provision “ambiguous.” <em>McGann v. Murry,</em> 75 Ill.App.3d 697, 393 N.E.2d 1339, 1342 – 1343, 31 Ill.Dec. 32 (3d Dist. 1979); <em>St. George Chicago, Inc. v. George J. Murges & Associates, Ltd</em>., 296 Ill.App.3d 285, 695 N.E.2d 503, 506 – 507, 230 Ill.Dec. 1013 (1st Dist. 1998); F<em>ord v. Dovenmuehle Mortgage, Inc</em>., 273 Ill.App.3d 240, 651 N.E.2d 751, 745 – 755, 209 Ill.Dec. 573 (1st Dist. 1995). Whether ambiguity exists is a question of law for the court. Advertising Checking Bureau, supra, 427 N.E.2d at 1042; Pioneer Trust & Savings Bank v. Lucky Stores, Inc., 91 Ill.App.3d 573, 414 N.E.2d 1152, 1154, 47 Ill.Dec. 36 (1st Dist. 1980).</p>
<p>It is well-settled in Illinois that, when construing a written lease, the court must give words their commonly accepted meaning and must construe every part with reference to all other portions of the lease “so that every part may stand, if possible, and no part of it, either in words or sentences, shall be regarded as superfluous or void if it can be prevented.” <em>Kokenes v. Cities Service Oil Co</em>., 24 Ill.App.3d 483, 321 N.E.2d 338, 340 (1st Dist. 1974), quoting <em>Szulerecki v. Oppenheimer,</em> 283 Ill. 525, 119 N.E. 643, 646 (1918). See also <em>Southland, supra</em>, 443 N.E.2d at 297.</p>
<p>In construing a lease, the instrument is to be considered as a whole and the primary object is to derive the intent of the parties. However, a contract must be enforced as written, and when the terms of a lease are clear and unambiguous, they will be given their natural and ordinary meaning. <em>Gerardi v. Vaal</em>, 169 Ill.App.3d 818, 523 N.E.2d 1327, 1331, 120 Ill.Dec. 416 (3d Dist. 1988).</p>
<p>The foregoing sounds pretty straightforward, but unless attorneys and their clients draft leases with a comprehensive understanding of the interplay between particularly drafted provisions and every other part of the lease — including so-called “standard boilerplate” provisions — they may find themselves surprised by what they have “agreed to.”</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<h3 class="wp-block-heading">PRACTICE POINTER</h3>
<p> Drafting a commercial real estate lease is similar to drafting any other commercial document, except that the meaning and intent of contractual lease provisions are colored by an extensive body of underlying real property law that has developed over the centuries.</p>
<p>A commercial real estate lease should say what the parties mean and mean what it says. Words have meaning; phrases have meaning; each provision has meaning. The interplay of words, phrases, and all provisions in a lease will help determine the meaning of each other word, phrase, or provision. See <em>Kokenes, supra</em>, 321 N.E.2d at 340; <em>Szulerecki, supra</em>, 119 N.E. at 646.</p>
<h3 class="wp-block-heading">PRACTICE POINTER</h3>
<p> Be sure the words and phrases you use mean what your client believes they mean before proceeding.</p>
<p> If there are provisions of a commercial real estate lease you do not fully understand — including provisions you believe are “standard boilerplate” provisions — you need to learn what they mean and how they affect other parts of the lease, and your client’s rights, duties and remedies, before advising your client to proceed.</p>
</blockquote>
<p>The following discussion highlights some areas in which the rights, duties, and remedies of the commercial real estate tenant (and, by mirror image, the landlord) appear not to have been what one or the other party thought they were.</p>
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<h2 class="wp-block-heading">LEASEHOLD EASEMENTS</h2>
<p>An easement creates an interest in land and must, therefore, be founded on a deed or other writing, or on prescription, which presumes a previous grant. <em>Brunotte v. De Witt</em>, 360 Ill. 518, 196 N.E. 489, 495 (1935); <em>The Fair v. Evergreen Park Shopping Center of Delaware</em>, 4 Ill.App.2d 454, 124 N.E.2d 649, 654 (1st Dist. 1954). It may be created by covenant or agreement as well as by grant, for such agreements are in legal effect grants. <em>Chicago Title & Trust Co. v. Wabash-Randolph Corp</em>., 384 Ill. 78, 51 N.E.2d 132, 136 (1943); <em>D.M. Goodwillie Co. v. Commonwealth Electric Co.</em>, 241 Ill. 42, 89 N.E. 272, 283 (1909); <em>The Fair, supra</em>, 124 N.E.2d at 654.</p>
<p>“No particular words are necessary to constitute a grant, and any words which clearly show the intention to give an easement, which is by law grantable, are sufficient to effect that purpose.” <em>Wabash-Randolph, supra</em>, 51 N.E.2d at 136. See also <em>The Fair, supra</em>, 124 N.E.2d at 654. The agreement must be construed so as to carry out the plain intent of the parties. <em>Barber v. Allen</em>, 212 Ill. 125, 72 N.E. 33, 36 (1904).</p>
<h3 class="wp-block-heading">A. Parking</h3>
<p>Parking rights are fertile ground for disputes between commercial tenants and landlords. A significant source of litigation is imprecise drafting, which can result in the creation of implied easements having a scope larger than the developer intended.</p>
<div class="wp-block-image">
<figure class="alignleft"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_29466233.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="300" height="228" data-attachment-id="519" data-permalink="http://harp-onthis.com/commercial-real-estate-development-life-lessons-and-residential-neighbors/httpwww-dreamstime-comstock-photos-walking-shopping-center-image29466233/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_29466233.jpg?fit=1982%2C1512" data-orig-size="1982,1512" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"(c) Amsis1 | Dreamstime.com","focal_length":"0","iso":"0","shutter_speed":"0","title":"http:\/\/www.dreamstime.com\/stock-photos-walking-shopping-center-image29466233"}" data-image-title="http://www.dreamstime.com/stock-photos-walking-shopping-center-image29466233" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_29466233.jpg?fit=300%2C228" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_29466233.jpg?fit=1024%2C781" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_29466233.jpg?resize=300%2C228" alt="http://www.dreamstime.com/stock-photos-walking-shopping-center-image29466233" class="wp-image-519" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_29466233.jpg?resize=300%2C228 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_29466233.jpg?resize=1024%2C781 1024w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_29466233.jpg?resize=393%2C300 393w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_29466233.jpg?w=1982 1982w" sizes="auto, (max-width: 300px) 100vw, 300px" /></a></figure></div>
<p>As illustrated in the cases discussed below, the law in Illinois is that when the landlord makes no reservation of the right to alter the common areas in the lease, and when the site plan attached to the lease accurately and clearly delineates the common areas, the tenant has an easement in the particular configuration of common space delineated by the lease and plats.</p>
<h4 class="wp-block-heading">1. Shopping Center Parking</h4>
<p>– In <em>Madigan Bros. v. Melrose Shopping Center Co</em>., 123 Ill.App.3d 851, 463 N.E.2d 824, 79 Ill.Dec. 270 (1st Dist. 1984), a shopping center tenant sought a permanent injunction to prevent a landlord from constructing a restaurant or other building in the shopping center’s parking area, without consent of the tenant.</p>
<p>The lease included a provision that stated:</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p>this lease includes the non-exclusive right to Tenant and its agents, servants, successors, assigns, licensees, invitees, customers, suppliers and patrons to use and enjoy throughout the term of this lease the “common areas” of the Shopping Center, to-wit, the driveways, entrances, exits, roadways, parking areas, sidewalks, malls and other features and facilities provided for the general uses and purposes of the Shopping Center. 463 N.E.2d at 826.</p>
</blockquote>
<p>The lease further provided: “The location and arrangement of said parking areas, sidewalks, pedestrian malls, entrances and exits and roadways will substantially conform with the plat attached hereto and shall be kept open at all times<em>.</em>” <em>Id.</em></p>
<p>Additionally, the lease provided that the landlord would provide, operate, manage, and maintain all parking areas “together with any enlargement or rearrangement thereof required by enlarging the Shopping Center” and provided that the tenant shall “have, hold and enjoy the demised premises and the entire . . . building together with all other improvements and all easements, rights and appurtenances which are a part of the demised premises during the full term the lease and any extensions thereof, without hindrance or ejection by any persons lawfully claiming under Landlord.” <em>Id.</em></p>
<p>Attached to the lease as exhibits were (a) a plot plan of the shopping center showing the leased space; (b) a legal description of the shopping center; and (c) an exhibit showing “the number and area of existing and proposed automobile parking spaces in the Shopping Center together with existing and proposed driveways, entrances, exits and roadways.” Id. The third exhibit was subsequently amended to show the exact location of the parking area and indicate the specific number of parking spaces being provided in the shopping center. The lease was also amended to permit the landlord to construct a bank in the parking area in return for the landlord waiving a restriction against the tenant opening a new store within four miles of the shopping center.</p>
<p>The tenant sought to enjoin the landlord’s construction of the restaurant or other buildings in the shopping center’s parking area, claiming the lease created for the benefit of the tenant a nonexclusive easement in and to the shopping center parking areas. The landlord denied that the tenant had any easement rights under the lease and otherwise denied interfering with any of tenant’s rights under its lease. The landlord claimed that the landlord had reserved the right to make changes to the location or configuration of the parking areas and that the lease required only that the landlord maintain the specified ratio of parking spaces to leasable area, which would be done under the landlord’s construction plan.</p>
<p>The court held that the lease was clear and unambiguous in granting the tenant the use and enjoyment of the shopping center’s parking facilities. The court stated that “[t]he principal function of a court in construing a written contract is to discern and to give effect to the intention of the parties as expressed in the language of the document when read as a whole” and that “[w]hen the terms of a contract are clear and unambiguous, they must be enforced.” 463 N.E.2d at 828.</p>
<p>After considering the documents presented, the court concluded that the intent of the parties was to grant the shopping center tenants an easement in the parking areas for ingress, egress, and parking, as set out in the site plan, noting, “[i]t is the law in Illinois that where no reservation by the landlord of the right to alter the common areas is made in the lease and where the site plan attached to the lease accurately and precisely delineates the common areas, the tenant has an easement to the particular configuration of common space delineated by the lease and attached plats.” Id.</p>
<p>– In <em>Walgreen Co. v. America National Bank & Trust Company of Chicago,</em> 4 Ill.App.3d 549, 281 N.E.2d 462 (1st Dist. 1972), Walgreens was a tenant in the Village Green Shopping Center in Park Ridge. Walgreens filed an action to enjoin the landlord and Fotomat from permitting or causing construction of a structure of any kind in the parking area. In particular, Walgreens sought to enjoin the erection of an approximately 40-square-foot kiosk within an area comprising roughly three parking spaces that was to be operated by Fotomat for the sale of photographic equipment and supplies and for film processing. The trial court granted the injunction requested by Walgreens, and the landlord appealed. The principal issue on appeal was whether the landlord breached its lease with Walgreens by leasing an area in the parking lot of the shopping center to Fotomat for construction of a kiosk.</p>
