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<title>what to look for – HARP – On This. . .</title>
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<description>A Commercial Real Estate and Business Thought-board</description>
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<title>COOL PROJECTS – A Love Affair Revisited</title>
<link>http://harp-onthis.com/cool-projects-real-estate/</link>
<comments>http://harp-onthis.com/cool-projects-real-estate/#respond</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Wed, 19 May 2021 22:28:00 +0000</pubDate>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[Business]]></category>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[adaptive reuse]]></category>
<category><![CDATA[business]]></category>
<category><![CDATA[Chicago]]></category>
<category><![CDATA[closing]]></category>
<category><![CDATA[closings]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[conducting due diligence]]></category>
<category><![CDATA[cool projects]]></category>
<category><![CDATA[creative use]]></category>
<category><![CDATA[development]]></category>
<category><![CDATA[due diliigence]]></category>
<category><![CDATA[economic redevelopment]]></category>
<category><![CDATA[ICSC RECon 2015]]></category>
<category><![CDATA[industrial property]]></category>
<category><![CDATA[investment]]></category>
<category><![CDATA[keys to closing]]></category>
<category><![CDATA[purchase]]></category>
<category><![CDATA[real estate]]></category>
<category><![CDATA[redevelopment]]></category>
<category><![CDATA[transactions]]></category>
<category><![CDATA[urban infill]]></category>
<category><![CDATA[what to look for]]></category>
<guid isPermaLink="false">http://harp-onthis.com/?p=1173</guid>
<description><![CDATA[Adaptive Reuse Of Underutilized Real Estate Cool Projects – A Love Affair Revisited We are entering a new frontier for adaptive re-use. The worldwide COVID-19 pandemic has left the urban commercial landscape in tatters. Shuttered vacant commercial space is commonplace […]]]></description>
<content:encoded><![CDATA[
<h1 class="wp-block-heading"><mark style="background-color:rgba(0, 0, 0, 0)" class="has-inline-color has-vivid-cyan-blue-color"><strong>Adaptive Reuse Of Underutilized Real Estate </strong></mark></h1>
<h1 class="wp-block-heading"><mark style="background-color:rgba(0, 0, 0, 0)" class="has-inline-color has-vivid-cyan-blue-color"><strong><em>Cool Projects</em> – A Love Affair Revisited</strong></mark></h1>
<p>We are entering a new frontier for adaptive re-use. The worldwide COVID-19 pandemic has left the urban commercial landscape in tatters. Shuttered vacant commercial space is commonplace throughout cities and towns. Doors and windows are boarded-up in shopping districts and entertainment districts that were thriving as recently as February 2020. Some have become barely recognizable. </p>
<p><strong>Looking to the Future</strong></p>
<div class="wp-block-image">
<figure class="alignleft size-large is-resized"><img data-recalc-dims="1" fetchpriority="high" decoding="async" data-attachment-id="1927" data-permalink="http://harp-onthis.com/cool-projects-real-estate/old-post-office/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/old-post-office.jpg?fit=1200%2C630" data-orig-size="1200,630" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="old-post-office" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/old-post-office.jpg?fit=300%2C158" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/old-post-office.jpg?fit=1024%2C538" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/old-post-office.jpg?resize=400%2C210" alt="old post office" class="wp-image-1927" width="400" height="210" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/old-post-office.jpg?resize=1024%2C538 1024w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/old-post-office.jpg?resize=300%2C158 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/old-post-office.jpg?resize=768%2C403 768w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/04/old-post-office.jpg?w=1200 1200w" sizes="(max-width: 400px) 100vw, 400px" /></figure></div>
<p>What is to become of this vast inventory of vacant retail space, shuttered restaurants, empty hotels and office buildings, abandoned shopping malls, cavernous and empty theaters, stranded travel destinations, and more? Who will have the vision and courage to adapt and redevelop these properties into newly viable economic jewels? And when? </p>
<p>Make no mistake; it will happen. And it’s likely to happen much more quickly than you think. </p>
<p>While many are just beginning to peak their cautious heads out from under their COVID blankets, <em>value-add developers</em> are assembling to scoop-up valuable assets to be reimagined and repositioned for economic glory. If you believe the residential real estate market is hot, hold onto your collective hats. There are enormous profits to be made in commercial real estate and new business. These COVID-depressed sectors have struggled during the COVID shutdown, but unless the government blows it with short-sighted regulation and foolish tax policy, substantial economic revitalization is about to commence. Jobs, business opportunities, community-desired services and amenities, and great economic rewards are on the horizon. The ingenuity and creativity of value-add developers and the entrepreneurs they enable, coupled with vast amounts of available capital, are about to be unleashed in a torrent. </p>
<p>Pent-up demand is a powerful force. We are about to witness the creative power of visionary value-add developers as they reimagine and reinvent vacant and underutilized commercial space and turn it into some remarkably C<em>oo</em>l Projects. I can’t wait!</p>
<h1 class="wp-block-heading"><mark style="background-color:rgba(0, 0, 0, 0)" class="has-inline-color has-vivid-cyan-blue-color"><strong>C<em>OO</em>L PROJECTS – Real Estate Projects I <em>Love</em> to Work On. </strong></mark></h1>
<p>I love cool real estate projects. Cool projects are why I became a lawyer. Cool projects are why I come to the office each day. Cool real estate projects are why I did not become an astrophysicist (well, one reason – although, that might have been cool too). Cool projects are the reason I live, smile, dance, breath, scour the earth for new deals, jump for joy.</p>
<p>And by “c<em>oo</em>l”, I don’t mean in a thermal sense – but rather in a “<em>this project is so cool</em>” sense. I am referring to real estate projects that are awesome. Real estate projects that are fun. Real estate projects that make you say “<em>Wow – what a cool project!</em>”</p>
<div class="wp-block-image">
<figure class="alignleft size-large is-resized"><img data-recalc-dims="1" decoding="async" data-attachment-id="1527" data-permalink="http://harp-onthis.com/harp-photo-sept-2019-less-than-2mb/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2019/09/Harp-Photo-Sept.-2019-less-than-2MB.png?fit=360%2C402" data-orig-size="360,402" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="Harp Photo – Sept. 2019 less than 2MB" data-image-description="" data-image-caption="<p>R. Kymn Harp</p>
" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2019/09/Harp-Photo-Sept.-2019-less-than-2MB.png?fit=269%2C300" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2019/09/Harp-Photo-Sept.-2019-less-than-2MB.png?fit=360%2C402" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2019/09/Harp-Photo-Sept.-2019-less-than-2MB.png?resize=162%2C179" alt="" class="wp-image-1527" width="162" height="179"/><figcaption class="wp-element-caption">R. Kymn Harp</figcaption></figure></div>
<p>Cool projects don’t need to be costly projects in major urban centers – although those can be cool too. I’m talking about projects that are creative. Projects that require vision and imagination. Projects that take something mundane and turn it into something special.</p>
<p>Some people think I only like huge projects. To be honest, I do like huge projects, but largely because the huge projects I have worked on also happened to be cool projects.</p>
<p>Redevelopment of the commercial portions of Marina City in downtown Chicago was a cool project. Ground-up development of Sears Centre Arena in Hoffman Estates, Illinois was a cool project. Work on various mixed-use projects around the Midwest and upstate New York have been cool projects. But so has been the much smaller development of an 8,000 square foot microbrewery in the historic Motor Row District of Chicago using TIF financing; development of countless restaurant and entertainment venues throughout the Midwest; conversion of a multi-story industrial building into a high-tech office center; conversion of an outdated office building into a stylish, luxury hotel; adaptive reuse of outdated retail strip centers, bank buildings, city and suburban office buildings, bowling alleys, warehouses, industrial buildings, gas stations, and various small to medium sized special purpose buildings into modern, fully functional jewels – reinvented to provide much needed retail and service amenities for local neighborhoods and communities. It is not the size of the project that makes it cool – or the cost – it is the concept, imagination and creative challenge involved that makes the difference. At least for me.</p>
<h2 class="wp-block-heading"><span style="color: #008080;"><span class="has-inline-color has-vivid-cyan-blue-color"><strong>Cool Projects Test</strong></span></span></h2>
<p>Here’s a test [call it the “<span style="color: #000000;"><em>Cool Projects Test</em></span>”, if you will]:</p>
<p>Which of the following projects is more likely to end up on Kymn Harp’s list of <em>cool projects</em>?</p>
<span id="more-1173"></span>
<h5 class="wp-block-heading"><span style="color: #008080;"><em><span class="has-inline-color has-vivid-cyan-blue-color">Project Choice No. 1:</span></em></span></h5>
<p>a. Developing a stand-alone bank building on a commerical outlot?</p>
<p><em>Or</em></p>
<p>b. Converting an historic firehouse into an upscale restaurant and wine bar with take-out bakery?</p>
<h5 class="wp-block-heading"><span style="color: #008080;"><em><span class="has-inline-color has-vivid-cyan-blue-color">Project Choice No. 2:</span></em></span></h5>
<p>a. Developing a 196 unit apartment complex on a large vacant lot?</p>
<p><em>Or</em></p>
<p>b. Redeveloping a former 3-story Main Street department store into a mixed-use project with first floor restaurants, sidewalk cafés, first floor retail, a side street residential lobby, apartments on the 2nd and 3rd floors, and a rooftop sundeck and fitness center?</p>
<h5 class="wp-block-heading"><span style="color: #008080;"><em><span class="has-inline-color has-vivid-cyan-blue-color">Project Choice No. 3:</span></em></span></h5>
<p>a. Developing a stand-alone strip shopping center?</p>
<p><em>Or</em></p>
<p>b. Developing retail shops within the underutilized first floor and lower level pedway serving an existing hotel/convention center?</p>
<h5 class="wp-block-heading"><span style="color: #008080;"><em><span class="has-inline-color has-vivid-cyan-blue-color">Project Choice No. 4:</span></em></span></h5>
<p>a. Developing a multiplex movie theater?</p>
<p><em>Or</em></p>
<p>b. Converting a former multiplex movie theater into a multi-tenant, specialty entertainment center with intimate live music venues, restaurants, an art gallery, and ethnic-focused shopping boutiques to serve a growing ethnic population in the surrounding community?</p>
<h5 class="wp-block-heading"><span style="color: #008080;"><em><span class="has-inline-color has-vivid-cyan-blue-color">Project Choice No. 5:</span></em></span></h5>
<p>a. Developing a national chain pharmacy on a corner lot?</p>
<p><em>Or</em></p>
<p>b. Redeveloping a former church as a music and theatrical venue with a restaurant, music store and gift shop?</p>
<h5 class="wp-block-heading"><span style="color: #008080;"><em><span class="has-inline-color has-vivid-cyan-blue-color">Project Choice No. 6:</span></em></span></h5>
<p>a. Developing a new suburban office tower?</p>
<p><em>Or</em></p>
<p>b. Coordinating economic redevelopment of a suburban downtown business district to transform a stagnant center of town into an affluent Millennial-friendly live-work-play lifestyle environment?</p>
<h5 class="wp-block-heading"><span style="color: #008080;"><em><span class="has-inline-color has-vivid-cyan-blue-color">Project Choice No. 7:</span></em></span></h5>
<p>a. Developing an industrial/office park?</p>
<p><em>Or</em></p>
<p>b. Developing a multi-user sports and entertainment complex with restaurants, retail and parking?</p>
<p>Which Project Choices listed above qualify as “<em>cool projects</em>”? Not everyone will agree. There is no absolute, right answer. And don’t get me wrong, if a client walked through my door with any of these projects, I would be happy to jump on-board. But, the truth is that – in a perfect world, if given a choice – I would choose Project Choice “<span style="text-decoration: underline;">b</span>” every time.</p>
<p>Why? There is just something exhilarating about taking tired, underutilized or functionally obsolete properties and reinventing them as revitalized developments that make users say: “<em>WOW – what a cool project!</em>”</p>
<p>Cool projects require a lot of planning, legal insight, and specialized due diligence to make sure a successful transformation can be achieved, but the value-added turnaround can be long-lasting and well worth the effort.</p>
<p>I am always on the hunt for cool projects. I enjoy working with all my clients, but my favorite clients are investors, developers and business owners with creative vision, who can imagine the future, and make it happen.</p>
