Corporate Transparency Act Compliance – Obtain your FinCEN ID NOW

The Corporate Transparency Act (“Transparency Act”) is a new federal law that went into effect on January 1, 2024.  It applies to most privately held companies (each, a “reporting company”)[i], especially those typically used for commercial real estate investment and most small businesses. There are exceptions but they are limited. Failure to comply exposes you to fines and criminal liability, including possible jail time.

            The Transparency Act is administered and enforced by the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCEN”). Its aim is to curtail money laundering and other illegal activities.

Beneficial Owners

            To comply, each reporting company must file with FinCEN a written disclosure of all “beneficial owners” having a direct or indirect interest in the company.  Beneficial owners are those individuals who (a) exercise “substantial control” over the entity, or (b) own or control at least 25% of the ownership interests in the entity.

Substantial control

“Substantial control” is very broadly defined to include any individual who (i) serves as senior officer of a reporting company; (ii) has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body) of a reporting company; (iii) directs, determines, or has substantial influence over important decisions made by the reporting company (functional or de facto authority); or (iv) has any other form of substantial control over the reporting company. Examples of individuals who are deemed to exercise “substantial control” include but are not limited to: c-suite officers of a corporation including any individual who holds the position of general counsel; managers of a limited liability company, trustees of a trust, and general partners of a limited partnership, to name a few

Beneficial Ownership Information Report

Each reporting company is required to timely file with FinCEN a Beneficial Ownership Information Report (BOI Report) containing all necessary information. A parent company is not authorized to combine affiliated companies into a single BOI Report. Each and every reporting company must file a separate BOI Report. 

In light of the legal exposure to fines and jail time, it is prudent to overreport rather than underreport to assure full compliance with the Transparency Act.

Deadline for Reporting:

For reporting companies formed prior to January 1, 2024, the reporting deadline is December 31, 2024. For reporting companies formed on or after January 1, 2024 but prior to January 1, 2025, the reporting deadline is ninety (90) days after formation. For reporting companies formed on or after January 1, 2025, the reporting deadline is thirty (30) days after formation.  A BOI Report needs to be filed only once except that if, after filing any initial BOI Report, any of the information in the BOI Report changes, the BOI Report must be timely updated.

BOI Report Contents:

Each BOI Report must be filed with FinCEN electronically using FinCENs’ Beneficial Ownership Secure System (“BOSS”). The BOI Report must include precise information about the reporting company and its beneficial owners. The information for each reporting company must include, without limitation, the following: the full legal name and any alternate or assumed name of the reporting company; its jurisdiction of formation; current U.S. address; Tax ID number; and a description and copy of an acceptable identifying document. 

IN ADDITION, each BOI Report must include detailed Beneficial Owner Information including (A) the individual’s last name (or if the beneficial owner is an entity, the entity’s legal name); first name, date of birth, current residence address, a description and copy of an acceptable form of identification, which may include the photo page of a current passport, state issued driver’s license (front and back) or other government issued photo ID (front and back); or (B) the beneficial owner’s FinCEN Identifier (“FinCEN ID).  

FinCEN Identifier (FinCEN ID):

It is common for investors to be a beneficial owner of more than one reporting company. Since identifying information for each beneficial owner must be included in each BOI Report, repeatedly providing your detailed Beneficial Owner Information for successive BOI Reports may prove cumbersome and redundant. You may also be concerned about providing your Beneficial Owner Information to others. There is a solution.

Instead of repeatedly providing all required Beneficial Owner Information and documentation to each reporting company for each BOI Report, you can file it once with FinCEN and obtain a FinCEN Identifier, which is a unique 12-digit number issued by FinCEN which matches your Beneficial Owner Information to your information in the FinCEN database. The FinCEN database is designed to be confidential and secure, with highly restricted access. Thereafter, whenever a BOI Report is required to be filed, you may simply provide your FinCEN Identifier in lieu of detailed personal identifying information and documentation.