<p>Article 7(a) of the lease to Walgreens provided in part as follows:</p>
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<p>It is an express condition of this lease that at all times during the continuance of this lease, Landlord shall provide, maintain, repair, adequately light when necessary during Tenant’s business hours, clean, supervise and keep available the Parking Areas as shown on the attached plan (which Parking Areas shall contain at least 150,000 square feet and shall provide for the parking of at least 400 automobiles), and also adequate service areas, pedestrian malls, sidewalks, curbs, roadways and other facilities appurtenant thereto. Said Parking Areas shall be for the free and exclusive use of customers, invitees and employees of Tenant and of other occupants of said Shopping Center, shall have suitable automobile entrances and exits from and to adjacent streets and roads, shall be level and shall be suitably paved and pitched to streets for surface water run off. 281 N.E.2d at 465.</p>
</blockquote>
<p>The lease provided that Walgreens would pay its proportionate share of costs for operating and maintaining the parking facilities in proportion to the relative square footage of the Walgreens to the total area of all retail facilities in the shopping center. Also, Walgreens was not obligated to open its store or pay rent until “[a]ll the parking and other facilities described in Article 7 have been completed, paved and lighted and are available for use.”<em> Id</em>.</p>
<p>The Fotomat kiosk was to be placed in a part of the shopping center designated on the plan attached to the Walgreens lease as a parking lot. It was designed to serve customers who drove up on either side of it in a motor vehicle. The kiosk was to have dimensions of 9 feet × 4½ feet, eliminating three parking spaces. Even with the elimination of the three parking spaces, the parking lot would still have in excess of 150,000 square feet and sufficient space for more than 400 parking spaces.</p>
<p>The landlord claimed that the plot plan attached to the Walgreens lease was only descriptive and illustrative, since Article 7(a), by stating “which Parking Areas shall contain at least 150,000 square feet and shall [provide for the parking of] at least 400 automobiles,” set forth the landlord’s contractual obligation. 281 N.E.2d at 466. The landlord argued that there was no other way to give meaning and effect to this language in Article 7(a) that specified the minimum square footage of the parking area and minimum number of parking spaces.</p>
<p>The court held that the rules of contract construction apply to written leases and that</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p>(t)he principal function of a court in construing a written agreement is to discern and to give effect to the intention of the parties as expressed in the language of the document when read as a whole. . . . A court cannot remake a contract and give a litigant a better bargain than he himself was satisfied to make; and when the terms of a contract are clear and unambiguous, they must be enforced. (Citations omitted.) <em>Id</em>.</p>
</blockquote>
<p>The court noted that “the lessor foresaw the possibility of a need to expand the retail facilities and as a part of the plot plan reserved the right to rearrange interior walls of one of the buildings in the shopping center, and in addition it reserved the right to expand the retail establishments into two specified areas. No provision, however, was made for diminishing the designated number of parking lots.” 281 N.E.2d at 467.</p>
<p>The court found from the language in the lease and the attached plot plan that the lease was clear and unambiguous. “The plot plan set forth with exactitude the location of the retail facilities, the pedestrian mall, the sidewalks, the roadways, the service drives, the parking areas, and 463 parking places.” Id.</p>
<p>The lease provided under Article 7(b) that Walgreens was to pay its proportionate share of costs to operate and maintain the parking lots and under Article 7(a) that the customers, invitees, and employees of Walgreens and other shopping center tenants were to be given free and exclusive use of the parking areas. After considering the evidence presented, the court concluded that the lease granted Walgreens and other tenants in the shopping center “an easement in the parking areas for ingress, egress, and parking as set out in the plan” and upheld the injunction against constructing the Fotomat kiosk. Id.</p>
<h4 class="wp-block-heading">2. Office Building Parking</h4>
<div class="wp-block-image">
<figure class="alignleft"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstime_m_5364405.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="300" height="150" data-attachment-id="512" data-permalink="http://harp-onthis.com/section-1031-like-kind-exchanges-part-1-of-3/httpwww-dreamstime-comroyalty-free-stock-photo-residential-commercial-buildings-image5364405/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstime_m_5364405.jpg?fit=3000%2C1500" data-orig-size="3000,1500" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"(c) Ptoone | Dreamstime.com","focal_length":"0","iso":"0","shutter_speed":"0","title":"http:\/\/www.dreamstime.com\/royalty-free-stock-photo-residential-commercial-buildings-image5364405"}" data-image-title="http://www.dreamstime.com/royalty-free-stock-photo-residential-commercial-buildings-image5364405" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstime_m_5364405.jpg?fit=300%2C150" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstime_m_5364405.jpg?fit=1024%2C512" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstime_m_5364405.jpg?resize=300%2C150" alt="http://www.dreamstime.com/royalty-free-stock-photo-residential-commercial-buildings-image5364405" class="wp-image-512" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstime_m_5364405.jpg?resize=300%2C150 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstime_m_5364405.jpg?resize=1024%2C512 1024w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstime_m_5364405.jpg?resize=500%2C250 500w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstime_m_5364405.jpg?w=2000 2000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstime_m_5364405.jpg?w=3000 3000w" sizes="auto, (max-width: 300px) 100vw, 300px" /></a></figure></div>
<p>In <em>Mutual of Omaha Life Insurance Co. v. Executive Plaza, Inc.</em>, 99 Ill.App.3d 190, 425 N.E.2d 503, 54 Ill.Dec. 638 (2d Dist. 1981), the tenants in a multistory commercial office building sued the manager and owner for breach of parking rights provisions in a lease. At the time of execution of the lease, a parking lot was provided adjacent to the office building, consisting of approximately 148 spaces for use by all tenants in the building and their clients. The parking lot had five points of ingress and egress: two on North Court Street (a two-way street) and one each on Park Street and Locust Street (two-way streets) and North Church Street (a one-way street). Parking was available to the general public on three of the five streets.</p>
<p>Subsequently, the landlord entered into a lease with Coopers and Lybrand (C & L) for 27 percent of the total rentable area. As part of the C & L lease, the landlord granted C & L employees exclusive access and use of 32 parking spaces in the previously existing common parking lot and an additional 18 spaces in a newly constructed parking lot on Locust Street across from the premises. The restricted parking areas were cordoned off by chains, and access to the restricted parking areas was controlled by plastic pass cards inserted into a gate mechanism to raise a gate. The access gate to the 32 restricted parking spaces in the former common lot was one of the two access points on North Court Street previously providing common access to the common parking lot.</p>
<p>The trial court ruled that the lease had been breached by partially restricting access to parking that was required under the lease to be available to all tenants, but concluded that removal of the parking restriction would not solve the claimed harm of inconvenience, that no direct economic or money loss to tenants had been proved, and that injunctive relief was not appropriate under these circumstances. The tenants appealed.</p>
<p>The appellate court reversed the ruling of the trial court and held: “The rule in Illinois is now clearly that language such as we have in the lease in question creates an easement appurtenant over a parking area in a shopping center, and this is the law elsewhere as well.” 425 N.E.2d at 507. Although the parties did not cite any authorities that specifically applied the rules that have developed in the shopping center cases (see §9.5 above) to parking appurtenant to an office building, the court determined that there was “no logical basis for having one set of rules for shopping centers and a different set of rules for other contractual relationships.”<em> Id</em>., quoting <em>Crest Commercial, Inc. v. Union-Hall, Inc</em>., 104 Ill.App.2d 110, 118, 243 N.E.2d 652, 657 (2d Dist. 1968).</p>
<p>The court noted:</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p>It might, of course, be argued that the furnishing of customer parking is absolutely essential to the tenants’ business in a shopping center whereas parking in connection with the less competitive setting of an office building a mere convenience. . . However, here the tenants have been found to have an easement appurtenant by express contract and from that contractual relationship it follows, in our opinion, that the use of the appurtenant parking areas may not be reduced or substantially altered during the term of the lease. (Citation omitted.) Id.</p>
</blockquote>
<p>The court went on to state that “the grant of an easement appurtenant as found by the trial court is a proper subject of mandatory injunction even if only minor interference is shown.” 425 N.E.2d at 507 – 508, citing <em>Ogilby v. Donaldson’s Floors, Inc</em>., 13 Ill.2d 305, 148 N.E.2d 758, 760 – 761 (1958). The court noted that to show irreparable injury, a party is not required to show that the injury is beyond the possibility of compensation, nor must the injury be very great, and “the fact that no actual damages could be proved and the jury could award only nominal damages ‘often furnishes the very best reason why a court of equity should interfere.’ ” 425 N.E.2d at 508, quoting <em>Newell v. Sass</em>, 142 Ill. 104, 31 N.E. 176, 180 (1892).</p>
<h3 class="wp-block-heading">PRACTICE POINTER</h3>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p> If a commercial lease describes available parking — and especially if it makes reference to a plot plan/site plan that delineates the location of buildings, roads, parking, curb cuts, etc. — and the landlord thereafter attempts to alter the parking or access rights without a clear and unequivocal right to do so, the tenant will have a legal right to assert a breach of lease and obtain a mandatory injunction to prevent the change, or require that the <em>status quo ante</em> be restored. For the landlord to avoid this outcome, it is important to provide in the lease an express reservation of the right to alter existing or planned parking at the landlord’s discretion, if that is the landlord’s intent.</p>
</blockquote>
<h4 class="wp-block-heading">B. Obstruction and Reduction of Passageways</h4>