<p>Not every project I work on is a <em>cool project</em>. As a real estate lawyer, I work on the deals that clients bring me. Some projects are just good investments waiting to be built. I’m fine with that. There is nothing wrong with building projects that just serve a need. I endorse the concept, and am always glad to help, so give me a call. I am at your service.</p>
<p><em>But</em> . . ., for sure if you are contemplating a <em>cool project</em> – please stop whatever else you are doing, pick up your phone and call me. My direct line is <strong><span class="has-inline-color has-vivid-cyan-blue-color">312-456-0378</span></strong>. Let’s talk. My partners and I can help you get it done – and, I assure you, we can each have a blast doing it.</p>
<p>There is no thrill quite like the thrill of like-minds working together in sync, with skill and creativity, to move a cool project forward, from concept to completion. I would love to be part of your team.</p>
<p><em>Thanks for listening.</em></p>
<p>Be c<em>oo</em>l. </p>
<p> Be creative.</p>
<p> Call me.</p>
<p>Thanks,<br /><em>Kymn</em></p>
]]></content:encoded>
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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>COMMERCIAL REAL ESTATE BOOT CAMP</title>
<link>http://harp-onthis.com/commercial-real-estate-boot-camp/</link>
<comments>http://harp-onthis.com/commercial-real-estate-boot-camp/#respond</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Fri, 13 Apr 2018 20:35:15 +0000</pubDate>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[Chicago]]></category>
<category><![CDATA[closing]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[conducting due diligence]]></category>
<category><![CDATA[due diligence checklist]]></category>
<category><![CDATA[how to close]]></category>
<category><![CDATA[IICLE]]></category>
<category><![CDATA[Illinois]]></category>
<category><![CDATA[keys to closing]]></category>
<category><![CDATA[real estate]]></category>
<category><![CDATA[what to look for]]></category>
<guid isPermaLink="false">http://harp-onthis.com/?p=1392</guid>
<description><![CDATA[NEW – COMMERCIAL REAL ESTATE BOOT CAMP- April 24, 2018- presented by the Illinois Institute for Continuing Legal Education I’m pleased to tell you about a terrific CLE program I’ll be speaking at and moderating: the IICLE® Commercial Real Estate Boot […]]]></description>
<content:encoded><![CDATA[
<h2 class="wp-block-heading">NEW – COMMERCIAL REAL ESTATE BOOT CAMP- April 24, 2018- presented by the Illinois Institute for Continuing Legal Education</h2>
<div class="wp-block-image">
<figure class="alignleft"><a href="http://www.iicle.com/download/crebc18_brochure.pdf"><img data-recalc-dims="1" loading="lazy" decoding="async" width="60" height="77" data-attachment-id="740" data-permalink="http://harp-onthis.com/commercial-real-estate-boot-camp/image004/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2014/04/image004.png?fit=60%2C77" data-orig-size="60,77" 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="image004" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2014/04/image004.png?fit=60%2C77" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2014/04/image004.png?fit=60%2C77" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2014/04/image004.png?resize=60%2C77" alt="" class="wp-image-740"/></a></figure></div>
<p>I’m pleased to tell you about a terrific CLE program I’ll be speaking at and moderating: the <strong>IICLE® Commercial Real Estate Boot Camp</strong>, which will be held on <strong>Tuesday, April 24, 2018, at the One North Wacker Conference Center (UBS TOWER) in Chicago </strong>. A <strong>SPRINGFIELD SIMULCAST and LIVE WEBCAST</strong> will also be available.</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="1773" data-permalink="http://harp-onthis.com/commercial-real-estate-boot-camp/portraitofnewbusinessownersbyemptyofficewindow/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/new-business-owners-by-empty-office-window.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) 2017 Monkey Business Images\/Shutterstock. No use without permission.","focal_length":"0","iso":"0","shutter_speed":"0","title":"Portrait,Of,New,Business,Owners,By,Empty,Office,Window","orientation":"0"}" data-image-title="Portrait,Of,New,Business,Owners,By,Empty,Office,Window" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/new-business-owners-by-empty-office-window.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/new-business-owners-by-empty-office-window.jpg?fit=1000%2C667" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/new-business-owners-by-empty-office-window.jpg?resize=1000%2C667" alt="portrait of new business owners by empty office window" class="wp-image-1773" style="width:400px;height:267px" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/new-business-owners-by-empty-office-window.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/new-business-owners-by-empty-office-window.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/new-business-owners-by-empty-office-window.jpg?resize=768%2C512 768w" sizes="auto, (max-width: 1000px) 100vw, 1000px" /></figure></div>
<p>This program is a “boot camp” for commercial real estate transactions, intended as intensive, fast-paced, basic training. The goal is to provide practical knowledge fundamental to everyday commercial real estate transactions practice, including basic forms. This course is designed for (i) lawyers with one to seven years of experience handling commercial real estate transactions; and (ii) lawyers at any level of experience seeking to learn the fundamentals of everyday commercial real estate transactions.</p>
<p>In this program you will learn about (a) client intake and engagement letters; (b) drafting/reviewing a letter of intent to purchase; (c) drafting the purchase and sale agreement; (d) obtaining and reviewing a suitable ALTA survey; (e) commercial title insurance with typically required commercial endorsements; (f) three common types of escrows; (g) types of deeds typical to commercial real estate transactions; (h) required governmental notices; (i) due diligence in preparing for closing; (j) documenting party authority; (k) the basic opinion of borrowers’ counsel; and (l) common closing issues.</p>
<p>You can view the full e-brochure here: <a href="http://www.iicle.com/download/crebc18_brochure.pdf" target="_blank" rel="noopener">PROGRAM BROCHURE</a></p>
<p>Check out the full agenda (the program provides 6 hours of CLE, including 1 hour of Professional Responsibility) and register now at http://www.iicle.com/crebc18 or call IICLE® at 800-252-8062.</p>
<p>As you may know, there is a shortage of commercial real estate attorneys with mid-level experience. Not because attorneys are not interested, but because during the commercial real estate crash that began with the collapse of Lehman Bros. on September 15, 2008, and the following <em>Great Recession </em>with its lingering effects on the commercial real estate market until just the past two or three years, there were few commercial real estate transactions upon which new attorneys could gain experience. Times have changed. Commercial real estate practice is booming. We need more attorneys who actually know what they’re doing. This Commercial Real Estate Boot Camp is a great start!</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>I hope to see you on April 24th!</p>
<div class="wp-block-image">
<figure class="alignleft"><a href="http://www.iicle.com/download/crebc18_brochure.pdf"><img data-recalc-dims="1" loading="lazy" decoding="async" width="300" height="39" data-attachment-id="738" data-permalink="http://harp-onthis.com/commercial-real-estate-boot-camp/image002/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2014/04/image002.jpg?fit=693%2C92" data-orig-size="693,92" 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="IICLE banner" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2014/04/image002.jpg?fit=300%2C39" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2014/04/image002.jpg?fit=693%2C92" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2014/04/image002.jpg?resize=300%2C39" alt="" class="wp-image-738" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2014/04/image002.jpg?resize=300%2C39 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2014/04/image002.jpg?resize=500%2C66 500w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2014/04/image002.jpg?w=693 693w" sizes="auto, (max-width: 300px) 100vw, 300px" /></a></figure></div>]]></content:encoded>
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<post-id xmlns="com-wordpress:feed-additions:1">1392</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>
]]></content:encoded>
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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>
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<item>
<title>AIR RIGHTS DEVELOPMENT – Chicago, Illinois</title>
<link>http://harp-onthis.com/developing-chicago-air-rights/</link>
<comments>http://harp-onthis.com/developing-chicago-air-rights/#comments</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Fri, 08 Jul 2016 21:22:00 +0000</pubDate>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[White Papers]]></category>
<category><![CDATA[adaptive reuse]]></category>
<category><![CDATA[air rights]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[development]]></category>
<category><![CDATA[industrial property]]></category>
<category><![CDATA[investment]]></category>
<category><![CDATA[project entitlement]]></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=1314</guid>
<description><![CDATA[WHY DEVELOP AIR RIGHTS? Prime commercial land is limited. Prices per square foot can be astronomical. Demand for efficiency to maximize return on investment is growing. No wonder developers and property owners are looking to the sky, with varying degrees […]]]></description>
<content:encoded><![CDATA[
<h2 class="wp-block-heading">WHY DEVELOP AIR RIGHTS?</h2>
<p>Prime commercial land is limited. Prices per square foot can be astronomical. Demand for efficiency to maximize return on investment is growing. No wonder developers and property owners are looking to the sky, with varying degrees of success, to capture all the value they can from each urban parcel. Air rights development may be the solution you are looking for.</p>
<div class="wp-block-image">
<figure class="alignleft"><img data-recalc-dims="1" loading="lazy" decoding="async" width="216" height="300" data-attachment-id="103" data-permalink="http://harp-onthis.com/developing-chicago-air-rights/httpwww-dreamstime-comstock-image-chicago-skyline-image2898031/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_2898031-licensed.jpg?fit=1469%2C2040" data-orig-size="1469,2040" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"(c) Russiangal | Dreamstime.com","focal_length":"0","iso":"0","shutter_speed":"0","title":"http:\/\/www.dreamstime.com\/stock-image-chicago-skyline-image2898031"}" data-image-title="http://www.dreamstime.com/stock-image-chicago-skyline-image2898031" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_2898031-licensed.jpg?fit=216%2C300" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_2898031-licensed.jpg?fit=737%2C1024" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_2898031-licensed.jpg?resize=216%2C300" alt="http://www.dreamstime.com/stock-image-chicago-skyline-image2898031" class="wp-image-103" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_2898031-licensed.jpg?resize=216%2C300 216w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_2898031-licensed.jpg?resize=737%2C1024 737w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/dreamstime_m_2898031-licensed.jpg?w=1469 1469w" sizes="auto, (max-width: 216px) 100vw, 216px" /></figure></div>
<p>Owners and developers, and people in general, are conditioned to think of potential development sites as flat surfaces with essentially two dimensions: north/south and east/west. They see only the surface of the land, and envision the building they will construct for the particular purpose they have in mind; a bank, a drugstore, a restaurant, a strip mall, a parking garage, an office building. If the parcel is larger than they need, they may envision subdividing the parcel to make two or more lots. In most cases, however, they think primarily in terms of land coverage for the type of building they need. They visualize only the two dimensional space depicted on their Site Plan or Plat of Survey.</p>
<p>In 30 out of 50 states, including Illinois and all other Mid-Western states, the “Rectangular Survey System” is in effect. The Rectangular Survey System was adopted in 1785 to meet the needs of the Federal Government as it faced the challenge of dividing vast areas of undeveloped land lying west of the original 13 colonies. The system, developed under the direction of Thomas Jefferson, essentially divides the United States into rectangles, measured in relation to lines known as Meridians and Base Lines.</p>
<p>Development lots are instinctively viewed as the two-dimensional surface of land visually representing a potential development parcel. Descriptions of a parcel typically refer to “a parcel of land X feet by Y feet” located in relation to an intersection or other identifiable landmark.</p>
<p>Once a parcel is “developed”, or designated for development, by construction of improvements on the land, it is natural to think of the parcel as being unavailable for further development (unless the existing improvements are to be demolished).</p>
<p>Classic examples of this are single story commercial buildings at prime commercial locations, a multi-deck parking garage or mid-rise building in a downtown development area, railroad tracks or spurs cutting across valuable urban land and, in some cases, roadways and alleys.</p>