Obtaining a FinCEN Identifier is easy. Go to: http://fincenid.fincen.gov  then click on the Sign In or Create an Account button and follow the instructions.  Alternatively, simply Google: How to obtain FinCEN ID and then follow the step-by-step instructions.

Don’t delay. The clock is ticking.

[i] As of March 11, 2024, FinCEN has posted an Updated Notice concerning a lawsuit entitled National Small Business Untied v. Yellen, No. 5:22-cv-01448 (N.D. Ala.) where a federal district court entered a final declaratory judgment concluding that the Corporate Transparency Act exceeds the Constitutions’ limits on the powers of Congress and enjoining the Department of Treasury and FinCEN from enforcing the Corporate Transparency Act against the plaintiffs. The Justice Department, on behalf of the Department of Treasury filed a Notice of Appeal on March 11, 2024. While the litigation is ongoing, FinCEN will continue to implement the Corporate Transparency Act as required by Congress, while complying with the courts order. For more information go to:  https://www.fincen.gov/news/news-releases/updated-notice-regarding-national-small-business-united-v-yellen-no-522-cv-01448

Synopsis:

An Illinois landlord under a commercial lease must take reasonable measures to mitigate damages,

. . . but only if mitigation of damages is required – which is not always.

The General Duty to Mitigate

      Illinois landlords and their agents are required to use reasonable measures to mitigate damages recoverable against a defaulting lessee. 735 ILCS 5/9-213.1. The term “reasonable measures” is not defined by statute, and Illinois courts have held that whether the landlord has complied with the reasonable-measures standard is a question of fact, to be determined on a case-by-case basis. Danada Square, LLC v. KFC National Management Co., 392 Ill.App.3d 598, 913 N.E.2d 33, 41, 332 Ill.Dec. 438 (2d Dist. 2009).

      Section 9-213.1 of the Code of Civil Procedure, 735 ILCS 5/1-101, et seq., is mandatory, however, and it is the responsibility of the landlord, when proving damages, to also prove that it took reasonable measures to mitigate damages, whether or not the landlord’s requirement to mitigate damages was raised as an affirmative defense by the tenant. St. George Chicago, Inc. v. George J. Murges & Associates, Ltd., 296 Ill.App.3d 285, 695 N.E.2d 503, 508 – 509, 230 Ill.Dec. 1013 (1st Dist. 1998); Snyder v. Ambrose, 266 Ill.App.3d 163, 639 N.E.2d 639, 640 – 641, 203 Ill.Dec. 319 (2d Dist. 1994).

      The landlord has the burden to prove mitigation of damages as a prerequisite to recovery. Snyder, supra, 639 N.E.2d at 641; St. Louis North Joint Venture v. P & L Enterprises, Inc., 116 F.3d 262, 265 (7th Cir. 1997). Losses that are reasonably avoidable are not recoverable. Nancy’s Home of Stuffed Pizza, Inc. v. Cirrincione, 144 Ill.App.3d 934, 494 N.E.2d 795, 800; 98 Ill.Dec. 673 (1st Dist. 1986); Culligan Rock River Water Conditioning Co. v. Gearhart, 111 Ill.App.3d 254, 443 N.E.2d 1065, 1068, 66 Ill.Dec. 902 (2d Dist. 1982).

      In dicta, the court in St. George, supra, stated that failure to take reasonable measures to mitigate damages may not necessarily bar recovery by the landlord, but it will result in the landlord’s recovery being reduced. 695 N.E.2d at 509. How this would work from an evidentiary standpoint, however, is not entirely clear. Presumably, the landlord could introduce evidence at trial that, although the landlord did not take reasonable measures to mitigate damages, if it had, damages would have been reduced by some specified amount. If the landlord fails to introduce even that evidence, however, the question appears to remain open as to whether the landlord adequately proved damages — since the burden of proof of damages remains with the landlord and there is no suggestion that the statutory requirement to prove mitigation shifts to the tenant.

