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.
Real estate due diligence requires insight as well. To find the answers, you must
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This is not earth shattering news, but it is a reminder that defenses to mortgage foreclosure actions must be well grounded in fact and warranted by existing law or a good faith argument for the extension, modification or reversal of existing law. In simple terms – defenses must at least be legally plausible.
One of the more bizarre defenses raised by a small group of defendants who refer to themselves as “sovereign citizens” is a so-called “land patent” defense. It does not work – at least not in Illinois.
In a long, unusual, and fairly cumbersome opinion filed by the Illinois Appellate Court on September 23, 2013, in the case of Parkway Bank and Trust Company v. Victor Korzen and Tomas Zanzola, 2013 IL App (1st) 130380, the First District Appellate Court addressed “a number of tactics a small number of debtors use to both delay the ultimate resolution of cases against them and to use the legal system for improper purposes. Some people might classify those who engage in these tactics as “sovereign citizens”, but regardless of nomenclature, their methods are not only counterproductive, but detrimental to the efficient and fair administration of justice. A recent New York Times article noted the FBI has labeled the strategy as “paper terrorism”.
I am a strong proponent of raising every viable defense to a mortgage foreclosure when representing a defendant. There are many defects in mortgage loan files, and many more defects arising from faulty loan administration, defective securitization of syndicated loans, and breaches of public policy and black letter law by lenders. Some lenders have fraudulently manufactured and forged missing assignment documents and other documents to fill material document gaps. There are legitimate defenses that can be raised and valid lender liability claims that can be pursued in many circumstances if the situation warrants and the resources are available to mount a strong defense and counter-attack.
That said, not every so-called “defense” is legitimate, and some are just plain goofy.
Among the illegitimate “defenses” is the claimed “land patent” defense. It simply does not work. It is not well grounded in law, and there is no good faith argument for the extension, modification or reversal of existing law that courts in Illinois – or probably anywhere in the United States – are likely to recognize as having been pursued in “good faith”. As a consequence, if you raise the “land patent” defense in defense of an Illinois mortgage foreclosure action, you are going to lose, be sanctioned, and perhaps be prosecuted for committing a Class 4 Felony.
In this short post, I do not intend to give an in-depth description of the (faulty) theory behind the land patent defense, but I will direct your attention to paragraph 72 et seq. of the Parkway Bank v. Korzen case, referred to above. Read this case if you are thinking about using the land patent contrivance as a “defense”, particularly in an Illinois mortgage foreclosure action. It does not work.
Just a brief post regarding LLC Property:On September 3, 2013, the Illinois Appellate Court for the Fifth District filed an opinion in the case of Peabody-Waterside Development, LLC v. Islands of Waterside, LLC, Regions Bank N.A., and Prairie Construction Management, LLC 2013 IL App (5th) 120490.
The Court’s Opinion is consistent with Illinois law related to limited liability companies (LLC). The fact that the trial court got it wrong and had to be reversed, however, is not entirely surprising. Experience demonstrates that many lawyers, and courts, either don’t understand the law related to the separateness of an LLC from its members, or refuse to believe it.
The law in Illinois is quite clear. Members of an LLC have no ownership interest in the property or business of the LLC. Members own an economic interest in the distributable cash flow (if any) from the LLC, but no interest in the property or business that generates that cash flow. The LLC Act is clear. The case-law is clear. Like it or not, this is the law in Illinois (and in virtually all USA jurisdictions).
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Questions abound about where our commercial real estate market is headed. As many suspect, where we were prior to the Great Recession is not where we are now, and not where we’re headed as we move forward. Things have changed. We have entered an era where the so-called “Third Space” will dominate commercial real estate development.
What is the “third space“? Urban planners describe it generally as the space designed for creative social interaction, which lies, figuratively, between home and the workplace.
From a purely economic standpoint, it is difficult to see how brick and mortar retailers in today’s marketplace can effectively compete with internet retailers not burdened with comparable fixed costs. Internet retailers have a huge advantage when it comes to convenience, accessibility, and price-competitiveness as compared to fixed location, brick and mortar retailers. Unlike the pre-2008 marketplace, today’s shoppers enjoy virtually limitless access to online goods and services. Online shopping is easy and convenient.
To remind ourselves, the commercial real estate industry began its skid in the summer of 2008, after the collapse of the sub-prime residential lending market in the Spring of 2007. The commercial real estate market experienced a virtual death knell following the collapse of Lehman Brothers on September 15, 2008.
With this backdrop, and the ubiquity of iPhones and other smartphones in society today, we sometimes forget that the very first iPhone was not even released to the public until June 29, 2007. The first Android smartphone was not introduced until October 2008. Twitter and text messaging were in their mere infancy in 2008 as the commercial real estate market crash occurred. Today they are the leading means by which the discretionary income-rich millennial generation (those born between about 1980 and 2000) socialize and communicate.
Yes, technology and our retail culture have changed dramatically while the commercial real estate market has been on hiatus over the past several years. What does that mean to commercial real estate investors and developers? It means our developments have to change too.