<p>Each of these situations represent, potentially, under-utilization of valuable real estate. Finding a way to develop the “air” above these existing or planned improvements maximizes the economic utility of these parcels and can be like creating “<em>money from thin air</em>.”</p>
<p>The practice of finding ways to utilize the “space above” is often referred to as “air rights development”. Air rights development requires thinking in three dimensions, and requires serious design consideration and legal planning but, when land values are at a premium and zoning permits, the economic return may be dramatic.</p>
<p>Though often overlooked, virtually all of Chicago’s downtown business district is a “<em>city in the air</em>“. People tend to think of streets and street level entrances to buildings in the downtown Chicago “loop” as being at “ground level”. This is simply not the case. Most of what is thought of in the Chicago Loop as being at “ground level” is located 12 to 22 feet above the earth’s surface. This explains the vast network of “lower” streets and passageways in downtown Chicago, such as “Lower Wacker Drive”, “Lower Dearborn Street”, “Lower State Street”, etc. which most people seldom traverse. It also explains why, in 1992, the Chicago Loop business district was virtually shut down by “the Great Loop Flood of ’92”, but few people got wet or even saw any water as office and retail buildings were closed and workers were sent home because of “flooding”.</p>
<p>The point of these observations is to reveal that “development of air rights” is not new. It is also not “. . . some exotic legal manipulation of doubtful efficacy dreamed up by big city lawyers for use only in big cities”. Development of so-called “air rights” is little more than efficient use of a limited resource when use becomes economically feasible and beneficial.</p>
<h2 class="wp-block-heading">WHAT ARE “AIR RIGHTS”?</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="1785" data-permalink="http://harp-onthis.com/developing-chicago-air-rights/lookingupatthecitysdenserealestateproperties/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/looking-up-at-the-citys-dense-real-estate-properties.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) 2019 Lili.Q\/Shutterstock. No use without permission.","focal_length":"0","iso":"0","shutter_speed":"0","title":"Looking,Up,At,The,City's,Dense,Real,Estate,Properties","orientation":"1"}" data-image-title="Looking,Up,At,The,City’s,Dense,Real,Estate,Properties" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/looking-up-at-the-citys-dense-real-estate-properties.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/looking-up-at-the-citys-dense-real-estate-properties.jpg?fit=1000%2C668" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/looking-up-at-the-citys-dense-real-estate-properties.jpg?resize=400%2C267" alt="looking up at the city's dense real estate properties" class="wp-image-1785" width="400" height="267" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/looking-up-at-the-citys-dense-real-estate-properties.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/looking-up-at-the-citys-dense-real-estate-properties.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/looking-up-at-the-citys-dense-real-estate-properties.jpg?resize=768%2C513 768w" sizes="auto, (max-width: 400px) 100vw, 400px" /></figure></div>
<p>“Air rights” are part of the “bundle of rights” constituting fee simple title to real estate. The term “air rights” generally refers to the right of the owner of fee simple title of a parcel of land to use the space above the land. If this right did not exist, it would not be possible to </p>
<span id="more-1314"></span>
<p>construct improvements on the land, such as a home, fence or other structure above the surface of the land. While the ancient common law doctrine that “ownership of land extends to the periphery of the universe” has been limited to accommodate the modern world realities of air-travel, the fundamental concept that land ownership includes the right to use and occupy the airspace above the surface of the land is well established.</p>
<p>As one of the bundle of property rights comprising fee simple title to real estate, “air rights” may also be “unbundled” and alienated separate from other rights in the bundle. Conceptually, from a legal standpoint, the separation and transfer of so-called “air rights” is not materially different from subdividing and transferring a lot pictured in only two dimensions. Instead of subdividing and selling off, for example, “that part of Lot 1 lying east of the west 100 feet of Lot 1” as depicted on a plat of survey, the transfer of air rights subdivides and transfers a parcel based upon its vertical elevation. For example, one might subdivide and transfer “that part of Lot 1 lying above a horizontal plane located 100 feet above [some benchmark elevation].</p>
<p>By dividing a development parcel “vertically”, it is often possible to “stack” uses in a mixed use development owned by more than one owner or developer, in the same way it is possible to subdivide and develop side-by-side a horizontal surface subdivision. In some cases, without even developing the open air above existing or planned improvements, it is possible to sell and transfer “air rights” to an adjacent property owner to allow construction of a taller building on an adjacent building site. Recognizing this potential can result in a substantial economic windfall to a property owner otherwise under-utilizing a valuable development parcel.</p>
<p>Air rights development is a combination of black letter real estate law and the applicable zoning code of the community in which your property is located. Because zoning codes are legislative pronouncements, they are subject to change as local city councils determine appropriate. For this reason, the current zoning classification for every project, and certainly for any project involving “air rights development” must be examined at the beginning of each transaction as part of the due diligence investigation.</p>
<h3 class="wp-block-heading"><strong><em>Hypothetical Facts</em></strong><strong>:</strong></h3>
<p>Suppose you are planning to acquire a 20,000 square foot parcel in Chicago, Illinois zoned DC-12 or DX-12. Your purchase price is $4,500,000. You believe it is a perfect location for a restaurant-banquet-entertainment complex serving food and liquor, with live entertainment and dancing. You visualize a state of the art venue spread out over 2 floors, with about 19,000 square feet of usable space per floor, for a total restaurant-banquet-entertainment venue of 38,000 square feet. Fortunately, adequate parking is close by and available. Demand for offices and condominium housing is growing in the vicinity of your parcel, which you believe will further enhance the chances of success of your planned business by bringing more customers through your doors. Although you recognize development of offices and condominiums in your area is a “hot” development opportunity and might also be an excellent investment, you have no interest or experience in developing offices or condominiums and really just want to develop and open your dream restaurant-banquet-entertainment complex. You have calculated your costs of construction and operation, and believe the project is economically feasible, although you would like to find a way to cut your costs or otherwise increase your return on investment.</p>
<p><em>Consider this</em>: The restaurant-banquet-entertainment complex you wish to construct is a permitted use in the applicable zoning classification under the Chicago Zoning Ordinance. Also permitted is a wide array of other business and service uses, as well as dwelling units as long as the dwelling units are not below the second floor.</p>
<p>The permitted floor area ratio (F.A.R.) for a parcel zoned as a DC-12 or DX-12 zoning classification under the Chicago Zoning Ordinance is 12; which means that the total square footage of the building or buildings permitted on your 20,000 square foot parcel is 240,000 square feet. You are utilizing only 38,000 square feet, which means, from a zoning standpoint at least, you are under-utilizing your parcel to the extent of 202,000 square feet.</p>
<h3 class="wp-block-heading"><em>Making Money from Thin Air</em></h3>
<p>Suppose you were able to reconfigure your proposed project to free up 1000 to 1200 square feet per floor in return for recovering half (or more) of your total land cost.</p>
<p>If this were possible, your restaurant/banquet/entertainment complex may be reduced in size to 36,000 square feet instead of 38,000 square feet, but your development cost for the project would be reduced $2,000,000 or more. Almost free money.</p>
<h4 class="wp-block-heading"><em>How could this work? </em></h4>
<p><strong><em>Scenario No. 1</em></strong>: With the hypothetical facts presented, it is certainly within the realm of possibilities to market and sell the “air space” above your proposed restaurant-banquet-entertainment complex for development of offices and/or condominiums. As mentioned, under the applicable zoning classification, 202,000 square feet remains available for development on your site. Assume prevailing land values of $225 per square foot (represented by your purchase price of $4,500,000 for a 20,000 square foot parcel), a condominium/office developer may well view your “air space parcel” as a bargain at $2,000,000 ($100 per square foot – measured in two dimensions for 20,000 square feet) since it would still enable construction of 202,000 square feet of floor area above the second floor.</p>
<p>Obviously, to make the “air space” usable, adequate means of access and support must be planned, which will require detailed planning for design and construction of both the ground level parcel and the “air space” parcel (which do not necessarily need to be constructed at the same time, although simultaneous construction may be more efficient and practical) and creation of legally sufficient easements of support, and easements for ingress and egress, utilities, loading and unloading, mail delivery, a street level lobby, elevators, standpipes, etc., as well as drafting of development specific covenants running with the land to promote non-interference and compatibility of use of each parcel. The necessity for easements of support, and easements (or conveyance of fee parcels) for a street level lobby, mail delivery areas, and loading and unloading areas, is the reason slight reduction in size of the proposed restaurant/banquet/entertainment complex is suggested in the premise to Scenario No. 1 – to free up space for these purposes.</p>
<p>While sale of an “air rights parcel” will require added expense for engineering (much of which will likely be undertaken by the proposed developer of the air rights parcel) and attorneys’ fees to negotiate and draft a workable declaration of easements, covenants and restrictions to legally facilitate the development and use of each parcel, the economic advantage of being able to sell the air rights parcel may more than justify the added effort and development expense involved.</p>
<p><em><strong>Scenario No. 2</strong>.</em> Assume the same hypothetical facts as in Scenario No. 1, except that instead of being the owner of the parcel referred to in Scenario No. 1 (the “Entertainment Parcel”), you own or wish to develop a parcel adjacent to the Entertainment Parcel. Perhaps the Entertainment Parcel has already been developed with the restaurant-banquet-entertainment complex referred to in Scenario No. 1. Assume your parcel (the “High Rise Parcel”) is 40,000 square feet with a zoning, classification that allows a floor area ratio (F.A.R.) of 12, and you wish to construct (or to sell your parcel to a developer to construct) a mixed-use development with first floor retail, five floors of office space and six floors of luxury condominiums. Because zoning for the High Rise Parcel allows an F.A.R. of 12, you determine a twelve-story, 480,000 square foot building is the maximum you will be able to construct on your 40,000 square foot lot.</p>
<p>In conducting a financial analysis of your project you determine that the marginal cost of each floor would result in you generating a substantially greater return on your investment if you were able to construct additional floors of office space, condominiums or even multi-level parking in your proposed project on the High Rise Parcel. Still, you are faced with the maximum F.A.R. of 12 for the High Rise Parcel as established by the Chicago Zoning Ordinance.</p>
<p>Is there a solution?</p>
<p>Perhaps. . .</p>
<h3 class="wp-block-heading">Maximizing the Development Opportunity</h3>
<p>The Chicago Zoning Ordinance defines a “Zoning Lot” as follows: “<em>A ‘zoning lot or lots’ is a single tract of land located within a single block, which (at the time of filing for a building permit) is designated by its owner or developer as a tract to be used, developed, or built upon as a unit, under single ownership or control.</em>”</p>
<p>Therefore, ‘zoning lot or lots’ may or may not coincide with a lot of record.</p>
<p>One solution is that the owner of the High Rise Parcel might acquire the “air rights” over the Entertainment Parcel (by purchasing from the owner of the Entertainment Parcel, “. . . all of the Entertainment Parcel except that part thereof lying below a horizontal plane located x feet above the Chicago City Datum”) and then designate the Entertainment Parcel as part of the Zoning Lot to be developed and controlled by the developer of the High Rise Parcel. The “Zoning Lot” would then be 60,000 square feet. Because the F.A.R. remains 12, the maximum floor area on the total Zoning Lot is 720,000 square feet.</p>