      At least one recent case has, in dicta, questioned aspects of both St. George and Snyder, supra, disagreeing that proof of mitigation must be demonstrated by the landlord as a prerequisite to recovering damages and has suggested that the issue of mitigation of damages is an affirmative defense that must be raised by the tenant, or it is waived. Takiff Properties Group Ltd. #2 v. GTI Life, Inc., 2018 IL App (1st) 171477, ¶23; 124 N.E.3d 11; 429 Ill.Dec. 242.

      Further, as a matter of first impression, the court in Takiff went on hold that the landlord’s obligation to mitigate can be contractually waived by a commercial tenant Takiff, at ¶29, and, as determined by the trial court, was in fact contractually waived by the tenant, rendering the issue of mitigation moot. 2018 IL App (1st) 171477 at ¶31.

      Possession as a Condition Precedent to Landlord’s Duty to Mitigate.

      Notwithstanding any general duty of landlord to mitigate damages, a landlord has no duty to mitigate until the landlord comes into possession. 2460-68 Clark LLC v. Chopo Chicken, LLC, 2022 IL App (1st) 210119, ¶34; Block 418, LLC v. Uni-Tel Communications Group, Inc.  398 Ill.App.3d 586, 925 N.E.2d 253, 258 ((Ill. App. 2 Dist. 2010); St. George Chicago, Inc. v. George J. Murges & Associates, Ltd., 296 Ill.App.3d at 290-91.

      Discussing the application of this principal, the Chopo Chicken court noted that an eviction proceeding is a summary proceeding to recover possession. Since a landlord has no duty to mitigate until the landlord is in possession, and, in an eviction action, a landlord is not in possession until the eviction court grants the landlord an order of possession and landlord recovers possession, landlord’s efforts to mitigate, or the lack thereof, are not relevant.  Chopo Chicken, supra ¶34

      Liquidated Damages Provision Makes Mitigation Irrelevant. 

      It is the general rule in Illinois that, in the case of an enforceable liquidated damages provision, mitigation is irrelevant and should not be considered in assessing damages. Chopo Chicken at ¶33. A liquidated damages provision is an agreement by the parties as to the amount of damages that must be paid in the event of default. Chopo Chicken at ¶33. Liquidated damages in commercial leases are not uncommon.

      In Chopo Chicken, the court considered a provision that included an itemization of damages recoverable by landlord from tenant including “a sum equal to the amount of unpaid rent and other charges and adjustments called for herein for the balance of the term hereof, which sum shall be due to Landlord as damages by reason of Tenant’s default hereunder” which, the court found, constituted a liquidated damages provision. 

      Similarly, in the St. George case, 296 Ill.App.3d 285; 695 N.E.2d 503, 507 the court found that a so-called “rent differential” formula (i.e. amount determined by the excess if any of the present value of the aggregate Monthly Base Rent and Operating Expense Adjustments for the remainder of the Term as then in effect over the then present value of aggregate fair rental value of the Premises for the balance of the Term the present value calculated in each case at 3%) constituted a liquidated damages provision.

            The Summary Rule regarding Mitigation

      Based upon the foregoing cases, the actual Illinois rule governing mitigation of damages in commercial lease disputes appears to be as follows: A landlord must take reasonable measures to mitigate damages, if mitigation of damages is required – but mitigation of damages is not required (i) until the landlord is placed in possession of the leased premises, or (ii) when the lease includes a liquidated damages provision.

Chicago Law Firms Robbins, Salomon & Patt and DiMonte & Lizak Merge

– Newly formed Robbins DiMonte, Ltd. combines to become one of Chicagoland’s largest boutique law firms, an all-in-one legal source offering full-service capabilities for individuals, investors, businesses and financial institutions–

CHICAGO (January 11, 2022) – Robbins, Salomon & Patt, Ltd. (RSP) and DiMonte & Lizak, LLC (D&L) have merged their Chicago-based law practices to form Robbins DiMonte, Ltd. at robbinsdimonte.com. The combination expands the firms’ collective capabilities in core practice areas including business and real estate, finance, litigation, and trusts and estates, while bolstering their already strong presence in the Chicagoland and Midwest markets.  Led by CEO Andrew M. Sachs and President Riccardo A. DiMonte, the combined firm has 60 lawyers, with 40 staff and paralegals located across two offices in downtown Chicago and Park Ridge, Illinois.