<p>Construction of a glass bay entrance to a tenant’s store in a shopping center that extended five feet beyond the building lines depicted on a site plan attached to other tenant leases, and which disrupted sightlines to adjacent stores, was found to constitute an unpermitted obstruction or reduction of a private passageway created by the site plan. <em>The Fair v. Evergreen Park Shopping Plaza of Delaware, Inc</em>., 4 Ill.App.2d 454, 124 N.E.2d 649, 652 (1st Dist. 1954).</p>
<p>The court found that when a right of passageway is granted over a strip of land having definite boundaries, the right extends over the full width of the tract described. The Fair (a major tenant facing the mall in the shopping center) was entitled to use the entire mall. The court concluded that the injury was a continuing one, and because there was no adequate remedy at law, “the remedy for the obstruction or reduction of a private passageway is by injunction.” 124 N.E.2d at 656, citing <em>Carpenter v. Capital Electric Co.</em>, 178 Ill. 29, 52 N.E. 973, 975 (1899).</p>
<h4 class="wp-block-heading">C. Building Corridors</h4>
<p>As with parking rights, a floor plan attached to a lease may establish an implied easement in favor of tenants that would bar the landlord from relocating corridors reflected on the floor plan; however, express language in the lease clearly permitting a landlord to relocate the corridors will overcome any contrary implication arising from the floor plan. <em>Advertising Checking Bureau, Inc. v. Canal-Randolph Associates,</em> 101 Ill.App.3d 140, 427 N.E.2d 1039, 1042 – 1043, 56 Ill.Dec. 634 (1st Dist. 1991).</p>
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<p><em>COMING UP . . .<br /></em></p>
<p>We hope you have found the foregoing discussion useful. Coming up, in <strong>Part 2</strong> of this series, we will discuss the often misunderstood leasehold “<em><strong>Covenant of Quite Enjoyment”</strong></em> in the context of commercial leases.</p>
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<title>POP QUIZ! — Commercial Real Estate Due Diligence</title>
<link>http://harp-onthis.com/pop-quiz-commercial-real-estate-due-diligence/</link>
<comments>http://harp-onthis.com/pop-quiz-commercial-real-estate-due-diligence/#comments</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Fri, 13 Feb 2015 00:06:29 +0000</pubDate>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[#CRE]]></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[consequences]]></category>
<category><![CDATA[development]]></category>
<category><![CDATA[due diligence checklist]]></category>
<category><![CDATA[due diliigence]]></category>
<category><![CDATA[keys to closing]]></category>
<category><![CDATA[property]]></category>
<category><![CDATA[transactions]]></category>
<category><![CDATA[what to look for]]></category>
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<description><![CDATA[I read once that if you took all the lawyers in the world and laid them end to end along the equator — it would be a good idea to leave them there. That’s what I read. What do you […]]]></description>
<content:encoded><![CDATA[<div class="wp-block-image">
<figure class="alignleft"><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>I read once that if you took all the lawyers in the world and laid them end to end along the equator — it would be a good idea to leave them there.</p>
<p>That’s what I read. What do you suppose that means?</p>
<p>I have written before about the need to exercise due diligence when purchasing commercial real estate. The need to investigate, before Closing, every significant aspect of the property you are acquiring. The importance of evaluating each commercial real estate transaction with a mindset that once the Closing occurs, there is no going back. The Seller has your money and is gone. If post-Closing problems arise, Seller’s contract representations and warranties will, at best, mean expensive litigation. CAVEAT EMPTOR! [“<em>Let the buyer beware!</em>”]
<p>Paying extra attention at the beginning of a commercial real estate transaction to “get it right” can save tens of thousands of dollars versus when a deal goes bad. It’s like the old <em>Fram</em>® oil filter slogan during the 1970’s: “<em>You can pay me now – or pay me later</em>”. In commercial real estate, however, “later” may be too late.</p>
<div class="wp-block-image">
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<p>Buying commercial real estate is NOT like buying a home. It is not. It is not. It is NOT.</p>
<p>In Illinois, and many other states, virtually every residential real estate closing requires a lawyer for the buyer and a lawyer for the seller. This is probably smart. It is good consumer protection.</p>
<p>The “problem” this causes, however, is that every lawyer handling residential real estate transactions considers himself or herself a “real estate lawyer”, capable of handling any real estate transaction that may arise.</p>
<p>We learned in law school that there are only two kinds of property: real estate and personal property. Therefore – we intuit – if we are competent to handle a residential real estate closing, we must be competent to handle a commercial real estate closing. They are each “real estate”, right?</p>
<p><em>ANSWER</em>: Yes, they are each real estate. No, they are not the same.</p>
<p>The legal issues and risks in a commercial real estate transaction are remarkably different from the legal issues and risks in a residential real estate transaction. Most are not even remotely similar. Attorneys concentrating their practice handling residential real estate closings do not face the same issues as attorneys concentrating their practice in commercial real estate.</p>
<p>It is a matter of experience. You either know the issues and risks inherent in commercial real estate transactions – and know how to deal with them – or you don’t.</p>
<p>A key point to remember is that the myriad consumer protection laws that protect residential home buyers have no application to – and provide no protection for – buyers of commercial real estate.</p>
<p>Competent commercial real estate practice requires focused and concentrated investigation of all issues material to the transaction by someone who knows what they are looking for. In short, it requires the experienced exercise of <em>due diligence</em>.</p>
<p>I admit – the exercise of due diligence is not cheap, but the failure to exercise due diligence can create a financial disaster for the commercial real estate investor. Don’t be “<em>penny wise and pound foolish</em>”. If you are buying a home, hire an attorney who regularly represents home buyers. If you are buying commercial real estate, hire an attorney who regularly represents commercial real estate buyers.</p>
<p>Years ago I stopped handling residential real estate transactions. As an active commercial real estate attorney, even I hire residential real estate counsel for my own home purchases. I do that because residential real estate practice is fundamentally different from commercial real estate.</p>
<p>Maybe I do <em>harp</em> on the need for competent counsel experienced in commercial real estate transactions. I genuinely believe it. I believe it is essential. I believe if you are going to invest in commercial real estate, you must apply your critical thinking skills and be smart.</p>
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<h2 class="wp-block-heading"> </h2>
<h2 class="wp-block-heading"><span style="color: #008080;">POP QUIZ:</span></h2>
<p>Here’s a simple test of YOUR critical thinking skills:</p>
<p>Please read the following Scenarios and answer the questions TRUE or FALSE: </p>
<span id="more-1033"></span>
<p><em><strong>Scenario No. 1:</strong></em> It’s Valentine’s Day. You are in hot pursuit of the love of your life. A few weeks ago, she confided in you that all she ever dreamed of for Valentine’s Day was that her lover would show up at her door, dressed in a white tuxedo with tails and a top hat, and present<br />her with a beautiful bouquet of flowers. You’ve rented the tuxedo, but now you are concerned about how much money you are spending.</p>
<p><strong>TRUE OR FALSE?:</strong> Since flowers are pretty much all the same, it is OK for you to skip the roses and show up with a bouquet of fresh yellow dandelions.</p>
<p><em><strong>Scenario No. 2:</strong></em> For several years your eyesight has deteriorated to the point where you can barely see your alarm clock. You are now considering corrective eye surgery so you won’t need glasses. Your sister-in-law had corrective eye surgery and has had spectacular results. She recommends her eye surgeon, but mentions the cost is about $5,700 for both eyes and that the surgery is not covered by insurance. A few years ago, you had surgery to correct your hemorrhoids and it cost you only eight hundred bucks.</p>
<p><strong>TRUE OR FALSE?:</strong> Since surgeons all went to medical school and are all medical doctors, you are being frugal and wise by asking the surgeon who performed your hemorrhoid surgery to perform your corrective eye surgery.</p>
<p><em><strong>Scenario No. 3: </strong></em> Several years ago, when you first got married, you asked a former classmate who is a lawyer to represent you in the purchase of your town home. The cost was only $375. A year later, you started a family and decided you needed a Will. The same attorney prepared Wills for you and your spouse for a total cost of $700. You started your own business and your attorney friend formed a corporation for you and charged you only $600 plus the cost of the corporate minute book. Years later, when your son was arrested for misdemeanor reckless driving, your attorney friend handled the criminal case and got your son off with supervision for only $1,500.</p>
<p>Your business has been successful and you have built a pretty sizable nest egg, but you are tired of working for every dime and want to try investing in real estate. You have your eye on a strip shopping center. It includes a grocery store, bank, hardware store, dry cleaners (on a month to month tenancy), a couple of fast food restaurants, a gift shop, dental office, bowling alley (with a lease about to expire), and wraps behind a gas station/mini-mart on the corner. The purchase price is $8,000,000, but the net operating income looks pretty good. You figure if you turn the bowling alley into a full service restaurant/banquet facility, and convert the dry cleaners into a 24-hour coin laundry, the net operating income will increase and the shopping center will turn into a spectacular investment. You plan to pull together much of your life savings and put down $2,000,000 to buy this strip shopping center, borrowing the balance of $6,000,000. You remember that your lawyer friend handled the purchase of your home several years ago, so you know he handles real estate.</p>
<p><strong>TRUE OR FALSE?:</strong> Commercial real estate is the same as residential real estate [Hey, its all dirt, isn’t it (?)], so you are being a shrewd businessperson by hiring your lawyer friend who will charge much less than a lawyer who handles shopping center purchases several time a year. [What is this “due diligence” stuff anyway?]
<h2 class="wp-block-heading"><span style="color: #008080;">ANSWERS:</span></h2>
<p>If you answered <em>TRUE</em> for any of the foregoing Scenarios . . .</p>
<p>…Well …</p>
<p>… you may NOT be quite ready for prime time. Perhaps you should stop and reflect a while on the course your life has taken.</p>
<p>If, on the other hand, you understand that the answer to each of the foregoing questions is <em>FALSE</em>, I am available to help you in <em>Scenario No. 3</em>.</p>
<p>For <em>Scenario No. 2</em>, you should follow your sister-in-law’s suggestion and contact her eye surgeon, or some other eye surgeon with equal skill.</p>
<p>For <em>Scenario No. 1</em>, you are on your own. [But, if you answered TRUE for Scenario No. 1, you may be FOREVER on you own.]
