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<title>purchase – HARP – On This. . .</title>
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<title>New Year, New Office – Chicago</title>
<link>http://harp-onthis.com/new-year-new-office-chicago/</link>
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<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Sun, 19 Jan 2025 15:37:27 +0000</pubDate>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[Illinois commercial lease]]></category>
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<category><![CDATA[development]]></category>
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<category><![CDATA[investment]]></category>
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<category><![CDATA[purchase]]></category>
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<description><![CDATA[R Kymn Harp Joins Buchalter – January 2025 Buchalter is pleased to announce the opening of its newest office in Chicago, Illinoiswith the addition of lawyers and staff previously comprising the Chicago office of Robbins DiMonte, Ltd joining Buchalter. The […]]]></description>
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<h2 class="wp-block-heading"><a href="https://www.buchalter.com/attorneys/r-kymn-harp/#overview">R Kymn Harp</a> Joins <a href="http://www.buchalter.com">Buchalter</a> – January 2025</h2>
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<p><a href="http://www.buchalter.com">Buchalter</a> is pleased to announce the opening of its newest office in Chicago, Illinois<br />with the addition of lawyers and staff previously comprising the Chicago office of Robbins DiMonte, Ltd joining <a href="http://www.buchalter.com">Buchalter</a>. The Chicago office has 25 attorneys and support staff, including Shareholders <strong>Thomas Jefson, Steven Jakubowski, Patrick Owens, David Resnick, R. Kymn Harp, James Mainzer, Justin Weisberg, and Thomas Yardley Jr. </strong> Joining them are Jennifer Barton, Emily Kaminski, Teresa Minnich, Christine Walsh, Marko Van Buskirk, Timothy Hameetman, and Richard Stavins. In addition,<strong> Shareholder <a href="https://www.buchalter.com/attorneys/pamela-kohlman-webster/#overview">Pamela Webster</a></strong> will also spend a significant amount of time in the Chicago office. The team of highly experienced attorneys have deep roots and a long history of achieving exceptional results for clients.</p>
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<p>“As the third-largest city in the country, having a Chicago office has been a long-term goal for the firm,”<br />said <a href="https://www.buchalter.com/attorneys/adam-j-bass/#overview">Adam Bass</a>, President and Chief Executive Officer of <a href="http://www.buchalter.com">Buchalter</a>. “The city’s thriving real estate,<br />financial services, private equity, and technology sectors, along with its ideal geographic location,<br />present tremendous opportunities and strengthens Buchalter’s national presence. Finding the right<br />lawyers was essential, and the highly respected group joining us in Chicago are an excellent business and<br />cultural fit.”</p>
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<p>Buchalter’s expansion into Chicago marks a strategic move as the firm continues to bolster its national<br />footprint in key markets across the country. The firm established a presence in the Southeast with the<br />opening of its Nashville office in 2023 that has grown to 25 lawyers, followed by an office in Atlanta in 2024.</p>
<p>With the additions of the new lawyers in Chicago, the firm offers clients a deeper bench in practices it is well-known for, including real estate, banking and finance capabilities, trusts and estate matters, and complex litigation. </p>
<p>As the Office Managing Shareholder of Buchalter’s Chicago office, <strong><a href="https://www.buchalter.com/attorneys/thomas-a-jefson/#overview">Thomas Jefson </a></strong>has extensive experience handling all aspects of complex trust and estate matters including, estate planning for High and Ultra-High Net Worth families, asset protection, probate and trust administration services, complex litigation involving disputed trusts and estates, claims against decedents as well as designing strategies to maximize tax savings. As a trusted legal advisor for over 22 years, Jefson regularly represents families, business owners and executives, investors, and individuals in sophisticated matters to preserve wealth and protect assets that help achieve their objectives for years to come. Additionally, he counsels financial institutions, business leaders within diverse industries in the areas of tax planning, charitable endeavors, fiduciary duty compliance, and other business transactional matters. </p>
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<p>“We are thrilled to join Buchalter, and I’m honored to lead the Chicago office,” said Jefson. “Joining<br />Buchalter provides us with the perfect opportunity to strengthen the support we provide to our clients, expand the services they count on, and collaborate with an impressive team of attorneys.”</p>
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<p><strong><a href="https://www.buchalter.com/attorneys/r-kymn-harp/#overview">R. Kymn Harp</a></strong> has over 40 years of experience representing investors, developers, business owners, and<br />other stakeholders in all aspects of commercial real estate transactions and development. He applies a<br />practical approach to project and transaction management through clear identification of transaction<br />objectives and challenges, focused due diligence and creative problem-solving, and personal hands-on<br />transaction management. He also is actively engaged in the complementary practice of business<br />management law, representing businesses, and business owners and investors.</p>
<p><strong><a href="https://www.buchalter.com/attorneys/james-m-mainzer/#overview">James Mainzer</a></strong> also has over 40 years of experience practicing in the areas of taxation, business<br />representation, real estate, and trusts and estates. His federal tax practice includes a heavy emphasis on<br />sophisticated partnership taxation and tax deferred exchanges. He represents private sector clients in<br />tax collection defense, audit, income tax, and estate tax matters. He also has substantial experience<br />dealing with IRS agents, revenue officers and IRS tax counsel regarding audits, tax appeals, and Federal<br />Tax Court matters.</p>
<p><strong><a href="https://www.buchalter.com/attorneys/david-p-resnick/#overview">David Resnick</a> </strong>maintains a national practice concentrated in commercial real estate development, and<br />leasing and finance matters. He has over 24 years of experience handling all facets of commercial real<br />estate transactions, including the acquisition, sale, financing and leasing of industrial, office, residential,<br />retail and mixed-use properties. He also provides legal services to hospitality clients with respect to their<br />real estate, finance and operational matters.</p>
<p><strong><a href="https://www.buchalter.com/attorneys/steve-jakubowski/#overview">Steve Jakubowski</a> </strong>concentrates his practice in distressed financings and workouts, bankruptcies,<br />receiverships, and related ancillary litigation. He has been lead and co-counsel in bankruptcy cases<br />nationwide, stretching from Delaware to Hawaii, including in multiple high profile cases nationwide on behalf of lenders, debtors, creditors and equity committees, acquirers, and litigation targets. These matters have involved a variety of industries, including: biotech; commercial real estate; premium fitness clubs; farming; department stores; restaurant chains; convenience stores; metal fabricators; equipment lessors; and wholesale food manufacturing, packaging, and distribution.</p>
<p><strong><a href="https://www.buchalter.com/attorneys/patrick-d-owens/#overview">Patrick Owens</a></strong> possesses extensive expertise in estate planning for young professionals to established<br />high net worth clients. This experience also extends to managing a diverse array of estates, from<br />modest, nontaxable ones to those that are significantly large and complex, involving tax liabilities. His<br />involvement spans the full spectrum of trust and estate administration and oversight. He expertly<br />navigates these trusts and estates through their lifecycle, handling or overseeing all requisite income,<br />gift, and estate tax filings with meticulous attention to detail.</p>
<p><a href="https://www.buchalter.com/attorneys/justin-l-weisberg/#overview"><strong>Justin Weisberg</strong> </a>has over 30 years of legal experience with a national construction law and commercial<br />litigation practice. He represents private, public, local, and international clients in a variety of<br />construction-related transactions and litigation matters. His legal experience has included contract<br />negotiation and drafting of design, design-build, IPD, P3, and construction contracts as well as<br />mediation, arbitration and litigation including both bench and jury trials of numerous disputes involving<br />design and construction matters.</p>
<p><strong><a href="https://www.buchalter.com/attorneys/thomas-p-yardley-jr/#overview">Thomas Yardley Jr.</a></strong> concentrates his practice in the areas of litigation, business transactions, creditors’<br />rights and bankruptcy, and employment and construction law. With over 30 years of experience, he has<br />handled diverse litigation matters for small business owners, high net worth individuals and<br />corporations. He has successfully represented clients in both state and federal court including:<br />commercial and contractual disputes, corporate litigation, minority shareholder oppression matters,<br />other employment cases, construction matters, condominium and real estate disputes, bankruptcy and<br />creditors’ rights matters, among others.</p>
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<p>“We are thrilled to welcome Tom and the entire Chicago team to Buchalter,” added Bass. “We have<br />immediate plans to expand the office and are looking forward to the future.”</p>
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<p>The Chicago office of Buchalter is located in Chicago’s central business district, at 180 N. LaSalle St., Chicago, Illinois 60601 – temporarily in Suite 3300, while it awaits completion of its new ultra-modern suite of offices on the 23rd floor of the same building, expected to be ready for occupancy in late Spring 2025,</p>
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<p><a href="http://“As the third-largest city in the country, having a Chicago office has been a long-term goal for the firm,” said Adam Bass, President and Chief Executive Officer of Buchalter. “The city’s thriving real estate, financial services, private equity, and technology sectors, along with its ideal geographic location, present tremendous opportunities and strengthens Buchalter’s national presence. Finding the right lawyers was essential, and the highly respected group joining us in Chicago are an excellent business and cultural fit.”://www.buchalter.com">Buchalter</a> is a full-service business law firm representing local, regional, national, and international<br />clients in a multitude of practice areas and their subspecialties, among them: Bank and Finance,<br />Corporate, Health Care, Litigation, Insolvency and Financial Law, Intellectual Property, Labor and<br />Employment, Real Estate, and Tax and Estate Planning. Buchalter has approximately 550 attorneys with<br />offices in California, Arizona, Colorado, Georgia, Illinois, Oregon, Tennessee, Utah, and Washington. For<br />more information about the firm, visit:<a href="http://www.buchalter.com"> buchalter.com</a>.</p>
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<title>COOL PROJECTS – A Love Affair Revisited</title>
<link>http://harp-onthis.com/cool-projects-real-estate/</link>
<comments>http://harp-onthis.com/cool-projects-real-estate/#respond</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Wed, 19 May 2021 22:28:00 +0000</pubDate>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[Business]]></category>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[adaptive reuse]]></category>
<category><![CDATA[business]]></category>
<category><![CDATA[Chicago]]></category>
<category><![CDATA[closing]]></category>
<category><![CDATA[closings]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[conducting due diligence]]></category>
<category><![CDATA[cool projects]]></category>
<category><![CDATA[creative use]]></category>
<category><![CDATA[development]]></category>
<category><![CDATA[due diliigence]]></category>
<category><![CDATA[economic redevelopment]]></category>
<category><![CDATA[ICSC RECon 2015]]></category>
<category><![CDATA[industrial property]]></category>
<category><![CDATA[investment]]></category>
<category><![CDATA[keys to closing]]></category>
<category><![CDATA[purchase]]></category>
<category><![CDATA[real estate]]></category>
<category><![CDATA[redevelopment]]></category>
<category><![CDATA[transactions]]></category>
<category><![CDATA[urban infill]]></category>
<category><![CDATA[what to look for]]></category>
<guid isPermaLink="false">http://harp-onthis.com/?p=1173</guid>
<description><![CDATA[Adaptive Reuse Of Underutilized Real Estate Cool Projects – A Love Affair Revisited We are entering a new frontier for adaptive re-use. The worldwide COVID-19 pandemic has left the urban commercial landscape in tatters. Shuttered vacant commercial space is commonplace […]]]></description>
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<h1 class="wp-block-heading"><mark style="background-color:rgba(0, 0, 0, 0)" class="has-inline-color has-vivid-cyan-blue-color"><strong>Adaptive Reuse Of Underutilized Real Estate </strong></mark></h1>
<h1 class="wp-block-heading"><mark style="background-color:rgba(0, 0, 0, 0)" class="has-inline-color has-vivid-cyan-blue-color"><strong><em>Cool Projects</em> – A Love Affair Revisited</strong></mark></h1>
<p>We are entering a new frontier for adaptive re-use. The worldwide COVID-19 pandemic has left the urban commercial landscape in tatters. Shuttered vacant commercial space is commonplace throughout cities and towns. Doors and windows are boarded-up in shopping districts and entertainment districts that were thriving as recently as February 2020. Some have become barely recognizable. </p>
<p><strong>Looking to the Future</strong></p>
<div class="wp-block-image">
<figure class="alignleft size-large is-resized"><img data-recalc-dims="1" fetchpriority="high" decoding="async" data-attachment-id="1927" data-permalink="http://harp-onthis.com/cool-projects-real-estate/old-post-office/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/old-post-office.jpg?fit=1200%2C630" data-orig-size="1200,630" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="old-post-office" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/old-post-office.jpg?fit=300%2C158" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/old-post-office.jpg?fit=1024%2C538" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/old-post-office.jpg?resize=400%2C210" alt="old post office" class="wp-image-1927" width="400" height="210" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/old-post-office.jpg?resize=1024%2C538 1024w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/old-post-office.jpg?resize=300%2C158 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/old-post-office.jpg?resize=768%2C403 768w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/old-post-office.jpg?w=1200 1200w" sizes="(max-width: 400px) 100vw, 400px" /></figure></div>
<p>What is to become of this vast inventory of vacant retail space, shuttered restaurants, empty hotels and office buildings, abandoned shopping malls, cavernous and empty theaters, stranded travel destinations, and more? Who will have the vision and courage to adapt and redevelop these properties into newly viable economic jewels? And when? </p>
<p>Make no mistake; it will happen. And it’s likely to happen much more quickly than you think. </p>
<p>While many are just beginning to peak their cautious heads out from under their COVID blankets, <em>value-add developers</em> are assembling to scoop-up valuable assets to be reimagined and repositioned for economic glory. If you believe the residential real estate market is hot, hold onto your collective hats. There are enormous profits to be made in commercial real estate and new business. These COVID-depressed sectors have struggled during the COVID shutdown, but unless the government blows it with short-sighted regulation and foolish tax policy, substantial economic revitalization is about to commence. Jobs, business opportunities, community-desired services and amenities, and great economic rewards are on the horizon. The ingenuity and creativity of value-add developers and the entrepreneurs they enable, coupled with vast amounts of available capital, are about to be unleashed in a torrent. </p>
<p>Pent-up demand is a powerful force. We are about to witness the creative power of visionary value-add developers as they reimagine and reinvent vacant and underutilized commercial space and turn it into some remarkably C<em>oo</em>l Projects. I can’t wait!</p>
<h1 class="wp-block-heading"><mark style="background-color:rgba(0, 0, 0, 0)" class="has-inline-color has-vivid-cyan-blue-color"><strong>C<em>OO</em>L PROJECTS – Real Estate Projects I <em>Love</em> to Work On. </strong></mark></h1>
<p>I love cool real estate projects. Cool projects are why I became a lawyer. Cool projects are why I come to the office each day. Cool real estate projects are why I did not become an astrophysicist (well, one reason – although, that might have been cool too). Cool projects are the reason I live, smile, dance, breath, scour the earth for new deals, jump for joy.</p>
<p>And by “c<em>oo</em>l”, I don’t mean in a thermal sense – but rather in a “<em>this project is so cool</em>” sense. I am referring to real estate projects that are awesome. Real estate projects that are fun. Real estate projects that make you say “<em>Wow – what a cool project!</em>”</p>
<div class="wp-block-image">
<figure class="alignleft size-large is-resized"><img data-recalc-dims="1" decoding="async" data-attachment-id="1527" data-permalink="http://harp-onthis.com/harp-photo-sept-2019-less-than-2mb/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2019/09/Harp-Photo-Sept.-2019-less-than-2MB.png?fit=360%2C402" data-orig-size="360,402" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="Harp Photo – Sept. 2019 less than 2MB" data-image-description="" data-image-caption="<p>R. Kymn Harp</p>
" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2019/09/Harp-Photo-Sept.-2019-less-than-2MB.png?fit=269%2C300" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2019/09/Harp-Photo-Sept.-2019-less-than-2MB.png?fit=360%2C402" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2019/09/Harp-Photo-Sept.-2019-less-than-2MB.png?resize=162%2C179" alt="" class="wp-image-1527" width="162" height="179"/><figcaption class="wp-element-caption">R. Kymn Harp</figcaption></figure></div>
<p>Cool projects don’t need to be costly projects in major urban centers – although those can be cool too. I’m talking about projects that are creative. Projects that require vision and imagination. Projects that take something mundane and turn it into something special.</p>
<p>Some people think I only like huge projects. To be honest, I do like huge projects, but largely because the huge projects I have worked on also happened to be cool projects.</p>
<p>Redevelopment of the commercial portions of Marina City in downtown Chicago was a cool project. Ground-up development of Sears Centre Arena in Hoffman Estates, Illinois was a cool project. Work on various mixed-use projects around the Midwest and upstate New York have been cool projects. But so has been the much smaller development of an 8,000 square foot microbrewery in the historic Motor Row District of Chicago using TIF financing; development of countless restaurant and entertainment venues throughout the Midwest; conversion of a multi-story industrial building into a high-tech office center; conversion of an outdated office building into a stylish, luxury hotel; adaptive reuse of outdated retail strip centers, bank buildings, city and suburban office buildings, bowling alleys, warehouses, industrial buildings, gas stations, and various small to medium sized special purpose buildings into modern, fully functional jewels – reinvented to provide much needed retail and service amenities for local neighborhoods and communities. It is not the size of the project that makes it cool – or the cost – it is the concept, imagination and creative challenge involved that makes the difference. At least for me.</p>
<h2 class="wp-block-heading"><span style="color: #008080;"><span class="has-inline-color has-vivid-cyan-blue-color"><strong>Cool Projects Test</strong></span></span></h2>
<p>Here’s a test [call it the “<span style="color: #000000;"><em>Cool Projects Test</em></span>”, if you will]:</p>
<p>Which of the following projects is more likely to end up on Kymn Harp’s list of <em>cool projects</em>?</p>
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<h5 class="wp-block-heading"><span style="color: #008080;"><em><span class="has-inline-color has-vivid-cyan-blue-color">Project Choice No. 1:</span></em></span></h5>
<p>a. Developing a stand-alone bank building on a commerical outlot?</p>
<p><em>Or</em></p>
<p>b. Converting an historic firehouse into an upscale restaurant and wine bar with take-out bakery?</p>
<h5 class="wp-block-heading"><span style="color: #008080;"><em><span class="has-inline-color has-vivid-cyan-blue-color">Project Choice No. 2:</span></em></span></h5>
<p>a. Developing a 196 unit apartment complex on a large vacant lot?</p>
<p><em>Or</em></p>
<p>b. Redeveloping a former 3-story Main Street department store into a mixed-use project with first floor restaurants, sidewalk cafés, first floor retail, a side street residential lobby, apartments on the 2nd and 3rd floors, and a rooftop sundeck and fitness center?</p>
<h5 class="wp-block-heading"><span style="color: #008080;"><em><span class="has-inline-color has-vivid-cyan-blue-color">Project Choice No. 3:</span></em></span></h5>
<p>a. Developing a stand-alone strip shopping center?</p>
<p><em>Or</em></p>
<p>b. Developing retail shops within the underutilized first floor and lower level pedway serving an existing hotel/convention center?</p>
<h5 class="wp-block-heading"><span style="color: #008080;"><em><span class="has-inline-color has-vivid-cyan-blue-color">Project Choice No. 4:</span></em></span></h5>
<p>a. Developing a multiplex movie theater?</p>
<p><em>Or</em></p>
<p>b. Converting a former multiplex movie theater into a multi-tenant, specialty entertainment center with intimate live music venues, restaurants, an art gallery, and ethnic-focused shopping boutiques to serve a growing ethnic population in the surrounding community?</p>
<h5 class="wp-block-heading"><span style="color: #008080;"><em><span class="has-inline-color has-vivid-cyan-blue-color">Project Choice No. 5:</span></em></span></h5>
<p>a. Developing a national chain pharmacy on a corner lot?</p>
<p><em>Or</em></p>
<p>b. Redeveloping a former church as a music and theatrical venue with a restaurant, music store and gift shop?</p>
<h5 class="wp-block-heading"><span style="color: #008080;"><em><span class="has-inline-color has-vivid-cyan-blue-color">Project Choice No. 6:</span></em></span></h5>
<p>a. Developing a new suburban office tower?</p>
<p><em>Or</em></p>
<p>b. Coordinating economic redevelopment of a suburban downtown business district to transform a stagnant center of town into an affluent Millennial-friendly live-work-play lifestyle environment?</p>
<h5 class="wp-block-heading"><span style="color: #008080;"><em><span class="has-inline-color has-vivid-cyan-blue-color">Project Choice No. 7:</span></em></span></h5>
<p>a. Developing an industrial/office park?</p>
<p><em>Or</em></p>
<p>b. Developing a multi-user sports and entertainment complex with restaurants, retail and parking?</p>
<p>Which Project Choices listed above qualify as “<em>cool projects</em>”? Not everyone will agree. There is no absolute, right answer. And don’t get me wrong, if a client walked through my door with any of these projects, I would be happy to jump on-board. But, the truth is that – in a perfect world, if given a choice – I would choose Project Choice “<span style="text-decoration: underline;">b</span>” every time.</p>