“Both of our firms have been in existence for over 50 years and enjoy longtime client relationships. We each recognized that by joining forces with a similarly situated firm to deepen our bench strength and heighten service to clients, we could position ourselves for the next 50 years,” commented Sachs, who was previously RSP’s CEO. “Like RSP, D&L has deep roots in Illinois and throughout the Midwest with a collaborative culture that seeks to effectively and creatively solve client needs to achieve positive client outcomes. As we explored this opportunity, the synergies between our firms became obvious. By combining firms, we are leveraging each other’s specialties and consolidating our resources, which will allow us to deliver even greater value to our clients with in-depth insights across multi-disciplinary teams, diverse experiences, and integrated solutions.”

“This is a true combination of equals, with attorneys and practice areas that are highly complementary,” said DiMonte, who served as Managing Partner of D&L. ‘With our full array of practice offerings, the firm will become a full-service destination of choice for investors, owners, and middle market businesses. Robbins DiMonte is positioned for long-term success and will continue to be a firm well-regarded for personal service, creativity, and forward-thinking, solution-minded attorneys.”

“The interests of our clients were central to making the decision to merge,” noted Sachs and DiMonte. “Both firms wanted to remain nimble and adaptable to changing client needs, while leveraging our comprehensive knowledge and breadth of experience, which we believe power our strong client alliances.”

Our Commitment to You

The two firms bring a deep commitment to the Chicagoland communities and look forward to continuing to connect with clients and community partners. Together, Robbins DiMonte will forge ahead as a new firm grounded in our shared core beliefs: strategic collaboration, transparency, innovative solutions, cost consciousness, a personal touch, and community engagement.

Power in Collaboration

###

For more information about Robbins DiMonte, Ltd., visit robbinsdimonte.com

Park Ridge
216 W. Higgins Rd.
Park Ridge, Illinois 60068
Phone: (847) 698-9600

Adaptive Reuse Of Underutilized Real Estate

Cool Projects – A Love Affair Revisited

We are entering a new frontier for adaptive re-use. The worldwide COVID-19 pandemic has left the urban commercial landscape in tatters. Shuttered vacant commercial space is commonplace throughout cities and towns. Doors and windows are boarded-up in shopping districts and entertainment districts that were thriving as recently as February 2020. Some have become barely recognizable.

Looking to the Future

What is to become of this vast inventory of vacant retail space, shuttered restaurants, empty hotels and office buildings, abandoned shopping malls, cavernous and empty theaters, stranded travel destinations, and more? Who will have the vision and courage to adapt and redevelop these properties into newly viable economic jewels? And when?

Make no mistake; it will happen. And it’s likely to happen much more quickly than you think.

While many are just beginning to peak their cautious heads out from under their COVID blankets, value-add developers are assembling to scoop-up valuable assets to be reimagined and repositioned for economic glory. If you believe the residential real estate market is hot, hold onto your collective hats. There are enormous profits to be made in commercial real estate and new business. These COVID-depressed sectors have struggled during the COVID shutdown, but unless the government blows it with short-sighted regulation and foolish tax policy, substantial economic revitalization is about to commence. Jobs, business opportunities, community-desired services and amenities, and great economic rewards are on the horizon. The ingenuity and creativity of value-add developers and the entrepreneurs they enable, coupled with vast amounts of available capital, are about to be unleashed in a torrent.

Pent-up demand is a powerful force. We are about to witness the creative power of visionary value-add developers as they reimagine and reinvent vacant and underutilized commercial space and turn it into some remarkably Cool Projects. I can’t wait!

COOL PROJECTS – Real Estate Projects I Love to Work On.

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

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

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

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

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

Cool Projects Test

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

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

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 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 “to close the transaction“.  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.

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.