<p>Because 38,000 square feet has been used (or is to be used) for the restaurant/banquet/entertainment complex, 682,000 square feet remains available for development on the Zoning Lot (being, in effect, the High Rise Parcel). Therefore, instead of being able to construct only a 480,000 square foot project on the High Rise Parcel, if developed alone, the developer would now be able to construct up to an additional 202,000 square feet (for a total of 682,000 square feet) on the High Rise Parcel – or, roughly, 5 additional floors at 40,000 square feet each, because the High Rise Parcel and the Entertainment Parcel, collectively, constitute the “Zoning Lot”. (Note, however, that some zoning districts also have a “maximum height” restriction so, once again, it is critical that you carefully review the applicable zoning ordinance in all particulars.)</p>
<p>* * *</p>
<p>Of course, if the developer does construct 682,000 square feet of floor area on the High Rise Parcel (in addition to the 38,000 square feet constructed on the Entertainment Parcel) under the foregoing Scenario No. 2, all floor area available for development of the combined Zoning Lot pursuant to the zoning ordinance will have been fully utilized. As a result, since the Zoning Lot is fully developed as a whole, no further opportunity exists to expand the square footage of improvements on the Entertainment Parcel. If the restaurant/banquet/entertainment complex fails, or is destroyed or otherwise demolished, the replacement improvements will be limited to a maximum square footage of 38,000 square feet.</p>
<p>To avoid this outcome, parties will sometimes negotiate an “air rights transfer” that raises the elevation of the delimiting horizontal plane and includes an express covenant running with the land that reserves potential floor area to the transferring parcel (in this case, the Entertainment Parcel).</p>
<p>Under Scenario No. 2, the sale of “air rights” is more akin to the sale of “development rights”, but the legal principle is substantially the same as in Scenario No. 1. In each case, a property owner is selling the right to develop “the sky above” while retaining the ground level development parcel.</p>
<p>* * *</p>
<p>“Air rights” are valuable property rights that can be sold, purchased and transferred. Under the right circumstances, “air rights” may represent a substantial untapped resource with great value to those who recognize their potential. Since the transfer of these property rights may not directly impair the owner’s intended use of the surface level property, they are sometimes described as a way to generate “<em>money from thin air</em>“.</p>
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<title>Due Diligence Basics – Commercial Real Estate</title>
<link>http://harp-onthis.com/due-diligence-basics-cre/</link>
<comments>http://harp-onthis.com/due-diligence-basics-cre/#respond</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Thu, 16 Jun 2016 21:07:05 +0000</pubDate>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[Commercial Real Estate]]></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[due diliigence]]></category>
<category><![CDATA[industrial property]]></category>
<category><![CDATA[keys to closing]]></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=1306</guid>
<description><![CDATA[Due diligence is essential when investing in, developing or financing commercial real estate. You must know the right questions to ask, and where to find the answers. The object is not simply to get to closing, but to assure that […]]]></description>
<content:encoded><![CDATA[
<p>Due diligence is essential when investing in, developing or financing commercial real estate. You must know the right questions to ask, and where to find the answers. The object is not simply to get to closing, but to assure that the project will function as intended after closing.</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="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" /><figcaption class="wp-element-caption">R. Kymn Harp<br />Robbins, Salomon & Patt, Ltd.</figcaption></figure></div>
<p>Due diligence is a standard of conduct. It is the amount of diligent inquiry due under the circumstances of your particular transaction. It requires that you determine, confirm and answer “yes” to every question required to be answered in the affirmative, and that you determine, confirm and answer “no” to every question required to be answered in the negative, for your project to proceed to closing and function as intended after closing.</p>
<p>In commercial real estate transactions, there are two layers of due diligence:</p>
<ol class="wp-block-list">
<li>Transaction due diligence; and</li>
<li>Property due diligence.</li>
</ol>
<p></p>
<p></p>
<h2 class="wp-block-heading"><span style="color: #000000;">TRANSACTION DUE DILIGENCE</span></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="1812" data-permalink="http://harp-onthis.com/due-diligence-basics-cre/financial-innovation-technology-develop-smart-e-commerce-service-and-growth-digital-transaction/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/financial-innovation-technology-develop-smart-e-commerce-service-and-growth-digital-transaction.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="financial-innovation-technology-develop-smart-e-commerce-service-and-growth-digital-transaction" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/financial-innovation-technology-develop-smart-e-commerce-service-and-growth-digital-transaction.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/financial-innovation-technology-develop-smart-e-commerce-service-and-growth-digital-transaction.jpg?fit=1000%2C667" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/financial-innovation-technology-develop-smart-e-commerce-service-and-growth-digital-transaction.jpg?resize=400%2C267" alt="financial innovation technology develop smart e commerce service and growth digital transaction" class="wp-image-1812" width="400" height="267" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/financial-innovation-technology-develop-smart-e-commerce-service-and-growth-digital-transaction.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/financial-innovation-technology-develop-smart-e-commerce-service-and-growth-digital-transaction.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/financial-innovation-technology-develop-smart-e-commerce-service-and-growth-digital-transaction.jpg?resize=768%2C512 768w" sizes="auto, (max-width: 400px) 100vw, 400px" /></figure></div>
<p>In any commercial transaction, transaction due diligence requires that we ask and know the answers to fundamental questions in seven particular areas of concern. These areas of concern include the six elements of every story-line, plus authority of the parties to act. Transaction due diligence requires that you determine, confirm and know the answers to each of the following:</p>
<ol class="wp-block-list">
<li> <em>Who</em> are the parties to the transaction?</li>
</ol>
<p>a. Seller</p>
<p>b. Buyer</p>
<p>c. Lender</p>
<p>d. Tenants</p>
<p>e. Other</p>
<p>2. <em>What property</em> is included?</p>
<p>a. Real estate</p>
<p>b. Personal property</p>
<p>c. Franchise agreements or rights</p>
<p>d. Other</p>
<p>3. <em>Where</em> is the property located?</p>
<p>4. <em>Why</em> is the property being acquired? – Intended use?</p>
<p>5. <em>When</em> must it Close? And other critical dates?</p>
<p>a. Due diligence period</p>
<p>b. Title delivery deadline</p>
<p>c. Survey delivery deadline</p>
<p>d. Financing deadlines</p>
<p>e. Section 1031 identification period and replacement property acquisition deadlines</p>
<p>f. Other critical dates</p>
<p>6. <em>How</em> will the transaction be structured?</p>
<p>a. Sale</p>
<p>b. Lease</p>
<p>c. Section 1031 exchange</p>
<p>d. Seller financing</p>
<p>e. Other transaction structure issues</p>
<p>7. <em>By what authority</em> are the parties acting?</p>
<p>a. Board approval, if necessary</p>
<p>b. Shareholder approval, if necessary</p>
<p>c. Governmental approvals, if necessary</p>
<p>d. Manager authority under LLC Operating Agreement</p>
<p>e. LLC member consent, if necessary</p>
<p>f. Landlord consent, if necessary</p>
<p>g. Lender consent, if necessary</p>
<p>h. Any other required consents or approvals or other sources of authority</p>
<p>When the “what” of Transaction Due Diligence is commercial or industrial real estate, the next step is to conduct an investigation of the property using all appropriate due diligence. Property due diligence is describes below.</p>
<h2 class="wp-block-heading"><span style="color: #000000;">PROPERTY DUE DILIGENCE</span></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="1813" data-permalink="http://harp-onthis.com/due-diligence-basics-cre/cardboard-house-icon-and/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/cardboard-house-icon-and.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="cardboard-house-icon-and" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/cardboard-house-icon-and.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/cardboard-house-icon-and.jpg?fit=1000%2C667" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/cardboard-house-icon-and.jpg?resize=400%2C267" alt="cardboard house icon and due diligence" class="wp-image-1813" width="400" height="267" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/cardboard-house-icon-and.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/cardboard-house-icon-and.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/cardboard-house-icon-and.jpg?resize=768%2C512 768w" sizes="auto, (max-width: 400px) 100vw, 400px" /></figure></div>
<p>Property due diligence has four additional areas of concern. As discussed below, the four major areas of concern for property due diligence are <em>market demand, access, use</em> and<em> finances</em>. All of the questions concerning the property that need to be asked and answered when investing in, developing or financing commercial or industrial real estate fall within one or more of these four major areas of concern.</p>
<p>Property due diligence requires that you determine, confirm and know the answers to each of the following:</p>
<p> 1. <em>Market Demand</em></p>
<p>a. How will the property be used?</p>
<p>b. Who are the intended users?</p>
<p>c. Is there a need – and more importantly, will there be a need at the time the project is completed?</p>
<p>2. <em>Access</em></p>
<p>a. How will users get to the property?</p>
<p>b. Are there adequate traffic controls, stoplights, stop signs, etc.?</p>
<p>c. Adequate drives for customers and deliveries?</p>
<p>d. Sufficient roadway stacking room at nearby intersections?</p>
<p>e. Lawful curb-cuts?</p>
<p>f. Full access vs. right-turn only?</p>
<p>g. Adequate parking for business needs (which may be more than zoning requirements)?</p>
<p>h. ADA compliant/handicap accessible?</p>
<p>i. Any other access requirements or impediments?</p>
<p>3. <em>Use</em></p>
<p>a. Any private land use controls/restrictions on use?</p>
<p>b. Proper zoning?</p>
<p>c. Sufficient parking as required by zoning?</p>
<p>d. Sufficient occupancy capacity?</p>
<p>e. Adequate utility service?</p>
<p>f. If buyer is acquiring the property for its own use, are there any existing tenants or users that must be terminated or removed? Can they be lawfully removed?</p>
<p>g. Environmental issues? (which may be as much a finance issue as a use issue)</p>
<p>h. Other use requirements or issues?</p>
<p>4. <em>Finances</em></p>
<p>a. Financing</p>
<p>i. Appraised value?</p>
<p>ii. Loan to value – equity requirement?</p>
<p>iii. Terms of financing?</p>
<p>iv. Lender required due diligence expenses?</p>
<p>v. Lease subordination required?</p>
<p>x. Subordination Non-Disturbance and Attornment (SNDA) Agreements?</p>
<p>y. Tenant Estoppel Certificates?</p>
<p>vi. Other lender requirements?</p>
<p>b. Financial Metrics</p>
<p>i. Real estate taxes and special assessments?</p>
<p>ii. Rehab/repair costs?</p>
<p>iii. User fees and recapture costs?</p>
<p>iv. Environmental remediation costs?</p>
<p>v. Leases?</p>
<p>1. Lease income?</p>
<p>2. Security deposits?</p>
<p>3. Rental abatement?</p>
<p>4. CAM and operating expense reconciliations?</p>
<p>5. Landlord obligations to Tenants for build-out, etc.?</p>
<p>vi. Other financial benefits and burdens affecting the property?</p>
<h2 class="wp-block-heading">RESOURCES</h2>
<p>Many of the white papers and posts on this blog delve more deeply into due diligence issues and concerns. You may find particularly useful my post <a href="http://harp-onthis.com/due-diligence-checklists-for-commercial-real-estate-transactions-3/">Due Diligence Checklists: for Commercial Real Estate Transactions</a>.</p>
<p>Should you need assistance, we have a number of attorneys at <a href="http://www.rsplaw.com">Robbins Salomon & Patt, Ltd</a>. who are experienced commercial real estate practitioners and can help. Do not hesitate to reach out to us. We are always looking for new clients with interesting or challenging projects.</p>
<p>Enjoy!</p>
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<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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<post-id xmlns="com-wordpress:feed-additions:1">1259</post-id> </item>
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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>
]]></content:encoded>
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<item>
<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>
<content:encoded><![CDATA[