<p>Why? There is just something exhilarating about taking tired, underutilized or functionally obsolete properties and reinventing them as revitalized developments that make users say: “<em>WOW – what a cool project!</em>”</p>
<p>Cool projects require a lot of planning, legal insight, and specialized due diligence to make sure a successful transformation can be achieved, but the value-added turnaround can be long-lasting and well worth the effort.</p>
<p>I am always on the hunt for cool projects. I enjoy working with all my clients, but my favorite clients are investors, developers and business owners with creative vision, who can imagine the future, and make it happen.</p>
<p>Not every project I work on is a <em>cool project</em>. As a real estate lawyer, I work on the deals that clients bring me. Some projects are just good investments waiting to be built. I’m fine with that. There is nothing wrong with building projects that just serve a need. I endorse the concept, and am always glad to help, so give me a call. I am at your service.</p>
<p><em>But</em> . . ., for sure if you are contemplating a <em>cool project</em> – please stop whatever else you are doing, pick up your phone and call me. My direct line is <strong><span class="has-inline-color has-vivid-cyan-blue-color">312-456-0378</span></strong>. Let’s talk. My partners and I can help you get it done – and, I assure you, we can each have a blast doing it.</p>
<p>There is no thrill quite like the thrill of like-minds working together in sync, with skill and creativity, to move a cool project forward, from concept to completion. I would love to be part of your team.</p>
<p><em>Thanks for listening.</em></p>
<p>Be c<em>oo</em>l. </p>
<p> Be creative.</p>
<p> Call me.</p>
<p>Thanks,<br /><em>Kymn</em></p>
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<post-id xmlns="com-wordpress:feed-additions:1">1173</post-id> </item>
<item>
<title>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" 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" loading="lazy" 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="auto, (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" 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="" 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" /></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>A PASSION FOR (REAL ESTATE) BUSINESS</title>
<link>http://harp-onthis.com/passion-real-estate-business/</link>
<comments>http://harp-onthis.com/passion-real-estate-business/#respond</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Mon, 13 Nov 2017 21:45:41 +0000</pubDate>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[Business]]></category>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[adaptive reuse]]></category>
<category><![CDATA[business]]></category>
<category><![CDATA[Chicago]]></category>
<category><![CDATA[closing]]></category>
<category><![CDATA[closings]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[development]]></category>
<category><![CDATA[due diligence checklist]]></category>
<category><![CDATA[due diliigence]]></category>
<category><![CDATA[how to close]]></category>
<category><![CDATA[industrial property]]></category>
<category><![CDATA[investment]]></category>
<category><![CDATA[keys to closing]]></category>
<category><![CDATA[project entitlement]]></category>
<category><![CDATA[property]]></category>
<category><![CDATA[public-private partnership]]></category>
<category><![CDATA[purchase]]></category>
<category><![CDATA[site entitlement]]></category>
<category><![CDATA[transactions]]></category>
<category><![CDATA[urban infill]]></category>
<category><![CDATA[what to look for]]></category>
<guid isPermaLink="false">http://harp-onthis.com/?p=1380</guid>
<description><![CDATA[Lawyers are like most other business professionals. We want your business and we want your referrals – we just don’t always know the best way to ask for either. Take me for example. I’ve been handling commercial real estate transactions […]]]></description>
<content:encoded><![CDATA[
<p>Lawyers are like most other business professionals. We want your business and we want your referrals – we just don’t always know the best way to ask for either.</p>
<div class="wp-block-image">
<figure class="alignleft"><img data-recalc-dims="1" loading="lazy" decoding="async" width="250" height="222" data-attachment-id="1379" data-permalink="http://harp-onthis.com/passion-real-estate-business/kymn_harp/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2017/11/Kymn_Harp.png?fit=250%2C222" data-orig-size="250,222" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="Kymn_Harp" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2017/11/Kymn_Harp.png?fit=250%2C222" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2017/11/Kymn_Harp.png?fit=250%2C222" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2017/11/Kymn_Harp.png?resize=250%2C222" alt="" class="wp-image-1379"/></figure></div>
<p>Take me for example. I’ve been handling commercial real estate transactions and business deals for nearly 40 years. I’ve loved (almost) every day of it, and I look forward to many more (knock on wood). My clients appreciate my insights and value the guidance I provide. Other attorneys respect what I do, and brokers and CPAs like working with me because I strive for practical solutions to efficiently and effectively get the job done. I pay close attention to learn my clients’ business objectives, then work diligently and negotiate hard to get my clients what they expect – when they expect it. That’s what lawyers do. Or at least what all lawyers should do. For any client hiring a lawyer, what else is there? Achieving client objectives and getting the deal closed on time is why lawyers exist. Deals fail, for sure, but we can never be the reason they fail. Deals that fail are a waste of everyone’s time and money. Getting the deal done, if it can be done, is our value proposition.</p>
<p>Deals are my lifeblood – my passion. They’re why I wake up every morning and get out of bed. I love this stuff. I can’t explain exactly why that is – it just is. Why do musicians practice their instruments and play? Why do scratch golfers golf? Why do competitive skiers ski? It’s our passion. We don’t know exactly why – it comes from within. And we always need more.</p>
<p>Commercial real estate deals always come first for me, but in every commercial real estate project is a business. They go hand in hand. My preference for a good real estate deal over a good business deal is a matter of only slight degree. There’s not really a number one and a number two. It’s more like #1 and #1A.</p>
<p>So what’s the problem?</p>
<div class="wp-block-image">
<figure class="alignright size-full is-resized"><img data-recalc-dims="1" loading="lazy" decoding="async" width="1000" height="667" data-attachment-id="1807" data-permalink="http://harp-onthis.com/passion-real-estate-business/businesspropertyrealestateandinvestmentconceptswithinvestorandwhite/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/business-propertyreal-estate-and-investment.jpg?fit=1000%2C667" data-orig-size="1000,667" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"Shutterstock","camera":"","caption":"","created_timestamp":"0","copyright":"Copyright (c) 2021 HAKINMHAN\/Shutterstock. No use without permission.","focal_length":"0","iso":"0","shutter_speed":"0","title":"Business,Property,real,Estate,And,Investment,Concepts,With,Investor,And,White","orientation":"1"}" data-image-title="Business,Property,real,Estate,And,Investment,Concepts,With,Investor,And,White" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/business-propertyreal-estate-and-investment.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/business-propertyreal-estate-and-investment.jpg?fit=1000%2C667" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/business-propertyreal-estate-and-investment.jpg?resize=1000%2C667" alt="business property,real estate and investment" class="wp-image-1807" style="width:400px;height:267px" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/business-propertyreal-estate-and-investment.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/business-propertyreal-estate-and-investment.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/business-propertyreal-estate-and-investment.jpg?resize=768%2C512 768w" sizes="auto, (max-width: 1000px) 100vw, 1000px" /></figure></div>
<p>The problem is, a lot of people don’t know I’m available to represent them. I write books and articles on commercial real estate. I give seminars on how to structure and close business and real estate transactions. I publish a commercial real estate and business blog. People think I’m busy, or that I only handle huge deals. The truth is, I <em>am</em> busy – but never too busy to handle another deal, large or small. In the words of the late, great Lucille Ball: “<em>If you want something done, ask a busy person to do it</em>.” We all loved Lucy!</p>
<p>The most shocking question I get from prospective clients is: “<em>Would you (I) be willing to handle my (their) next business or commercial real estate deal?</em>” Are they kidding? My answer is always an emphatic “<em>yes</em>”! It’s my passion. It’s my love. It’s what I live for.</p>
<p>To be sure, I’m a business professional, and I charge for what I do, but if you have a commercial real estate deal or business deal, and need representation, I’m in. Never be shy about calling me. We’ll work out the economics. The range of deals I handle is extraordinarily diverse. For a taste, look at my blog <a href="http://www.harp-onthis.com">Harp-OnThis.com,</a> or check out my latest book, Illinois Commercial Real Estate on<a href="https://www.amazon.com/Illinois-Commercial-Real-Estate-Kymn/dp/1524535095"> Amazon.com</a> or in your local public library. I love this stuff. I need this stuff. Of course I want to represent you. When can we get started?</p>
<p>So back to my initial point: I do want your business and your business referrals. Like many other business professionals, I just don’t know the best way to go about asking for it. What do you suggest?</p>
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<post-id xmlns="com-wordpress:feed-additions:1">1380</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>
<category><![CDATA[how to close]]></category>
<category><![CDATA[Illinois]]></category>
<category><![CDATA[industrial property]]></category>
<category><![CDATA[investment]]></category>
<category><![CDATA[keys to closing]]></category>
<category><![CDATA[purchase]]></category>
<category><![CDATA[real estate]]></category>
<category><![CDATA[transactions]]></category>
<category><![CDATA[what to look for]]></category>
<guid isPermaLink="false">http://harp-onthis.com/?p=1376</guid>
<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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<post-id xmlns="com-wordpress:feed-additions:1">1376</post-id> </item>
<item>
<title>Outside Investors and the Real Estate PPM – A Critical Step</title>
<link>http://harp-onthis.com/outside-investors-and-the-real-estate-ppm-a-critical-step/</link>
<comments>http://harp-onthis.com/outside-investors-and-the-real-estate-ppm-a-critical-step/#respond</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Thu, 16 Feb 2017 23:16:05 +0000</pubDate>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[adaptive reuse]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[due diligence checklist]]></category>
<category><![CDATA[investment]]></category>
<category><![CDATA[PPM]]></category>
<category><![CDATA[private placement memorandum]]></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=1352</guid>
<description><![CDATA[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. […]]]></description>
<content:encoded><![CDATA[<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="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" /></figure></div>
<p>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.</p>
<h2 class="wp-block-heading">TYPICAL INVESTMENT STRUCTURE</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="1782" data-permalink="http://harp-onthis.com/outside-investors-and-the-real-estate-ppm-a-critical-step/developers-and-engineers-discuss-future-of-the-major-real-estate-project/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/developers-and-engineers-discuss-future-of-the-major-real-estate-project.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="developers-and-engineers-discuss-future-of-the-major-real-estate-project" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/developers-and-engineers-discuss-future-of-the-major-real-estate-project.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/developers-and-engineers-discuss-future-of-the-major-real-estate-project.jpg?fit=1000%2C667" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/developers-and-engineers-discuss-future-of-the-major-real-estate-project.jpg?resize=400%2C267" alt="developers and engineers discuss future of the major real estate project" class="wp-image-1782" width="400" height="267" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/developers-and-engineers-discuss-future-of-the-major-real-estate-project.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/developers-and-engineers-discuss-future-of-the-major-real-estate-project.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/developers-and-engineers-discuss-future-of-the-major-real-estate-project.jpg?resize=768%2C512 768w" sizes="auto, (max-width: 400px) 100vw, 400px" /></figure></div>
<p>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.</p>
<h2 class="wp-block-heading">OUTSIDE INVESTORS – PROS AND CONS</h2>
<p>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.</p>
<p> 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.</p>
<h2 class="wp-block-heading">DUE DILIGENCE AND THE REAL ESTATE PPM</h2>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<h2 class="wp-block-heading">PPM – A DEFENSE DOCUMENT</h2>
<p>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.</p>
<p>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 <em>waste of money</em> 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, <em>believe it or not</em>, there is a meaningful risk that the investors will sue – especially if they end up losing money.</p>
<p>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 <em>investment contract</em> and, by extension, a <em>security</em>. 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.</p>
<p>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.</p>
<p>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.</p>
<h2 class="wp-block-heading">INVESTOR RELIANCE ON PPM</h2>
<p>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 <em>i</em>’s and cross the <em>t</em>’s to make sure the PPM is complete and accurate – which makes it a valuable source of information for the prospective investor.</p>
<h2 class="wp-block-heading">PROJECT DUE DILIGENCE BY INVESTOR</h2>
<p>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.</p>
<p>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.</p>
<p class="has-text-align-center">* * *</p>
<p>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.</p>
<p>Thanks for listening,</p>
<p>Kymn</p>
]]></content:encoded>
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<post-id xmlns="com-wordpress:feed-additions:1">1352</post-id> </item>
<item>
<title>NEW BOOK – Illinois Commercial Real Estate</title>
<link>http://harp-onthis.com/1338-2/</link>
<comments>http://harp-onthis.com/1338-2/#respond</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Mon, 17 Oct 2016 14:41:53 +0000</pubDate>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[adaptive reuse]]></category>
<category><![CDATA[asset protection]]></category>
<category><![CDATA[checklist]]></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[how to close]]></category>
<category><![CDATA[industrial property]]></category>
<category><![CDATA[investment]]></category>
<category><![CDATA[keys to closing]]></category>
<category><![CDATA[lenders]]></category>
<category><![CDATA[lending]]></category>
<category><![CDATA[loan documentation]]></category>
<category><![CDATA[project entitlement]]></category>
<category><![CDATA[public-private partnership]]></category>
<category><![CDATA[purchase]]></category>
<category><![CDATA[real estate]]></category>
<category><![CDATA[site entitlement]]></category>
<category><![CDATA[transactions]]></category>
<category><![CDATA[urban infill]]></category>
<category><![CDATA[what to look for]]></category>
<guid isPermaLink="false">http://harp-onthis.com/?p=1338</guid>
<description><![CDATA[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 […]]]></description>
<content:encoded><![CDATA[<p>I’m happy to announce that the website for my new book, <strong><em>Illinois Commercial Real Estate</em></strong> is now live. Visit www.Illinois-CRE.com for a book excerpt.</p>
<p><a href="http://www.Illinois-CRE.com"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="1331" data-permalink="http://harp-onthis.com/illinois-commercial-real-estate-book-cover/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2016/10/Illinois-Commercial-Real-Estate-Book-Cover.jpg?fit=734%2C1087" data-orig-size="734,1087" 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="illinois-commercial-real-estate-book-cover" data-image-description="" data-image-caption="<p>www.illinois-cre.com</p>
" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2016/10/Illinois-Commercial-Real-Estate-Book-Cover.jpg?fit=203%2C300" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2016/10/Illinois-Commercial-Real-Estate-Book-Cover.jpg?fit=691%2C1024" class="alignleft size-medium wp-image-1331" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2016/10/Illinois-Commercial-Real-Estate-Book-Cover.jpg?resize=203%2C300" alt="illinois-commercial-real-estate-book-cover" width="203" height="300" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2016/10/Illinois-Commercial-Real-Estate-Book-Cover.jpg?resize=203%2C300 203w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2016/10/Illinois-Commercial-Real-Estate-Book-Cover.jpg?resize=691%2C1024 691w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2016/10/Illinois-Commercial-Real-Estate-Book-Cover.jpg?w=734 734w" sizes="auto, (max-width: 203px) 100vw, 203px" /></a><strong><em>Illinois Commercial Real Estate, Due Diligence to Closing, with Checklists</em></strong>, 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.</p>
<p>I’d like to extend <strong>Special Thanks</strong> to:</p>
<p>My <em>clients</em>, whose passion for creative commercial development I share;</p>
<p>My<em> partners and staff</em> at <a href="http://www.rsplaw.com">Robbins, Salomon and Patt, Ltd.,</a> who work with me tirelessly to earn our client’s business every day.</p>
<p><a href="http://www.rsplaw.com/catherine-cooke/">Catherine A. Cooke</a> and<a href="http://www.rsplaw.com/emily-c-kaminski/"> Emily C. Kaminski,</a> attorneys at Robbins, Salomon & Patt, Ltd. who provided legal research, advice, counseling, and technical editing;</p>
<p><a href="http://www.rsplaw.com/james-mainzer/">James M. Mainzer</a>, tax partner at Robbins, Salomon & Patt, Ltd., for his insights and assistance on tax matters;</p>
<p>The editing staff at the<a href="http://www.iicle.com/"><em> Illinois Institute for Continuing Legal Education</em></a>, for editing early versions of chapters 11, 12, 25, 27 and 28, which were first published in <a href="http://www.iicle.com/">IICLE</a> Practice Handbooks;</p>
<p>Dale V. Weaver, Illinois licensed surveyor, who was kind enough to convert my rough draft drawings into the diagrams included at chapter 25;</p>
<p>. . . and, of course, my friend and valuable resource, Linda Day Harrison, founder of <a href="http://thebrokerlist.com/">theBrokerList</a>, for her ongoing encouragement and support.</p>
<p>If you are buying, developing, financing, selling, leasing or otherwise dealing with commercial real estate in Illinois, I hope you will find <strong><em>Illinois Commercial Real Estate, Due Diligence to Closing, with Checklists</em></strong><em> </em>to be a useful resource.</p>
<p>ENJOY!!!</p>
<p>R. Kymn Harp</p>
<p><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="1041" data-permalink="http://harp-onthis.com/illinois-llcs-the-asset-protection-advantage/rsp_logohd-3/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?fit=963%2C350" data-orig-size="963,350" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"1"}" data-image-title="RSP_LogoHD (3)" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?fit=300%2C109" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?fit=963%2C350" class="alignleft size-medium wp-image-1041" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?resize=300%2C109" alt="RSP_LogoHD (3)" width="300" height="109" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?resize=300%2C109 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?w=963 963w" sizes="auto, (max-width: 300px) 100vw, 300px" /></p>
]]></content:encoded>
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<post-id xmlns="com-wordpress:feed-additions:1">1338</post-id> </item>
<item>
<title>NEW: ALTA Land Title Survey Standards</title>
<link>http://harp-onthis.com/new-alta-land-title-survey-standards/</link>
<comments>http://harp-onthis.com/new-alta-land-title-survey-standards/#respond</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Thu, 21 Jan 2016 00:06:26 +0000</pubDate>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[checklist]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[conducting due diligence]]></category>
<category><![CDATA[development]]></category>
<category><![CDATA[due diligence checklist]]></category>
<category><![CDATA[how to close]]></category>
<category><![CDATA[industrial property]]></category>
<category><![CDATA[keys to closing]]></category>
<category><![CDATA[purchase]]></category>
<category><![CDATA[real estate]]></category>
<category><![CDATA[transactions]]></category>
<category><![CDATA[what to look for]]></category>
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<description><![CDATA[NEW ALTA LAND TITLE SURVEY STANDARDS effective February 23, 2016. UPDATE:  Effective February 23, 2016, new minimum standard detail requirements for ALTA Land Title Surveys went into effect, replacing the previously existing 2011 Minimum Standard Detail Requirements for ALTA/ACSM Land […]]]></description>
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<h1 class="wp-block-heading"><span style="color: #2492ab;">NEW ALTA LAND TITLE SURVEY STANDARDS effective February 23, 2016.</span></h1>
<p>UPDATE: Effective February 23, 2016, new minimum standard detail requirements for ALTA Land Title Surveys went into effect, replacing the previously existing 2011 Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys.</p>
<p>Note that the National Society of Professional Surveyors (NSPS) is the legal successor organization to the American Congress of Surveying and Mapping (ACSM). Accordingly, the new survey standards will be cited as the “<em>2016 Minimum Standard Detail requirements for ALTA/NSPS Land Title Surveys.</em>“</p>
<div class="wp-block-image">
<figure class="alignright size-full is-resized"><img data-recalc-dims="1" loading="lazy" decoding="async" width="1000" height="667" data-attachment-id="1940" data-permalink="http://harp-onthis.com/new-alta-land-title-survey-standards/surveyorengineerwithpartnermakingmeasureonthefield/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/surveyor-engineer-with-partner-making-measure-on-the-field.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) 2012 Tom Wang\/Shutterstock. No use without permission.","focal_length":"0","iso":"0","shutter_speed":"0","title":"Surveyor,Engineer,With,Partner,Making,Measure,On,The,Field","orientation":"0"}" data-image-title="Surveyor,Engineer,With,Partner,Making,Measure,On,The,Field" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/surveyor-engineer-with-partner-making-measure-on-the-field.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/surveyor-engineer-with-partner-making-measure-on-the-field.jpg?fit=1000%2C667" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/surveyor-engineer-with-partner-making-measure-on-the-field.jpg?resize=1000%2C667" alt="surveyor engineer with partner making measure on the field" class="wp-image-1940" style="width:400px;height:267px" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/surveyor-engineer-with-partner-making-measure-on-the-field.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/surveyor-engineer-with-partner-making-measure-on-the-field.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/surveyor-engineer-with-partner-making-measure-on-the-field.jpg?resize=768%2C512 768w" sizes="auto, (max-width: 1000px) 100vw, 1000px" /></figure></div>