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:

NO MORTGAGE CONTINGENCY:     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 not contingent upon the Buyer obtaining a mortgage – does not 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 contingent upon the Buyer obtaining a mortgage loan.

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 contingency 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.

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. At that point 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.

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 mortgage contingency does not mean there will be no lender – it simply means the Buyer is taking the legal and financial risk that a mortgage will be obtained.

2.   AN “AS IS” CLAUSE DOES NOT MEAN NO INSPECTION:  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.

It has recently been suggested to me by Seller’s counsel that since the Buyer is purchasing property in “AS IS” 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 AS IS 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 AS IS 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.

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 AS IS 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, then 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.

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.

Thanks for listening. . .

Kymn

Lawyers are like most other business professionals. We want your business and we want your referrals – we just don’t always know the best way to ask for either.

Take me for example. I’ve been handling commercial real estate transactions and business deals for nearly 40 years. I’ve loved (almost) every day of it, and I look forward to many more (knock on wood). My clients appreciate my insights and value the guidance I provide. Other attorneys respect what I do, and brokers and CPAs like working with me because I strive for practical solutions to efficiently and effectively get the job done. I pay close attention to learn my clients’ business objectives, then work diligently and negotiate hard to get my clients what they expect – when they expect it. That’s what lawyers do. Or at least what all lawyers should do. For any client hiring a lawyer, what else is there?  Achieving client objectives and getting the deal closed on time is why lawyers exist. Deals fail, for sure, but we can never be the reason they fail. Deals that fail are a waste of everyone’s time and money. Getting the deal done, if it can be done, is our value proposition.

Deals are my lifeblood – my passion. They’re why I wake up every morning and get out of bed. I love this stuff. I can’t explain exactly why that is – it just is.  Why do musicians practice their instruments and play? Why do scratch golfers golf? Why do competitive skiers ski?  It’s our passion. We don’t know exactly why – it comes from within. And we always need more.

Commercial real estate deals always come first for me, but in every commercial real estate project is a business. They go hand in hand. My preference for a good real estate deal over a good business deal is a matter of only slight degree. There’s not really a number one and a number two. It’s more like #1 and #1A.

So what’s the problem?

The problem is, a lot of people don’t know I’m available to represent them. I write books and articles on commercial real estate. I give seminars on how to structure and close business and real estate transactions. I publish a commercial real estate and business blog.  People think I’m busy, or that I only handle huge deals. The truth is, I am busy – but never too busy to handle another deal, large or small. In the words of the late, great Lucille Ball: “If you want something done, ask a busy person to do it.” We all loved Lucy!

The most shocking question I get from prospective clients is: “Would you (I) be willing to handle my (their) next business or commercial real estate deal?”  Are they kidding? My answer is always an emphatic “yes”! It’s my passion. It’s my love.  It’s what I live for.

To be sure, I’m a business professional, and I charge for what I do, but if you have a commercial real estate deal or business deal, and need representation, I’m in. Never be shy about calling me. We’ll work out the economics. The range of deals I handle is extraordinarily diverse. For a taste, look at my blog Harp-OnThis.com, or check out my latest book, Illinois Commercial Real Estate on Amazon.com or in your local public library. I love this stuff. I need this stuff. Of course I want to represent you. When can we get started?

So back to my initial point:  I do want your business and your business referrals. Like many other business professionals, I just don’t know the best way to go about asking for it. What do you suggest?

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 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.

Automation is a cost-saver, no doubt. But is it a reasonable substitute for thoughtful analysis and tailor-made solutions to client specific problems?

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.

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?

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.

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.

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?

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?

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.

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.

Will doing it right up front cost more?

Probably.

Will it be worth it if things go poorly?

You bet.

Should clients buy a size 9 shoe for their size 10 foot?

Thanks for listening. . .

Kymn

It is not uncommon for commercial real estate investors to pool their funds for real estate investments. To obtain project financing, equity requirements remain relatively high. Loan to value ratios are in the 60% to 70% range in many circumstances. Even a modestly priced commercial project with a $5,000,000 price tag may require equity in the range of $1,500,000 to $2,000,000. The greater the price tag, the higher the equity requirement. A Real Estate PPM is an important tool when raising funds from outside investors for a real estate project.