<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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<post-id xmlns="com-wordpress:feed-additions:1">1197</post-id> </item>
<item>
<title>DUE DILIGENCE CHECKLISTS for Commercial Real Estate Transactions</title>
<link>http://harp-onthis.com/due-diligence-checklists-for-commercial-real-estate-transactions-3/</link>
<comments>http://harp-onthis.com/due-diligence-checklists-for-commercial-real-estate-transactions-3/#comments</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Thu, 26 Mar 2015 00:06:49 +0000</pubDate>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[Uncategorized]]></category>
<category><![CDATA[White Papers]]></category>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[adaptive reuse]]></category>
<category><![CDATA[bankers]]></category>
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<category><![CDATA[Chicago]]></category>
<category><![CDATA[closing]]></category>
<category><![CDATA[closings]]></category>
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<category><![CDATA[due diligence checklist]]></category>
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<category><![CDATA[industrial property]]></category>
<category><![CDATA[keys to closing]]></category>
<category><![CDATA[lenders]]></category>
<category><![CDATA[lending]]></category>
<category><![CDATA[loan documentation]]></category>
<category><![CDATA[loans]]></category>
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<category><![CDATA[purchase]]></category>
<category><![CDATA[site entitlement]]></category>
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<guid isPermaLink="false">http://harp-onthis.com/?p=1095</guid>
<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">
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<p>A KEY element of successfully investing in commercial real estate is performing an adequate Due Diligence Investigation prior to becoming legally bound to acquire or finance the property. Conducting a Due Diligence Investigation is important not just to enable you to walk away from the transaction, if necessary, but even more importantly to enable you to discover obstacles and opportunities presented by the property that can be addressed prior to closing, to enable the transaction to proceed in a manner most beneficial to your overall objective. An adequate Due Diligence Investigation will assure awareness of all material facts relevant to the intended use or disposition of the property after closing. This is a critical point. The ultimate objective is not just to get to Closing – but rather to confirm that the property can be used or developed as intended <em>after</em> Closing.</p>
<p>The following checklists – while not all-inclusive – will help you conduct a focused and meaningful Due Diligence Investigation.</p>
<span id="more-1095"></span>
<h2 class="wp-block-heading"><span style="color: #199ca8;">BASIC DUE DILIGENCE CONCEPTS</span></h2>
<p><em>Caveat Emptor</em>: Let the Buyer beware.</p>
<p>Consumer protection laws applicable to home purchases and other consumer transactions seldom apply to commercial real estate transactions. The rule that a Buyer must examine, judge, and test for himself, applies to the purchase of all commercial real estate in the USA.</p>
<p><em>Due Diligence</em>: <span style="text-decoration: underline;">Black’s Law Dictionary</span>, West Publishing Company defines Due Diligence as follows:</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p>Such measure of prudence, activity, or assiduity, as is proper to be expected from, and ordinarily exercised by a prudent (person) under the particular circumstances; not measured by any absolute standard, but depending upon the relative facts of the specific case.</p>
</blockquote>
<p>Contract representations and warranties are <em>NOT</em> an adequate substitute for Due Diligence. A breach of a representation or warranty will simply mean you have the right to sue – which is time consuming and expensive.</p>
<p>The point of commercial real estate due diligence is to avoid transaction surprises and confirm that the property can be used and function as intended.</p>
<div class="wp-block-image">
<figure class="alignleft"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="300" height="199" data-attachment-id="614" data-permalink="http://harp-onthis.com/perfect-seller/questions-and-answers-signpost/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?fit=1699%2C1130" data-orig-size="1699,1130" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"Concept image of the six most common questions and answers on a signpost.","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"Questions and Answers signpost"}" data-image-title="Questions and Answers signpost" data-image-description="<p>Concept image of the six most common questions and answers on a signpost.</p>
" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?fit=300%2C199" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?fit=1024%2C681" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?resize=300%2C199" alt="Questions and Answers signpost" class="wp-image-614" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?resize=300%2C199 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?resize=1024%2C681 1024w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?resize=451%2C300 451w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/09/Who-What-Where-image-iStock.jpg?w=1699 1699w" sizes="auto, (max-width: 300px) 100vw, 300px" /></a></figure></div>
<p>Basic transaction due diligence will focus on the fundamental elements of any storyline: Who, What, Where, When, Why and How. These are key elements of inquiry that must be answered for any transaction, whether or not the transaction involves commercial real estate as its principal focus.</p>
<p>Property due diligence for commercial real estate will focus on four (4) primary areas of concern:</p>
<ul class="wp-block-list">
<li>Market Demand</li>
<li>Access</li>
<li>Uses</li>
<li>Finances</li>
</ul>
<p>For a detailed discussion of the four primary areas of concern, see my article: <a title="Commercial Real Estate Due Diligence – Do You Know the Four Areas of Inquiry?" href="http://harp-onthis.com/commercial-real-estate-due-diligence-do-you-know-the-four-areas-of-inquiry/" target="_blank" rel="noopener">Commercial Real Estate Due Diligence: Do You Know the Four Areas of Inquiry?</a></p>
<p>Before focusing on the four areas of concern for property due diligence, transaction due diligence requires that we consider for whom the Due Diligence Investigation is being conducted. The scope, intensity, and focus of any Due Diligence Investigation of commercial real estate will depend upon the objectives of the party for whom the investigation is being conducted. These objectives may vary depending upon whether the investigation is being conducted for the benefit of: (i) a Strategic Buyer (or long-term lessee); (ii) a Financial Buyer; (iii) a Developer (whether ground-up development, or redevelopment for adaptive reuse); or (iv) a Lender.</p>
<p>If you are a Seller, understand that to Close the transaction, your Buyer and its Lender must address all issues material to their respective objectives – some of which require information only you, as Owner, can adequately provide. If you are a Seller, please see my article: <a title="PERFECT SELLER – Selling Commercial Real Estate" href="http://harp-onthis.com/perfect-seller/" target="_blank" rel="noopener">Perfect Seller</a> for guidance.</p>
<h3 class="wp-block-heading"><span style="color: #199ca8;">GENERAL DUE DILIGENCE OBJECTIVES</span></h3>
<div class="wp-block-image">
<figure class="alignright size-full is-resized"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="1833" data-permalink="http://harp-onthis.com/due-diligence-checklists-for-commercial-real-estate-transactions-3/due-diligence-word-on-wooden-cube-isolated-on-orange-background-1/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/due-diligence-word-on-wooden-cube-isolated-on-orange-background-1.jpg?fit=1000%2C667" data-orig-size="1000,667" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="due-diligence-word-on-wooden-cube-isolated-on-orange-background-1" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/due-diligence-word-on-wooden-cube-isolated-on-orange-background-1.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/due-diligence-word-on-wooden-cube-isolated-on-orange-background-1.jpg?fit=1000%2C667" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/due-diligence-word-on-wooden-cube-isolated-on-orange-background-1.jpg?resize=400%2C267" alt="due diligence word on wooden cube isolated on orange background" class="wp-image-1833" width="400" height="267" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/due-diligence-word-on-wooden-cube-isolated-on-orange-background-1.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/due-diligence-word-on-wooden-cube-isolated-on-orange-background-1.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/due-diligence-word-on-wooden-cube-isolated-on-orange-background-1.jpg?resize=768%2C512 768w" sizes="auto, (max-width: 400px) 100vw, 400px" /></figure></div>
<p><span style="color: #000000;">(i) A <em>Strategic Buyer </em></span>(or long-term lessee) is acquiring the property for its own use, and must verify that the property is suitable for the intended use.</p>
<p>(ii) A <em>Financial Buyer</em> is acquiring the property for the expected return on investment generated by the property’s anticipated revenue stream, and must determine the amount, velocity, and durability of the revenue stream. This will likely include a consideration of credit-worthiness and market demand of long-term tenants, lease rental rates at the property compared to lease rental rates for comparable properties in the marketplace which may impact lease renewal rates, lease duration and expiration dates of all property leases to gauge exposure to mass-vacancies, tenant co-occupancy requirements and other factors that may impact the durability of the revenue stream generated by the property. A sophisticated Financial Buyer will likely calculate its yield based upon discounted cash-flows rather than the much less precise capitalization rate (“cap rate”), and will need adequate financial information to do so.</p>
<p>(iii) A <em>Developer</em> is seeking to add value by changing the character or use of the property – usually with a short-term to intermediate-term exit strategy to dispose of the property; although a Developer might plan to hold the property long-term as a Financial Buyer after development or redevelopment. The Developer must focus upon whether the planned change in character or use can be accomplished in a cost-effective manner.</p>
<p>(iv) A <em>Lender</em> is seeking to establish two basic lender criteria:</p>
<p> 1. <em>Ability to Repay</em> – The ability of the property to generate sufficient revenue to repay the loan an a timely basis; <em>and</em></p>
<p>2. <em>Sufficiency of Collateral</em> – The objective disposal value of the collateral in the event of a loan default, to assure adequate funds to repay the loan, carrying costs and costs of collection in the event forced collection becomes necessary. Particularly in light of the collapse of the commercial real estate market during the <em>Great Recession</em> of recent years, a Lender may pay particular attention to the overall loan coverage ratio, sources of equity, debt coverage ratio, and, similar to a Financial Buyer, may be concerned with the credit-worthiness and market demand of long-term tenants, lease rental rates at the property compared to lease rental rates for comparable properties in the marketplace which may impact lease renewal rates, lease duration and expiration dates of all property leases to gauge exposure to mass-vacancies, tenant co-occupancy requirements and other factors that may impact future value of the collateral.</p>
<p>The amount of diligent inquiry due to be expended (i.e.<em> due diligence</em>) to investigate any particular commercial real estate project is the amount of inquiry required to answer in the affirmative each question that must be answered yes, and to answer in the negative each question that must be answered no, to address all material concerns of the party for whom the Due Diligence Investigation is being undertaken.</p>
<p>The following Due Diligence Checklists are offered as helpful guides to assist in focusing on important issues to be considered in connection with a commercial real estate transaction.</p>
<h3 class="wp-block-heading"><span style="color: #199ca8;">I. THE PROPERTY</span></h3>
<p><span style="color: #000000;">1. Exactly what PROPERTY does the Purchaser believe it is acquiring?</span></p>
<ul class="wp-block-list">
<li>Land?</li>
<li>Building?</li>
<li>Fixtures?</li>
<li>Other Improvements?</li>
<li>Other Rights?</li>
<li>The entire fee title interest including all air rights?</li>
<li>All development rights?</li>
</ul>
<p>2. What is Purchaser’s planned use of the Property?</p>
<p>3. Does the physical condition of the Property permit use as planned?</p>
<ul class="wp-block-list">
<li>Commercially adequate access to public streets and ways?</li>
<li>Sufficient parking?</li>
<li>Structural condition of improvements?</li>
<li>Wi-fi ready with access to high speed internet?</li>
<li>Environmental contamination?
<ul class="wp-block-list">
<li>Innocent Purchaser defense vs. exemption from liability</li>
<li>All Appropriate Inquiry</li>
</ul>
</li>
</ul>
<p>4. Is there any legal restriction to Purchaser’s use of the Property as planned?</p>
<ul class="wp-block-list">
<li>Zoning?</li>
<li>Private land use controls?</li>
<li>Americans with Disabilities Act?</li>
<li>Availability of Licenses?