The leading takeaway from ICSC RECON 2013 is the need for commercial real estate developers, retailers, lenders and urban planners to grasp the immense changes to our culture borne by the lightning-speed proliferation of social networking and technology. Commercial real estate developments, whether new or retooled, will need to create a reason for consumers to come to our commercial projects to shop and spend. To be successful, our projects will need to be fully integrated, media rich environments providing prospective customers with a compelling reason to come to live, work and play. They will need to provide an enticing third space between home and work for consumers to spend their time and money.
The current push in Congress to mandate collection and remittance of sales taxes on internet-based out-of-state sales may help state and local governments fill their coffers, but imposing this tax will likely do little to help brick and mortar retailers.The fact that online sales may be taxed to the same extent as brick and mortar based sales is not likely to dissuade online shopping.
Rather than begrudge the impact of internet-based shopping on brick and mortar retail, developers and retailers alike will need to wholeheartedly embrace technology to create an enticing, in-person experience that integrates online social networks with face-to-face social interaction and shopping. This is the challenge of our time for retail and commercial real estate development.
Meeting this challenge will require, first, that we grasp it, and, second, that we envision how to effectively integrate fundamental real estate development concepts with new and emerging technologies. To get to the desired bottom line, we will almost certainly need to understand and focus on the third space.
Thanks for listening,
Kymn
May 20, 2013. ICSC RECON UPDATE. Today was an exhausting but productive day. My Fitbit recorded nearly 20,000 steps, or roughly 8.75 miles covered. My feet hurt, so I believe it.
It was great to see friendly, familiar faces, from past and present – happy to be making deals again. There is, for the first time in a very long time, an upbeat mood in the CRE industry, and an abundance of new construction and redevelopment projects underway.
I was interested to hear what community development directors from communities around the country had to say. To a large extent they are “open for business”, fully expecting to hear from developers seeking development incentives, and prepared to be of assistance.
Interestingly, some communities question whether development incentives should be necessary with development coming back. . . To which I have to respond: Really?
My reminder to communities is that
(more…)May 14, 2013: The Chicago Real Estate Council hosted a panel of experts during a lunch meeting today to discuss the current state of commercial real estate industry 
capital markets. The panel was moderated by Dave Hendrickson of Jones Lang LaSalle, and featured panelists Steve Kay, from Cantor Fitzgerald representing CMBS markets, Matt Napoli of PPM America, Inc. representing the life insurance company perspective, Mark Witt of Pearlmark Real Estate Partners, an equity funded mezzanine lender, and Dave Patchin SVP of Fifth Third Bank.
The panelists discussed the tremendous uptick in commercial real estate lending over the past year in all product types, and the prospects for dramatic growth 2013 and beyond. Interest rates in the 3% to 4% range are prevalent with loan to value ratios of 60% to 75% typical. The spread on LIBOR based loans is typically around 200 basis points above LIBOR.
All primary loan panelists agreed that they prefer to finance projects without the use of mezzanine financing, but in certain circumstances they will consider permitting mezzanine financing.
The consensus was that interest rates are likely to remain flat for the next 12 to 18 months, but that over the next five years interest rates are likely to rise roughly 200 basis points.
None of the panelists expressed concern about the Chicago market overheating in the foreseeable future, but they are being more diligent in evaluating multifamily development and acquisition loans due to rising concerns about absorption of all the recently announced new apartment developments in the City of Chicago. Generally, however, the sense is that multifamily projects in desirable downtown locations remain attractive, while projects in fringe locations pose rising risks.
Nationally, some markets show signs of overheating – with cap rates and purchase prices skewed. This is likely a consequence of historically low interest rates permitting increased cash on cash rates of return. The concern is, once again, the potential loss of value when these loans must be refinanced in 3 to 7 years if interest rates have risen significantly.
A general consensus was expressed that the Chicago commercial real estate market continues to have strong growth potential into the foreseeable future, and that secondary and tertiary markets also represent significant areas of opportunity for CRE investment.
Bottom feeders have a distasteful reputation with some – but, truth be told, they are among the most reliable leading economic indicators of recovery for the commercial real estate industry.
There is a stunning disconnect between equity markets and the economy as a whole. The Dow Jones Industrial Average is at record highs, with 15,000 in plain sight. Equity investors are betting on a bright future. To gauge the economy by that measure, the economy appears to be healthy and rebounding nicely.
Leave Wall Street, and drive through urban and suburban retail districts, and the picture is not so bright. Vacant and boarded up storefronts are common. Parking lots are in disrepair. Shopping center signs are blank – or filled with half burnt-out signs displaying names of tenants past.
Sure. Commercial deal flow is beginning to pick up, but compared to what? A car travelling three miles per hour can triple its speed, but it is still moving at a remarkably slow pace by most standards.
I went for a drive recently, touring retail shopping centers and office parks to find out where the action is. The answer? Almost nowhere. It didn’t really surprise me. Although deal flow is picking up in my practice, most deals are with cash-rich bottom feeders (or bottom feeder funds) buying up distressed properties. Not that I’m knocking bottom feeders. Chances are good they will (more…)