TYPICAL INVESTMENT STRUCTURE

Private real estate investments are typically structured through a manager-managed limited liability company (LLC), with the project promoter or its affiliate named as the manager. Oftentimes, the business terms of the transaction will include a cumulative preferred return to equity investors, an attractive internal rate of return to equity investors until all capital is returned, and a waterfall that provides for a disproportionate percentage of distributable cash to be used toward repayment of the equity investment until it is repaid in full, followed by a permanent allocation of profits and losses based on percentage of ownership.

OUTSIDE INVESTORS – PROS AND CONS

The advantage to the promoter in raising capital from outside investors is that it places the promoter in a position to acquire and control more and larger real estate projects. A disadvantage to promoters is that they must give up a meaningful piece of project ownership and anticipated profits in return for using other people’s money.

 An advantage to outside investors is that they may realize high investment returns and certain tax advantages by participating in a real estate investment. A disadvantage is that they typically have little direct control over the project and must rely upon the knowledge, skill and efforts of the promoter to make money. Of course, if the outside investors don’t possess the knowledge and skill themselves, relying on an experienced real estate promoter may be their best bet for taking advantage of the opportunities real estate investment has to offer.

DUE DILIGENCE AND THE REAL ESTATE PPM

Whether investing in a stabilized real estate project, a project to be newly constructed, or a value-add project requiring redevelopment, renovation, or adaptive reuse, careful evaluation of the benefits and risks always require knowledgeable investigation using due diligence.

A good place for an outside investor to begin is by closely reading the investment PPM (private placement memorandum) which an outside investor should expect to receive from the promoter before making an investment. A well drafted Real Estate PPM will describe the project, the relevant history and experience of the promoter, sources of funds, uses of funds, material terms of the investment, including transfer restrictions, the exit strategy, and the identifiable risks of the investment and the project.

The Real Estate PPM, however, is only the beginning. A conscientious investor needs to go beyond the statements in the PPM to gain an understanding of the underlying real estate project itself, not unlike a conscientious lender would – but even more so, since the interest of an equity investor is subordinate to the interest of any secured lenders. If the prospective investor does not have the direct knowledge and expertise to evaluate and understand the underlying real estate project, it is highly advisable for the prospective investor to hire an advisor, attorney or consultant who has the skill-set to conduct the evaluation.

PPM – A DEFENSE DOCUMENT

Promoters sometimes resist preparing a fully developed PPM because they believe (naively) that it is an unnecessary burden and needless expense. Realistically, however, it is essential and its cost is a cost of raising money from outside investors.

Some promoters discount the value of a carefully prepared PPM because they think of it as a marketing brochure. With that belief, they conclude that their investors don’t need an expensive marketing brochure prepared by a lawyer. In truth, a PPM is not a marketing brochure. It is a critical defense document. Like insurance, it is only a waste of money if you never need it. Even the most well thought-out real estate project may not turn out as planned, or may not result in the impressive profits anticipated at the outset. In that case, believe it or not, there is a meaningful risk that the investors will sue – especially if they end up losing money.

Anytime a person is making a passive investment with the expectation that profits will be derived solely through the efforts of another, the investment is, by definition, an investment contract and, by extension, a security.  The party offering the security is required by law to make a whole host of disclosures to make sure the investor is fully informed of all material facts and risks. Failure to adequately describe the investment and disclose known and foreseeable risks exposes the promoter to serious potential liability under applicable securities laws and regulations.

When the investors sue, it will be for on a variety of theories, including breach of contract, fraud in the inducement, common law fraud, negligent misrepresentation, and violation of applicable securities laws. The investors will allege that the promoter made all kinds of promises and told the investor all kinds of things regarding the project and the investment, which the promoter knew, or should have known, were false.  The investor will also claim the promoter concealed or failed to disclose facts and risks known to the promoter which, if disclosed, would have caused the investors to decline making the investment. Since securities laws provide investment rescission rights and impose near strict liability on a broad range of promoters and persons controlling the investment, the promoter and its principal advocates can be exposed to significant personal liability absent an effective and reliable defense.