<ul class="wp-block-list">
<li>Liquor license?</li>
<li>Entertainment license?</li>
<li>Outdoor dining license?</li>
</ul>
</li>
<li> Drive through windows permitted?</li>
<li>Other legal restrictions or impediments?</li>
</ul>
<p>5. How much does Purchaser expect to pay for the Property?</p>
<p>6. Is there any condition on or within the Property that is likely to increase Purchaser’s effective cost to acquire or use the Property?</p>
<ul class="wp-block-list">
<li>Property owner’s assessments?</li>
<li> Real estate tax in line with value?</li>
<li>Special Assessment?</li>
<li>Required user fees for necessary amenities?</li>
<li>Drainage?</li>
<li>Access?</li>
<li>Parking?</li>
<li>Other?</li>
</ul>
<p>7. Any encroachments onto the Property, or from the Property onto other lands?</p>
<p>8. Are there any encumbrances on the Property that will not be cleared at Closing?</p>
<ul class="wp-block-list">
<li>Easements?</li>
<li>Covenants running with the land?</li>
<li>Liens or other financial servitude?</li>
<li>Leases?</li>
</ul>
<p>9. If the Property is subject to any Leases, are there any?</p>
<ul class="wp-block-list">
<li>Security Deposits?</li>
<li>Options to Extend Term?</li>
<li>Options to Purchase?</li>
<li>Rights of First Refusal?</li>
<li>Rights of First Offer?</li>
<li>Rights of Early Termination?</li>
<li>Maintenance obligations?</li>
<li>Duty of Landlord to provide utilities?</li>
<li>Real estate tax or CAM escrows?</li>
<li>Delinquent rent?</li>
<li>Prepaid rent?</li>
<li>Tenant mix/use controls?</li>
<li>Tenant co-occupancy covenants?</li>
<li>Tenant exclusives?</li>
<li>Tenant Parking requirements?</li>
<li><a title="Commercial Landlord-Tenant Issues – PART 1 – Getting it Right" href="http://harp-onthis.com/commercial-landlord-tenant-issues-part-1-getting-it-right/" target="_blank" rel="noopener">Leasehold easements?</a></li>
<li><a title="COMMERCIAL LANDLORD-TENANT – Part 2 – The Covenant of Quiet Enjoyment" href="http://harp-onthis.com/commercial-landlord-tenant-part-2-the-covenant-of-quiet-enjoyment/" target="_blank" rel="noopener">Strict covenants of quiet enjoyment?</a></li>
<li>Automatic subordination of Lease to future mortgages?</li>
<li>Other material Lease terms?</li>
</ul>
<p>10. New Construction?</p>
<ul class="wp-block-list">
<li>Availability of construction permits?</li>
<li>Site plan approvals?</li>
<li>Soil conditions?</li>
<li>Utilities?</li>
<li>Curb cuts?</li>
<li>Traffic control requirements?</li>
<li>NPDES (National Pollutant Discharge Elimination System) Permit?
<ul class="wp-block-list">
<li>Storm Water Pollution Prevention Plan required?</li>
</ul>
</li>
<li>Other governmental approvals required?</li>
</ul>
<h3 class="wp-block-heading"><span style="color: #199ca8;">II. THE SELLER</span></h3>
<p><span style="color: #000000;">1. Who is the Seller?</span></p>
<ul class="wp-block-list">
<li>Individual?</li>
<li>Trust?</li>
<li>Partnership?</li>
<li>Corporation?</li>
<li>Limited liability company?</li>
<li>Other legally existing entity?</li>
</ul>
<p>2. If other than a natural person, does the Seller validly exist and is Seller in good standing?</p>
<p>3. Does the Seller own the Property?</p>
<p>4. Does the Seller have authority to convey the Property?</p>
<ul class="wp-block-list">
<li>Board of Director approval?</li>
<li>Shareholder or Member approval?</li>
<li>Other consents?</li>
<li>If foreign individual or entity, are any special requirements applicable?
<ul class="wp-block-list">
<li>Qualification to do business in jurisdiction of Property?</li>
<li>Federal tax withholding?</li>
<li>U.S. Patriot Act compliance?</li>
<li>Bank Secrecy Act/Anti-Money Laundering Compliance?</li>
</ul>
</li>
</ul>
<p>5. Who has authority to bind the Seller?</p>
<p>6. Are sale proceeds sufficient to pay off all liens?</p>
<h3 class="wp-block-heading"><span style="color: #199ca8;"> III. THE PURCHASER</span></h3>
<p><span style="color: #000000;">1. Who is the Purchaser?</span></p>
<p>2. What is the Purchaser/Grantee’s exact legal name?</p>
<p>3. If Purchaser/Grantee is an entity, has it been validly created and is it in good standing?</p>
<ul class="wp-block-list">
<li>Articles of Incorporation – Articles of Organization or Formation?</li>
<li>Certificate of Good Standing?</li>
</ul>
<p>4. Is the Purchaser/Grantee authorized to own and operate the Property and, if applicable, finance acquisition of the Property?</p>
<ul class="wp-block-list">
<li>Board of Director approvals?</li>
<li>Shareholder or Member approvals?</li>
<li>If foreign individual or entity, are any special requirements applicable?
<ul class="wp-block-list">
<li>Qualification to do business in jurisdiction of the Property?</li>
<li>U.S. Patriot Act compliance?</li>
<li>Bank Secrecy Act/Anti-Money Laundering compliance?</li>
</ul>
</li>
</ul>
<p>5. Who is authorized to bind the Purchaser/Grantee?</p>
<h3 class="wp-block-heading"><span style="color: #199ca8;">IV. TRANSACTION STRUCTURE</span></h3>
<p><span style="color: #000000;">1. Is transaction a cash purchase?</span></p>
<p>2. Purchase with lender financing?</p>
<ul class="wp-block-list">
<li>Bank financing?</li>
<li>Insurance company financing?</li>
<li>Hard money loan?</li>
<li>Seller financing?
<ul class="wp-block-list">
<li>Installment Agreement for Deed?</li>
<li>Seller provided mortgage?</li>
</ul>
</li>
</ul>
<p>3. <a title="Keys Rules For Section 1031 Exchanges" href="http://harp-onthis.com/keys-rules-section-1031-exchanges/" target="_blank" rel="noopener">Tax-deferred exchange pursuant to Section 1031 </a>of the Internal Revenue Code?</p>
<ul class="wp-block-list">
<li>Replacement property identified?</li>
<li>Qualified Intermediary selected?</li>
<li>Key time periods determined to comply with Section 1031 exchange rules?</li>
<li>Reverse exchange?</li>
<li>Other Section 1031 compliance issues?</li>
</ul>
<p>4. <a title="10 Things to Know About Commercial Real Estate Development Agreements" href="http://harp-onthis.com/10-things-know-commercial-real-estate-development-agreements/">Public-Private Partnerships</a> with municipal or other governmental economic incentives?</p>
<ul class="wp-block-list">
<li>Tax increment financing?</li>
<li>Sales tax revenue sharing?</li>
<li>Business district financing?</li>
<li>Special service area financing?</li>
<li>Municipal General Obligation loan?</li>
</ul>
<p>5. Third-party Source Payments?</p>
<ul class="wp-block-list">
<li>Naming rights agreements?</li>
<li>Sponsorships?</li>
<li>Concession agreements?</li>
</ul>
<h3 class="wp-block-heading"><span style="color: #199ca8;">V. PURCHASER FINANCING</span></h3>
<h4 class="wp-block-heading"><span style="color: #199ca8;">A. BUSINESS TERMS OF THE LOAN</span></h4>
<p><span style="color: #000000;">1. What loan terms have the Borrower and its Lender agreed to?</span></p>
<ul class="wp-block-list">
<li>What is the amount of the loan?</li>
<li>What is the interest rate?</li>
<li>What are the repayment terms?</li>
<li>What is the collateral?
<ul class="wp-block-list">
<li>Commercial real estate only?</li>
<li>Real estate and personal property together?</li>
<li>First lien?</li>
<li>Junior lien?</li>
</ul>
</li>
<li>Is it a single advance loan?</li>
<li>A multiple advance loan?</li>
<li>A construction loan?</li>
<li>If it is a multiple advance loan, can the principal be re-borrowed once repaid prior to maturity of the loan; making it, in effect, a revolving line of credit?</li>
<li>Are there reserve requirements?
<ul class="wp-block-list">
<li>Interest reserves?</li>
<li>Repair reserves?</li>
<li>Real estate tax reserves?</li>
<li>Insurance reserves?</li>
<li>Environmental remediation reserves?</li>
<li>Other reserves?</li>
</ul>
</li>
</ul>
<p>2. Are there requirements for Borrower to open business operating accounts with the Lender? If so, is the Borrower obligated to maintain minimum compensating balances?</p>
<p>3. Is the Borrower required to pledge business accounts as additional collateral?</p>
<p>4. Are there early repayment fees or yield maintenance requirements (each sometimes referred to as “prepayment penalties”)?</p>
<p>5. Are there repayment blackout periods during which the Borrower is not permitted to repay the loan?</p>
<p>6. Is a profit participation payment to Lender required upon disposition?</p>
<p>7. Is there a Loan Commitment fee or “good faith deposit” due upon Borrower’s acceptance of the Loan Commitment?</p>
<p>8. Is there a loan funding fee or loan brokerage fee or other loan fee due Lender or a loan broker at Closing?</p>
<p>9. Is there a Exit Fee due to Lender upon the loan being paid off?</p>
<p>10. What are the Borrower’s expense reimbursement obligations to Lender? When are they due? What is the Borrower’s obligation to pay the Lender’s expenses if the loan does not close?</p>
<h4 class="wp-block-heading"><span style="color: #199ca8;">B. DOCUMENTING THE COMMERCIAL REAL ESTATE LOAN</span></h4>
<p>Does the Purchaser/Borrower have all information necessary to comply with the Lender’s loan closing requirements?</p>
<p>Not all loan documentation requirements may be known at the outset of a transaction, although most commercial real estate loan documentation requirements are fairly typical. Some required information can be obtained only from the Seller. Production of that information to Purchaser for delivery to its lender must be required in the purchase contract.</p>
<p>As guidance to what a commercial real estate lender may require, the following sets forth a fairly typical Closing Checklist for a loan secured by commercial real estate.</p>
<h5 class="wp-block-heading"><span style="color: #199ca8;">COMMERCIAL REAL ESTATE LOAN CLOSING CHECKLIST</span></h5>
<p><span style="color: #000000;">1. Promissory Note</span></p>
<p>2. Personal Guaranties (which may be full, partial, secured, unsecured, payment guaranties, collection guaranties, so-called “<em>bad boy</em>” guaranties, or a variety of other types of guaranties as may be required by Lender)</p>
<p>3. Loan Agreement (often incorporated into the Promissory Note and/or Mortgage in lieu of being a separate document)</p>
<p>4. Mortgage (sometimes expanded to be a Mortgage, Security Agreement and Fixture Filing)</p>
<p>5. Assignment of Rents</p>
<p>6. Security Agreement</p>
<p>7. Financing Statement</p>
<p>8. Evidence of Borrower’s Existence in Good Standing, including:</p>
<ul class="wp-block-list">
<li>Certified copy of organizational documents of borrowing entity (including Articles of Incorporation, if Borrower is a corporation; Articles of Organization (or in Delaware, Articles of Formation) and a written Operating Agreement, if Borrower is a limited liability company; certified copy of trust agreement with all amendments, if Borrower is a land trust or other trust; etc.)</li>
<li>Certificate of Good Standing (if a corporation or LLC) or Certificate of Existence (if a limited partnership) or Certificate of Qualification to Transact Business (if Borrower is an entity doing business in a State other than its State of formation)</li>
</ul>
<p>9. Evidence of Borrower’s Authority to Borrow, including:</p>
<ul class="wp-block-list">
<li>Borrower’s Certificate</li>
<li>Certified resolutions</li>
<li>Incumbency Certificate</li>
</ul>
<p>10. Satisfactory Commitment for Title Insurance (which will typically require, for analysis by the Lender, copies of all documents or record appearing on Schedule B of the title commitment which are to remain after Closing), with required commercial title insurance endorsements, often including:</p>
<ul class="wp-block-list">
<li>ALTA 3.1 Zoning Endorsement modified to include parking (although, if the Property is a multi-user property, such as a retail shopping center, an ALTA 3.0 Zoning endorsement may be appropriate)</li>
<li>ALTA Comprehensive Endorsement No. 1</li>
<li>Location Endorsement (street address)</li>
<li>Access Endorsement (insuring commercially reasonable vehicular and pedestrian access to public streets and ways)</li>
<li>Contiguity Endorsement (the insured land comprises as single parcel with no gaps or gores)</li>
<li>PIN Endorsement (insuring that he identified real estate tax permanent index numbers (PIN) are the only applicable PIN numbers affecting the collateral, and that they relate solely to the real property comprising the collateral)</li>