<p>Critical thinking skills are vital. Use them when dealing with Commercial Real Estate.</p>
<p><em>Thanks for listening . . . </em><br /><em>Kymn</em></p>
<p>P.S. Please excuse me for <em>harping</em> on due diligence. ~ It is my birthright. ~ With the last name “Harp”, I am entitled to <em>harp</em> on anything I wish.</p>
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<post-id xmlns="com-wordpress:feed-additions:1">1033</post-id> </item>
<item>
<title>STRATEGIES FOR ASSESSING COMMERCIAL TENANT CREDIT</title>
<link>http://harp-onthis.com/strategies-assessing-commercial-tenant-credit/</link>
<comments>http://harp-onthis.com/strategies-assessing-commercial-tenant-credit/#respond</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Thu, 22 Jan 2015 21:47:43 +0000</pubDate>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[checklist]]></category>
<category><![CDATA[Chicago]]></category>
<category><![CDATA[commercial leasing]]></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[enforcement actions]]></category>
<category><![CDATA[industrial property]]></category>
<category><![CDATA[investment]]></category>
<category><![CDATA[landlord concerns]]></category>
<category><![CDATA[leasing]]></category>
<category><![CDATA[tenant credit]]></category>
<category><![CDATA[transactions]]></category>
<category><![CDATA[what to look for]]></category>
<guid isPermaLink="false">http://harp-onthis.com/?p=1024</guid>
<description><![CDATA[GUEST BLOG BY DAVID RESNICK of ROBBINS, SALOMON & PATT, LTD. When considering a lease, tenants are usually focused on the location, size and quality of the leased space, and perform some minimal diligence on the landlord and property manager […]]]></description>
<content:encoded><![CDATA[<div class="wp-block-image">
<figure class="alignleft"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/01/Resnick_low_res_C_CSC2789.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="175" height="219" data-attachment-id="1023" data-permalink="http://harp-onthis.com/strategies-assessing-commercial-tenant-credit/resnick_low_res_c_csc2789/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/01/Resnick_low_res_C_CSC2789.jpg?fit=175%2C219" data-orig-size="175,219" data-comments-opened="1" data-image-meta="{"aperture":"8","credit":"","camera":"NIKON D7000","caption":"","created_timestamp":"1367315896","copyright":"","focal_length":"92","iso":"125","shutter_speed":"0.01","title":"","orientation":"1"}" data-image-title="Resnick_low_res_C_CSC2789" data-image-description="" data-image-caption="<p>David Resnick, Attorney<br />
Robbins, Salomon & Patt, Ltd.</p>
" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/01/Resnick_low_res_C_CSC2789.jpg?fit=175%2C219" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/01/Resnick_low_res_C_CSC2789.jpg?fit=175%2C219" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/01/Resnick_low_res_C_CSC2789.jpg?resize=175%2C219" alt="David Resnick, Attorney Robbins, Salomon & Patt, Ltd." class="wp-image-1023"/></a><figcaption class="wp-element-caption">David Resnick, Attorney<br />Robbins, Salomon & Patt, Ltd.</figcaption></figure></div>
<h3 class="wp-block-heading"><em>GUEST BLOG BY DAVID RESNICK of ROBBINS, SALOMON & PATT, LTD.</em></h3>
<p>When considering a lease, tenants are usually focused on the location, size and quality of the leased space, and perform some minimal diligence on the landlord and property manager to ensure fair treatment over the course of the term. Landlords have a more difficult task,however. A prospective tenant, and most importantly, that tenant’s ability to pay rent, is often unknown to the landlord. In recent years, real estate professionals have witnessed expansion in the array of users of commercial space and at the same time, property owners have been compelled to seek out new types of tenants. Increasing numbers of start-ups and new ventures are seeking to lease space, many of which are backed by various types of equity financing. As a result of these changes, landlords should be particularly vigilant in understanding how their tenants make money, as well as the financial identities of the parties backstopping the obligations of those tenants.</p>
<h2 class="wp-block-heading">Analyze Tenant Credit</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="1847" data-permalink="http://harp-onthis.com/strategies-assessing-commercial-tenant-credit/businessmandoingpaperworkathomereadingfinancialreportlearn/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/reviewing-taxes.jpg?fit=1000%2C666" data-orig-size="1000,666" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"Shutterstock","camera":"","caption":"","created_timestamp":"0","copyright":"Copyright (c) 2022 fizkes\/Shutterstock. No use without permission.","focal_length":"0","iso":"0","shutter_speed":"0","title":"Business,Man,Doing,Paperwork,At,Home,,Reading,Financial,Report,,Learn","orientation":"1"}" data-image-title="Business,Man,Doing,Paperwork,At,Home,,Reading,Financial,Report,,Learn" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/reviewing-taxes.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/reviewing-taxes.jpg?fit=1000%2C666" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/reviewing-taxes.jpg?resize=400%2C267" alt="reviewing taxes" class="wp-image-1847" width="400" height="267" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/reviewing-taxes.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/reviewing-taxes.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/reviewing-taxes.jpg?resize=768%2C511 768w" sizes="auto, (max-width: 400px) 100vw, 400px" /></figure></div>
<p>Landlords should always analyze tenant credit in the context of the lease. After all, the success of leased real estate, as well as the property owner’s ability to borrow against that asset, is dependent upon the stability of its tenants. While rent is the primary economic factor in any lease transaction, other factors such as term (including rights of extension), area of the premises (including rights of expansion and rights of first refusal on additional space) and the scope of tenant improvements create the platform upon which a tenant’s credit can be evaluated. For example, substantial build-out (regardless of who pays for it) that may inhibit the re-letting the space following a default. Therefore, landlords should be mindful of the tenant’s capacity to pay its construction obligations, which capacity is usually encapsulated in the tenant’s credit and litigation history.</p>
<p>A proper underwriting of a tenant’s credit requires a thorough understanding of that tenant’s business. A prudent landlord will pay attention not only to the tenant’s sources of revenue, but to the market upon which the tenant relies and the business plan upon which the tenant charts its future success. What are the contours of the business model? Is the revenue sustainable? What is the plan for future growth? Has the tenant gone through restructuring or been forced to lay off personnel? Landlords can avoid doing business with troubled or unstable tenants by performing background, lien and litigation searches on the tenant parties as part of the underwriting process. This kind of diligence can usually be completed in a short time-frame at a reasonable cost, and may save substantial time and money if the landlord is forced to evict a tenant it should have known to be at increased risk of default.</p>
<p>Technology has given rise to new products which enhance the process of underwriting tenant credit. For example, the Chicago firm (RE)Meter has created the first “credit score” for commercial tenants, which captures and synthesizes proposed lease transaction terms and basic tenant financial information with exclusive data maintained by a number of federal agencies, including the U.S. Census Bureau, the Department of Labor and the Internal Revenue Service ((RE)Meter is the first firm to access IRS information in this context). The end product, called the TIL Report, can be completed in a mere 15 minutes and offers landlords a sector- and market-specific analysis of its prospective tenants, reflecting a number of detailed metrics including growth trends, profitability and rent per employee. Innovations like these have altered the landscape of tenant underwriting and will enable landlords to make more prudent decisions when marketing space and assessing the risk of potential tenants.</p>
<h2 class="wp-block-heading">Tenant Credit Enhancements</h2>
<p>Conventionally, several mechanisms exist to enhance the credit of a prospective tenant who fails on its own to meet the underwriting criteria of the landlord. The first and foremost of these is the security deposit, which is posted by the tenant in the form of cash or letter of credit and held by the landlord for all or part of the duration of the lease. The deposit may be applied by the landlord towards unpaid amounts payable under the lease like rent, proportionate common area expenses or taxes, or reimbursement of amounts expended to repair damage to the premises. A stronger credit tenant may receive the benefit of a return of all or part of the deposit held by landlord over time, provided the tenant has not defaulted.</p>
<h2 class="wp-block-heading">Security Deposits</h2>
<p>While cash security deposits have historically been the industry standard in commercial leasing, landlords are increasingly requiring letter of credit security deposits instead. For many landlords, the benefits of cash on hand are overshadowed by the security of an obligation issued by a third-party bank, particularly when the landlord is able to draw on the letter of credit following a default without notice to or consent by the tenant. Letters of credit also may bear advantages to the landlord following a bankruptcy by the tenant, as the obligation of the issuing bank to pay on the letter of credit is independent of the tenant’s obligations under the lease. However, some courts have found that letter of credit security deposits are part of the tenant’s bankruptcy estate and thus subject to the cap on a landlord’s claim for damages under Section 502(b)(6) of the United States Bankruptcy Code.</p>
<h2 class="wp-block-heading">Lease Guaranties</h2>
<p>Guaranties are a common alternative for securing the credit of a commercial tenant. In the context of commercial leasing, a guaranty is a legally enforceable undertaking by a third party to fulfill the payment or performance obligations of the tenant under a lease. A guaranty may be given by an entity, such as a corporate parent or affiliate, or an individual, such as a majority owner or other key principal of the tenant. To most effectively backstop the credit of the tenant, a guaranty should be a guaranty of payment as opposed to a guaranty of performance. This distinction ensures that the landlord will not be forced to exhaust its remedies against the tenant before pursuing enforcement of the guaranty. Rather, the landlord may pursue the tenant and guarantor simultaneously for unpaid amounts under the lease.</p>
<p>Once a landlord has determined that it will require a guaranty to secure the tenant’s obligations under the lease, what should the landlord look for in evaluating potential guarantors? The most straightforward factor, notwithstanding whether the proposed guarantor is an individual or an entity, is cash on hand and other liquid assets. In satisfaction of the landlord’s inquiry, an guarantors may produce income tax returns, bank statements, financial statements, balance sheets or other evidence of personal holdings. The review process for publicly traded companies is simplified in that pertinent financial information is publicly available. Of course, testing for liquidity has its flaws. There exists no iron-clad protection against fraud, and disclosures only present a snapshot of a party’s credit at the time of the test as opposed to a forecast of future liquidity and stability. A review of tenant and guarantor financial information, as well as credit reports for collections, pledging of material assets or opening of new lines of credit, should be performed at regular intervals throughout the term of the lease.</p>