<p>Several substantive changes have been made in the updated 2016 land title survey standards. A comparison of the 2016 standards to the previous 2011 standards is highlighted on the Red-lined version showing the changes made. Among the notable changes are changes to the <span style="text-decoration: underline;">Table A</span> list of <em>Optional Survey Responsibilities and Specifications. </em>The modifications to <span style="text-decoration: underline;">Table A</span> are largely a result of the 2016 Land Title Survey standards making certain requirements mandatory instead of optional. Additional changes involve reassigned responsibilities (or at least a clarification of responsibilities) for obtaining certain information for use by surveyors in preparing a 2016 ALTA/NSPS Land Title Survey.</p>
<h2 class="wp-block-heading"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="1041" data-permalink="http://harp-onthis.com/illinois-llcs-the-asset-protection-advantage/rsp_logohd-3/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?fit=963%2C350" data-orig-size="963,350" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"1"}" data-image-title="RSP_LogoHD (3)" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?fit=300%2C109" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?fit=963%2C350" class="alignleft size-medium wp-image-1041" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?resize=300%2C109" alt="RSP_LogoHD (3)" width="300" height="109" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?resize=300%2C109 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?w=963 963w" sizes="auto, (max-width: 300px) 100vw, 300px" /><span style="color: #2492ab;">Update Purchase Agreements to Require Surveys compliant with NEW 2016 ALTA Land Title Survey Standards</span></h2>
<p>Especially for commercial or industrial real estate purchase agreements (and financing commitments) requiring ALTA Surveys prepared after February 23, 2016, be sure to contractually require that they be prepared in accordance the the 2016 Minimum Standard Detail requirements for ALTA/NSPS Land Title Surveys. Be sure, also, to modify your existing contracts as they pertain to the <em><span style="text-decoration: underline;">Table A</span> Optional Survey Responsibilities and Specifications</em> to address the new <span style="text-decoration: underline;">Table A</span> instead of the version associated with the former 2011 standards.</p>
<p>Purchasers should check with their lenders, and with the title insurance company engaged to insure title, to be certain everyone is on the same page, and that all parties understand their respective responsibilities for obtaining documents and information necessary for use by the Surveyor. Lenders and their counsel should do likewise.</p>
<p>2016 should be an interesting year for commercial real estate. Best of luck for a prosperous year!</p>
<p>Thanks,</p>
<p>Kymn</p>
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<title>Keys to Closing A Commercial Real Estate Transaction</title>
<link>http://harp-onthis.com/keys-to-closing-a-commercial-real-estate-transaction/</link>
<comments>http://harp-onthis.com/keys-to-closing-a-commercial-real-estate-transaction/#comments</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Sat, 17 Oct 2015 12:10:09 +0000</pubDate>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[White Papers]]></category>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[checklist]]></category>
<category><![CDATA[closing]]></category>
<category><![CDATA[closings]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[conducting due diligence]]></category>
<category><![CDATA[development]]></category>
<category><![CDATA[due diligence checklist]]></category>
<category><![CDATA[due diliigence]]></category>
<category><![CDATA[how to close]]></category>
<category><![CDATA[industrial property]]></category>
<category><![CDATA[keys to closing]]></category>
<category><![CDATA[property]]></category>
<category><![CDATA[purchase]]></category>
<category><![CDATA[real estate]]></category>
<category><![CDATA[site entitlement]]></category>
<category><![CDATA[transactions]]></category>
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<guid isPermaLink="false">http://harp-onthis.com/?p=202</guid>
<description><![CDATA[Commercial Real Estate Closings Anyone who thinks closing a commercial real estate transaction is a clean, easy, stress-free undertaking has never closed a commercial real estate transaction. Expect the unexpected, and be prepared to deal with it. I’ve been closing […]]]></description>
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<h1 class="wp-block-heading">Commercial Real Estate Closings</h1>
<p>Anyone who thinks closing a commercial real estate transaction is a clean, easy, stress-free undertaking has never closed a commercial real estate transaction. Expect the unexpected, and be prepared to deal with it.</p>
<div class="wp-block-image">
<figure class="alignleft"><img data-recalc-dims="1" loading="lazy" decoding="async" width="256" height="300" data-attachment-id="1321" data-permalink="http://harp-onthis.com/keys-to-closing-a-commercial-real-estate-transaction/harp-author-photo-pid-732110/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2016/07/Harp-Author-Photo-PID-732110.jpg?fit=1025%2C1200" data-orig-size="1025,1200" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"1468856809","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="Harp Author Photo PID 732110" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2016/07/Harp-Author-Photo-PID-732110.jpg?fit=256%2C300" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2016/07/Harp-Author-Photo-PID-732110.jpg?fit=875%2C1024" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2016/07/Harp-Author-Photo-PID-732110.jpg?resize=256%2C300" alt="Harp Author Photo PID 732110" class="wp-image-1321" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2016/07/Harp-Author-Photo-PID-732110.jpg?resize=256%2C300 256w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2016/07/Harp-Author-Photo-PID-732110.jpg?resize=768%2C899 768w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2016/07/Harp-Author-Photo-PID-732110.jpg?resize=875%2C1024 875w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2016/07/Harp-Author-Photo-PID-732110.jpg?w=1025 1025w" sizes="auto, (max-width: 256px) 100vw, 256px" /></figure></div>
<p>I’ve been closing commercial real estate transactions for over 35 years. I grew up in the commercial real estate business.</p>
<p>My father was a “<em>land guy</em>”. He assembled land, put in infrastructure and sold it for a profit. His mantra:<em> “Buy by the acre, sell by the square foot.”</em> From an early age, he drilled into my head the need to <em>“be a deal maker; not a deal breaker.”</em> This was always coupled with the admonition: “<em>If the deal doesn’t close, no one is happy</em>.” His theory was that attorneys sometimes “<em>kill tough deals</em>” simply because they don’t want to be blamed if something goes wrong.</p>
<p>A key point to understand is that commercial real estate Closings do not “<em>just happen</em>”; they are made to happen. There is a time-proven method for successfully Closing commercial real estate transactions. That method requires adherence to the four KEYS TO CLOSING outlined below:</p>
<span id="more-202"></span>
<h1 class="has-text-align-center wp-block-heading">KEYS TO CLOSING</h1>
<h2 class="wp-block-heading">1. HAVE A PLAN:</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="1822" data-permalink="http://harp-onthis.com/keys-to-closing-a-commercial-real-estate-transaction/signingacontract-clientandbrokeragentleaseagreementsuccessful/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/client-and-broker-agent-lease-agreement.jpg?fit=1000%2C668" data-orig-size="1000,668" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"Shutterstock","camera":"","caption":"","created_timestamp":"0","copyright":"Copyright (c) 2023 Laddawan punna\/Shutterstock. No use without permission.","focal_length":"0","iso":"0","shutter_speed":"0","title":"Signing,A,Contract.,Client,And,Broker,Agent,,Lease,Agreement,,Successful","orientation":"1"}" data-image-title="Signing,A,Contract.,Client,And,Broker,Agent,,Lease,Agreement,,Successful" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/client-and-broker-agent-lease-agreement.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/client-and-broker-agent-lease-agreement.jpg?fit=1000%2C668" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/client-and-broker-agent-lease-agreement.jpg?resize=400%2C265" alt="client and broker agent, lease agreement" class="wp-image-1822" width="400" height="265" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/client-and-broker-agent-lease-agreement.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/client-and-broker-agent-lease-agreement.jpg?zoom=2&resize=400%2C265 800w" sizes="auto, (max-width: 400px) 100vw, 400px" /></figure></div>
<p>This sounds obvious, but it is remarkable how many times no specific Plan for Closing is developed. It is not a sufficient Plan to merely say: “<em>I like a particular piece of property; I want to own it.</em>” That is not a Plan. That may be a goal, but that is not a Plan.</p>
<p>A Plan requires a clear and detailed vision of what, specifically, you want to accomplish, and how you intend to accomplish it. For instance, if the objective is to acquire a large warehouse/light manufacturing facility with the intent to convert it to a mixed use development with first floor retail, a multi-deck parking garage and upper level condominiums or apartments, the transaction Plan must include all steps necessary to get from where you are today to where you need to be to fulfill your objective. If the intent, instead, is to demolish the building and build a strip shopping center, the Plan will require a different approach. If the intent is to simply continue to use the facility for warehousing and light manufacturing, a Plan is still required, but it may be substantially less complex.</p>
<p>In each case, developing the transaction Plan should begin when the transaction is first conceived and should focus on the requirements for successfully Closing upon conditions that will achieve the Plan objective. The Plan must guide contract negotiations, so that the Purchase Agreement reflects the Plan and the steps necessary for Closing and post-Closing use. If Plan implementation requires particular zoning requirements, or creation of easements, or termination of party wall rights, or confirmation of structural elements of a building, or availability of utilities, or availability of municipal entitlements, or environmental remediation and regulatory clearance, or other identifiable requirements, the Plan and the Purchase Agreement must address those issues and include those requirements as conditions to Closing.</p>
<p>If it is unclear at the time of negotiating and entering into the Purchase Agreement whether all necessary conditions exists, the Plan must include a suitable period to conduct a focused and diligent investigation of all issues material to fulfilling the Plan. Not only must the Plan include a period for investigation, the investigation must actually take place with all due diligence.</p>
<p>NOTE: The term is “<em>Due Diligence</em>”; not “<em>do diligence</em>”. The amount of diligence required in conducting the investigation is the amount of diligence required under the circumstances of the transaction to answer in the affirmative all questions that must be answered “yes”, and to answer in the negative all questions that must be answered “no”. The transaction Plan will help focus attention on what these questions are. (<em>See</em>: <a title="DUE DILIGENCE CHECKLISTS for Commercial Real Estate Transactions" href="http://harp-onthis.com/due-diligence-checklists-for-commercial-real-estate-transactions-3/" target="_blank" rel="noopener">Due Diligence: Checklists for Commercial Real Estate Transactions</a>.)</p>
<h2 class="wp-block-heading"> 2. ASSESS AND UNDERSTAND THE ISSUES:</h2>
<p>Closely connected to the importance of having a Plan is the importance of understanding all significant issues that may arise in implementing the Plan. Some issues may represent obstacles, while others represent opportunities. One of the greatest causes of transaction failure is a lack of understanding of the issues or how to resolve them in a way that furthers the Plan.</p>
<p>Various risk shifting techniques are available and useful to address and mitigate transaction risks. Among them is title insurance with appropriate use of available commercial endorsements. In addressing potential risk shifting opportunities related to real estate title concerns, understanding the difference between a “real property law issue” vs. a “title insurance risk issue” is critical. Experienced commercial real estate counsel familiar with available commercial endorsements can often overcome what sometimes appear to be insurmountable title obstacles through creative draftsmanship and the assistance of a knowledgeable title underwriter.</p>
<p>Beyond title issues, there are numerous other transaction issues likely to arise as a commercial real estate transaction proceeds toward Closing. With commercial real estate, negotiations seldom end with execution of the Purchase Agreement.</p>
<p>New and unexpected issues often arise on the path toward Closing that require creative problem-solving and further negotiation. Sometimes these issues arise as a result of facts learned during the buyer’s due diligence investigation. Other times they arise because independent third-parties necessary to the transaction have interests adverse to, or at least different from, the interests of the seller, buyer or buyer’s</p>
<p>lender. When obstacles arise, tailor-made solutions are often required to accommodate the needs of all concerned parties so the transaction can proceed to Closing. To appropriately tailor a solution, you have to understand the issue and its impact on the legitimate needs of those affected.</p>
<h2 class="wp-block-heading">3. RECOGNIZE AND OVERCOME THIRD PARTY INERTIA:</h2>
<p>A major source of frustration, delay and, sometimes, failure of commercial real estate transactions results from what I refer to as “<em>third-party inertia</em>”. Recognize that the Closing deadlines important to transaction participants are often meaningless to unrelated third parties whose participation and cooperation is vital to moving the transaction forward. Chief among third-party dawdlers are governmental agencies, but the culprit may be any third-party vendor or other third-party not controlled by the buyer or seller. For them, the transaction is often “just another file” on their already cluttered desk.</p>
<p>Experienced commercial real estate counsel is often in the best position to recognize inordinate delay by third parties and can often cajole recalcitrant third parties into action with an appropriately timed telephone call. Often, experienced commercial real estate counsel will have developed relationships with necessary vendors and third parties through prior transactions, and can use those established relationships to expedite the transaction at hand. Most importantly, however, experienced commercial real estate counsel is able to recognize when undue delay is occurring and push for a timely response when appropriate. Third party vendors are human (they claim) and typically respond to timely appeals for action. It is the old cliché at work: “<em>The squeaky wheel gets the oil</em>”. Care must be taken, however, to tactfully apply pressure only when necessary and appropriate. Repeated requests or demands for action when inappropriate to the circumstance runs the risk of alienating a necessary party and adding to delay instead of eliminating it. Once again, human nature at work. Experienced commercial real estate counsel will often understand when to apply pressure and when to lay off.</p>
<h2 class="wp-block-heading">4. PREPARE FOR THE CLOSING FRENZY:</h2>
<p>Like it or not, controlled chaos leading up to Closing is the norm rather than the exception for commercial real estate transactions. It occurs because of the necessity of relying on independent third parties, the necessity of providing certifications and showings dated in close proximity to Closing, and because new issues often arise at or near Closing as a consequence of facts and information discovered through the continual exercise of due diligence on the path toward Closing.</p>
<p>Whether dealing with third-party lessees, lenders, appraisers, local planning, zoning or taxing authorities, public or quasi-public utilities, project surveyors, environmental consultants, title insurance companies, adjoining property owners, insurance companies, structural engineers, state or local departments of transportation, or other necessary third-party vendors or participants, it will often be the case that you must wait for them to react within their own time-frame to enable the Closing to proceed. The transaction is seldom as important to them as it is to the buyer and seller.</p>
<p>To the casual observer, building-in additional lead-time to allow for stragglers and dawdlers to act may seem to be an appropriate solution. The practical reality, however, is that many tasks must be completed within a narrow window of time just prior to Closing.</p>
<p>As much as one may wish to eliminate the last-minute rush in the days just before Closing, in many instances it is just not possible. Many documents and “<em>showings</em>”, such as UCC searches, surveys, water department certifications, governmental notices, appraisals, property inspection reports, environmental site assessments, estoppel certificates, rent rolls, certificates of authority, and the like, must be dated near in time to the Closing, often within a few days or weeks of Closing. If prepared and dated too far in advance, they become stale and meaningless and must be redone, resulting in additional time and expense. The reality is that commercial real estate Closings often involve big dollar amounts and evolving circumstances. Rather than complain and stress-out over the hectic pace of coordinating all Closing requirements and conditions as Closing approaches, you are wise to anticipate the fast paced frenzy leading up to Closing and should be prepared for it.</p>
<p>As Closing approaches, commercial real estate counsel, real estate brokers and necessary representatives of the buyer and seller should remain available and ready to respond to changing demands and circumstances. This is not a time to go on vacation or to be on an out-of-town business trip. It is a time to remain focused and ready for action. Recognizing that pre-Closing frenzy is the norm rather than an exception for commercial real estate transactions may help ease tension among the parties and their respective counsel and pave the way for a successful Closing.</p>
<p>Like it or not, this is the way it is. Prepare for the Closing frenzy and be available to respond. This is the way it works. Anyone who tells you differently is either lying to you or has had little experience in Closing commercial real estate transactions.</p>
<p class="has-text-align-center">****</p>
<p> So there you have it. The four <strong>KEYS TO CLOSING</strong> a commercial real estate transaction.</p>
<h2 class="wp-block-heading"> 1. <span style="text-decoration: underline;">H</span>AVE A PLAN</h2>
<h2 class="wp-block-heading"> 2. <span style="text-decoration: underline;">A</span>SSESS AND UNDERSTAND THE ISSUES</h2>
<h2 class="wp-block-heading"> 3. <span style="text-decoration: underline;">R</span>ECOGNIZE AND OVERCOME THIRD PARTY INERTIA</h2>
<h2 class="wp-block-heading"> 4. <span style="text-decoration: underline;">P</span>REPARE FOR THE CLOSING FRENZY</h2>
<p>Apply these Keys to Closing, and your chance of success goes up. Ignore these Keys to Closing, and your transaction may drift into oblivion.</p>
<p><em>Thanks for listening,</em></p>
<p><em> Kymn</em></p>
<p> </p>
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<title>Illinois Commercial Condominiums – The Inactive Association Challenge</title>
<link>http://harp-onthis.com/illinois-commercial-condominiums-the-inactive-association-challenge/</link>
<comments>http://harp-onthis.com/illinois-commercial-condominiums-the-inactive-association-challenge/#respond</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Mon, 10 Aug 2015 15:30:41 +0000</pubDate>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[Commercial Condominiums]]></category>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[checklist]]></category>
<category><![CDATA[closings]]></category>
<category><![CDATA[commercial condominium associations]]></category>
<category><![CDATA[commercial condominiums]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[due diliigence]]></category>
<category><![CDATA[how to close]]></category>
<category><![CDATA[Illinois condos]]></category>
<category><![CDATA[industrial property]]></category>
<category><![CDATA[purchase]]></category>
<category><![CDATA[transactions]]></category>
<category><![CDATA[what to look for]]></category>
<guid isPermaLink="false">http://harp-onthis.com/?p=1197</guid>
<description><![CDATA[RESALE DISCLOSURE CHALLENGES – When the Commercial Condominium Association is “Inactive” Remarkably, perhaps as an aftermath of the Great Recession during which resales of commercial condominiums were infrequent, it is not rare to find that the owners association for a […]]]></description>
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<h2 class="wp-block-heading"><strong><span style="color: #21b6db;">RESALE DISCLOSURE CHALLENGES – When the Commercial Condominium Association is “Inactive”</span></strong></h2>
<ul class="wp-block-list">
<li>Section 18.3 of the Illinois Condominium Property Act provides that a unit owners’ association will be responsible for the overall administration of the property through its duly elected board of managers. 765 ILCS 605/18.3.</li>
<li>Section 19 of the Illinois Condominium Property Act sets forth a specific set of records that the board of managers of every association is required to maintain. 765 ILCS 605/19.</li>
<li>Section 22.1 of the Illinois Condominium Property Act provides that “in the event of any resale of a condominium unit by a unit owner other than the developer such owner shall obtain from the board of managers and shall make available for inspection to the prospective purchaser, upon demand . . .” a fairly comprehensive list of condominium instruments, and other documents and information, concerning the makeup and financial condition of the owners association, insurance coverage, litigation, reserves, assessments, and the like. 765 ILCS 605/22.1.</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>Remarkably, perhaps as an aftermath of the <em>Great Recession</em> during which resales of commercial condominiums were infrequent, it is not rare to find that the owners association for a commercial condominium has become inactive or only slightly active. Record keeping and budgeting may have become ‘streamlined”, addressing little more than collecting minimal assessments to pay insurance premiums on common elements. The owner’s association may have no formal budget, no capital reserves, extreme deferred maintenance, scant, if any, record of meetings of the board of managers, and no centralized or organized record keeping system beyond a box in a filing cabinet in the back-office of one of the unit owners.</p>
<p>Because of the infrequency of unit transfers in recent years, and the possible inexperience of a record-keeper who may have gotten the record-keeping job by default – when the last remaining board member left following foreclosure of his or her unit during the <em>Great Recession</em> – obtaining and providing the resale disclosure documents and information required by §22.1 can be a challenge.</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="1825" data-permalink="http://harp-onthis.com/illinois-commercial-condominiums-the-inactive-association-challenge/realestateagentandhousemodel/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/real-estate-agent-and-house-model.jpg?fit=1000%2C662" data-orig-size="1000,662" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"Shutterstock","camera":"","caption":"","created_timestamp":"0","copyright":"Copyright (c) 2017 bannosuke\/Shutterstock. No use without permission.","focal_length":"0","iso":"0","shutter_speed":"0","title":"Real,Estate,Agent,And,House,Model","orientation":"0"}" data-image-title="Real,Estate,Agent,And,House,Model" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/real-estate-agent-and-house-model.jpg?fit=300%2C199" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/real-estate-agent-and-house-model.jpg?fit=1000%2C662" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/real-estate-agent-and-house-model.jpg?resize=400%2C264" alt="real estate agent and house model" class="wp-image-1825" width="400" height="264" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/real-estate-agent-and-house-model.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/real-estate-agent-and-house-model.jpg?resize=300%2C199 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/real-estate-agent-and-house-model.jpg?resize=768%2C508 768w" sizes="auto, (max-width: 400px) 100vw, 400px" /></figure></div>