A well-crafted PPM can be highly effective in providing a strong defense by spelling out, in writing, all the material details and assumptions of the project and the investment, and all known and foreseeable risks inherent in the project and the investment. It will also limit the right of the investors to rely upon only the matters expressed in the PPM, and will clarify the distinction between statements of fact, and forward looking projections which constitute matters of opinion or belief which cannot reasonably be relied upon. As such, the Real Estate PPM is a powerful defense tool that no real estate promoter seeking investment from outsiders should go without. If things go poorly, it will be the firewall between the investors’ loss and the personal liability of the promoter.

INVESTOR RELIANCE ON PPM

From the investors’ perspective, the PPM is a valuable tool as well. If meticulously crafted, it will disclose the material details of the project and the investment, and will point out risks the investor should consider, even if they are risks the investor is willing to accept.   The investor will have the right to rely upon the facts and details set forth in the PPM unless expressly qualified or limited. If the PPM misstates the facts or omits to disclose known or knowable risks, the PPM can serve as a powerful piece of evidence in a claim against the promoter. It is precisely this evidentiary risk that impels promoters to dot the i’s and cross the t’s to make sure the PPM is complete and accurate – which makes it a valuable source of information for the prospective investor.

PROJECT DUE DILIGENCE BY INVESTOR

Even with the inclusion of necessary facts and disclosures in the Real Estate PPM, a detailed analysis and discussion of certain real estate fundamentals underlying the project may not fall within the purview of the PPM. If the disclosed risks are carefully crafted with broad language, in may be up to the prospective investor, in the exercise of due diligence, to evaluate the underlying project to confirm the suitability of the property for its envisioned use.

Due diligence by the investor is always appropriate. If the prospective investor does not have the knowledge on its own to understand real estate fundamentals, it is incumbent upon the investor to engage a real estate professional who possesses the necessary knowledge.  Regardless of whether a failure to adequately disclose and address gaps in the underlying project fundamentals is sufficient to expose the promoter to liability, imposing liability on the promoter is not the object of the investment. The object of the investment is to put the investor’s money to work in a profitable venture that will yield a favorable return – not a lawsuit.

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Whether raising money from outside investors, or considering an investment in a real estate project as a passive outside investor, a well-crafted Real Estate PPM is a vital component and critical step. Ignore it at your own peril.

Thanks for listening,

Kymn

I’m happy to announce that the website for my new book, Illinois Commercial Real Estate is now live.  Visit www.Illinois-CRE.com for a book excerpt.

Illinois Commercial Real Estate, Due Diligence to Closing, with Checklists, is intended as a practical handbook for investors, developers, brokers, lenders, attorneys and others interested in commercial real estate projects in Illinois. This book zeros-in on commercial real estate due diligence, and walks the reader through the due diligence process, from conception to closing, with a focus on making sure the commercial real estate project functions as intended after closing.  Checklists are provided as an aid to commercial real estate professionals to assist on evaluation of the property and the transaction on the path toward successful closing. As people in the real estate industry understand, if the deal doesn’t close, it doesn’t count.

I’d like to extend Special Thanks to:

My clients, whose passion for creative commercial development I share;

My partners and staff at Robbins, Salomon and Patt, Ltd., who work with me tirelessly to earn our client’s business every day.

Catherine A. Cooke and Emily C. Kaminski, attorneys at Robbins, Salomon & Patt, Ltd. who provided legal research, advice, counseling, and technical editing;

James M. Mainzer, tax partner at Robbins, Salomon & Patt, Ltd., for his insights and assistance on tax matters;

The editing staff at the Illinois Institute for Continuing Legal Education, for editing early versions of chapters 11, 12, 25, 27 and 28, which were first published in IICLE Practice Handbooks;

Dale V. Weaver, Illinois licensed surveyor, who was kind enough to convert my rough draft drawings into the diagrams included at chapter 25;

. . . and, of course, my friend and valuable resource, Linda Day Harrison, founder of theBrokerList, for her ongoing encouragement and support.