<h2 class="wp-block-heading">Financial Disclosure Challenges</h2>
<p>Financial disclosures may be problematic or some privately-held concerns. Particularly in the modern era of start-up firms financed by venture capital and private equity interests, tenants and proposed guarantors may be limited by investor confidentiality. With this in mind, parties to a lease should clarify in the lease or guaranty the form of any future disclosures to be made. Tenants and guarantors may resist delivering full-fledged audited financial statements in favor of reduced balance sheets or nominal form of profit and loss statement. Depending on the profile of the market and building, landlords may be willing to accept less than full disclosure if the statements deliver a reasonable picture of the financial health of the party delivering them.</p>
<h2 class="wp-block-heading">Tenant Stability and Performance Incentives</h2>
<p>As lease term and the disclosure provisions are negotiated, tenants may push the landlord for a variety of concessions that effectively incentivize and reward tenant stability. Perhaps the most common examples of this request are limitations on the security deposit, pledged assets or the liability under or the term of the guaranty. Limitations like these can take a variety of forms, from a fixed term to a cap on the guarantor’s liability based upon a fixed dollar-figure or factor of rent payable under the lease, to an automatic reduction of either the security deposit or the cap on the guarantor’s liability over time. In each instance, the landlord should be cognizant of the hurdles the tenant party must overcome to receive the benefit of these limitations, none more important than the uninterrupted timely payment of rent without default.</p>
<h2 class="wp-block-heading">Tenant Credit is a Key to Successful Lease Performance</h2>
<p>In light of the crises our industry has withstood in recent years, a landlord’s exuberance in welcoming new tenants is understandable. But in the current era of increasing economic growth, landlords should adopt a cautious approach in understanding and monitoring the business of their tenants. No landlord can predict with certainty the success or failure of its tenants; however, perhaps now more than ever, a thorough and complete examination of tenant credit is essential to the financial success of any leased real estate.</p>
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<post-id xmlns="com-wordpress:feed-additions:1">1024</post-id> </item>
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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>
<category><![CDATA[Business]]></category>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[Private Sector Business]]></category>
<category><![CDATA[White Papers]]></category>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[asset protection]]></category>
<category><![CDATA[business]]></category>
<category><![CDATA[closings]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[conducting due diligence]]></category>
<category><![CDATA[consequences]]></category>
<category><![CDATA[default]]></category>
<category><![CDATA[defense]]></category>
<category><![CDATA[due diliigence]]></category>
<category><![CDATA[foreclosure]]></category>
<category><![CDATA[keys to closing]]></category>
<category><![CDATA[property]]></category>
<category><![CDATA[purchase]]></category>
<category><![CDATA[real estate]]></category>
<category><![CDATA[what to look for]]></category>
<guid isPermaLink="false">http://harp-onthis.com/?p=58</guid>
<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">
<figure class="alignleft"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_27096841.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="300" height="300" data-attachment-id="59" data-permalink="http://harp-onthis.com/asset-protection-lessons-learned/httpwww-dreamstime-comstock-image-empty-safe-image27096841/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_27096841.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) Marvinjk | Dreamstime.com","focal_length":"0","iso":"0","shutter_speed":"0","title":"http:\/\/www.dreamstime.com\/stock-image-empty-safe-image27096841"}" data-image-title="http://www.dreamstime.com/stock-image-empty-safe-image27096841" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_27096841.jpg?fit=300%2C300" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_27096841.jpg?fit=1024%2C1024" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_27096841.jpg?resize=300%2C300" alt="http://www.dreamstime.com/stock-image-empty-safe-image27096841" class="wp-image-59" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_27096841.jpg?resize=300%2C300 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_27096841.jpg?resize=150%2C150 150w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_27096841.jpg?resize=1024%2C1024 1024w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_27096841.jpg?w=1732 1732w" sizes="auto, (max-width: 300px) 100vw, 300px" /></a></figure></div>
<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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<post-id xmlns="com-wordpress:feed-additions:1">58</post-id> </item>
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<title>LENDING BLIND – SIX YEARS AFTER LEHMAN’S COLLAPSE</title>
<link>http://harp-onthis.com/lending-blind-the-pitfall-of-commercial-real-estate-lending-without-full-knowledge/</link>
<comments>http://harp-onthis.com/lending-blind-the-pitfall-of-commercial-real-estate-lending-without-full-knowledge/#respond</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Mon, 15 Sep 2014 11:10:53 +0000</pubDate>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[lending]]></category>
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<guid isPermaLink="false">http://harp-onthis.com/?p=144</guid>
<description><![CDATA[Commercial Real Estate Lending:  What You Don’t Know Can Hurt You! If there is anything commercial real estate lenders have learned during the collapse of the commercial real estate market over the past five or so years, it would be the […]]]></description>
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<h2 class="wp-block-heading">Commercial Real Estate Lending: What You Don’t Know Can Hurt You!</h2>
<p>If there is anything commercial real estate lenders have learned during the collapse of the commercial real estate market over the past five or so years, it would be the danger of “lending blind”. Commercial real estate lending without fully understanding the project is a prescription for disaster. An original version of this article was first published in 2005. It is eerie how prophetic the warning signs were. Surely lenders have learned. . . .</p>
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<p>What is “lending blind”? Lending blind is making commercial real estate loans without fully understanding the underlying project and the collateral risks it presents. Lending blind is closing one’s eyes to important legal, environmental and land use issues uniquely applicable to commercial real estate and ignoring available risk-shifting techniques in the hope or unfounded belief that if the issues are not carefully considered, maybe they won’t exist.</p>
<p>Make no mistake: Commercial real estate lending is not the same as residential real estate lending. [Little did we anticipate where the residential real estate market was headed when this comparison was made.] Many bankers and other lenders faced with customer resistance to higher loan costs may wish to close their eyes to this reality. Ignoring this reality, however, does not change it. Ignoring this reality may on the surface seem to cut costs, but it can endanger bank profits and jeopardize capital.</p>
<p>“Sound and safe lending practices” is not just a phrase used by banking regulators. It should be a way of doing business.</p>
<p>Failing to focus on genuine risks presented by commercial real estate lending is not a sound and safe lending practice.</p>
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<figure class="alignright size-full is-resized"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="1860" data-permalink="http://harp-onthis.com/lending-blind-the-pitfall-of-commercial-real-estate-lending-without-full-knowledge/businessconceptmeaningcommercialrealestateloanwithinscriptionon/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/commercial-real-estate-loan.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) 2020 Yuriy K\/Shutterstock. No use without permission.","focal_length":"0","iso":"0","shutter_speed":"0","title":"Business,Concept,Meaning,Commercial,Real,Estate,Loan,With,Inscription,On","orientation":"1"}" data-image-title="Business,Concept,Meaning,Commercial,Real,Estate,Loan,With,Inscription,On" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/commercial-real-estate-loan.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/commercial-real-estate-loan.jpg?fit=1000%2C667" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/commercial-real-estate-loan.jpg?resize=400%2C267" alt="commercial real estate loan" class="wp-image-1860" width="400" height="267" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/commercial-real-estate-loan.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/commercial-real-estate-loan.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/commercial-real-estate-loan.jpg?resize=768%2C512 768w" sizes="auto, (max-width: 400px) 100vw, 400px" /></figure></div>
<p>Believing a commercial real estate loan is properly documented through use of pre-packaged computer generated loan documents, without also requiring qualified, in-depth analysis of land use controls imposed by documents of record and zoning, knowledgeable examination of survey, lease subordination, insurance, access, borrower authority and other legal issues, and without fully understanding environmental risks presented by existing, former or contemplated tenants, occupiers, and adjacent land owners, is not following sound and safe lending practices.</p>
<p>Blindly following a loan document checklist and filling the loan file with documents and materials that “evidence” a well documented loan, without a genuine understanding of the limitations, pitfalls, and legal red flags the documents may raise, is not following sound and safe lending practices.</p>
<p>Using the ostrich approach to lending is a game of Russian Roulette. The result can be catastrophic to bank profits and capital if and when the loan goes bad.</p>
<p>Banks and other commercial lenders following these unsound and unsafe banking practices do not like this message. They often assert their loan processors are “good people” with excellent training and years of experience using their canned document software.</p>
<p>The fact that a lender’s in-house loan processors are “good people” is not in question. The fact that they are well-trained to input relevant data so a computer can generate a beautiful set of loan documents is not the issue.</p>
<p>The issue is what may lie beyond the documents.</p>
<p>A perfectly generated set of “standard loan documents” may be of little value if they fail to adequately address unique issues raised by the commercial real estate project serving as collateral. To be certain, each commercial real estate project is different. Unlike owner-occupied residential real estate, it cannot safely be “assumed” that commercial real estate collateral is legally suitable for, or can even legally be used for, its intended use.</p>
<p>A beautifully drafted Mortgage on commercial real estate is of little value if the project does not have a legal right to commercially reasonable access or parking. CASE IN POINT: How secure is a loan on an 800 person banquet facility in a mixed use center if the banquet facility has a legal right to park only 155 cars? CASE IN POINT: What is the collateral value of a hotel on a highly visible highway interchange, which has as its primary means of access only a license to use a private drive that can be closed at any time? [Is the appraiser legally responsible for discovering this fact when making the loan appraisal? What kind of access does the typical title insurance policy insure?]