<p>This challenge presents practical problems for the unit seller, unit buyer and the unit buyer’s proposed mortgagee when attempting to resell a commercial condominium unit. Not the least of these problems is delay and frustration in moving toward closing – which may ultimately sour a prospective buyer and its lender, and lead the buyer to back away from acquiring the unit at all.</p>
<p>Deferred maintenance of common elements affecting any unit in the condominium association could have an adverse financial impact on all unit owners. For example, if a commercial or industrial condominium association is comprised of multiple commercial/industrial buildings, a required roof replacement, foundation repair, or other structural repair for any of the buildings, or a recognized environmental condition in the common areas, could be expensive, with the cost shared among all unit owners. Accordingly, when investigating the condition of a commercial/industrial condominium unit being considered for acquisition, due diligence may require having all common elements in the association inspected, rather than merely looking at the unit being considered for acquisition. This may be more expensive and may take more time than might ordinarily be expected when purchasing a stand-alone building that is not a condominium unit.</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p><strong>PRACTICE TIP</strong></p>
<p>Consider when drafting a purchase agreement under these circumstances, who should bear the cost of inspecting all common elements in the association? Ordinarily the cost of “due diligence” is a buyer’s expense. But if extraordinary inspections of association common elements beyond the specific unit being acquired is required in the exercise of due diligence because the selling unit owner did not demand that the owners’ association be operated by a board of managers in compliance with the Illinois Condominium Property Act, should the buyer bear this extraordinary expense, or should the seller?</p>
</blockquote>
<p>There is no easy solution for this challenge, especially for a buyer planning to purchase a unit in one of these inactive associations. The best advice may be to become proactive – whether as an existing unit owner or upon becoming a new unit owner, to reactivate and invigorate the owners’ association and its board of managers, and to take steps to run the owners association in a businesslike manner, in compliance with the Illinois Condominium Property Act.</p>
<p>Generally speaking, owners of commercial condominiums are business people. They should demand that the association be run like they would run any business or investment property they invest in, if they expect to be successful.</p>
<p>If you have a viable solution to this challenge, please comment with your insights and practical suggestions.</p>
<p>Thank you in advance for participating in this discussion.</p>
<p>Kymn</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>
<category><![CDATA[Commercial Real Estate]]></category>
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<description><![CDATA[ 2016 Updat Are you planning to purchase, finance, develop or redevelop any of the following types of commercial real estate in the USA? A KEY element of successfully investing in commercial real estate is performing an adequate Due Diligence Investigation […]]]></description>
<content:encoded><![CDATA[<div class="wp-block-image">
<figure class="alignright"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="199" height="300" data-attachment-id="1145" data-permalink="http://harp-onthis.com/due-diligence-checklists-for-commercial-real-estate-transactions-3/harp-3_17_15-019/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?fit=2848%2C4288" data-orig-size="2848,4288" data-comments-opened="1" data-image-meta="{"aperture":"9","credit":"","camera":"NIKON D300","caption":"","created_timestamp":"1426589698","copyright":"","focal_length":"52","iso":"200","shutter_speed":"0.008","title":"","orientation":"0"}" data-image-title="Harp 3_17_15-019" data-image-description="" data-image-caption="<p>R. Kymn Harp<br />
Robbins, Salomon & Patt, Ltd.</p>
" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?fit=199%2C300" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?fit=680%2C1024" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?resize=199%2C300" alt="R. Kymn Harp Robbins, Salomon & Patt, Ltd." class="wp-image-1145" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?resize=199%2C300 199w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?resize=680%2C1024 680w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?w=2000 2000w" sizes="auto, (max-width: 199px) 100vw, 199px" /></a><figcaption class="wp-element-caption">R. Kymn Harp<br />Robbins, Salomon & Patt, Ltd.</figcaption></figure></div>
<h6 class="wp-block-heading"> <span style="color: #199ca8;">2016 Updat</span></h6>
<h2 class="wp-block-heading"><span style="color: #098f9c;">Are you planning to purchase, finance, develop or redevelop any of the following types of commercial real estate in the USA?</span></h2>
<ul class="wp-block-list">
<li>Shopping Center</li>
<li>Office building</li>
<li>Large Multifamily/Apartments/Condominium Project</li>
<li>Sports and/or Entertainment Venue</li>
<li>Mixed-Use Commercial-Residential-Office</li>
<li>Parking Lot/Parking Garage</li>
<li>Retail Store</li>
<li>Lifestyle or Enclosed Mall</li>
<li>Restaurant/Banquet Facility</li>
<li>Intermodal logistics/distribution facility</li>
<li>Medical Building</li>
<li>Gas Station</li>
<li>Manufacturing facility</li>
<li>Pharmacy</li>
<li>Special Use facility</li>
<li>Air Rights parcel</li>
<li>Subterranean parcel</li>
<li>Infrastructure improvements</li>
<li>Other commercial (non-single family, non-farm) property</li>
</ul>
<div class="wp-block-image">
<figure class="alignleft"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="300" height="109" data-attachment-id="1041" data-permalink="http://harp-onthis.com/illinois-llcs-the-asset-protection-advantage/rsp_logohd-3/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?fit=963%2C350" data-orig-size="963,350" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"1"}" data-image-title="RSP_LogoHD (3)" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?fit=300%2C109" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?fit=963%2C350" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?resize=300%2C109" alt="RSP_LogoHD (3)" class="wp-image-1041" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?resize=300%2C109 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?w=963 963w" sizes="auto, (max-width: 300px) 100vw, 300px" /></a></figure></div>
<p>A KEY element of successfully investing in commercial real estate is performing an adequate Due Diligence Investigation prior to becoming legally bound to acquire or finance the property. Conducting a Due Diligence Investigation is important not just to enable you to walk away from the transaction, if necessary, but even more importantly to enable you to discover obstacles and opportunities presented by the property that can be addressed prior to closing, to enable the transaction to proceed in a manner most beneficial to your overall objective. An adequate Due Diligence Investigation will assure awareness of all material facts relevant to the intended use or disposition of the property after closing. This is a critical point. The ultimate objective is not just to get to Closing – but rather to confirm that the property can be used or developed as intended <em>after</em> Closing.</p>
<p>The following checklists – while not all-inclusive – will help you conduct a focused and meaningful Due Diligence Investigation.</p>
<span id="more-1095"></span>
<h2 class="wp-block-heading"><span style="color: #199ca8;">BASIC DUE DILIGENCE CONCEPTS</span></h2>
<p><em>Caveat Emptor</em>: Let the Buyer beware.</p>
<p>Consumer protection laws applicable to home purchases and other consumer transactions seldom apply to commercial real estate transactions. The rule that a Buyer must examine, judge, and test for himself, applies to the purchase of all commercial real estate in the USA.</p>
<p><em>Due Diligence</em>: <span style="text-decoration: underline;">Black’s Law Dictionary</span>, West Publishing Company defines Due Diligence as follows:</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p>Such measure of prudence, activity, or assiduity, as is proper to be expected from, and ordinarily exercised by a prudent (person) under the particular circumstances; not measured by any absolute standard, but depending upon the relative facts of the specific case.</p>
</blockquote>
<p>Contract representations and warranties are <em>NOT</em> an adequate substitute for Due Diligence. A breach of a representation or warranty will simply mean you have the right to sue – which is time consuming and expensive.</p>
<p>The point of commercial real estate due diligence is to avoid transaction surprises and confirm that the property can be used and function as intended.</p>
<div class="wp-block-image">
<figure class="alignleft"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="300" height="199" data-attachment-id="614" data-permalink="http://harp-onthis.com/perfect-seller/questions-and-answers-signpost/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?fit=1699%2C1130" data-orig-size="1699,1130" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"Concept image of the six most common questions and answers on a signpost.","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"Questions and Answers signpost"}" data-image-title="Questions and Answers signpost" data-image-description="<p>Concept image of the six most common questions and answers on a signpost.</p>
" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?fit=300%2C199" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?fit=1024%2C681" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?resize=300%2C199" alt="Questions and Answers signpost" class="wp-image-614" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?resize=300%2C199 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?resize=1024%2C681 1024w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?resize=451%2C300 451w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?w=1699 1699w" sizes="auto, (max-width: 300px) 100vw, 300px" /></a></figure></div>
<p>Basic transaction due diligence will focus on the fundamental elements of any storyline: Who, What, Where, When, Why and How. These are key elements of inquiry that must be answered for any transaction, whether or not the transaction involves commercial real estate as its principal focus.</p>
<p>Property due diligence for commercial real estate will focus on four (4) primary areas of concern:</p>
<ul class="wp-block-list">
<li>Market Demand</li>
<li>Access</li>
<li>Uses</li>
<li>Finances</li>
</ul>
<p>For a detailed discussion of the four primary areas of concern, see my article: <a title="Commercial Real Estate Due Diligence – Do You Know the Four Areas of Inquiry?" href="http://harp-onthis.com/commercial-real-estate-due-diligence-do-you-know-the-four-areas-of-inquiry/" target="_blank" rel="noopener">Commercial Real Estate Due Diligence: Do You Know the Four Areas of Inquiry?</a></p>
<p>Before focusing on the four areas of concern for property due diligence, transaction due diligence requires that we consider for whom the Due Diligence Investigation is being conducted. The scope, intensity, and focus of any Due Diligence Investigation of commercial real estate will depend upon the objectives of the party for whom the investigation is being conducted. These objectives may vary depending upon whether the investigation is being conducted for the benefit of: (i) a Strategic Buyer (or long-term lessee); (ii) a Financial Buyer; (iii) a Developer (whether ground-up development, or redevelopment for adaptive reuse); or (iv) a Lender.</p>
<p>If you are a Seller, understand that to Close the transaction, your Buyer and its Lender must address all issues material to their respective objectives – some of which require information only you, as Owner, can adequately provide. If you are a Seller, please see my article: <a title="PERFECT SELLER – Selling Commercial Real Estate" href="http://harp-onthis.com/perfect-seller/" target="_blank" rel="noopener">Perfect Seller</a> for guidance.</p>
<h3 class="wp-block-heading"><span style="color: #199ca8;">GENERAL DUE DILIGENCE OBJECTIVES</span></h3>
<div class="wp-block-image">
<figure class="alignright size-full is-resized"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="1833" data-permalink="http://harp-onthis.com/due-diligence-checklists-for-commercial-real-estate-transactions-3/due-diligence-word-on-wooden-cube-isolated-on-orange-background-1/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/due-diligence-word-on-wooden-cube-isolated-on-orange-background-1.jpg?fit=1000%2C667" data-orig-size="1000,667" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="due-diligence-word-on-wooden-cube-isolated-on-orange-background-1" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/due-diligence-word-on-wooden-cube-isolated-on-orange-background-1.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/due-diligence-word-on-wooden-cube-isolated-on-orange-background-1.jpg?fit=1000%2C667" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/due-diligence-word-on-wooden-cube-isolated-on-orange-background-1.jpg?resize=400%2C267" alt="due diligence word on wooden cube isolated on orange background" class="wp-image-1833" width="400" height="267" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/due-diligence-word-on-wooden-cube-isolated-on-orange-background-1.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/due-diligence-word-on-wooden-cube-isolated-on-orange-background-1.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/due-diligence-word-on-wooden-cube-isolated-on-orange-background-1.jpg?resize=768%2C512 768w" sizes="auto, (max-width: 400px) 100vw, 400px" /></figure></div>
<p><span style="color: #000000;">(i) A <em>Strategic Buyer </em></span>(or long-term lessee) is acquiring the property for its own use, and must verify that the property is suitable for the intended use.</p>
<p>(ii) A <em>Financial Buyer</em> is acquiring the property for the expected return on investment generated by the property’s anticipated revenue stream, and must determine the amount, velocity, and durability of the revenue stream. This will likely include a consideration of credit-worthiness and market demand of long-term tenants, lease rental rates at the property compared to lease rental rates for comparable properties in the marketplace which may impact lease renewal rates, lease duration and expiration dates of all property leases to gauge exposure to mass-vacancies, tenant co-occupancy requirements and other factors that may impact the durability of the revenue stream generated by the property. A sophisticated Financial Buyer will likely calculate its yield based upon discounted cash-flows rather than the much less precise capitalization rate (“cap rate”), and will need adequate financial information to do so.</p>
<p>(iii) A <em>Developer</em> is seeking to add value by changing the character or use of the property – usually with a short-term to intermediate-term exit strategy to dispose of the property; although a Developer might plan to hold the property long-term as a Financial Buyer after development or redevelopment. The Developer must focus upon whether the planned change in character or use can be accomplished in a cost-effective manner.</p>
<p>(iv) A <em>Lender</em> is seeking to establish two basic lender criteria:</p>
<p> 1. <em>Ability to Repay</em> – The ability of the property to generate sufficient revenue to repay the loan an a timely basis; <em>and</em></p>
<p>2. <em>Sufficiency of Collateral</em> – The objective disposal value of the collateral in the event of a loan default, to assure adequate funds to repay the loan, carrying costs and costs of collection in the event forced collection becomes necessary. Particularly in light of the collapse of the commercial real estate market during the <em>Great Recession</em> of recent years, a Lender may pay particular attention to the overall loan coverage ratio, sources of equity, debt coverage ratio, and, similar to a Financial Buyer, may be concerned with the credit-worthiness and market demand of long-term tenants, lease rental rates at the property compared to lease rental rates for comparable properties in the marketplace which may impact lease renewal rates, lease duration and expiration dates of all property leases to gauge exposure to mass-vacancies, tenant co-occupancy requirements and other factors that may impact future value of the collateral.</p>
<p>The amount of diligent inquiry due to be expended (i.e.<em> due diligence</em>) to investigate any particular commercial real estate project is the amount of inquiry required to answer in the affirmative each question that must be answered yes, and to answer in the negative each question that must be answered no, to address all material concerns of the party for whom the Due Diligence Investigation is being undertaken.</p>
<p>The following Due Diligence Checklists are offered as helpful guides to assist in focusing on important issues to be considered in connection with a commercial real estate transaction.</p>
<h3 class="wp-block-heading"><span style="color: #199ca8;">I. THE PROPERTY</span></h3>
<p><span style="color: #000000;">1. Exactly what PROPERTY does the Purchaser believe it is acquiring?</span></p>
<ul class="wp-block-list">
<li>Land?</li>
<li>Building?</li>
<li>Fixtures?</li>
<li>Other Improvements?</li>
<li>Other Rights?</li>
<li>The entire fee title interest including all air rights?</li>
<li>All development rights?</li>
</ul>
<p>2. What is Purchaser’s planned use of the Property?</p>
<p>3. Does the physical condition of the Property permit use as planned?</p>
<ul class="wp-block-list">
<li>Commercially adequate access to public streets and ways?</li>
<li>Sufficient parking?</li>
<li>Structural condition of improvements?</li>
<li>Wi-fi ready with access to high speed internet?</li>
<li>Environmental contamination?
<ul class="wp-block-list">
<li>Innocent Purchaser defense vs. exemption from liability</li>
<li>All Appropriate Inquiry</li>
</ul>
</li>
</ul>
<p>4. Is there any legal restriction to Purchaser’s use of the Property as planned?</p>
<ul class="wp-block-list">
<li>Zoning?</li>
<li>Private land use controls?</li>
<li>Americans with Disabilities Act?</li>
<li>Availability of Licenses?
<ul class="wp-block-list">
<li>Liquor license?</li>
<li>Entertainment license?</li>
<li>Outdoor dining license?</li>
</ul>
</li>
<li> Drive through windows permitted?</li>
<li>Other legal restrictions or impediments?</li>
</ul>
<p>5. How much does Purchaser expect to pay for the Property?</p>
<p>6. Is there any condition on or within the Property that is likely to increase Purchaser’s effective cost to acquire or use the Property?</p>
<ul class="wp-block-list">
<li>Property owner’s assessments?</li>
<li> Real estate tax in line with value?</li>
<li>Special Assessment?</li>
<li>Required user fees for necessary amenities?</li>
<li>Drainage?</li>
<li>Access?</li>
<li>Parking?</li>
<li>Other?</li>
</ul>
<p>7. Any encroachments onto the Property, or from the Property onto other lands?</p>
<p>8. Are there any encumbrances on the Property that will not be cleared at Closing?</p>
<ul class="wp-block-list">
<li>Easements?</li>
<li>Covenants running with the land?</li>
<li>Liens or other financial servitude?</li>
<li>Leases?</li>
</ul>
<p>9. If the Property is subject to any Leases, are there any?</p>
<ul class="wp-block-list">
<li>Security Deposits?</li>
<li>Options to Extend Term?</li>
<li>Options to Purchase?</li>
<li>Rights of First Refusal?</li>
<li>Rights of First Offer?</li>
<li>Rights of Early Termination?</li>
<li>Maintenance obligations?</li>
<li>Duty of Landlord to provide utilities?</li>
<li>Real estate tax or CAM escrows?</li>
<li>Delinquent rent?</li>
<li>Prepaid rent?</li>
<li>Tenant mix/use controls?</li>
<li>Tenant co-occupancy covenants?</li>
<li>Tenant exclusives?</li>
<li>Tenant Parking requirements?</li>
<li><a title="Commercial Landlord-Tenant Issues – PART 1 – Getting it Right" href="http://harp-onthis.com/commercial-landlord-tenant-issues-part-1-getting-it-right/" target="_blank" rel="noopener">Leasehold easements?</a></li>
<li><a title="COMMERCIAL LANDLORD-TENANT – Part 2 – The Covenant of Quiet Enjoyment" href="http://harp-onthis.com/commercial-landlord-tenant-part-2-the-covenant-of-quiet-enjoyment/" target="_blank" rel="noopener">Strict covenants of quiet enjoyment?</a></li>
<li>Automatic subordination of Lease to future mortgages?</li>
<li>Other material Lease terms?</li>
</ul>
<p>10. New Construction?</p>
<ul class="wp-block-list">
<li>Availability of construction permits?</li>
<li>Site plan approvals?</li>
<li>Soil conditions?</li>
<li>Utilities?</li>
<li>Curb cuts?</li>
<li>Traffic control requirements?</li>
<li>NPDES (National Pollutant Discharge Elimination System) Permit?
<ul class="wp-block-list">
<li>Storm Water Pollution Prevention Plan required?</li>
</ul>
</li>
<li>Other governmental approvals required?</li>
</ul>
<h3 class="wp-block-heading"><span style="color: #199ca8;">II. THE SELLER</span></h3>
<p><span style="color: #000000;">1. Who is the Seller?</span></p>
<ul class="wp-block-list">
<li>Individual?</li>
<li>Trust?</li>
<li>Partnership?</li>
<li>Corporation?</li>
<li>Limited liability company?</li>
<li>Other legally existing entity?</li>
</ul>
<p>2. If other than a natural person, does the Seller validly exist and is Seller in good standing?</p>
<p>3. Does the Seller own the Property?</p>
<p>4. Does the Seller have authority to convey the Property?</p>
<ul class="wp-block-list">
<li>Board of Director approval?</li>
<li>Shareholder or Member approval?</li>
<li>Other consents?</li>
<li>If foreign individual or entity, are any special requirements applicable?
<ul class="wp-block-list">
<li>Qualification to do business in jurisdiction of Property?</li>
<li>Federal tax withholding?</li>
<li>U.S. Patriot Act compliance?</li>
<li>Bank Secrecy Act/Anti-Money Laundering Compliance?</li>
</ul>
</li>
</ul>
<p>5. Who has authority to bind the Seller?</p>
<p>6. Are sale proceeds sufficient to pay off all liens?</p>
<h3 class="wp-block-heading"><span style="color: #199ca8;"> III. THE PURCHASER</span></h3>
<p><span style="color: #000000;">1. Who is the Purchaser?</span></p>
<p>2. What is the Purchaser/Grantee’s exact legal name?</p>
<p>3. If Purchaser/Grantee is an entity, has it been validly created and is it in good standing?</p>
<ul class="wp-block-list">
<li>Articles of Incorporation – Articles of Organization or Formation?</li>
<li>Certificate of Good Standing?</li>
</ul>
<p>4. Is the Purchaser/Grantee authorized to own and operate the Property and, if applicable, finance acquisition of the Property?</p>
<ul class="wp-block-list">
<li>Board of Director approvals?</li>
<li>Shareholder or Member approvals?</li>
<li>If foreign individual or entity, are any special requirements applicable?
<ul class="wp-block-list">
<li>Qualification to do business in jurisdiction of the Property?</li>
<li>U.S. Patriot Act compliance?</li>
<li>Bank Secrecy Act/Anti-Money Laundering compliance?</li>
</ul>
</li>
</ul>
<p>5. Who is authorized to bind the Purchaser/Grantee?</p>
<h3 class="wp-block-heading"><span style="color: #199ca8;">IV. TRANSACTION STRUCTURE</span></h3>
<p><span style="color: #000000;">1. Is transaction a cash purchase?</span></p>
<p>2. Purchase with lender financing?</p>
<ul class="wp-block-list">
<li>Bank financing?</li>
<li>Insurance company financing?</li>
<li>Hard money loan?</li>
<li>Seller financing?