If you are buying, developing, financing, selling, leasing or otherwise dealing with commercial real estate in Illinois, I hope you will find Illinois Commercial Real Estate, Due Diligence to Closing, with Checklists to be a useful resource.

ENJOY!!!

R. Kymn Harp

WHY DEVELOP AIR RIGHTS?

Prime commercial land is limited. Prices per square foot can be astronomical. Demand for efficiency to maximize return on investment is growing. No wonder developers and property owners are looking to the sky, with varying degrees of success, to capture all the value they can from each urban parcel. Air rights development may be the solution you are looking for.

Owners and developers, and people in general, are conditioned to think of potential development sites as flat surfaces with essentially two dimensions: north/south and east/west. They see only the surface of the land, and envision the building they will construct for the particular purpose they have in mind; a bank, a drugstore, a restaurant, a strip mall, a parking garage, an office building. If the parcel is larger than they need, they may envision subdividing the parcel to make two or more lots. In most cases, however, they think primarily in terms of land coverage for the type of building they need. They visualize only the two dimensional space depicted on their Site Plan or Plat of Survey.

In 30 out of 50 states, including Illinois and all other Mid-Western states, the “Rectangular Survey System” is in effect. The Rectangular Survey System was adopted in 1785 to meet the needs of the Federal Government as it faced the challenge of dividing vast areas of undeveloped land lying west of the original 13 colonies. The system, developed under the direction of Thomas Jefferson, essentially divides the United States into rectangles, measured in relation to lines known as Meridians and Base Lines.

Development lots are instinctively viewed as the two-dimensional surface of land visually representing a potential development parcel. Descriptions of a parcel typically refer to “a parcel of land X feet by Y feet” located in relation to an intersection or other identifiable landmark.

Once a parcel is “developed”, or designated for development, by construction of improvements on the land, it is natural to think of the parcel as being unavailable for further development (unless the existing improvements are to be demolished).

Classic examples of this are single story commercial buildings at prime commercial locations, a multi-deck parking garage or mid-rise building in a downtown development area, railroad tracks or spurs cutting across valuable urban land and, in some cases, roadways and alleys.

Each of these situations represent, potentially, under-utilization of valuable real estate. Finding a way to develop the “air” above these existing or planned improvements maximizes the economic utility of these parcels and can be like creating “money from thin air.”

The practice of finding ways to utilize the “space above” is often referred to as “air rights development”. Air rights development requires thinking in three dimensions, and requires serious design consideration and legal planning but, when land values are at a premium and zoning permits, the economic return may be dramatic.

Though often overlooked, virtually all of Chicago’s downtown business district is a “city in the air“. People tend to think of streets and street level entrances to buildings in the downtown Chicago “loop” as being at “ground level”. This is simply not the case. Most of what is thought of in the Chicago Loop as being at “ground level” is located 12 to 22 feet above the earth’s surface. This explains the vast network of “lower” streets and passageways in downtown Chicago, such as “Lower Wacker Drive”, “Lower Dearborn Street”, “Lower State Street”, etc. which most people seldom traverse. It also explains why, in 1992, the Chicago Loop business district was virtually shut down by “the Great Loop Flood of ’92”, but few people got wet or even saw any water as office and retail buildings were closed and workers were sent home because of “flooding”.

The point of these observations is to reveal that “development of air rights” is not new. It is also not “. . . some exotic legal manipulation of doubtful efficacy dreamed up by big city lawyers for use only in big cities”. Development of so-called “air rights” is little more than efficient use of a limited resource when use becomes economically feasible and beneficial.

WHAT ARE “AIR RIGHTS”?

“Air rights” are part of the “bundle of rights” constituting fee simple title to real estate. The term “air rights” generally refers to the right of the owner of fee simple title of a parcel of land to use the space above the land. If this right did not exist, it would not be possible to