<li>Usury Endorsement (insuring that the loan does not violate prohibitions against excessive interest charges)</li>
<li>other title insurance endorsements applicable to protect the intended use and value of the real estate collateral, as may be determined upon review of the Commitment for Title Insurance, Survey and documents of record, or arising from the existence of special issues pertaining to the transaction or the Borrower</li>
</ul>
<p>11. Current ALTA/NSPS Land Title Survey (3 sets), prepared in accordance with the 2016 (or current) Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys, with such Table A Additional Requirements as the Lender may determine necessary.</p>
<p>12. Current certified Rent Roll</p>
<p>13. Certified copy of all Leases (4 sets – 1 each for Buyer, Buyer’s attorney, Title Company, and Lender)</p>
<p>14. Lessee Estoppel Certificates</p>
<p>15. Lessee Subordination, Non-Disturbance and Attornment Agreements (sometimes referred to simply as “SNDAs”)</p>
<p>16. UCC, Judgment, Pending Litigation, Bankruptcy and Tax Lien Search Report</p>
<p>17. Appraisal – complying with Title XI of FIRREA (Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended)</p>
<p>18. Environmental Site Assessment Report (sometimes referred to as Environmental Phase I and/or Phase 2 Audit Report) prepared in accordance with ASTM Standard e1527-13 (or current)</p>
<p>19. Environmental Indemnity Agreement (signed by Borrower and Guarantors)</p>
<p>20. Site Improvements Assessment Report (sometimes an ASTM Property Condition Assessment prepared in accordance with ASTM Standard e2018-08 (or current) is required)</p>
<p>21. Evidence of Hazard Insurance naming Lender as the Mortgagee/Lender Loss Payee; and Liability Insurance naming Lender as an “<em>additional insured</em>” (sometimes listed simply as “Acord 27” and “Acord 25”, respectively); and sometimes a separate “Agreement to Provide Insurance”</p>
<p>22. Legal Opinion of Borrower’s Counsel</p>
<p>23. Credit Underwriting documents, such as signed tax returns, property operating statements, etc. as may be specified by the Lender</p>
<p>24. Compliance Agreement (sometimes also called an Errors and Omissions Agreement), whereby the Borrower agrees to correct, after Closing, errors or omissions in the loan documentation</p>
<p class="has-text-align-center"><strong><span style="color: #199ca8;">*****</span></strong></p>
<p>It is useful to become familiar with the Lender’s loan documentation requirements as early in the transaction as practical. The requirements will likely be set forth in some detail in the Lender’s Loan Commitment – which is the contract that serves as the road map for the loan transaction between Borrower and Lender. In Illinois, to be binding, the Loan Commitment must be in writing and be signed by the Lender.</p>
<p>Conducting the Due Diligence Investigation (that is to say, investigating all property and transactional concerns material to the commercial real estate transaction with all diligence due under the circumstances) can be time consuming and expensive. It can be made less so by knowing what to look for, devising a due diligence plan, and focusing on those matters that are of material concern.</p>
<p>If the loan requirements cannot be satisfied, it is better to make that determination during the contractual “<em>due diligence period</em>” – which typically provides for a so-called “<em>free out</em>” when the Borrower/Purchaser can receive the return of part or all of its earnest money deposit and avoid full liability under the purchase agreement for failure to move forward – rather than at a later date when the earnest money may be at risk of forfeiture or when other liability for failure to Close may attach.</p>
<h3 class="wp-block-heading"><span style="color: #199ca8;">CONCLUSION</span></h3>
<p>Conducting an effective Due Diligence Investigation in a commercial real estate transaction to discover all material facts and conditions affecting the Property and the transaction is of critical importance. Doing so will help identify risks which may be present in any commercial transaction, so the risks can be adequately shifted or otherwise mitigated. A properly focused investigation conducted with appropriate due diligence may disclose previously unrecognized opportunities as well as potential problems. An appropriate Due Diligence Investigation requires intentional and focused attention to all details material to the Property and to the transaction by a skilled professional, or group of professionals, who can recognize significant issues and opportunities. An investigation that is not properly focused may miss critical issues and may be overly broad and excessively expensive.</p>
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<p>Recommendation: Exercise Due Diligence.</p>
<p>We are here to help.</p>
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<title>COMMERCIAL LANDLORD-TENANT – Part 2 – The Covenant of Quiet Enjoyment</title>
<link>http://harp-onthis.com/commercial-landlord-tenant-part-2-the-covenant-of-quiet-enjoyment/</link>
<comments>http://harp-onthis.com/commercial-landlord-tenant-part-2-the-covenant-of-quiet-enjoyment/#comments</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Mon, 23 Mar 2015 11:00:24 +0000</pubDate>
<category><![CDATA[Business]]></category>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[Landlord-Tenant]]></category>
<category><![CDATA[White Papers]]></category>
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<category><![CDATA[commercial lease]]></category>
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<category><![CDATA[commercial tenant rights]]></category>
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<description><![CDATA[This is Part 2 of a multi-part series of articles discussing the duties, rights and remedies of commercial real estate tenants in Illinois. Part 1, entitled “Getting It Right” discussed the importance of clarity in lease drafting, and the potential […]]]></description>
<content:encoded><![CDATA[
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p></p>
</blockquote>
<div class="wp-block-image">
<figure class="alignleft is-resized"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="199" height="300" data-attachment-id="1145" data-permalink="http://harp-onthis.com/due-diligence-checklists-for-commercial-real-estate-transactions-3/harp-3_17_15-019/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?fit=2848%2C4288" data-orig-size="2848,4288" data-comments-opened="1" data-image-meta="{"aperture":"9","credit":"","camera":"NIKON D300","caption":"","created_timestamp":"1426589698","copyright":"","focal_length":"52","iso":"200","shutter_speed":"0.008","title":"","orientation":"0"}" data-image-title="Harp 3_17_15-019" data-image-description="" data-image-caption="<p>R. Kymn Harp<br />
Robbins, Salomon & Patt, Ltd.</p>
" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?fit=199%2C300" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?fit=680%2C1024" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?resize=199%2C300" alt="R. Kymn Harp Robbins, Salomon & Patt, Ltd." class="wp-image-1145" style="width:175px;height:245px" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?resize=199%2C300 199w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?resize=680%2C1024 680w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?w=2000 2000w" sizes="auto, (max-width: 199px) 100vw, 199px" /></a><figcaption class="wp-element-caption">R. Kymn Harp<br />Robbins, Salomon & Patt, Ltd.</figcaption></figure></div>
<div class="wp-block-image">
<figure class="alignleft"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/03/Catherine-Cooke-Shareholder-at-RSP.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="175" height="245" data-attachment-id="1051" data-permalink="http://harp-onthis.com/commercial-landlord-tenant-issues-part-1-getting-it-right/catherine-cooke-shareholder-at-rsp/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/03/Catherine-Cooke-Shareholder-at-RSP.jpg?fit=175%2C245" data-orig-size="175,245" data-comments-opened="1" data-image-meta="{"aperture":"9","credit":"","camera":"NIKON D7000","caption":"","created_timestamp":"1367319064","copyright":"","focal_length":"98","iso":"125","shutter_speed":"0.008","title":"","orientation":"1"}" data-image-title="Catherine Cooke" data-image-description="" data-image-caption="<p>Catherine Cooke<br />
Robbins, Salomon & Patt, Ltd.</p>
" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/03/Catherine-Cooke-Shareholder-at-RSP.jpg?fit=175%2C245" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/03/Catherine-Cooke-Shareholder-at-RSP.jpg?fit=175%2C245" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/03/Catherine-Cooke-Shareholder-at-RSP.jpg?resize=175%2C245" alt="Catherine Cook Shareholder at Robbins, Salomon & Patt, Ltd." class="wp-image-1051"/></a><figcaption class="wp-element-caption">Catherine A. Cooke<br /> Robbins, Salomon & Patt, Ltd.</figcaption></figure></div>
<p><em>This is Part 2 of a multi-part series of articles discussing the duties, rights and remedies of commercial real estate tenants in Illinois. <a title="Commercial Landlord-Tenant Issues – PART 1 – Getting it Right" href="http://harp-onthis.com/commercial-landlord-tenant-issues-part-1-getting-it-right/" target="_blank" rel="noopener">Part 1, entitled “Getting It Right”</a> discussed the importance of clarity in lease drafting, and the potential for unintended leasehold easements for parking, and other uses.</em></p>
<p><em>In March 2015, the Illinois Institute for Continuing Legal Education (“IICLE”) published its 2015 Edition practice handbook entitled: Commercial Landlord-Tenant Practice. To provide best-practice guidance to all Illinois attorneys, IICLE recruits experienced attorneys with relevant knowledge to write each handbook chapter. For the 2015 Edition, IICLE asked R. Kymn Harp and Catherine A. Cooke to write the chapter entitled Tenant’s Duties, Rights and Remedies. We were, of course, pleased to oblige. Although each of us represent commercial landlords at least as often as we represent commercial tenants, a clear understanding of the duties, rights and remedies of commercial real estate tenants is critical when representing either side of the commercial lease transaction. </em></p>
<p><em>The following is an excerpt (slightly edited) from our chapter in the 2015 Edition. We hope you find this excerpt, and the excerpts that will follow, informative and useful. Feel free to contact IICLE directly to purchase the entire volume.</em></p>
<h2 class="wp-block-heading"><span style="color: #1897ab;">The COVENANT OF QUIET ENJOYMENT </span><br /><span style="color: #1897ab;">What Is It? — General Principles</span></h2>
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<figure class="alignright size-full is-resized"><img data-recalc-dims="1" loading="lazy" decoding="async" width="1000" height="667" data-attachment-id="1836" data-permalink="http://harp-onthis.com/commercial-landlord-tenant-part-2-the-covenant-of-quiet-enjoyment/sweetidleness-lazyyounghispanicladysitinrelaxedpose/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/successful-female-new-flat-apartment-buyer-rest-at-home-feel-pleasure.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 fizkes\/Shutterstock. No use without permission.","focal_length":"0","iso":"0","shutter_speed":"0","title":"Sweet,Idleness.,Lazy,Young,Hispanic,Lady,Sit,In,Relaxed,Pose","orientation":"1"}" data-image-title="Sweet,Idleness.,Lazy,Young,Hispanic,Lady,Sit,In,Relaxed,Pose" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/successful-female-new-flat-apartment-buyer-rest-at-home-feel-pleasure.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/successful-female-new-flat-apartment-buyer-rest-at-home-feel-pleasure.jpg?fit=1000%2C667" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/successful-female-new-flat-apartment-buyer-rest-at-home-feel-pleasure.jpg?resize=1000%2C667" alt="successful female new flat apartment buyer rest at home feel pleasure" class="wp-image-1836" style="width:400px;height:267px" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/successful-female-new-flat-apartment-buyer-rest-at-home-feel-pleasure.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/successful-female-new-flat-apartment-buyer-rest-at-home-feel-pleasure.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/successful-female-new-flat-apartment-buyer-rest-at-home-feel-pleasure.jpg?resize=768%2C512 768w" sizes="auto, (max-width: 1000px) 100vw, 1000px" /></figure></div>