<ul class="wp-block-list">
<li>Installment Agreement for Deed?</li>
<li>Seller provided mortgage?</li>
</ul>
</li>
</ul>
<p>3. <a title="Keys Rules For Section 1031 Exchanges" href="http://harp-onthis.com/keys-rules-section-1031-exchanges/" target="_blank" rel="noopener">Tax-deferred exchange pursuant to Section 1031 </a>of the Internal Revenue Code?</p>
<ul class="wp-block-list">
<li>Replacement property identified?</li>
<li>Qualified Intermediary selected?</li>
<li>Key time periods determined to comply with Section 1031 exchange rules?</li>
<li>Reverse exchange?</li>
<li>Other Section 1031 compliance issues?</li>
</ul>
<p>4. <a title="10 Things to Know About Commercial Real Estate Development Agreements" href="http://harp-onthis.com/10-things-know-commercial-real-estate-development-agreements/">Public-Private Partnerships</a> with municipal or other governmental economic incentives?</p>
<ul class="wp-block-list">
<li>Tax increment financing?</li>
<li>Sales tax revenue sharing?</li>
<li>Business district financing?</li>
<li>Special service area financing?</li>
<li>Municipal General Obligation loan?</li>
</ul>
<p>5. Third-party Source Payments?</p>
<ul class="wp-block-list">
<li>Naming rights agreements?</li>
<li>Sponsorships?</li>
<li>Concession agreements?</li>
</ul>
<h3 class="wp-block-heading"><span style="color: #199ca8;">V. PURCHASER FINANCING</span></h3>
<h4 class="wp-block-heading"><span style="color: #199ca8;">A. BUSINESS TERMS OF THE LOAN</span></h4>
<p><span style="color: #000000;">1. What loan terms have the Borrower and its Lender agreed to?</span></p>
<ul class="wp-block-list">
<li>What is the amount of the loan?</li>
<li>What is the interest rate?</li>
<li>What are the repayment terms?</li>
<li>What is the collateral?
<ul class="wp-block-list">
<li>Commercial real estate only?</li>
<li>Real estate and personal property together?</li>
<li>First lien?</li>
<li>Junior lien?</li>
</ul>
</li>
<li>Is it a single advance loan?</li>
<li>A multiple advance loan?</li>
<li>A construction loan?</li>
<li>If it is a multiple advance loan, can the principal be re-borrowed once repaid prior to maturity of the loan; making it, in effect, a revolving line of credit?</li>
<li>Are there reserve requirements?
<ul class="wp-block-list">
<li>Interest reserves?</li>
<li>Repair reserves?</li>
<li>Real estate tax reserves?</li>
<li>Insurance reserves?</li>
<li>Environmental remediation reserves?</li>
<li>Other reserves?</li>
</ul>
</li>
</ul>
<p>2. Are there requirements for Borrower to open business operating accounts with the Lender? If so, is the Borrower obligated to maintain minimum compensating balances?</p>
<p>3. Is the Borrower required to pledge business accounts as additional collateral?</p>
<p>4. Are there early repayment fees or yield maintenance requirements (each sometimes referred to as “prepayment penalties”)?</p>
<p>5. Are there repayment blackout periods during which the Borrower is not permitted to repay the loan?</p>
<p>6. Is a profit participation payment to Lender required upon disposition?</p>
<p>7. Is there a Loan Commitment fee or “good faith deposit” due upon Borrower’s acceptance of the Loan Commitment?</p>
<p>8. Is there a loan funding fee or loan brokerage fee or other loan fee due Lender or a loan broker at Closing?</p>
<p>9. Is there a Exit Fee due to Lender upon the loan being paid off?</p>
<p>10. What are the Borrower’s expense reimbursement obligations to Lender? When are they due? What is the Borrower’s obligation to pay the Lender’s expenses if the loan does not close?</p>
<h4 class="wp-block-heading"><span style="color: #199ca8;">B. DOCUMENTING THE COMMERCIAL REAL ESTATE LOAN</span></h4>
<p>Does the Purchaser/Borrower have all information necessary to comply with the Lender’s loan closing requirements?</p>
<p>Not all loan documentation requirements may be known at the outset of a transaction, although most commercial real estate loan documentation requirements are fairly typical. Some required information can be obtained only from the Seller. Production of that information to Purchaser for delivery to its lender must be required in the purchase contract.</p>
<p>As guidance to what a commercial real estate lender may require, the following sets forth a fairly typical Closing Checklist for a loan secured by commercial real estate.</p>
<h5 class="wp-block-heading"><span style="color: #199ca8;">COMMERCIAL REAL ESTATE LOAN CLOSING CHECKLIST</span></h5>
<p><span style="color: #000000;">1. Promissory Note</span></p>
<p>2. Personal Guaranties (which may be full, partial, secured, unsecured, payment guaranties, collection guaranties, so-called “<em>bad boy</em>” guaranties, or a variety of other types of guaranties as may be required by Lender)</p>
<p>3. Loan Agreement (often incorporated into the Promissory Note and/or Mortgage in lieu of being a separate document)</p>
<p>4. Mortgage (sometimes expanded to be a Mortgage, Security Agreement and Fixture Filing)</p>
<p>5. Assignment of Rents</p>
<p>6. Security Agreement</p>
<p>7. Financing Statement</p>
<p>8. Evidence of Borrower’s Existence in Good Standing, including:</p>
<ul class="wp-block-list">
<li>Certified copy of organizational documents of borrowing entity (including Articles of Incorporation, if Borrower is a corporation; Articles of Organization (or in Delaware, Articles of Formation) and a written Operating Agreement, if Borrower is a limited liability company; certified copy of trust agreement with all amendments, if Borrower is a land trust or other trust; etc.)</li>
<li>Certificate of Good Standing (if a corporation or LLC) or Certificate of Existence (if a limited partnership) or Certificate of Qualification to Transact Business (if Borrower is an entity doing business in a State other than its State of formation)</li>
</ul>
<p>9. Evidence of Borrower’s Authority to Borrow, including:</p>
<ul class="wp-block-list">
<li>Borrower’s Certificate</li>
<li>Certified resolutions</li>
<li>Incumbency Certificate</li>
</ul>
<p>10. Satisfactory Commitment for Title Insurance (which will typically require, for analysis by the Lender, copies of all documents or record appearing on Schedule B of the title commitment which are to remain after Closing), with required commercial title insurance endorsements, often including:</p>
<ul class="wp-block-list">
<li>ALTA 3.1 Zoning Endorsement modified to include parking (although, if the Property is a multi-user property, such as a retail shopping center, an ALTA 3.0 Zoning endorsement may be appropriate)</li>
<li>ALTA Comprehensive Endorsement No. 1</li>
<li>Location Endorsement (street address)</li>
<li>Access Endorsement (insuring commercially reasonable vehicular and pedestrian access to public streets and ways)</li>
<li>Contiguity Endorsement (the insured land comprises as single parcel with no gaps or gores)</li>
<li>PIN Endorsement (insuring that he identified real estate tax permanent index numbers (PIN) are the only applicable PIN numbers affecting the collateral, and that they relate solely to the real property comprising the collateral)</li>
<li>Usury Endorsement (insuring that the loan does not violate prohibitions against excessive interest charges)</li>
<li>other title insurance endorsements applicable to protect the intended use and value of the real estate collateral, as may be determined upon review of the Commitment for Title Insurance, Survey and documents of record, or arising from the existence of special issues pertaining to the transaction or the Borrower</li>
</ul>
<p>11. Current ALTA/NSPS Land Title Survey (3 sets), prepared in accordance with the 2016 (or current) Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys, with such Table A Additional Requirements as the Lender may determine necessary.</p>
<p>12. Current certified Rent Roll</p>
<p>13. Certified copy of all Leases (4 sets – 1 each for Buyer, Buyer’s attorney, Title Company, and Lender)</p>
<p>14. Lessee Estoppel Certificates</p>
<p>15. Lessee Subordination, Non-Disturbance and Attornment Agreements (sometimes referred to simply as “SNDAs”)</p>
<p>16. UCC, Judgment, Pending Litigation, Bankruptcy and Tax Lien Search Report</p>
<p>17. Appraisal – complying with Title XI of FIRREA (Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended)</p>
<p>18. Environmental Site Assessment Report (sometimes referred to as Environmental Phase I and/or Phase 2 Audit Report) prepared in accordance with ASTM Standard e1527-13 (or current)</p>
<p>19. Environmental Indemnity Agreement (signed by Borrower and Guarantors)</p>
<p>20. Site Improvements Assessment Report (sometimes an ASTM Property Condition Assessment prepared in accordance with ASTM Standard e2018-08 (or current) is required)</p>
<p>21. Evidence of Hazard Insurance naming Lender as the Mortgagee/Lender Loss Payee; and Liability Insurance naming Lender as an “<em>additional insured</em>” (sometimes listed simply as “Acord 27” and “Acord 25”, respectively); and sometimes a separate “Agreement to Provide Insurance”</p>
<p>22. Legal Opinion of Borrower’s Counsel</p>
<p>23. Credit Underwriting documents, such as signed tax returns, property operating statements, etc. as may be specified by the Lender</p>
<p>24. Compliance Agreement (sometimes also called an Errors and Omissions Agreement), whereby the Borrower agrees to correct, after Closing, errors or omissions in the loan documentation</p>
<p class="has-text-align-center"><strong><span style="color: #199ca8;">*****</span></strong></p>
<p>It is useful to become familiar with the Lender’s loan documentation requirements as early in the transaction as practical. The requirements will likely be set forth in some detail in the Lender’s Loan Commitment – which is the contract that serves as the road map for the loan transaction between Borrower and Lender. In Illinois, to be binding, the Loan Commitment must be in writing and be signed by the Lender.</p>
<p>Conducting the Due Diligence Investigation (that is to say, investigating all property and transactional concerns material to the commercial real estate transaction with all diligence due under the circumstances) can be time consuming and expensive. It can be made less so by knowing what to look for, devising a due diligence plan, and focusing on those matters that are of material concern.</p>
<p>If the loan requirements cannot be satisfied, it is better to make that determination during the contractual “<em>due diligence period</em>” – which typically provides for a so-called “<em>free out</em>” when the Borrower/Purchaser can receive the return of part or all of its earnest money deposit and avoid full liability under the purchase agreement for failure to move forward – rather than at a later date when the earnest money may be at risk of forfeiture or when other liability for failure to Close may attach.</p>
<h3 class="wp-block-heading"><span style="color: #199ca8;">CONCLUSION</span></h3>
<p>Conducting an effective Due Diligence Investigation in a commercial real estate transaction to discover all material facts and conditions affecting the Property and the transaction is of critical importance. Doing so will help identify risks which may be present in any commercial transaction, so the risks can be adequately shifted or otherwise mitigated. A properly focused investigation conducted with appropriate due diligence may disclose previously unrecognized opportunities as well as potential problems. An appropriate Due Diligence Investigation requires intentional and focused attention to all details material to the Property and to the transaction by a skilled professional, or group of professionals, who can recognize significant issues and opportunities. An investigation that is not properly focused may miss critical issues and may be overly broad and excessively expensive.</p>
<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>Recommendation: Exercise Due Diligence.</p>
<p>We are here to help.</p>
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<post-id xmlns="com-wordpress:feed-additions:1">1095</post-id> </item>
<item>
<title>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>
<guid isPermaLink="false">http://harp-onthis.com/?p=1065</guid>
<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>Illinois LLCs – The Asset Protection Advantage</title>
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<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Wed, 25 Feb 2015 21:29:21 +0000</pubDate>
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<description><![CDATA[Illinois LLCs – The Asset Protection Advantage A Technical Analysis Among sophisticated investors and other high-asset/high-net worth individuals and businesses, the topic of “asset protection” is bound to arise. As many became painfully aware during the recent Great Recession, bad […]]]></description>
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<h1 class="wp-block-heading">Illinois LLCs – The Asset Protection Advantage</h1>
<h2 class="wp-block-heading">A Technical Analysis</h2>
<p>Among sophisticated investors and other high-asset/high-net worth individuals and businesses, the topic of “<em>asset protection</em>” is bound to arise. As many became painfully aware during the recent <em>Great Recession</em>, bad things can happen to good people. In my article <a title="Asset Protection – Lessons Learned" href="http://harp-onthis.com/asset-protection-lessons-learned/" target="_blank" rel="noopener"><em>Asset Protection – Lessons Learned</em></a>, I discussed how properly structuring one’s holdings could have prevented, or at least mitigated, much of the financial devastation and anguish experienced by business owners, investors, real estate developers, doctors and others caught off-guard by the drastic economic collapse of 2007-2010.</p>
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<p>Often, there is confusion about what the term <em>asset protection</em> really means. Some imagine a shadowy network of off-shore trusts and secret bank accounts in foreign lands set up by unscrupulous characters to cheat innocent creditors. This is simply not true. In this article I will not debate the claimed pros and cons of secret bank accounts and so-called <em>off-shore asset protection trusts</em>. I will say, however, that under most circumstances, they don’t work for U.S. citizens residing in the U.S.A.</p>
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<p>Legitimate asset protection is nothing more or less than properly ordering one’s business and financial affairs in a way that does not unnecessarily expose all assets to claims of creditors.</p>
<p>The right of persons and businesses to limit their liability and exposure of their assets to claims of creditors is the well settled in the U.S.A. The United States of America, and each individual state, has a plethora of laws authorizing and recognizing the legitimacy of corporations and other limited liability entities as a means by which an investor can segregate assets and limit exposure to liability.</p>
<p>No person has a legal or moral obligation to structure his or her affairs in a way that makes it easy for a creditor of one business or professional enterprise to attach assets of the investor not committed to that enterprise. This protection may be impinged if the person or business engages in conduct tantamount to fraud, but actions explicitly authorized by applicable statute can hardly be characterized as being fraudulent. Fraud is an intentional tort requiring, among other elements, intentional breach of a duty owed to the person claimed to be harmed. If a statute expressly authorizes conduct, it implicitly, if not explicitly, negates any duty to act in a manner contrary to that authorized by the statute.</p>
<p>This article presents a technical analysis of certain asset protection attributes of an Illinois limited liability company expressly authorized by the Illinois Limited Liability Company Act, 805 ILCS 180/1-1 <em>et seq</em> (the “Illinois LLC Act”). The remarkably robust asset protection value of an Illinois limited liability company is measured by two key attributes:</p>
<p>1. The ability, expressly authorized by the Illinois LLC Act, to include in an LLC operating agreement provisions that protect the limited liability company and its business and assets from claims owed to others by members of the LLC – an attribute that creates a huge advantage vs. a corporation, as discussed in Part I, below; and</p>
<p>2. Enhanced protection of Members and Managers from liability for debts, contracts and torts incurred by the LLC, or resulting from acts or omissions of a Member or Manager while acting on behalf of the LLC, to an extent measurably greater than the protection afforded officers, directors and shareholders of a corporation.</p>
<p>Although one might reasonably expect that the order in which these key attributes are discussed would be reversed, the Part I discussion precedes the Part II discussion because the matters to be discussed in Part I are best considered at the outset, when the operating agreement is being drafted; while the matters discussed in Part II will most directly apply later, once a judgment creditor is seeking to enforce its judgment.</p>
<h3 class="wp-block-heading"><span style="text-decoration: underline;">PART I</span>: Key Statutory Provisions to Consider When Drafting the Operating Agreement</h3>
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<p>A limited liability company is typically governed by two main sources of governing authority. First and foremost, the enabling statute which authorizes the creation of a limited liability company and establishes its legal characteristics. Second, the organizational documents, including, in Illinois, the Articles of Organization, and an internal document governing the limited liability company’s ownership and management, known as an “operating agreement”.</p>
<p>To gain the full asset protection value afforded to an Illinois limited liability company, it is necessary to pay close attention to the powers expressly authorized by the Illinois LLC Act, and to strategically draft the operating agreement in a manner that utilizes those asset protection benefits expressly permitted by the Illinois LLC Act.</p>
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<h4 class="wp-block-heading"> </h4>
<h4 class="wp-block-heading">A. Key Sections to Consider.</h4>
<p>Seven sections of the Illinois LLC Act are of particular interest in terms of asset protection when drafting the operating agreement. A brief summary of these sections as they pertain to this discussion is as follows:</p>
<p><strong>805 ILCS 180/15-15</strong>. The factors a manager may take into consideration in discharging its duties as manager of the LLC are set forth in this section.</p>
<p><strong>805 ILCS 180/30-1</strong>. A member of an LLC is not a co-owner of the LLC’s property and has no transferable interest in the LLC’s property. The economic interest a member owns is called a “distributional interest,” which entitles the holder thereof to receive its share of any distributions made by the LLC.</p>
<p><strong>805 ILCS 180/30-5</strong>. A transfer of a distributional interest does not entitle the holder thereof to become or exercise any rights of a member. A transfer entitles the transferee to receive, to the extent transferred, only the distributions to which the transferor would be entitled.</p>
<p><strong>805 ILCS 180/30-10</strong>. A transferee may become a member only as permitted in accordance with the terms of the LLC operating agreement. A transferee who does not become a member is not entitled to participate in the management or conduct of the LLC’s business, and may not require access to information concerning LLC transactions, or inspect or copy any LLC records.</p>
<p><strong>805 ILCS 180/30-20</strong>. Sets forth the exclusive means by which a judgment creditor of a member or transferee may satisfy a judgment out of the judgment debtor’s distributional interest in an LLC.</p>
<p><strong>805 ILCS 180/35-1</strong>. On application of a transferee, asserting equitable grounds for dissolution, an LLC may be dissolved only upon a judicial determination that it is equitable to wind up the LLC’s business.</p>
<p><strong>805 ILCS 180/35-3</strong>. An operating agreement or the articles of organization may provide a means by which a new member can spring into existence, effective as of the date the last remaining member of the LLC becomes dissociated.</p>
<h4 class="wp-block-heading">B. The Asset Protection Advantage of Illinois LLCs vs. Corporations, Generally:</h4>
<p>As a general proposition, a judgment creditor with a judgment against a corporate shareholder can attach that shareholder’s shares to satisfy the judgment. After attachment, the judgment creditor becomes the owner of the shares, with the right to vote those shares (assuming they are voting shares) on matters calling for shareholder action, including election of the board of directors, sale of assets, etc. Some protection against this outcome can be gained by means of a shareholders’ agreement that restricts transferability of shares. If there is a single shareholder, however, or if a judgment is entered against all of the shareholders, the protection afforded by a shareholder agreement may be unavailable.</p>
<p>Under the Illinois LLC Act, the rights and remedies of a judgment creditor are substantially limited.</p>
<p>Section 30-20 of the Illinois LLC Act sets forth the exclusive remedy by which a judgment creditor of an LLC member or a member’s transferee may satisfy a judgment vis-à-vis the judgment debtor’s distributional interest in an LLC. The Illinois appellate court has confirmed the enforcement regime provided in §30-20. <em>Bank of America, N.A. v. Freed</em>, 2012 IL App (1st) 110749, ¶¶37 – 42, 983 N.E.2d 509.</p>
<p>Pursuant to §30-20 of the Illinois LLC Act:</p>
<p>A court may impose a charging order on the distributional interest of the judgment debtor. 805 ILCS 180/30-20(a).</p>
<p>A charging order creates a lien on the judgment debtor’s distributional interest. 805 ILCS 180/30-20(b).</p>
<p>A court may order foreclosure of the lien at any time, but the purchaser at the foreclosure sale has only the rights of a transferee. Id.</p>
<p>Section 30-10 of the Illinois LLC Act sets forth the scope of rights of a transferee. Unless provided otherwise in the operating agreement, the transferee does not become a member of the LLC and therefore has no right to participate in management or to conduct the LLC’s business, no right to require access to information concerning LLC transactions, and no right to inspect or copy LLC records. 805 ILCS 180/30-10(d).</p>
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<h5 class="wp-block-heading">PRACTICE NOTE:</h5>
<p>Relative to a manager-managed LLC, case law confirms that the right to manage the LLC is not a property interest that can be transferred. <em>Grochocinski v. Campbell (In re Campbell)</em>, 475 B.R. 622 (Bankr. N.D.Ill. 2012). In a gratuitous comment (see 475 B.R. at 631 n.6), however, the Campbell court suggested that the result would be different if the LLC were to be member-managed. The footnote is dicta — and, while arguably a correct interpretation of Section 541(c)-1 of the Bankruptcy Code, is likely incorrect outside a bankruptcy setting, based on the express language of the Illinois LLC Act. Prudence suggests, however, that for asset protection purposes, a manager-managed LLC is preferable.</p>
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<h4 class="wp-block-heading">C. The Charging Order</h4>
<p>In a typical case, the operating agreement may very likely grant the manager of a manager-managed limited liability company the authority and discretion to determine if and when distributions will be made to interest holders. If the judgment creditor is holding only a charging order lien against the distributional interest of a member, the judgment creditor will receive nothing if no distributions are made.</p>
<p>At first glance it may appear that foreclosing on a distributional interest and acquiring the rights of the judgment debtor in the distributional interest is the logical next step if the judgment is not being satisfied pursuant to a charging order entered in accordance with 805 ILCS 180/30-20(a). It should be noted, however, that foreclosing on the charging order lien and becoming the actual owner of the distributional interest is not without risk to the judgment creditor.</p>