<p>Obtaining a Lender’s Title Insurance Policy with specialized commercial endorsements is a useful method of shifting risks away from the lender, but the lender must understand how to interpret each endorsement to know what it insures. CASE IN POINT: While attending a loan closing as an “accommodation” for a lender making a large loan to one of its “best customers” to purchase a warehouse and manufacturing building, with instructions from the lender to simply “oversee execution of closing documents (the lender had prepared) and approve title”, it was discovered by lender’s counsel upon review of the lender’s required zoning endorsement that the borrower’s intended use of the facility was expressly prohibited by the applicable zoning ordinance. The ALTA 3.1 Zoning Endorsement to be attached to the loan policy disclosed that the borrower’s intended use was expressly excluded as a permitted use on the land. Neither the lender nor the borrower had read the endorsement or, if they had, they failed to understand its meaning. The transaction was aborted by the regretful but thankful borrower – who would have been unable to operate its business if the transaction had proceeded. Failure to recognize this restriction before funding would have almost certainly meant bankruptcy for one of the bank’s “best customers” and a huge non-performing loan for the lender.</p>
<p>Experience shows that lenders should not assume that borrowers and their counsel will always conduct an adequate due diligence investigation to ascertain all associated risks that may impact the project and important underlying assumptions for a loan.</p>
<p>A lender must also avoid the trap of over-reliance upon a borrower’s representations and warranties in the loan documents. If the borrower is mistaken, what is the consequence? Declaring a material default? CASE IN POINT: A Mortgage securing a $1,650,000 loan contained a warranty from borrower that “all leases encumbering the Real Estate are, and shall remain, subordinate to the lien of the Mortgage.” One lease was, in fact, not automatically subordinate to the Mortgage. The Lender’s Title Insurance Policy included an exception for all existing leases and tenancies. The non-subordinated lease contained a Lessee’s Option to Purchase the entire strip center for $1,520,000. Will declaring a default for breach of warranty solve this defect? What is the lender’s collateral position if the Lessee exercises its Option to Purchase?</p>
<p>The business of lending is about making sound and safe loans that profitably perform as planned. Yield is the key. Not foreclosure. The ability to declare a default and start enforcement and foreclosure proceedings is a remedy of last resort. It is not a viable substitute for diligent evaluation of material loan predicates and will rarely fix problems with underlying collateral.</p>
<p>Sound and safe lending requires comprehensive understanding of all relevant issues confronting each commercial real estate project serving as collateral. If lenders are going to make commercial real estate loans, they should be following sound and safe lending practices. To do this, they must either learn how to fully and meaningfully evaluate all of the attendant risks associated with their collateral, or engage counsel with specialized knowledge and experience in commercial real estate lending to perform this function.</p>
<p>Turning a blind eye to the uniqueness of commercial real estate collateral, and to the limitations of many well-meaning but unknowing in-house loan processors, is neither a sound nor a safe lending practice.</p>
<p>Independent, focused and knowledgeable lender due diligence is a must.</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>
<category><![CDATA[Business]]></category>
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<category><![CDATA[Private Sector Business]]></category>
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<guid isPermaLink="false">http://harp-onthis.com/?p=325</guid>
<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>
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<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>
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<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>Keys Rules For Section 1031 Exchanges</title>
<link>http://harp-onthis.com/keys-rules-section-1031-exchanges/</link>
<comments>http://harp-onthis.com/keys-rules-section-1031-exchanges/#comments</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Tue, 05 Aug 2014 11:10:02 +0000</pubDate>
<category><![CDATA[Business]]></category>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[White Papers]]></category>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[broker]]></category>
<category><![CDATA[capital gains]]></category>
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<category><![CDATA[keys to closing]]></category>
<category><![CDATA[like-kind exchange]]></category>
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<category><![CDATA[Section 1031]]></category>
<category><![CDATA[tax]]></category>
<category><![CDATA[tax deferred exchange]]></category>
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<category><![CDATA[trade or business]]></category>
<category><![CDATA[what to look for]]></category>
<guid isPermaLink="false">http://harp-onthis.com/?p=621</guid>
<description><![CDATA[This is the second installment of a three-part series on Section 1031 like-kind exchanges. Part 1 explained WHY you should consider use of a Section 1031 like-kind exchange when selling commercial or investment real property. Part 2 covers the key […]]]></description>
<content:encoded><![CDATA[
<p><i>This is the second installment of a three-part series on Section 1031 like-kind exchanges. <a title="Section 1031 Like-Kind Exchanges – Part 1 of 3" href="http://harp-onthis.com/business/section-1031-like-kind-exchanges-part-1-of-3/" target="_blank" rel="noopener"><span style="mso-bidi-font-weight: bold;">Part 1</span> explained WHY</a> you should consider use of a Section 1031 like-kind exchange when selling commercial or investment real property. <strong>Part 2</strong> covers the key rules for HOW to implement a Section 1031 like-kind exchange. Part 3 will cover special issues applicable to a Section 1031 like-kind exchange when a Tenant-In-Common [TIC] interest is being acquired.</i></p>
<h1 class="wp-block-heading">KEY RULES FOR SECTION 1031 EXCHANGES</h1>
<div class="wp-block-image">
<figure class="alignleft"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/U.S.-Tax-image-iStock.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="153" height="300" data-attachment-id="615" data-permalink="http://harp-onthis.com/keys-rules-section-1031-exchanges/u-s-tax-image-istock/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/U.S.-Tax-image-iStock.jpg?fit=990%2C1939" data-orig-size="990,1939" 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":""}" data-image-title="U.S. Tax image [iStock]" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/U.S.-Tax-image-iStock.jpg?fit=153%2C300" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/U.S.-Tax-image-iStock.jpg?fit=522%2C1024" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/U.S.-Tax-image-iStock.jpg?resize=153%2C300" alt="U.S. Tax image [iStock]" class="wp-image-615" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/U.S.-Tax-image-iStock.jpg?resize=153%2C300 153w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/U.S.-Tax-image-iStock.jpg?resize=522%2C1024 522w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/U.S.-Tax-image-iStock.jpg?w=990 990w" sizes="auto, (max-width: 153px) 100vw, 153px" /></a></figure></div>
<p><span style="font-size: 12.0pt;">The following is an outline of key rules applicable to Section 1031 exchanges. Become familiar with these rules. Unless you intend to completely cash out of real estate investing, a Section 1031 exchange may work to your benefit. If you intend to keep investing in real estate or using real estate in your trade or business, a Section 1031 exchange will maximize the capital you have available to reinvest.</span></p>
<h1 class="wp-block-heading"><b><i><span style="font-size: 12.0pt; color: #589199;">Key Elements of a Section 1031 Exchange*</span></i></b></h1>
<h2 class="wp-block-heading"><span style="font-size: 12.0pt;"> What is Section 1031? </span></h2>
<p><span style="font-size: 12.0pt;"> Section 1031 refers to Section 1031 of the Internal Revenue Code of 1986, as amended.</span></p>
<h2 class="wp-block-heading"><span style="font-size: 12.0pt;"> What does it do? </span></h2>
<p><span style="font-size: 12.0pt;">Section 1031 permits a taxpayer (the Exchangor) to dispose of certain real estate and personal property and replace it with like-kind property without being required to pay taxes on the transaction.</span></p>
<h2 class="wp-block-heading"><span style="font-size: 12.0pt;"> What property qualifies? </span></h2>
<p><span style="font-size: 12.0pt;">To qualify for a Section 1031 exchange, the property being disposed of (the Relinquished Property) must have been used in the Exchangor’s trade or business and/or must have been held for investment purposes. The property being acquired (the Replacement Property) must likewise be acquired for use in the Exchangor’s trade or business or for investment.</span><wp-block data-block="core/more"></wp-block></p>
<h2 class="wp-block-heading"><span style="font-size: 12.0pt;">What property is considered like-kind? </span></h2>
<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="1869" data-permalink="http://harp-onthis.com/keys-rules-section-1031-exchanges/closeupwomancustomerreceivinghousekeyfromagentor/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/close-up-woman-customer-receiving-house-key-from-agent-or-realtor-after-finish-agreement-and-sign-contract.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 Cat Box\/Shutterstock. No use without permission.","focal_length":"0","iso":"0","shutter_speed":"0","title":"Close,Up,Woman,Customer,Receiving,House,Key,From,Agent,Or","orientation":"1"}" data-image-title="Close,Up,Woman,Customer,Receiving,House,Key,From,Agent,Or" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/close-up-woman-customer-receiving-house-key-from-agent-or-realtor-after-finish-agreement-and-sign-contract.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/close-up-woman-customer-receiving-house-key-from-agent-or-realtor-after-finish-agreement-and-sign-contract.jpg?fit=1000%2C667" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/close-up-woman-customer-receiving-house-key-from-agent-or-realtor-after-finish-agreement-and-sign-contract.jpg?resize=1000%2C667" alt="close up woman customer receiving house key from agent or realtor after finish agreement and sign contract" class="wp-image-1869" style="width:400px;height:267px" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/close-up-woman-customer-receiving-house-key-from-agent-or-realtor-after-finish-agreement-and-sign-contract.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/close-up-woman-customer-receiving-house-key-from-agent-or-realtor-after-finish-agreement-and-sign-contract.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/close-up-woman-customer-receiving-house-key-from-agent-or-realtor-after-finish-agreement-and-sign-contract.jpg?resize=768%2C512 768w" sizes="auto, (max-width: 1000px) 100vw, 1000px" /></figure></div>
<p><span style="font-size: 12.0pt;">For real estate, to be like-kind means simply that real estate must be exchanged for real estate. The rules related to personal property are significantly more complex. </span><span style="font-size: 12.0pt;"><span style="font-size: 12.0pt;">Personal property is any property that is not real estate. </span></span></p>
<p><span style="font-size: 12.0pt;">Real estate exchanges are fairly straightforward. A warehouse may be exchanged for another warehouse or for any other qualifying real estate including, for instance, a factory building, office building, shopping center, single-tenant store, parking garage, or even a parcel of vacant ground so long as it qualifies as being acquired for use in the Exchangor’s trade or business or is to be held for investment. This is not a difficult test to pass. Similarly, a qualifying parcel of vacant ground or a shopping center or office building or factory or other parcels of investment real estate may be exchanged for any other qualifying real estate investment.</span></p>
<p>Personal property exchanges are not so straightforward. <span style="font-size: 12.0pt;">For personal property, the property must be substantially similar and of the same type or class. For example: a car can be exchanged for another car; and a bull can be exchanged for another bull; and a cow can be exchanged for another cow; but, a bull may not be exchanged for either a cow or a car. </span></p>
<p><span style="font-size: 12.0pt;">Although personal property exchange rules are substantially more technical and complicated than real property exchange rules, generally speaking, depreciable tangible personal property held for productive use in a trade or business can be exchanged for other depreciable tangible personal property held for productive use in a trade or business so long as they fall within the same NAICS classification code. </span></p>