<p>LLCs are, with rare exceptions, taxed as partnerships, with all profits and losses passed through to the owners of distributional interests (whether they own that interest as a member or as merely a transferee). As many partners in partnerships, including many partners in law firm partnerships, are painfully aware, this attribute of partnership taxation can result in dreaded “phantom income”; that is, partnership-level income that is taxable to the partner even though no cash is distributed to the partner. This same rule of pass-through tax liability applies to virtually all LLCs. (The exception being the rare case in which an LLC makes an IRS election to be taxed as a “C” corporation.)</p>
<p>As long as a judgment creditor has only a charging order lien imposed under §30-20, the judgment creditor is merely a lienholder, not an owner of the distributional interest. Accordingly, the tax consequences of phantom income inure to the judgment debtor, who remains the owner of the distributional interest. If, however, a judgment creditor forecloses on the lien created by the charging order, as permitted under §30-20(b), the purchaser at the foreclosure sale becomes the owner of the distributional interest, with all the attendant tax consequences that flow with that ownership. If taxable profits are allocated to the distributional interest holder, but no cash distribution is actually made, the judgment creditor, as owner of the foreclosed-on distributional interest, is liable to pay taxes on the allocated profit. As a consequence, the judgment creditor may conceivably find itself in a worse financial circumstance than existed before foreclosure of its charging order lien.</p>
<h4 class="wp-block-heading">D. Authority of Manager To Withhold Distributions</h4>
<p>If the manager of a manager-managed limited liability company elects to not distribute profits, the owner of the distributional interest is exposed to the risk of incurring tax liabilities as a consequence of phantom income. For this reason, some operating agreements require distribution of available cash flow in amounts necessary cover the potential tax liability of the LLC’s members and distributional interest holders. Experience suggests this may be the exception rather than the rule.</p>
<p>Some may question whether a manager has the right, in the faithful discharge of the manager’s fiduciary duties, to withhold distributions to interest holders if cash is available. To find support, they may point to §15-3(g) of the Illinois LLC Act, through incorporation of §15-3(d), which provides that in the exercise of its duty of care to the LLC and its members, an LLC manager must exercise any rights arising under the Illinois LLC Act or under the operating agreement consistent with the obligation of good faith and fair dealing. 805 ILCS 180/15-3.</p>
<p>As negotiating leverage, they may also note that §35-1(5) of the Illinois LLC Act provides that:</p>
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<p>“[o]n application by a transferee of a member’s interest, a judicial determination [may be made] that it is equitable to wind up the company’s business.”</p>
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<p>. . . arguing that the claimed breach of the manager’s fiduciary duty to distribute available income creates a circumstance that would make it equitable to wind up the company’s business.</p>
<p>Consider, however, §15-15, which provides:</p>
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<p>“In discharging the duties of their respective positions, members and individual managers may, in considering the best long term and short term interests of the limited liability company, consider the effects of any action (including without limitation, action that may involve or relate to a change or potential change in control of the limited liability company) upon employees, suppliers, and customers of the limited liability company or its subsidiaries, communities in which offices or other establishments of the limited liability company or its subsidiaries are located, and all other pertinent factors.”</p>
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<p>If an LLC manager can make a plausible case that it is in the best long-term or short-term interests of the LLC to build cash reserves for reinvestment in the company to grow its business or to fund capital improvements, such case may likely serve as reasonable justification for a manager’s decision to withhold distributions of cash flow to interest holders in the faithful discharge of its duties — notwithstanding that interest holders may incur phantom income tax liability.</p>
<p>If the case can be made that the manager is acting within the scope of its authority under the operating agreement and discharging its duties in accordance with the statutory standard established by §15-15, a powerful argument would likely exist that it would be an abuse of the court’s discretion to determine that the manager’s exercise of such expressly granted authority creates an equitable ground to wind up the LLC’s business under §35-1(5).</p>
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<h5 class="wp-block-heading">PRACTICE NOTE</h5>
<p>If an LLC member is subject to claims of creditors that may mature into a charging order, consider whether an LLC operating agreement that does not grant a manager full discretion to determine whether to make distributions may be amended to grant the manager full discretion.<em> Query:</em> Does such an amendment constitute a fraudulent transfer within the meaning of the Uniform Fraudulent Transfer Act (UFTA), 740 ILCS 160/1, <em>et seq.</em>? Can a fraudulent transfer ever occur when there has been no transfer or encumbrance of an asset? If the ability to be a manager is not a property interest in a manager-managed LLC (see <em>Grochocinski v. Campbell (In re Campbell)</em>, 475 B.R. 622 (Bankr. N.D.Ill. 2012)), can amending the scope of the manager’s authority constitute the transfer or encumbrance of an asset or property interest within the meaning of the UFTA?</p>
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<h4 class="wp-block-heading">E. The Springing Member</h4>
<p>The foregoing argument notwithstanding, if the judgment debtor were to be the sole member of a manager-managed limited liability company, with the result that upon foreclosure of the charging lien under 805 ILCS 180/30-20 the judgment creditor became the sole economic interest holder as owner of 100 percent of the distributional interest, a compelling case might be made that equity requires the business of the LLC to be wound up if requested by such 100% owner.</p>
<p>But what if, after foreclosure of the charging order on 100 percent of the distributional interest of the judgment debtor, the judgment creditor was, in fact, still not the owner of 100 percent of distributional interests in the LLC? What if, as of the time the foreclosure and transfer occurred, there was another distributional interest holder — which was, in fact, the sole member? Might that make a difference in the court’s determination that it is equitable to wind up the LLC’s business?</p>
<p>Based on the hypothetical facts we have been examining (i.e., foreclosure of 100 percent of the distributional interest held by all LLC members), how could this factual twist ever come into play?</p>
<p><em>Here’s how:</em></p>
<p>Consider §35-3(c)(2) of the Illinois LLC Act, which permits the articles of organization or operating agreement to provide for a new member to, essentially, spring into existence effective as of the dissociation of the last remaining member. (Transfer of all of a member’s distributional interest is an act of dissociation. See 805 ILCS 180/35-45(3).)</p>
<p>Suppose the operating agreement provides that within six months after dissociation of the last remaining member, the manager has the right to cause the LLC to issue, say, a one-percent distributional interest in the LLC to the manager, upon contribution by the manager to the LLC of an amount equal to one percent of the aggregate balance of all capital accounts, and that upon such occurrence the manager shall be admitted as a member? Upon being admitted as a member owning a one-percent distributional interest, the manager would be the sole member, with the ability to give unanimous approval to all actions requiring approval of the members. Might that make a compelling case that the LLC remains as a fully functioning entity capable of carrying out its business purpose? Consider, particularly, if the LLC operates a business as a going concern, with employees, vendors, and community stakeholders who benefit from the LLC’s continued existence and operation. Is it likely a court will find equitable grounds to order that the business of the LLC be wound up?</p>
<p>Obviously, each case must be judged on its own merits. But once again, from the standpoint of negotiating on behalf of a judgment debtor, plausible arguments well-grounded in fact and warranted by existing law that can create doubt in the mind of a judgment creditor as to the likely success of its enforcement efforts are valuable tools in reaching a favorable settlement.</p>
<h4 class="wp-block-heading"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/IMG_01561.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="84" data-permalink="http://harp-onthis.com/illinois-llcs-the-asset-protection-advantage/img_0156-2/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/IMG_01561.jpg?fit=537%2C720" data-orig-size="537,720" data-comments-opened="1" data-image-meta="{"aperture":"2.8","credit":"","camera":"iPhone 4","caption":"","created_timestamp":"1310642963","copyright":"","focal_length":"3.85","iso":"80","shutter_speed":"0.00149925037481","title":""}" data-image-title="IMG_0156" data-image-description="<p>RKH iPhone photo – Chicago – from USFDLG offices</p>
" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/IMG_01561.jpg?fit=223%2C300" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/IMG_01561.jpg?fit=537%2C720" class=" size-medium wp-image-84 alignright" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/IMG_01561.jpg?resize=223%2C300" alt="IMG_0156" width="223" height="300" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/IMG_01561.jpg?resize=223%2C300 223w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/IMG_01561.jpg?w=537 537w" sizes="auto, (max-width: 223px) 100vw, 223px" /></a>F. How Do These LLC Provisions Aid a Commercial Real Estate Borrower?</h4>
<p>Narrowly speaking, one might wonder how everything discussed above helps in the typical commercial loan scenario in which the limited liability company is the borrower, with direct liability, and the LLC members are guarantors, also with direct liability. If the LLC members have a single project with a single loan from a single lender, the point is well taken. The lender does not need to go through the members to get to the LLC’s income and assets. It can simply enforce its judgment against the LLC, while simultaneously, if it so chooses, also pursuing the guarantor members.</p>
<p>But what if the guarantor members are active real estate investors/developers (or other investors/professionals) who don’t have just one project (or business) through one LLC and one lender, but rather have two or more projects (or businesses) through two or more separate LLCs with loans from two or more separate lenders?</p>
<p><em>EXAMPLE</em>: Consider this fact scenario:</p>
<p>Project A is owned by LLC A and financed by Lender A for $5,000,000 (Loan A).</p>
<p>Project B is owned by LLC B and financed by Lender B for $8,000,000 (Loan B).</p>
<p>The members of LLC A are X and Y, who jointly and severally guaranty Loan A.</p>
<p>The members of LLC B are X and Z, who jointly and severally guaranty Loan B.</p>
<p>LLC A and LLC B are each manager-managed LLCs, in each case managed by XYZ Management LLC, which is owned by X, Y, and Z as equal members. XYZ Management LLC is not a member of either LLC A or LLC B. XYZ Management LLC is jointly managed by X, Y, and Z.</p>
<p>Project B is doing well and has equity of $7,000,000, with annual net cash flow after debt service of $650,000, with taxable profits after depreciation of $600,000.</p>
<p>Project A is in default and facing a $3,000,000 deficiency after sale of the collateral, resulting in a personal judgment in favor of Lender A against members X and Y on their personal guaranties.</p>
<p>Assume X and Y have no other attachable assets.</p>
<p>Applying the asset protection-friendly provision of the Illinois LLC Act, (coupled with a thoughtfully structured operating agreement) what may be the likely outcome of Lender A’s efforts to enforce its judgments?</p>
<p>Lender A obtains a $5,000,000 judgment against LLC A and pursues members X and Y on their personal guaranties. After disposing of the collateral owned by LLC A for $2,000,000, Lender A obtains a $3,000,000 joint and several judgment against members X and Y on their personal guaranties.</p>
<p>Through a citation to discover assets or otherwise, Lender A learns that X is a 50-percent member of LLC B, which has net equity of $7,000,000. Lender A also learns that X and Y are members of XYZ Management LLC, each owning 33.3 percent of that LLC.</p>
<p>Lender A wishes to satisfy its $3,000,000 judgment by attaching the 50-percent membership interest of X in LLC B.</p>
<p>Pursuant to §30-20 of the Illinois LLC Act, 805 ILCS 180/30-20, Lender A’s exclusive remedy relative to the LLC interest of member X is to obtain a charging order, which is a lien against distributions payable to X. With LLC B having net cash flow after debt service of $650,000 per year, the most Lender B expects to receive is $325,000 per year, based on the 50-percent membership interest of X.</p>
<p>In fact, XYZ Management LLC (the manager of LLC A) decides to reserve $650,000 per year for capital repairs and improvements and as a reserve against possible tenant vacancies and other contingencies. XYZ Management LLC elects not to make any distributions to members. As a consequence, pursuant to Lender A’s charging order, Lender A gets nothing, because X is not entitled to receive any distributions from LLC B on its distributional interest.</p>
<p>Lender A is unhappy. Lender A contemplates foreclosing its lien on the distributional interest of X pursuant to §30-20(b). If it does so, Lender A will become the owner of the 50-percent distributional interest of X in LLC B and will be subject to taxable phantom income of $300,000 per year (50 percent of the hypothetical $600,000 per year in taxable income) as the owner of a 50-percent distributional interest. Instead of being better off, Lender A may be worse off, having incurred a substantial income tax liability.</p>
<p>As an alternative, Lender A decides to try to force a liquidation of LLC B, so that it will receive 50 percent of the hypothetical $7,000,000 in equity in the project owned and operated by LLC B. To do this, Lender A decides to pursue the interests of X and Y in XYZ Management LLC. Since X and Y each owns 33.3 percent of XYZ Management LLC, Lender A assumes it can take control of XYZ Management LLC by obtaining a charging order on the interests of X and Y in XYZ Management LLC and then acquiring 66.6 percent via foreclosure of its charging order lien pursuant to §30-20(b).</p>
<p>Lender A contemplates that by acquiring the ownership interests of two out of three members of XYZ Management LLC, including the interests of two out three of its managers, Lender A will control XYZ Management LLC and, through that control, will be the manager of LLC B and can direct a sale or liquidation of LLC B’s assets.</p>
<p>Unfortunately for Lender A, it discovers that by foreclosing on the interests of X and Y in XYZ Management LLC, Lender A acquires, pursuant to §30-20(b), only the interests of a transferee, with no right to vote as a member and no right to participate in management of XYZ Management LLC per §30-10(d). Therefore, Lender A still has no management authority with respect to LLC B.</p>
<p>Query: Based on the foregoing hypothetical facts and likely outcome of its enforcement efforts, might the lender be willing to consider settlement with X and Y for less than full payment?</p>
<h4 class="wp-block-heading">G. What Is the Defaulted Borrower’s Exit Strategy?</h4>
<p>Asset protection can be more an “art” than a science. There is no magic formula for success in protecting the assets and income of commercial real estate borrowers when a loan goes bad, but there are effective strategies that can help facilitate settlement upon favorable terms that may avoid catastrophic financial ruin.</p>
<div class="wp-block-image">
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<p>A principal objective of asset protection — and even most defensive efforts on behalf of a commercial real estate borrower in the event of default on a commercial real estate loan — is typically to motivate the lender to settle on favorable terms. What terms a borrower or guarantor may consider favorable depends on the facts and circumstances of the particular case.</p>
<p>Often, the favorable outcome being sought is a release of the loan guarantors from personal liability on their loan guaranties. This may require the payment of some money by the guarantors, but ideally substantially less that the full exposure on the personal guaranty.</p>
<p>Generally, the lender is seeking to maximize its recovery. If it can recover the entire indebtedness and costs of collection, the lender will seek full recovery. If full recovery becomes doubtful, however, most lenders will settle for an approximation of what the lender reasonably expects it will net through continued forced collection efforts. The lender’s objective of maximizing recovery has been expressly incorporated into financial institution supervisory guidance through the joint financial regulators’ <em>Policy Statement on Prudent Commercial Real Estate Loan Workouts</em>, <a href="http://www.fdic.gov/news/news/financial/2009/fil09061a1.pdf" target="_blank" rel="noopener">www.fdic.gov/news/news/financial/2009/fil09061a1.pdf</a>.</p>
<p>Weighing the costs of recovery against the amount of recovery likely to be obtained is a relevant factor for lenders to consider in maximizing their recovery. Money has “time value” as well. The more quickly money is recovered, the more value it has. The fact that a judgment may be accruing interest at nine percent per annum, or that the borrower and its guarantors are liable to pay costs of collection, including reasonable attorneys’ fees, becomes fairly meaningless if the borrower and guarantors have no assets or income from which the lender can readily recover its claim. If the borrower and/or guarantors are properly positioned to borrow funds from friends or family to pay even a modest settlement that is equivalent to, or slightly exceeds, what the lender can readily recover through forced collection efforts, settlement is a plausible outcome.</p>
<p>The more difficult and doubtful collection efforts become, the more likely one may be to obtain favorable settlement terms.</p>
<h4 class="wp-block-heading">H. Timing Consideration for Asset Protection</h4>
<p>Asset protection strategies are most effective when planned far in advance. Transfers of assets into a limited liability company or other asset protection-friendly vehicle can come too late if not completed well in advance of financial difficulties. The statute of limitations for a transfer constituting a fraudulent transfer is four years. 740 ILCS 160/10. Fortunately for most commercial real estate borrowers, Illinois business owners and Illinois licensed professionals, no transfer may be necessary for them to avail themselves of the asset protection advantages of an Illinois LLC since most commercial real estate projects financed in the past several years, and most Illinois based businesses, and many Illinois licensed professions, have been owned from the outset in an Illinois LLC. Creative amendment to an existing operating agreement may be sufficient to increase the level of asset protection.</p>
<p>Planning ahead is the ideal solution — but sometimes you just have to take what the statute gives you. For Illinois LLCs, the Illinois LLC Act actually gives quite a lot.</p>
<h3 class="wp-block-heading"><span style="text-decoration: underline;">PART II</span>: Immunity from Liability of Members and Managers</h3>
<p>In Part I of this article, we discussed the key sections of the Illinois LLC Act which protect the LLC, its business, and other members, if any, by limiting recovery <em>vis-à-vis</em> the LLC of a judgment entered against an LLC member.</p>
<p>Of equal or greater value is 805 ILCS 180/10-10, as interpreted and sustained in Dass v. Yale, 2013 IL App (1st) 122520; 3 N.E.3d 858.</p>
<p>A. <strong>805 ILCS 180/10-10</strong> provides, as follows:</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p>“(a) Except as otherwise provided in subsection (d) of this Section, the debts, obligations and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company. A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager.</p>
<p>(b) (Blank)</p>
<p>(c) The failure of a limited liability company to observe the usual company formalities or requirements relating to the exercise of company powers or management of its business is not a ground for imposing personal liability on the members of managers for liabilities of the company.</p>
<p>(d) All or specified members of a limited liability company are liable in their capacity as members for all or specified debts, obligations, or liabilities of the company if:</p>
<p>(1) a provision to that effect is contained in the articles of organization; and</p>
<p>(2) a member so liable has consented in writing to the adoption of the provision or to be bound by the provisions.”</p>
</blockquote>
<h4 class="wp-block-heading"><strong>B. <em>Dass v. Yale</em></strong>, 2013 IL App (1st) 122520; 3 N.E.3d 858, cert. denied.</h4>
<p>In <em>Dass v. Yale</em>, the plaintiff claimed that Yale, the sole managing member of Wolcott LLC, an Illinois limited liability company, defrauded the plaintiff in connection with the sale of a condominium unit by making false representations plaintiff claimed constituted, <em>inter alia</em>, common law fraud. <em>See id</em>., ¶ 2.</p>
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<p>Yale moved to dismiss the claims against him, asserting he was insulated from liability under Section 10-10 of the Illinois LLC Act. The plaintiff objected, claiming the legislature never intended Section 10-10 of the Illinois LLC Act to shield limited liability company members or managers who commit fraud. The trial court disagreed, and sided with defendant Yale, finding that members and managers are immune from liability under Section 10-10 of the Illinois LLC Act and granted Yale’s motion to dismiss. <em>Id.</em> ¶ 3. The plaintiff appealed.</p>
<p>The Appellate Court noted that plaintiff Dass was not asserting a right to pierce the LLC entity veil, using any recognized piercing test (which will be discussed in Part II – C, below), but rather was asserting liability of Yale based, essentially, upon the general notion (as incorporated in the legislative comments to Section 303 of the Uniform Limited Liability Company Act (the “Uniform Act”)) that an agent, even while acting on behalf of a principal, is jointly and severally liable for tortious conduct committed by the agent. Id. ¶¶ 36, 40. Arguing that Section 10-10 of the Illinois LLC Act is substantively similar to Section 303 of the Uniform Act, plaintiff Dass asserted that Yale should be liable for the claimed fraud (or, at least, should have to answer for the claim, rather than be dismissed pursuant to Yale’s motion to dismiss).</p>
<p>The Appellate Court also noted that Section 303 of the Uniform Act and the comments accompanying Section 303 may normally be persuasive authority in interpreting Section 10-10 of the Illinois LLC Act due to similar language used in each, even though neither Section 303 nor the comments are formally a part of the Illinois LLC Act. Id., ¶¶ 40-41.Taking into consideration of the history of the Illinois LLC Act and other cases interpreting the history, however, the Appellate Court determined that the trial court was correct in finding that Yale is shielded from liability. The court stated:</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p>“Indeed, examining the history of the LLC Act itself demonstrates that the trial court was correct in interpreting section 10-10 to shield Yale from liability. The current language of section 10-10 has been in effect since January 1, 1998. See Pub. Act. 90-0424 (eff. Jan. 1, 1998). Prior to that, section 10-10 read:</p>
<p>(a) A member of a limited liability company shall be personally liable for any act, debt, obligation or liability of the limited liability company or another member or manager to the extent that a shareholder of an Illinois business corporation is liable in an analogous circumstance under Illinois law.</p>
<p>(b) A manager of a limited liability company shall be personally liable for any act, debt, obligation or liability of the limited liability company or another member or manager to the extent that a shareholder of an Illinois business corporation is liable in an analogous circumstance under Illinois law. 805 ILCS 180/10-10 (West 1996).</p>
<p>Generally, a change to the unambiguous language of a statute creates a rebuttable presumption that the amendment was intended to change the law. Here, the language of the LLC Act was changed by removing language explicitly providing for personal liability. As we noted in <em>Puleo,</em> “[a]s we have not found any legislative commentary regarding that amendment, we presume that by removing the noted statutory language, the legislature meant to shield a member or manager of an LLC from personal liability.” <em>Dass</em>, 2013 IL App (1st) 122520, ¶ 41 (internal citations omitted).”</p>
</blockquote>
<p>The court also noted that “the express language of section 10-10 (currently) provides that ‘the debts, obligations, and liabilities of a limited liability company, <em>whether arising in contract, tort, or otherwise</em>, are solely the liabilities of the company.’ We see no reason why the reasoning of <em>Puleo</em> and <em>Carollo</em>, which focused on the language of the LLC Act and its amendment, would not apply to a liability arising in tort, as in the case at bar, when such a scenario is expressly contemplated by the language of section 10-10. Accordingly, we affirm the trial court’s dismissal of plaintiffs’ complaint.” <em>Id</em>. ¶ 44 (emphasis in original) (internal citations omitted).</p>
<p>The plaintiff petitioned the Illinois Supreme Court for leave to appeal, which was denied on March 26, 2014. 2014 WL 1385161, 5 N.E.3d 1123 (Ill. Mar. 26, 2014). Thus, the decision stands as the binding law of Illinois.</p>
<h4 class="wp-block-heading">C. Piercing the LLC Entity Veil</h4>
<p>In a footnote, the Appellate Court in <em>Dass v. Yale</em> stated as follows: “We note that <em>Puleo</em> was somewhat limited in <em>Westmeyer v. Flynn</em>, 382 Ill. App. 3d 952, 960, 321 Ill. Dec. 406, 889 N.E.2d 671 (2008), where we found that section 10-10 did not bar actions involving piercing the</p>
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Robbins, Salomon & Patt, Ltd.</p>
" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?fit=199%2C300" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?fit=680%2C1024" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?resize=199%2C300" alt="R. Kymn Harp Robbins, Salomon & Patt, Ltd." class="wp-image-1145" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?resize=199%2C300 199w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?resize=680%2C1024 680w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?w=2000 2000w" sizes="auto, (max-width: 199px) 100vw, 199px" /></a><figcaption class="wp-element-caption">R. Kymn Harp<br />Robbins, Salomon & Patt, Ltd.</figcaption></figure></div>
<p>corporate veil. However, in the case at bar, there has been no claim that the corporate veil should be pierced.” <em>Dass</em>, 2013 IL App (1st) 122520, at n. 7.</p>
<p>With that footnote, it is at least appropriate to consider the circumstances under which the entity veil of an Illinois limited liability company might properly be pierced.</p>
<p>With one significant exception, Illinois limited liability companies are subject to the same piercing rules as Illinois corporations. <em>Buckley v. Abuzir</em>, 2014 IL App (1st) 130469; 8 N.E.3d 1166; <em>Denmar Builders, Inc. v. Suhadolnik (In re Suhadolnik)</em>, No. 08-A-7116, 2009 WL 2591338, at *4 (Bankr. C.D. Ill. Aug. 20, 2009).</p>
<p>Illinois courts have developed fairly uniform rules on the subject of veil-piercing. “Courts may pierce the corporate veil, where to corporation is so organized and controlled by another entity that maintaining the fiction of separate entities would sanction fraud or promote injustice. <em>Buckley</em>, 2014 IL App (1st) 130469, ¶ 12. A party seeking to pierce the corporate veil must make a substantial showing that one corporation is a dummy or a sham for another.” <em>Id.; In re Estate of Wallen</em>, 262 Ill. App. 3d 61, 68 (2d Dist. 1994).</p>
<p>Illinois courts will pierce the corporate veil when the following two-part test is satisfied: “(1) where there is such a unity of interest and ownership that the separate personalities of the corporation and the parties who compose it no longer exist; and (2) circumstances are such that adherence to the fiction of a separate corporation would promote injustice or inequitable circumstances. <em>Tower Investors LLC v. 111 East Chestnut Consultants, Inc</em>., 371 Ill. App. 3d 1019, 1033-34 (1st Dist. 2007).</p>
<p>The first part of the test generally refers to the failure of the corporation to observe corporate formalities. The second part of the test looks to whether circumstances exist that would effectively sanction fraud if the veil is not pierced.</p>
<p>The first part of the two-part test for veil piercing does not apply to limited liability companies under the Illinois LLC Act, by reason of the express language of 805 ILCS 180/10-10(c), which provides “The failure of a limited liability company to observe the usual company formalities or requirements relating to the exercise of company powers or management of its business is not a ground for imposing personal liability on the members or managers for liabilities of the company.” Id.</p>
<p>Note, however, that “while the Act provides specifically that the failure to observe corporate formalities is not a ground for imposing personal liability on the members of an LLC, it does not bar other bases for corporate veil piercing, such as alter ego, fraud or undercapitalization.” <em>Westmeyer v. Flynn</em>, 382 Ill. App. 3d 952, 960 (1st Dist. 2008); <em>Denmar Builders, Inc.</em>, 2009 WL 2591338, at *4; I<em>n re Polo Builders, Inc.</em>, 388 B.R. 338, 384 (Bankr. N.D. Ill. 2008).</p>
<p>An in-depth discussion of the overall topic of LLC veil piercing is beyond the scope of this article. Generally speaking, however, it is not as simple as some attorneys seem to think. Under proper circumstances, however, piercing may be allowed.</p>
<p>Enlightening discussions of the topic of veil piercing can be found in cases such as: <em>Judson Atkinson Candies, Inc. v. Latini-Hohberger Dhimantec</em>, 529 F.3d 371 (7th Cir. 2008); <em>Buckley v. Abuzir,</em> 2014 IL App (1st) 130469; and <em>On Command Video v. Roti</em>, 705 F.3d 267 (7th Cir. 2013). As a general proposition, however, merely losing money, failing in business, or depleting available capital through the ordinary course of business operations will not be a sufficient basis to pierce the entity veil to get to the assets of LLC members or managers. A party seeking to pierce the entity veil must make a substantial showing that the entity is a sham or was used to intentionally mislead or defraud in circumstances that would promote injustice. Mere inability of an LLC to satisfy or pay its liabilities, without more, is not enough. See On Command Video, 705 F.3d at 272; <em>In re Estate of Wallen</em>, 262 Ill. App. 3d at 68; Buckley, 2014 IL App (1st) 130469; 8 N.E.3d 1166; and <em>Tower Investors LLC</em>, 371 Ill. App. 3d at 1033-34.</p>
<h5 class="wp-block-heading">*<em>Publishing Note</em>: Parts of this article first appeared in the Commercial Real Estate handbook published by the Illinois Institute for Continuing Legal Education as part of the author’s 2013 chapter supplement [Chapter 4.S.] to “<em>Commercial Real Estate Financing from the Borrower’s Perspective</em>”.</h5>
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<title>Value Investing vs. Momentum Investing</title>
<link>http://harp-onthis.com/value-investing-vs-momentum-investing/</link>
<comments>http://harp-onthis.com/value-investing-vs-momentum-investing/#comments</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Thu, 02 Oct 2014 11:10:52 +0000</pubDate>
<category><![CDATA[Commercial Real Estate]]></category>
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<description><![CDATA[As the commercial real estate market begins to pick up steam, beware the urge to follow a “momentum” investment strategy rather that a “value” investment strategy. Momentum investing relies on market increases to generate a return on investment. It is […]]]></description>
<content:encoded><![CDATA[<p>As the commercial real estate market begins to pick up steam, beware the urge to follow a “momentum” investment strategy rather that a “value” investment strategy.</p>
<p><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_28661257-licensed.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="104" data-permalink="http://harp-onthis.com/keys-to-closing-a-commercial-real-estate-transaction/httpwww-dreamstime-comroyalty-free-stock-photography-skeleton-keys-image28661257/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_28661257-licensed.jpg?fit=1500%2C1998" data-orig-size="1500,1998" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"(c) Peanutroaster | Dreamstime.com","focal_length":"0","iso":"0","shutter_speed":"0","title":"http:\/\/www.dreamstime.com\/royalty-free-stock-photography-skeleton-keys-image28661257"}" data-image-title="http://www.dreamstime.com/royalty-free-stock-photography-skeleton-keys-image28661257" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_28661257-licensed.jpg?fit=225%2C300" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_28661257-licensed.jpg?fit=768%2C1024" class="alignleft size-medium wp-image-104" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_28661257-licensed.jpg?resize=225%2C300" alt="http://www.dreamstime.com/royalty-free-stock-photography-skeleton-keys-image28661257" width="225" height="300" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_28661257-licensed.jpg?resize=225%2C300 225w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_28661257-licensed.jpg?resize=768%2C1024 768w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_28661257-licensed.jpg?w=1500 1500w" sizes="auto, (max-width: 225px) 100vw, 225px" /></a>Momentum investing relies on market increases to generate a return on investment. It is the “rising tide floats all boats” investment model. It is the investment model of which all “bubbles” are made.</p>
<p>As momentum investing accelerates, investment fundamentals tend to get lost. Instead of evaluating cash on cash returns using discounted cash flows that underlie “value” investing, a casino mentality takes hold – whereby investors can justify acquiring assets generating even a negative cash return, with the notion that rising prices will yield a profit. As the saying goes: “Any fool can make a profit in a rising market – and many fools do”. The challenge, of course, comes when a market hits a plateau or, worse yet, the market declines.</p>
<p>As a general proposition, value investing is significantly more prudent. If a project is cash flowing, and generating a positive return on investment, today and for the foreseeable future – which is a fundamental precept of a value investment strategy – the potential added return of any increase in value in the underlying asset caused by the “rising tide” effect is icing on the cake. Choose your cake with care.</p>
<p>There are, of course, exceptions to every rule. But, employing an “exception” is wisely done only after sober reflection of the particular circumstance to determine that in that particular case the exception is warranted. When an exception is regularly employed, it is no longer an exception – but, rather, becomes the rule itself.</p>
<p>As in all markets, there will be winners and there will be losers. It makes sense in the coming commercial real estate revival to position yourself and your company as a winner. You may not get another chance.</p>
<p>Exercise all appropriate due diligence. Use readily available and appropriate asset protection strategies. Invest with intentional regard to reliably building wealth though a well conceived value investing strategy – not a roulette table strategy that, over time, is virtually certain to fail.</p>
<p>If this recent economic debacle has taught us anything, it has taught that bad things can happen to good people who lose sight of the fundamentals. Good deals – even great deals – can be made if reliable commercial real estate investment fundamentals are employed.</p>
<p>As a wise mentor once told me: “You have a good brain – use it.”</p>
<p>Good luck.</p>
<p>R. Kymn Harp<br />
Robbins, Salomon & Patt, Ltd.<br />
Chicago, IL<br />
www.rsplaw.com<br />
JOIN MY THOUGHTBOARD: www.Harp-OnThis.com</p>
<p>REPORTING FROM THE FIELD. . .</p>
]]></content:encoded>
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<post-id xmlns="com-wordpress:feed-additions:1">318</post-id> </item>
<item>
<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>
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<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>
<category><![CDATA[White Papers]]></category>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[bank]]></category>
<category><![CDATA[banks]]></category>
<category><![CDATA[checklist]]></category>
<category><![CDATA[closing]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[consequences]]></category>
<category><![CDATA[due diliigence]]></category>
<category><![CDATA[how to close]]></category>
<category><![CDATA[industrial property]]></category>
<category><![CDATA[lenders]]></category>
<category><![CDATA[loan documentation]]></category>
<category><![CDATA[loans]]></category>
<category><![CDATA[purchase]]></category>
<category><![CDATA[transactions]]></category>
<category><![CDATA[what to look for]]></category>
<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>
<content:encoded><![CDATA[
<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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<figure class="alignleft"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_12972202.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="300" height="188" data-attachment-id="110" data-permalink="http://harp-onthis.com/httpwww-dreamstime-comstock-photography-key-to-finance-logo-image12972202/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_12972202.jpg?fit=2184%2C1373" data-orig-size="2184,1373" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"(c) Davidwatmough | Dreamstime.com","focal_length":"0","iso":"0","shutter_speed":"0","title":"http:\/\/www.dreamstime.com\/stock-photography-key-to-finance-logo-image12972202"}" data-image-title="http://www.dreamstime.com/stock-photography-key-to-finance-logo-image12972202" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_12972202.jpg?fit=300%2C188" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_12972202.jpg?fit=1024%2C643" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_12972202.jpg?resize=300%2C188" alt="http://www.dreamstime.com/stock-photography-key-to-finance-logo-image12972202" class="wp-image-110" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_12972202.jpg?resize=300%2C188 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_12972202.jpg?resize=1024%2C643 1024w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_12972202.jpg?resize=477%2C300 477w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_12972202.jpg?w=2000 2000w" sizes="auto, (max-width: 300px) 100vw, 300px" /></a></figure></div>
<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>
<div class="wp-block-image">
<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>Keys Rules For Section 1031 Exchanges</title>
<link>http://harp-onthis.com/keys-rules-section-1031-exchanges/</link>
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<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Tue, 05 Aug 2014 11:10:02 +0000</pubDate>
<category><![CDATA[Business]]></category>
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<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">
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<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>
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<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>
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<title>Commercial Real Estate Due Diligence – Do You Know the Four Areas of Inquiry?</title>
<link>http://harp-onthis.com/commercial-real-estate-due-diligence-do-you-know-the-four-areas-of-inquiry/</link>
<comments>http://harp-onthis.com/commercial-real-estate-due-diligence-do-you-know-the-four-areas-of-inquiry/#comments</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Mon, 12 May 2014 23:00:34 +0000</pubDate>
<category><![CDATA[Commercial Real Estate]]></category>
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<description><![CDATA[  Albert Einstein:           “Everything should be made as simple as possible, but not simpler.”   Commercial Real Estate Due Diligence – the Four Areas of Inquiry I’m a big fan of Albert Einstein. He’s one of my intellectual heroes.  He […]]]></description>
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<h4 class="wp-block-heading"> </h4>
<h4 class="wp-block-heading">Albert Einstein: <i>“Everything should be made as simple as possible, but not simpler.”</i></h4>
<h2 class="wp-block-heading"> </h2>
<h2 class="wp-block-heading">Commercial Real Estate Due Diligence – the Four Areas of Inquiry</h2>
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" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/cropped-dreamstime_m_4416964.jpg?fit=300%2C124" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/cropped-dreamstime_m_4416964.jpg?fit=999%2C413" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/cropped-dreamstime_m_4416964.jpg?resize=300%2C124" alt="cropped-dreamstime_m_4416964.jpg" class="wp-image-120" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/cropped-dreamstime_m_4416964.jpg?resize=300%2C124 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/cropped-dreamstime_m_4416964.jpg?resize=500%2C206 500w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/cropped-dreamstime_m_4416964.jpg?w=999 999w" sizes="auto, (max-width: 300px) 100vw, 300px" /></a></figure></div>
<p>I’m a big fan of Albert Einstein. He’s one of my intellectual heroes. He could see and understand what others could barely imagine. His greatest gift, I believe, was his ability to find answers to questions others didn’t even know existed.</p>
<p>Real estate due diligence requires insight as well. To find the answers, you must </p>
<span id="more-288"></span>
<p>know the questions.</p>
<p>Of course, I’m no Albert Einstein but, then, real estate due diligence is not inter-galactic science.</p>
<p>The term itself is confusing. “<em>Due diligence</em>” is used grammatically like it’s a thing or a process. “<i>We need to complete our due diligence</i>”; or “<i>Let me review your due diligence”</i>; or “<i>due diligence is expensive</i>”. I admit, I use it the same way.</p>
<p>In fact, however, “due diligence” is a standard of conduct. Due diligence refers to the degree of diligence we should exercise to investigate and analyze all important issues facing a particular transaction. That is to say, the degree of diligence that is <em>“due”</em> under the circumstances.</p>
<p> This definition has two important components:</p>
<!--more-->
<ol class="wp-block-list">
<li>a focus on “<em>important issues</em>”; and</li>
<li>the degree of diligence appropriate under the circumstances of the particular transaction.</li>
</ol>
<p>The art of the deal, so to speak, is in understanding what is “<em>important</em>” and what degree of investigation is due.</p>
<p>Failure to accurately identify these two threshold considerations will lead to one of two outcomes. The due diligence investigation will be either: (1) incomplete – and therefore ineffective to discover and resolve the important transaction risks it is intended to protect against; or (2) overly broad – in which case it will be more time-consuming and expensive than it needs to be. Either way, its value is diminished.</p>
<p>Due diligence can be expensive. We need to avoid making it more expensive than necessary.</p>
<p>So, how do we make sure we get full value for our due diligence dollars? By making sure we know the right questions to ask, and then answering them.</p>
<p>This requires two preliminary sets of questions:</p>
<p> <i>First</i>: What is the vision for this property? Why is it being acquired, and how will it be used?</p>
<p> <i>Second</i>: What is necessary to be known in order to confirm the vision can be fulfilled?</p>
<p>To be sure, we must know the <i>first</i> to answer the <i>second</i>. It is in answering the second that due diligence must be exercised.</p>
<p>For guidance, please review: “<a title="DUE DILIGENCE CHECKLISTS for Commercial Real Estate Transactions" href="http://harp-onthis.com/due-diligence-checklists-for-commercial-real-estate-transactions-3/" target="_blank" rel="noopener"><i>Due Diligence Checklists for Commercial Real Estate Transactions</i></a>”.</p>
<h2 class="wp-block-heading">For commercial real estate, there are four principal areas of concern:</h2>
<ol class="wp-block-list">
<li> Market Demand</li>
<li> Access</li>
<li> Use</li>
<li> Finances</li>
</ol>
<div class="wp-block-image">
<figure class="alignright size-full is-resized"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="1878" data-permalink="http://harp-onthis.com/commercial-real-estate-due-diligence-do-you-know-the-four-areas-of-inquiry/youngprofessionaldrawingagrowingrealestatechart-concretebackground/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/young-professional-drawing-a-growing-real-estate-chart.jpg?fit=1000%2C795" data-orig-size="1000,795" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"Shutterstock","camera":"","caption":"","created_timestamp":"0","copyright":"Copyright (c) 2014 ImageFlow\/Shutterstock. No use without permission.","focal_length":"0","iso":"0","shutter_speed":"0","title":"Young,Professional,Drawing,A,Growing,Real,Estate,Chart.,Concrete,Background.","orientation":"0"}" data-image-title="Young,Professional,Drawing,A,Growing,Real,Estate,Chart.,Concrete,Background." data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/young-professional-drawing-a-growing-real-estate-chart.jpg?fit=300%2C239" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/young-professional-drawing-a-growing-real-estate-chart.jpg?fit=1000%2C795" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/young-professional-drawing-a-growing-real-estate-chart.jpg?resize=400%2C317" alt="young professional drawing a growing real estate chart" class="wp-image-1878" width="400" height="317" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/young-professional-drawing-a-growing-real-estate-chart.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/young-professional-drawing-a-growing-real-estate-chart.jpg?resize=300%2C239 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/young-professional-drawing-a-growing-real-estate-chart.jpg?resize=768%2C611 768w" sizes="auto, (max-width: 400px) 100vw, 400px" /></figure></div>
<p>Once the vision is clear, addressing these four areas of concern will determine whether that vision can be fulfilled. Within these four areas of concern we will find all the questions that need to be asked and answered to determine the feasibility of any commercial real estate transaction or project. How straightforward is that?</p>
<p>So what do these areas of concern entail? In simple terms, they can be summarized by a description of the inquiry they present.</p>
<h2 class="wp-block-heading">1. Market Demand</h2>
<p><em>Market demand</em> asks this question: Is the proposed project needed or wanted by target consumers in the geographic area within which the property is located?</p>
<p>Market demand is the most fundamental of the four aspects of commercial real estate. If there is no market demand, the transaction or project should not go forward. If you are developing, financing or investing in a real estate project, make sure there is market demand for what is being offered. If you are a strategic user intending to occupy and use the property yourself, market demand may be satisfied by your own business needs. If you are investing on speculation, be sure you know the demand of your intended market.</p>
<p>Determining market demand seldom involves a legal question. No attorney time is necessary. [<em>See? I’m saving you money already</em>.]