<p><span style="font-size: 12.0pt;">For instance, Limited Service Restaurants such as fast food restaurants, pizza delivery, sandwich shops, etc. fall within 2012 NAICS Code 722513. Accordingly, the assets of one can be exchanged for the assets of the other under Section 1031. But, note that the NAICS Code for a bar, tavern or nightclub is 722410, and the NAICS Code for a full service restaurant is 722511, so an exchange of assets of either of these for the assets of the other, or the assets of a Limited Service Restaurant (even though otherwise physically identical), may not likely be considered “like kind”. </span></p>
<p><span style="font-size: 12.0pt;">The point, for purposes of this post, is that exchange rules for personal property are substantially more complex than exchange rules for real property. Accordingly, if you are exchanging personal property – either in conjunction with an exchange of real property or purely as a personal property exchange – great care must be taken to comply with the personal property exchange rules to receive the benefits of a tax deferred exchange under Section 1031.<br /></span></p>
<h2 class="wp-block-heading"><span style="font-size: 12.0pt;">What property is excluded? </span></h2>
<p><span style="font-size: 12.0pt;">Some types of property are expressly excluded from tax deferred exchange treatment by statute, rule or regulation The following types of property <em>do not qualify</em> for aSection 1031 exchange: stocks, bonds, partnership interests, limited liability company interests, personal residences, stocks in trade or inventory, and certain other intangible property.</span></p>
<h2 class="wp-block-heading"><span style="font-size: 12.0pt;">Are there timing issues? </span></h2>
<p><span style="font-size: 12.0pt;">Section 1031 exchanges can be simultaneous, but they are not required to be. In fact, most exchanges made pursuant to Section 1031 are not simultaneous. There are, however, strict timing rules that apply tonon-simultaneous exchanges and strict rules prohibiting access to funds.</span></p>
<h2 class="wp-block-heading"><span style="font-size: 12.0pt;">What are the time limits? </span></h2>
<p><span style="font-size: 12.0pt;">The Replacement Property or properties must be identified, in writing, not later than forty-five days after the Relinquished Property is transferred (the Identification Period). The Replacement Property or properties must be acquired not later than the earlier of (i) 180 days after the Relinquished Property was transferred, or (ii) the due date for the Exchangor’s tax return, including any extensions (the Acquisition Period). The Identification Period is included within the Acquisition Period.</span></p>
<h2 class="wp-block-heading"><span style="font-size: 12.0pt;">How many Replacement Properties may be identified? </span></h2>
<p><span style="font-size: 12.0pt;">There is no fixed limit to the number of Replacement Properties that may be identified, but there are two primary rules that apply: (1) the Three-Property Rule, and (2) the 200% Rule.</span></p>
<p><span style="font-size: 12.0pt;"> 1. The Three-Property Rule allows you to identify up to three (3) properties as potential Replacement Properties, regardless of value. You need not acquire all three properties, but as of the end of the Identification Period, not more than three properties may be identified. This is the most commonly used identification rule.</span></p>
<p><span style="font-size: 12.0pt;"> 2. The 200% Rule allows you to identify any number of potential Replacement Properties so long as the aggregate value of all identified properties does not exceed 200% of the value of the Relinquished Property. You need not acquire all identified properties.</span></p>
<p><span style="font-size: 12.0pt;">Generally, if you identify more properties than permitted, you are treated as if you have not identified any properties. However, there is one more rule that might save the day. The 95% Rule allows you to identify any number of potential Replacement Properties, regardless of value, so long as you <em>actually acquire</em> within the Acquisition Period at least 95% of the value of all properties identified. Use of the 95% Rule is rare, and is generally considered more a safety valve rule than an intentionally used exchange rule<br /></span></p>
<h2 class="wp-block-heading"><span style="font-size: 12.0pt;"> Must all exchange proceeds be used? </span></h2>
<p><span style="font-size: 12.0pt;">There is no requirement that all proceeds received upon sale of the Relinquished Property be used to acquire the Replacement Property. Any exchange proceeds not used, however, are taxable.</span></p>
<h2 class="wp-block-heading"><span style="font-size: 12.0pt;">What constitutes exchange proceeds? </span></h2>
<p><span style="font-size: 12.0pt;">Exchange proceeds means the net sale price of the Relinquished Property, including all net equity and the amount of any mortgage encumbering the Relinquished Property, whether paid off at closing or assumed by the purchaser. It is not sufficient to merely reinvest the net equity received upon sale. The purchase price of the Replacement Property must equal or exceed the aggregate of the net equity received upon sale of the RelinquishedProperty plus any mortgage encumbering the Relinquished Property at the time of the sale closing.</span></p>
<p><span style="font-size: 12.0pt;"><em>Example</em>: If the Relinquished Property is encumbered by a $700,000 mortgage and is sold for $1 million as part of a Section 1031 exchange transaction, to defer all taxes, the purchase price of the Replacement Property must be at least $1 million, not merely $300,000.</span></p>
<h2 class="wp-block-heading"><span style="font-size: 12.0pt;">When can the Exchangor obtain access to unused proceeds? </span></h2>
<p><span style="font-size: 12.0pt;">Proceeds from sale of the Relinquished Property may be accessed only when the exchange is completed, fails, or expires. If no potential Replacement Properties are identified within the Identification Period, the exchange fails, and the Exchangor may receive the funds. Those funds will, however, be taxed in the year received. <em>But note</em>: If a mortgage was paid off at the Closing of the Relinquished Property, and the amount of the mortgage was greater than the tax basis of the Relinquished Property, the amount paid to satisfy the mortgage in excess of the tax basis of the Relinquished Property is taxable in the year of Closing of the Relinquished Property.</span></p>
<p><span style="font-size: 12.0pt;">If all properties identified within the Identification Period are acquired within the Acquisition Period, the exchange is completed, and any remaining funds may be received by the Exchangor. Those remaining funds are taxable. If less than all identified properties are acquired, but the Acquisition Period expires, all remaining funds may be received by the Exchangor, but are taxable.</span></p>
<h2 class="wp-block-heading"><span style="font-size: 12.0pt;">Conclusion:</span></h2>
<p><span style="font-size: 12.0pt;">These are the basics. As tax rates rise, Section 1031 exchanges become increasingly valuable.</span></p>
<p><span style="font-size: 12.0pt;">A Section 1031 exchange is not a new and exotic tax shelter scheme. Tax deferred exchanges of like-kind property have been recognized by the Internal Revenue Service as a valid tax deferral strategy since the early 1920s. The structure and effect of a Section 1031 exchange were specifically authorized by Congress by enacting Section 1031 of the Internal Revenue Code of 1986, as amended, and the Internal Revenue Service has promulgated extensive regulations for its implementation.</span></p>
<p><span style="font-size: 12.0pt;">Use Section 1031 to your advantage, but be sure to strictly comply with the Section 1031 rules.</span></p>
<p>* <em>Special Thanks to my tax partner, James M. Mainzer, for consulting on this post.</em></p>
<p><span style="font-size: 12.0pt;">_________________________________</span></p>
<p><i><span style="font-size: 12.0pt;">As required by the Internal Revenue Service under Circular 230, you are advised that any U.S. federal tax advice contained in this article is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this article.</span></i></p>
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<post-id xmlns="com-wordpress:feed-additions:1">621</post-id> </item>
<item>
<title>Land Patent Defense is Frivolous, Sanctionable, and a Class 4 Felony in Illinois</title>
<link>http://harp-onthis.com/land-patent-defense-frivolous-sanctionable-class-4-felony-illinois/</link>
<comments>http://harp-onthis.com/land-patent-defense-frivolous-sanctionable-class-4-felony-illinois/#comments</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Wed, 16 Oct 2013 16:53:03 +0000</pubDate>
<category><![CDATA[Business]]></category>
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<guid isPermaLink="false">http://harp-onthis.com/?p=633</guid>
<description><![CDATA[The law is clear.  The so-called “Land Patent” defense does NOT work. This is not earth shattering news, but it is a reminder that defenses to mortgage foreclosure actions must be well grounded in fact and warranted by existing law […]]]></description>
<content:encoded><![CDATA[
<h2 class="wp-block-heading">The law is clear. The so-called “Land Patent” defense does NOT work.</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="1889" data-permalink="http://harp-onthis.com/land-patent-defense-frivolous-sanctionable-class-4-felony-illinois/conceptofofficeforpurchaseandsaleorconstructionof/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/office-for-purchase-and-sale-or-construction-of-housing-real-estate-houses-plot-of-land.jpg?fit=1000%2C666" data-orig-size="1000,666" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"Shutterstock","camera":"","caption":"","created_timestamp":"0","copyright":"Copyright (c) 2022 phBodrova\/Shutterstock. No use without permission.","focal_length":"0","iso":"0","shutter_speed":"0","title":"Concept,Of,Office,For,Purchase,And,Sale,Or,Construction,Of","orientation":"1"}" data-image-title="Concept,Of,Office,For,Purchase,And,Sale,Or,Construction,Of" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/office-for-purchase-and-sale-or-construction-of-housing-real-estate-houses-plot-of-land.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/office-for-purchase-and-sale-or-construction-of-housing-real-estate-houses-plot-of-land.jpg?fit=1000%2C666" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/office-for-purchase-and-sale-or-construction-of-housing-real-estate-houses-plot-of-land.jpg?resize=400%2C266" alt="office for purchase and sale or construction of housing real estate houses plot of land" class="wp-image-1889" width="400" height="266" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/office-for-purchase-and-sale-or-construction-of-housing-real-estate-houses-plot-of-land.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/office-for-purchase-and-sale-or-construction-of-housing-real-estate-houses-plot-of-land.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/office-for-purchase-and-sale-or-construction-of-housing-real-estate-houses-plot-of-land.jpg?resize=768%2C511 768w" sizes="auto, (max-width: 400px) 100vw, 400px" /></figure></div>
<p>This is not earth shattering news, but it is a reminder that defenses to mortgage foreclosure actions must be well grounded in fact and warranted by existing law or a good faith argument for the extension, modification or reversal of existing law. In simple terms – defenses must at least be legally plausible.</p>
<p>One of the more bizarre defenses raised by a small group of defendants who refer to themselves as “sovereign citizens” is a so-called “land patent” defense. It does not work – at least not in Illinois.</p>
<p>In a long, unusual, and fairly cumbersome opinion filed by the Illinois Appellate Court on September 23, 2013, in the case of <a title="Parkway Bank v. Korzen" href="http://www.state.il.us/court/Opinions/AppellateCourt/2013/1stDistrict/1130380.pdf" target="_blank" rel="noopener"><em>Parkway Bank and Trust Company v. Victor Korzen and Tomas Zanzola, 2013 IL App (1st) 130380</em></a>, the First District Appellate Court addressed “<em>a number of tactics a small number of debtors use to both delay the ultimate resolution of cases against them and to use the legal system for improper purposes. Some people might classify those who engage in these tactics as “sovereign citizens”, but regardless of nomenclature, their methods are not only counterproductive, but detrimental to the efficient and fair administration of justice. A recent New York Times article noted the FBI has labeled the strategy as “paper terrorism”</em>.</p>
<p>I am a strong proponent of raising every viable defense to a mortgage foreclosure when representing a defendant. There are many defects in mortgage loan files, and many more defects arising from faulty loan administration, defective securitization of syndicated loans, and breaches of public policy and black letter law by lenders. Some lenders have fraudulently manufactured and forged missing assignment documents and other documents to fill material document gaps. There are legitimate defenses that can be raised and valid lender liability claims that can be pursued in many circumstances if the situation warrants and the resources are available to mount a strong defense and counter-attack.</p>