<h2 class="wp-block-heading"><b>2. Access</b></h2>
<p><em>Access</em> asks this question: Assuming adequate market demand to justify the proposed transaction or project, can target consumers seeking the goods or services to be offered at or from the property get to it with ease? This aspect includes evaluation of:</p>
<ul class="wp-block-list">
<li>existing or proposed highways, streets, and drives that will serve the site;</li>
<li>availability of in-and-out curb cuts for consumers and for delivery trucks and vans;</li>
<li>vehicular traffic flow to, from, and within the project site;</li>
<li>volume and convenience of pedestrian traffic;</li>
<li>ability of the project to accommodate the needs of the disabled in a manner compliant with Title III of the Americans with Disabilities Act (ADA), 42 U.S.C. §12181, et seq.;</li>
<li>adequacy of available parking (which, for business reasons, may need to be greater than the minimum required for zoning);</li>
<li>availability of public transportation; <em>and</em></li>
<li>all other factors that may affect the flow of consumers and users to and from the site.</li>
</ul>
<h2 class="wp-block-heading"><b> 3. Use </b></h2>
<p><em>Use</em> asks this question: Can the property be used as intended? This aspect includes an inquiry into:</p>
<ul class="wp-block-list">
<li>applicable zoning and private land use controls;</li>
<li>availability of utilities;</li>
<li>internet/social-network connectivity and availability of telecommunications;</li>
<li>site topography;</li>
<li>quality of soil compaction to enable improvement using cost-effective methods of construction;</li>
<li>evaluation of the environmental condition of the property to determine whether environmental impediments exist that would prevent use of the property as intended absent remediation, institutional controls or environmental impact mitigation; <em>and</em></li>
<li>all other factors that may prevent the site from being used as inte<b>nded. </b></li>
</ul>
<h2 class="wp-block-heading"> 4. Finances</h2>
<p><em>Finances</em> asks these questions: (a) Can funds be obtained to acquire, construct, and operate the project? <i>and </i>(b) Will the investor receive an adequate return on investment to justify proceeding with the transaction or project?</p>
<p>To answer these questions we must know the cost of acquisition or development and the net operating income and capital recovery expected to be generated by the project.</p>
<p>We must determine whether costly environmental remediation or institutional controls will be required; the amount of applicable user fees; environmental impact mitigation costs, if any; real estate taxes; special assessments; tenant allowance or build-out requirements; and all other factors having an economic impact.</p>
<p>Although finances are primarily a business concern, certain aspects of project finance do fall within the realm of legal due diligence. Thus the reference to one-half of the Finances concern being within the realm of attorney conducted due diligence.</p>
<p>Documentation of equity investments and project loans, as well as hybrids such as mezzanine financing, demand the attention of legal counsel.</p>
<p>If the property is leased, an evaluation of the amount, velocity and durability of the revenue stream and any financial commitments of the owner/landlord are often considered by counsel.</p>
<p>Certainly, if public money is sought to reduce the net cost of development, legal counsel is required.</p>
<h2 class="wp-block-heading"><b>Other Due Diligence Concerns</b></h2>
<p>The four areas of concern described above pertain to the “<em>real estate</em>” aspects of the transaction. If you are dealing with commercial real estate, your due diligence must focus on these issues.</p>
<p>Every capital transaction has other due diligence concerns as well. These other concerns are beyond the scope of this post, but may include issues pertaining to entity structure, authority of the parties, income and capital gains taxation and tax deferments, securities, and the overall structure of the transaction, to name just a few.</p>
<p>Commercial real estate due diligence is not rocket science but . . .</p>
<p> . . . it certainly helps if you know what you’re looking for.</p>
<p class="has-text-align-center"> Thanks for listening! <i> </i></p>
<p><i> Kymn</i></p>
<p> </p>
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<title>DUE DILIGENCE CHECKLISTS – for Commercial Real Estate Transactions</title>
<link>http://harp-onthis.com/due-diligence-checklists-for-commercial-real-estate-transactions/</link>
<comments>http://harp-onthis.com/due-diligence-checklists-for-commercial-real-estate-transactions/#comments</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Tue, 26 Nov 2013 14:10:51 +0000</pubDate>
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<description><![CDATA[Are you planning to purchase, finance or develop any of the following types of Commercial or Industrial Real Estate? A KEY element to successfully investing in commercial or industrial real estate is performing an adequate Due Diligence Investigation prior to […]]]></description>
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<h2 class="wp-block-heading">Are you planning to purchase, finance or develop any of the following types of Commercial or Industrial Real Estate?</h2>
<ul class="wp-block-list">
<li>• Shopping Center?</li>
<li>• Office Building?</li>
<li>• Large Multifamily residential?</li>
<li>• Parking Lot/Parking garage?</li>
<li>• Retail Store?</li>
<li>• Mixed-Use?</li>
<li>• Restaurant/Banquet property?</li>
<li>• Sports and Entertainment Venue?</li>
<li>• Intermodal Logistics Terminal?</li>
<li>• Medical Building?</li>
<li>• Gas Station?</li>
<li>• Distribution Center?</li>
<li>• Manufacturing facility?</li>
<li>• Pharmacy?</li>
<li>• Special Use facility ?</li>
<li>• Other?</li>
</ul>
<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 to successfully investing in commercial or industrial real estate is performing an adequate Due Diligence Investigation prior to becoming legally bound to acquire the property. An adequate Due Diligence Investigation will assure awareness of all material facts relevant to the intended use or disposition of the property after closing.</p>
<p> The following checklists will help you conduct a focused and meaningful Due Diligence Investigation.</p>
<h2 class="wp-block-heading"> BASIC DUE DILIGENCE CONCEPTS</h2>
<h3 class="wp-block-heading"> Caveat Emptor: Let the Buyer beware.</h3>
<p>Consumer protection laws applicable to home purchases seldom apply to commercial real estate transactions. The rule that a Buyer must examine, judge, and test for himself, applies to the purchase of commercial real estate.</p>
<h3 class="wp-block-heading">Due Diligence:</h3>
<p>“Such a measure of prudence, activity, or assiduity, as is proper to be expected from, and ordinarily exercised by, a reasonable and prudent (person) under the particular circumstances; not measured by any absolute standard, but depending upon the relative facts of the special case.” Black’s Law Dictionary; West Publishing Company.</p>
<p>Contractual representations and warranties are NOT a substitute for Due Diligence. Breach of representations and warranties = Litigation, time and $$$$$.</p>
<p>The point of commercial real estate due diligence is to avoid transaction surprises and confirm the Property can be used as intended.</p>
<h2 class="has-text-align-center wp-block-heading"> WHAT DILIGENCE IS DUE?</h2>
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<p>The scope, intensity and focus of any Due Diligence Investigation of commercial or industrial real estate depends upon the objectives of the party for whom the investigation is conducted. These objectives may vary depending upon whether the investigation is conducted for the benefit of: (i) a Strategic Buyer (or long-term lessee); (ii) a Financial Buyer; (iii) a Developer; or (iv) a Lender.</p>
<p>If you are a Seller, understand that to close the transaction your Buyer and its Lender must address all issues material to their respective objectives – some of which require information only you, as Owner, can adequately provide.</p>
<h3 class="wp-block-heading">GENERAL OBJECTIVES:</h3>
<p> (i) A “Strategic Buyer” (or long-term lessee) is acquiring the property for its own use and must verify that the property is suitable for that intended use.</p>
<p> (ii) A “Financial Buyer” is acquiring the property for the expected return on investment generated by the property’s anticipated revenue stream, and must determine the amount, velocity and durability of the revenue stream. A sophisticated Financial Buyer will likely calculate its yield based upon discounted cash-flows rather than the much less precise capitalization rate (“Cap. Rate”), and will need adequate financial information to do so.</p>
<p> (iii) A “Developer” is seeking to add value by changing the character or use of the property – usually with a short-term to intermediate-term exit strategy to dispose of the property; although, a Developer might plan to hold the property long term as a Financial Buyer after development or redevelopment. The Developer must focus on whether the planned change in character or use can be accomplished in a cost-effective manner.</p>
<p> (iv) A “Lender” is seeking to establish two basic lending criteria:</p>
<p> (1) “<em>Ability to Repay</em>” – The ability of the property to generate sufficient revenue to repay the loan on a timely basis; <em>and</em></p>
<p> (2) “<em>Sufficiency of Collateral</em>” – The objective disposal value of the collateral in the event of a loan default, to assure adequate funds to repay the loan, carrying costs and costs of collection in the event forced collection becomes necessary.</p>
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<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>The amount of diligent inquiry due to be expended (i.e. “Due Diligence”) to investigate any particular commercial or industrial real estate project is the amount of inquiry required to answer each of the following questions to the extent relevant to the objectives of the party conducting the investigation:</p>
<h2 class="wp-block-heading">I. THE PROPERTY:</h2>
<p> 1. Exactly what PROPERTY does Purchaser believe it is acquiring?</p>
<p>• Land?</p>
<p>• Building?</p>
<p>• Fixtures?</p>
<p>• Other Improvements?</p>
<p>• Other Rights?</p>
<p>• The entire fee title interest including all air rights and subterranean rights?</p>
<p>• All development rights?</p>
<p> 2. What is Purchaser’s planned use of the Property?</p>
<p> 3. Does the physical condition of the Property permit use as planned?</p>
<p>• Commercially adequate access to public streets and ways?</p>
<p>• Sufficient parking?</p>
<p>• Structural condition of improvements?</p>
<p>• Environmental contamination?</p>
<p>• Innocent Purchaser defense vs. exemption from liability</p>
<p>• All Appropriate Inquiry</p>
<p> 4. Is there any legal restriction to Purchaser’s use of the Property as planned?</p>
<p>• Zoning?</p>
<p>• Private land use controls?</p>
<p>• Americans with Disabilities Act?</p>
<p>• Availability of licenses?</p>
<p>• Liquor license?</p>
<p>• Entertainment license?</p>
<p>• Outdoor dining license?</p>
<p>• Drive through windows permitted?</p>
<p>• Other impediments?</p>
<p> 5. How much does Purchaser expect to pay for the property?</p>
<p> 6. Is there any condition on or within the Property that is likely to increase Purchaser’s effective cost to acquire or use the Property?</p>
<p>• Property owner’s assessments?</p>
<p>• Real estate tax in line with value?</p>
<p>• Special Assessment?</p>
<p>• Required user fees for necessary amenities?</p>
<p>• Drainage?</p>
<p>• Access?</p>
<p>• Parking?</p>
<p>• Other?</p>
<p> 7. Any encroachments onto the Property, or from the Property onto other lands?</p>
<p> 8. Are there any encumbrances on the Property that will not be cleared at Closing?</p>
<p>• Easements?</p>
<p>• Covenants Running with the Land?</p>
<p>• Liens or other financial servitudes?</p>
<p>• Leases?</p>
<p>9. If the Property is subject to any Leases, are there any:</p>
<p>• Security Deposits?</p>
<p>• Options to Extend Term?</p>
<p>• Options to Purchase?</p>
<p>• Rights of First Refusal?</p>
<p>• Rights of First Offer?</p>
<p>• Maintenance Obligations?</p>
<p>• Duty of Landlord to provide utilities?</p>
<p>• Real estate tax or CAM escrows?</p>
<p>• Delinquent rent?</p>
<p>• Pre-Paid rent?</p>
<p>• Tenant mix/use controls?</p>
<p>• Tenant exclusives?</p>
<p>• Tenant parking requirements?</p>
<p>• Automatic subordination of Lease to future mortgages?</p>
<p>• Other material Lease terms?</p>
<p>10. New Construction?</p>
<p>• Availability of construction permits?</p>
<p>• Soil conditions?</p>
<p>• Utilities?</p>
<p>• NPDES (National Pollutant Discharge Elimination System) Permit?</p>
<p>• Permit required if earth is disturbed on one acre or more of land.</p>
<p>• If applicable, Storm Water Pollution Prevention Plan (SWPPP) is required.</p>
<h2 class="wp-block-heading">II. THE SELLER:</h2>
<p>1. Who is the Seller?</p>
<p>• Individual?</p>
<p>• Trust?</p>
<p>• Partnership?</p>
<p>• Corporation?</p>
<p>• Limited Liability Company?</p>
<p>• Other legally existing entity?</p>
<p>2. If other than natural person, does Seller validly exist and is Seller in good standing?</p>
<p>3. Does the Seller own the Property?</p>
<p>4. Does Seller have authority to convey the Property?</p>
<p>• Board of Director Approvals?</p>
<p>• Shareholder or Member approval?</p>
<p>• Other consents?</p>
<p>• If foreign individual or entity, are any special requirements applicable?</p>
<p>• Qualification to do business in jurisdiction of Property?</p>
<p>• Federal Tax Withholding?</p>
<p>• US Patriot Act compliance?</p>
<p>5. Who has authority to bind Seller?</p>
<p>6. Are sale proceeds sufficient to pay off all liens?</p>
<h2 class="wp-block-heading">III. THE PURCHASER:</h2>
<p>1. Who is the Purchaser?</p>
<p>2. What is the Purchaser/Grantee’s exact legal name?</p>
<p>3. If Purchaser/Grantee is an entity, has it been validly created and is it in good standing?</p>
<p>• Articles or Incorporation – Articles of Organization</p>
<p>• Certificate of Good Standing</p>
<p>4. Is Purchaser/Grantee authorized to own and operate the Property and, if applicable, finance acquisition of the Property?</p>
<p>• Board of Director Approvals?</p>
<p>• Shareholder or Member approval?</p>
<p>• If foreign individual or entity, are any special requirements applicable?</p>
<p>• Qualification to do business in jurisdiction of the Property?</p>
<p>• US Patriot Act compliance?</p>
<p>• Bank Secrecy Act/Anti-Money Laundering compliance?</p>
<p>5. Who is authorized to bind the Purchaser/Grantee?</p>
<h2 class="wp-block-heading">IV. PURCHASER FINANCING:</h2>
<h3 class="wp-block-heading">A. BUSINESS TERMS OF THE LOAN:</h3>
<p>1. What loan terms have the Borrower and its Lender agreed to?</p>
<p>• What is the amount of the loan?</p>
<p>• What is the interest rate?</p>
<p>• What are the repayment terms?</p>
<p>• What is the collateral?</p>
<p>• Commercial real estate only?</p>
<p>• Real estate and personal property together?</p>
<p>• First lien?</p>
<p>• A junior lien?</p>
<p>• Is it a single advance loan?</p>
<p>• A multiple advance loan?</p>
<p>• A construction loan?</p>
<p>• If it is a multiple advance loan, can the principal be re-borrowed once repaid prior to maturity of the loan; making it, in effect, a revolving line of credit?</p>
<p>• Are there reserve requirements?</p>
<p>• Interest reserves?</p>
<p>• Repair reserves?</p>
<p>• Real estate tax reserves?</p>
<p>• Insurance reserves?</p>
<p>• Environmental remediation reserves?</p>
<p>• Other reserves?</p>
<p>2. Are there requirements for Borrower to open business operating accounts with the Lender? If so, is the Borrower obligated to maintain minimum compensating balances?</p>
<p>3. Is the Borrower required to pledge business accounts as additional collateral?</p>
<p>4. Are there early repayment fees or yield maintenance requirements (each sometimes referred to as “pre-payment penalties”)?</p>
<p>5. Are there repayment blackout periods during which Borrower is not permitted to repay the loan?</p>
<p>6. Is a profit participation payment to Lender required upon disposition?</p>
<p>7. Is there a Loan Commitment fee or “good faith deposit” due upon Borrower’s acceptance of the Loan Commitment?</p>
<p>8. Is there a loan funding fee or loan brokerage fee or other loan fee due Lender or a loan broker at closing?</p>
<p>9. What are the Borrower’s expense reimbursement obligations to Lender? When are they due? What is the Borrower’s obligation to pay Lender’s expenses if the loan does not close?</p>
<h3 class="wp-block-heading">B. DOCUMENTING THE COMMERCIAL REAL ESTATE LOAN</h3>
<p>Does Purchaser have all information necessary to comply with the Lender’s loan closing requirements?</p>
<p>Not all loan documentation requirements may be known at the outset of a transaction, although most commercial real estate loan documentation requirements are fairly typical. Some required information can be obtained only from the Seller. Production of that information to Purchaser for delivery to its lender must be required in the purchase contract.</p>
<p>As guidance to what a commercial real estate lender may require, the following sets forth a typical Closing Checklist for a loan secured by commercial real estate.</p>
<h2 class="wp-block-heading">Commercial Real Estate Loan Closing Checklist</h2>
<p>1. Promissory Note</p>
<p>2. Personal Guaranties (which may be full, partial, secured, unsecured, payment guaranties, collection guaranties or a variety of other types of guarantees as may be required by Lender)</p>
<p>3. Loan Agreement (often incorporated into the Promissory Note and/or Mortgage in lieu of being a separate document)</p>
<p>4. Mortgage (sometimes expanded to be a Mortgage, Security Agreement and Fixture Filing)</p>
<p>5. Assignment of Rents and Leases.</p>
<p>6. Security Agreement</p>
<p>7. Financing Statement (sometimes referred to as a “UCC-1”, or “Initial Filing”).</p>
<p>8. Evidence of Borrower’s Existence In Good Standing; including :</p>
<p>(a) Certified copy of organizational documents of borrowing entity (including Articles of Incorporation, if Borrower is a corporation; Articles of Organization and written Operating Agreement, if Borrower is a limited liability company; certified copy of trust agreement with all amendments, if Borrower is a land trust or other trust; etc.)</p>
<p>(b) Certificate of Good Standing (if a corporation or LLC) or Certificate of Existence (if a limited partnership) or Certificate of Qualification to Transact Business (if Borrower is an entity doing business in a State other than its State of formation)</p>
<p>9. Evidence of Borrower’s Authority to Borrow; including:</p>
<p>(a) Borrower’s Certificate</p>
<p>(b) Certified Resolutions</p>
<p>(c) Incumbency Certificate</p>
<p>10. Satisfactory Commitment for Title Insurance (which will typically require, for analysis by the Lender, copies of all documents of record appearing on Schedule B of the title commitment which are to remain after closing), with required commercial title insurance endorsements, often including:</p>
<p>(a) ALTA 3.1 Zoning Endorsement modified to include parking [although if the property is a multi-user property, such as a retail shopping center, an ALTA 3.0 Zoning Endorsement may be appropriate]
<p>(b) ALTA Comprehensive Endorsement 1</p>
<p>(c) Location Endorsement (street address)</p>
<p>(d) Access Endorsement (vehicular access to public streets and ways)</p>
<p>(e) Contiguity Endorsement (the insured land comprises a single parcel with no gaps or gores)</p>
<p>(f) PIN Endorsement (insuring that the identified real estate tax permanent index numbers are the only applicable PIN numbers affecting the collateral and that they relate solely to the real property comprising the collateral)</p>
<p>(g) Usury Endorsement (insuring that the loan does not violate any prohibitions against excessive interest charges)</p>
<p>(h) other title insurance endorsements applicable to protect the intended use and value of the col- lateral, as may be determined upon review of the Commitment for Title Insurance and Survey or arising from the existence of special issues pertaining to the transaction or the Borrower.</p>
<p>11. Current ALTA/ACSM Land Title Survey (3 sets), prepared in accordance with the 2011 (or current) Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys</p>
<p>12. Current Rent Roll</p>
<p>13. Certified copy of all Leases (4 sets – 1 each for Buyer, Buyer’s attorney, Title Company and Lender)</p>
<p>14. Lessee Estoppel Certificates</p>
<p>15. Lessee Subordination, Non-Disturbance and Attornment Agreements [sometimes referred to simply as “SNDAs”]
<p>16. UCC, Judgment, Pending Litigation, Bankruptcy and Tax Lien Search Report</p>
<p>17. Appraisal -complying with Title XI of FIRREA (Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended)</p>
<p>18. Environmental Site Assessment Report (sometimes referred to as Environmental Phase I and/or Phase 2 Audit Reports)</p>
<p>19. Environmental Indemnity Agreement (signed by Borrower and guarantors)</p>
<p>20. Site Improvements Inspection Report</p>
<p>21. Evidence of Hazard Insurance naming Lender as the Mortgagee/Lender Loss Payee; and Liability Insurance naming Lender as an “additional insured” (sometimes listed as simply “Acord 27 and Acord 25, respectively)</p>
<p>22. Legal Opinion of Borrower’s Attorney</p>
<p>23. Credit Underwriting documents, such as signed tax returns, property operating statements, etc. as may be specified by Lender</p>
<p>24. Compliance Agreement (sometimes also called an Errors and Omissions Agreement), whereby the Borrower agrees to correct, after closing, errors or omissions in loan documentation.</p>
<p class="has-text-align-center">* * * * *</p>
<p>It is useful to become familiar with the Lender’s loan documentation requirements as early in the transaction as practical. The requirements will likely be set forth with some detail in the lender’s Loan Commitment – which is typically much more detailed than most loan commitments issued in residential transactions.</p>
<p>Conducting the Due Diligence Investigation in a commercial real estate transaction can be time consuming and expensive in all events.</p>
<p>If the loan requirements cannot be satisfied, it is better to make that determination during the contractual “due diligence period” – which typically provides for a so-called “free out” – rather than at a later date when the earnest money may be at risk of forfeiture or when other liability for failure to close may attach.</p>
<h3 class="wp-block-heading">CONCLUSION</h3>
<p>Conducting an effective Due Diligence Investigation in a commercial or industrial real estate transaction to discover all material facts and conditions affecting the Property and the transaction is of critical importance.</p>
<p>Unlike owner occupied residential real estate, when a house can nearly always be occupied as the purchaser’s home, commercial and industrial real estate acquired for business use or for investment is impacted by numerous factors that may limit its use and value.</p>
<p>The existence of these factors and their impact on a Purchaser’s ability to use the Property as intended can only be discovered through diligent and focused investigation and attention to detail.</p>
<p>Exercise Due Diligence.</p>
<p>If you need assistance, please ask for help.</p>
]]></content:encoded>
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<post-id xmlns="com-wordpress:feed-additions:1">35</post-id> </item>
<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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<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>
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<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>
<div class="wp-block-image">
<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>
<div class="wp-block-image">
<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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