<p>That said, not every so-called “defense” is legitimate, and some are just plain goofy.</p>
<p>Among the illegitimate “defenses” is the claimed “land patent” defense. It simply does not work. It is not well grounded in law, and there is no good faith argument for the extension, modification or reversal of existing law that courts in Illinois – or probably anywhere in the United States – are likely to recognize as having been pursued in “good faith”. As a consequence, if you raise the “land patent” defense in defense of an Illinois mortgage foreclosure action, you are going to lose, be sanctioned, and perhaps be prosecuted for committing a Class 4 Felony.</p>
<p>In this short post, I do not intend to give an in-depth description of the (faulty) theory behind the land patent defense, but I will direct your attention to paragraph 72 et seq. of the <a title="Parkway Bank v. Korzen" href="http://www.state.il.us/court/Opinions/AppellateCourt/2013/1stDistrict/1130380.pdf" target="_blank" rel="noopener">Parkway Bank v. Korzen</a> case, referred to above. Read this case if you are thinking about using the land patent contrivance as a “defense”, particularly in an Illinois mortgage foreclosure action. It does not work.</p>
<p> </p>
<p> </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>
<category><![CDATA[White Papers]]></category>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[bank]]></category>
<category><![CDATA[bankers]]></category>
<category><![CDATA[banks]]></category>
<category><![CDATA[broker]]></category>
<category><![CDATA[business]]></category>
<category><![CDATA[Chicago]]></category>
<category><![CDATA[commercial litigation]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[consequences]]></category>
<category><![CDATA[CRE litigation]]></category>
<category><![CDATA[default]]></category>
<category><![CDATA[defense]]></category>
<category><![CDATA[development]]></category>
<category><![CDATA[enforcement actions]]></category>
<category><![CDATA[foreclosure]]></category>
<category><![CDATA[industrial property]]></category>
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<category><![CDATA[lenders]]></category>
<category><![CDATA[lending]]></category>
<category><![CDATA[loan workouts]]></category>
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<category><![CDATA[purchase]]></category>
<category><![CDATA[should I sue]]></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>
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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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<figure class="alignleft"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/04/RSP_LogoFull_2PMS.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="300" height="109" data-attachment-id="283" data-permalink="http://harp-onthis.com/about/rsp_logofull_2pms/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/04/RSP_LogoFull_2PMS.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":""}" data-image-title="RSP_LogoFull_2PMS" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/04/RSP_LogoFull_2PMS.jpg?fit=300%2C109" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/04/RSP_LogoFull_2PMS.jpg?fit=963%2C350" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/04/RSP_LogoFull_2PMS.jpg?resize=300%2C109" alt="RSP_LogoFull_2PMS" class="wp-image-283" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/04/RSP_LogoFull_2PMS.jpg?resize=300%2C109 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/04/RSP_LogoFull_2PMS.jpg?resize=500%2C181 500w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/04/RSP_LogoFull_2PMS.jpg?w=963 963w" sizes="auto, (max-width: 300px) 100vw, 300px" /></a></figure></div>
<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>
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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>
<category><![CDATA[White Papers]]></category>
<category><![CDATA[business]]></category>
<category><![CDATA[Chicago]]></category>
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<category><![CDATA[employer]]></category>
<category><![CDATA[employment]]></category>
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<category><![CDATA[Illinois]]></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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<p>While the foregoing is all well and good, a fundamental concept of law is that employment </p>
<span id="more-559"></span>
<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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<title>BOTTOM FEEDERS – A Leading Economic Indicator?</title>
<link>http://harp-onthis.com/bottom-feeders-a-leading-economic-indicator/</link>
<comments>http://harp-onthis.com/bottom-feeders-a-leading-economic-indicator/#comments</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Tue, 09 Apr 2013 22:48:56 +0000</pubDate>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[bank]]></category>
<category><![CDATA[bankers]]></category>
<category><![CDATA[banks]]></category>
<category><![CDATA[bargains]]></category>
<category><![CDATA[bottom feeders]]></category>
<category><![CDATA[closings]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[consequences]]></category>
<category><![CDATA[development]]></category>
<category><![CDATA[distressed]]></category>
<category><![CDATA[economy]]></category>
<category><![CDATA[extensions]]></category>
<category><![CDATA[foreclosure]]></category>
<category><![CDATA[industrial property]]></category>
<category><![CDATA[investment]]></category>
<category><![CDATA[lending]]></category>
<category><![CDATA[loan amendments]]></category>
<category><![CDATA[loan workouts]]></category>
<category><![CDATA[loans]]></category>
<category><![CDATA[property]]></category>
<category><![CDATA[purchase]]></category>
<category><![CDATA[real estate]]></category>
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<description><![CDATA[Bottom Feeders – and Bottom Feeder Funds – Our New BFF? Bottom feeders have a distasteful reputation with some – but, truth be told, they are among the most reliable leading economic indicators of recovery for the commercial real estate […]]]></description>
<content:encoded><![CDATA[<h2>Bottom Feeders – and Bottom Feeder Funds – Our New BFF?</h2>
<p style="text-align: justify;">Bottom feeders have a distasteful reputation with some – but, truth be told, they are among the most reliable leading economic indicators of recovery for the commercial real estate industry.</p>
<p style="text-align: justify;"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_291531441.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="105" data-permalink="http://harp-onthis.com/bottom-feeders-a-leading-economic-indicator/httpwww-dreamstime-comstock-images-financial-crisis-word-cloud-illustration-image29153144-2/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_291531441.jpg?fit=2043%2C1467" data-orig-size="2043,1467" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"(c) Jpldesigns | Dreamstime.com","focal_length":"0","iso":"0","shutter_speed":"0","title":"http:\/\/www.dreamstime.com\/stock-images-financial-crisis-word-cloud-illustration-image29153144"}" data-image-title="http://www.dreamstime.com/stock-images-financial-crisis-word-cloud-illustration-image29153144" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_291531441.jpg?fit=300%2C215" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_291531441.jpg?fit=1024%2C735" class="alignleft size-medium wp-image-105" alt="http://www.dreamstime.com/stock-images-financial-crisis-word-cloud-illustration-image29153144" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_291531441.jpg?resize=300%2C215" width="300" height="215" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_291531441.jpg?resize=300%2C215 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_291531441.jpg?resize=1024%2C735 1024w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_291531441.jpg?resize=417%2C300 417w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_291531441.jpg?w=2043 2043w" sizes="auto, (max-width: 300px) 100vw, 300px" /></a>There is a stunning disconnect between equity markets and the economy as a whole. The Dow Jones Industrial Average is at record highs, with 15,000 in plain sight. Equity investors are betting on a bright future. To gauge the economy by that measure, the economy appears to be healthy and rebounding nicely.</p>
<p style="text-align: justify;">Leave Wall Street, and drive through urban and suburban retail districts, and the picture is not so bright. Vacant and boarded up storefronts are common. Parking lots are in disrepair. Shopping center signs are blank – or filled with half burnt-out signs displaying names of tenants past.</p>
<p style="text-align: justify;">Sure. Commercial deal flow is beginning to pick up, but compared to what? A car travelling three miles per hour can triple its speed, but it is still moving at a remarkably slow pace by most standards.</p>
<p style="text-align: justify;">I went for a drive recently, touring retail shopping centers and office parks to find out where the action is. The answer? Almost nowhere. It didn’t really surprise me. Although deal flow is picking up in my practice, most deals are with cash-rich bottom feeders (or bottom feeder funds) buying up distressed properties. Not that I’m knocking bottom feeders. Chances are good they will <span id="more-306"></span>become some of the biggest winners as the commercial real estate market improves. Buy low – sell high. A time tested strategy.</p>
<p style="text-align: justify;">One of the real challenges since the Lehman Brothers collapse in September 2008 has been the absence of bottom feeders. Deals have been hugely discounted, but there have been few takers. Why? Because no one with money believed we were at a reliable <i>bottom</i> of the market.</p>
<p style="text-align: justify;">Things have changed. The bottom feeders are coming out in droves. This is an early sign of life for the commercial real estate market, but a danger sign for commercial real estate borrowers in distress.</p>
<p style="text-align: justify;">One of the reason lenders have continued to amend and extend loans is because they don’t have much choice. Lenders don’t want these projects on their books. For the past several years, if lenders were to foreclose, or accept a deed in lieu of foreclosure, they were almost certain to be stuck with the property. There were virtually no buyers – at almost any price.</p>
<p style="text-align: justify;">Lenders don’t need more REO. They don’t need the headaches. They don’t need the liability and expense of property ownership and management. What they need is to cash-out. Few investors, however, have been willing to bet the commercial real estate market was anywhere near the bottom, and fewer still were willing to bet the market was about to rebound, enabling them to make a profit on rising occupancy, rising rents, and rising property values.</p>
<p style="text-align: justify;">At last, this has begun to change. A growing number of bottom feeders are entering the market – believing, apparently, the bottom has been hit and is about to turn upward. Are the bottom feeders right? I don’t know – but I do know that their numbers are growing, because the deals keep pouring through our doors. Cash deals, creation of bottom feeder funds, capital raises, and creative financing. At some point they may engender a self fulfilling prophecy.</p>
<h2 style="text-align: justify;">This is good news for some – and bad news for others.</h2>
<p style="text-align: justify;">Why? You ask.</p>
<p style="text-align: justify;">As deal flow increases, lender patience with underwater or marginal loans is bound to wane. If lenders can get out of their loans with an acceptable level of loss – <i>out </i>they will surely get. Most lenders are fatigued with distressed loans, and don’t want to risk another downturn.</p>
<p style="text-align: justify;">Bottom feeders are increasingly giving lenders a viable way out. If you are a commercial real estate borrower living on short term extensions of your distressed loan, time is growing short. When that bottom-feeder, or other third party purchaser, comes along and offers to buy the loan or buy the property upon foreclosure at a price that will get the lender anywhere close to whole – or close to a level of loss the lender can afford to absorb, the next loan extension will be hard to come by, if it can be obtained at all.</p>
<p style="text-align: justify;">Love them or hate them – bottom feeders are entering the market. By year’s end, we may find ourselves in a growing feeding frenzy. A word of advice: Position yourself accordingly.</p>
<p style="text-align: justify;"><em>Thanks for listening.</em></p>
<p style="text-align: justify;"><em>Kymn</em></p>
<p style="text-align: justify;">
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