<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>
<div class="wp-block-image">
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<h3 class="wp-block-heading"><span style="color: #1897ab;"><em>COMING UP . . .</em></span></h3>
<p>In Part 3 of this series, we will discuss <span style="color: #1897ab;"><em><strong>Constructive Eviction</strong></em></span>—including the rights and remedies available to a commercial tenant who is constructively evicted by its landlord.</p>
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<title>Commercial Landlord-Tenant Issues – PART 1 – Getting it Right</title>
<link>http://harp-onthis.com/commercial-landlord-tenant-issues-part-1-getting-it-right/</link>
<comments>http://harp-onthis.com/commercial-landlord-tenant-issues-part-1-getting-it-right/#comments</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Thu, 12 Mar 2015 22:37:49 +0000</pubDate>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[Landlord-Tenant]]></category>
<category><![CDATA[White Papers]]></category>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[commercial landlord]]></category>
<category><![CDATA[commercial landlord tenant]]></category>
<category><![CDATA[commercial leases]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[commercial tenants]]></category>
<category><![CDATA[conducting due diligence]]></category>
<category><![CDATA[consequences]]></category>
<category><![CDATA[development]]></category>
<category><![CDATA[enforcement actions]]></category>
<category><![CDATA[industrial property]]></category>
<category><![CDATA[lease rights]]></category>
<category><![CDATA[real estate]]></category>
<category><![CDATA[rights to parking]]></category>
<category><![CDATA[what to look for]]></category>
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<description><![CDATA[In March 2015, the Illinois Institute for Continuing Legal Education (“IICLE”) published its 2015 Edition practice handbook entitled: Commercial Landlord-Tenant Practice. To provide best-practice guidance to all Illinois attorneys, IICLE recruits experienced attorneys with relevant knowledge to write each handbook […]]]></description>
<content:encoded><![CDATA[<div class="wp-block-image">
<figure class="alignleft is-resized"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="199" height="300" data-attachment-id="1145" data-permalink="http://harp-onthis.com/due-diligence-checklists-for-commercial-real-estate-transactions-3/harp-3_17_15-019/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?fit=2848%2C4288" data-orig-size="2848,4288" data-comments-opened="1" data-image-meta="{"aperture":"9","credit":"","camera":"NIKON D300","caption":"","created_timestamp":"1426589698","copyright":"","focal_length":"52","iso":"200","shutter_speed":"0.008","title":"","orientation":"0"}" data-image-title="Harp 3_17_15-019" data-image-description="" data-image-caption="<p>R. Kymn Harp<br />
Robbins, Salomon & Patt, Ltd.</p>
" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?fit=199%2C300" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?fit=680%2C1024" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?resize=199%2C300" alt="R. Kymn Harp Robbins, Salomon & Patt, Ltd." class="wp-image-1145" style="width:175px;height:245px" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?resize=199%2C300 199w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?resize=680%2C1024 680w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?w=2000 2000w" sizes="auto, (max-width: 199px) 100vw, 199px" /></a><figcaption class="wp-element-caption">R. Kymn Harp<br />Robbins, Salomon & Patt, Ltd.</figcaption></figure></div>
<div class="wp-block-image">
<figure class="alignleft"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/03/Catherine-Cooke-Shareholder-at-RSP.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="175" height="245" data-attachment-id="1051" data-permalink="http://harp-onthis.com/commercial-landlord-tenant-issues-part-1-getting-it-right/catherine-cooke-shareholder-at-rsp/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/03/Catherine-Cooke-Shareholder-at-RSP.jpg?fit=175%2C245" data-orig-size="175,245" data-comments-opened="1" data-image-meta="{"aperture":"9","credit":"","camera":"NIKON D7000","caption":"","created_timestamp":"1367319064","copyright":"","focal_length":"98","iso":"125","shutter_speed":"0.008","title":"","orientation":"1"}" data-image-title="Catherine Cooke" data-image-description="" data-image-caption="<p>Catherine Cooke<br />
Robbins, Salomon & Patt, Ltd.</p>
" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/03/Catherine-Cooke-Shareholder-at-RSP.jpg?fit=175%2C245" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/03/Catherine-Cooke-Shareholder-at-RSP.jpg?fit=175%2C245" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/03/Catherine-Cooke-Shareholder-at-RSP.jpg?resize=175%2C245" alt="Catherine Cook Shareholder at Robbins, Salomon & Patt, Ltd." class="wp-image-1051"/></a><figcaption class="wp-element-caption">Catherine Cooke<br /> Robbins, Salomon & Patt, Ltd.</figcaption></figure></div>
<p><em>In March 2015, the Illinois Institute for Continuing Legal Education (“IICLE”) published its 2015 Edition practice handbook entitled: <strong>Commercial Landlord-Tenant Practice.</strong> To provide best-practice guidance to all Illinois attorneys, IICLE recruits experienced attorneys with relevant knowledge to write each handbook chapter. For the current edition, IICLE asked R. Kymn Harp and Catherine Cooke of Robbins, Salomon & Patt, Ltd., Chicago, Illinois, to write the chapter entitled Tenant’s Duties, Rights and Remedies. We were, of course, pleased to oblige. Although each of us represent commercial landlords at least as often as we represent commercial tenants, a clear understanding of the duties, rights and remedies of commercial real estate tenants is critical when representing either side of the commercial lease transaction.</em></p>
<p><em>The following is an excerpt (slightly edited) from our chapter, Tenant’s Duties, Rights and Remedies appearing in the 2015 Edition of IICLE <strong>Commercial Landlord-Tenant Practice</strong>. We hope you find this excerpt, and the excerpts that will follow, informative and useful. Feel free to contact IICLE directly to purchase the entire volume.</em></p>
<h2 class="wp-block-heading">How Commercial Lease Issues Commonly Arise – Getting it Right</h2>
<div class="wp-block-image">
<figure class="alignright size-full is-resized"><img data-recalc-dims="1" loading="lazy" decoding="async" width="1000" height="667" data-attachment-id="1839" data-permalink="http://harp-onthis.com/commercial-landlord-tenant-issues-part-1-getting-it-right/successfuldealrealestateleaseorhomepurchaseconceptbuyer/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/successful-deal-Real-estate-lease-or-home-purchase.jpg?fit=1000%2C667" data-orig-size="1000,667" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"Shutterstock","camera":"","caption":"","created_timestamp":"0","copyright":"Copyright (c) 2022 CrizzyStudio\/Shutterstock. No use without permission.","focal_length":"0","iso":"0","shutter_speed":"0","title":"Successful,Deal,Real,Estate,Lease,Or,Home,Purchase,Concept,Buyer","orientation":"1"}" data-image-title="Successful,Deal,Real,Estate,Lease,Or,Home,Purchase,Concept,Buyer" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/successful-deal-Real-estate-lease-or-home-purchase.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/successful-deal-Real-estate-lease-or-home-purchase.jpg?fit=1000%2C667" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/successful-deal-Real-estate-lease-or-home-purchase.jpg?resize=1000%2C667" alt="successful deal Real estate lease or home purchase" class="wp-image-1839" style="width:400px;height:267px" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/successful-deal-Real-estate-lease-or-home-purchase.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/successful-deal-Real-estate-lease-or-home-purchase.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/successful-deal-Real-estate-lease-or-home-purchase.jpg?resize=768%2C512 768w" sizes="auto, (max-width: 1000px) 100vw, 1000px" /></figure></div>
<p>Commercial real estate leases, like virtually all documents and agreements relating to commercial real estate transactions and interests, are, to a very large extent, consistent only in their variety. In commercial real estate practice, there are few, if any, “standard form” documents or agreements. To be sure, there are provisions in commercial real estate leases that any experienced practitioner would expect to see, and there are some generally applicable legal concepts that apply, but the variety of issues that may arise — and the language used in each commercial lease — will directly and materially impact the “duties, rights, and remedies” of a tenant under any commercial lease.</p>
<p>The best answer to most questions about what are the rights, duties, and remedies of a tenant under a commercial real estate lease is “It depends.” What does it depend on? It depends primarily on what the parties to the lease — the landlord and tenant — intended, as (presumably) reflected by the express terms and conditions of the lease. However, two common challenges frequently exist, and they apply equally to commercial tenants and commercial landlords. They are (a) poorly written lease provisions that do not clearly and definitively set forth the intention of the landlord and tenant in a way that cannot reasonably be misunderstood and (b) inclusion of perceived “standard boilerplate” provisions in a lease without fully understanding their legal or practical affect on the leased premises, the parties, and the greater project of which the leased premises may be a part. When the intent of the parties is not abundantly clear, a court may find the answer implied by the facts and circumstances.</p>
<h2 class="wp-block-heading">GENERAL LEASE PRINCIPLES AND RULES OF CONSTRUCTION</h2>
<p>A “lease” is generally described as a contract for exclusive possession of land and improvements for a term of years or other duration, usually for a specified rent or other compensation. <em>Urban Investment & Development Co. v. Maurice L. Rothschild & Co</em>., 25 Ill.App.3d 546, 323 N.E.2d 588, 592 (1st Dist. 1975); <em>Feeley v. Michigan Avenue National Bank</em>, 141 Ill.App.3d 187, 490 N.E.2d 15, 18, 141 Ill.Dec. 187 (1st Dist. 1986).</p>
<p>In determining the duties, rights, and remedies of a tenant under a commercial lease in Illinois, the general rules of contract construction will apply. <em>Walgreen Co. v. American National Bank & Trust Company of Chicago</em>, 4 Ill.App.3d 549, 281 N.E.2d 462, 465 (1st Dist. 1972); <em>Feeley, supra</em>, 490 N.E.2d at 18; <em>Chicago Title & Trust Co. v. Southland Corp</em>., 111 Ill.App.3d 67, 443 N.E.2d 294, 297, 66 Ill.Dec. 611 (1st Dist. 1982). Interpretation of a lease is a question of law when the terms are plain and unambiguous. <em>Madigan Bros. v. Melrose Shopping Center Co</em>., 123 Ill.App.3d 851, 463 N.E.2d 824, 828, 79 Ill.Dec. 270 (1st Dist. 1984).</p>
<p>“An ambiguous contract is one capable of being understood in more senses than one; an agreement obscure in meaning, through indefiniteness of expression, or having a double meaning.” <em>Advertising Checking Bureau, Inc. v. Canal-Randolph Associates</em>, 101 Ill.App.3d 140, 427 N.E.2d 1039, 1042, 56 Ill.Dec. 634 (1st Dist. 1991), quoting <em>First National Bank of Chicago v. Victor Comptometer Corp</em>., 123 Ill.App.2d 335, 260 N.E.2d 99, 102 (1st Dist. 1970). However, the mere fact that the parties to a lease “dispute” the meaning of a lease provision and assign conflicting interpretations does not render the provision “ambiguous.” <em>McGann v. Murry,</em> 75 Ill.App.3d 697, 393 N.E.2d 1339, 1342 – 1343, 31 Ill.Dec. 32 (3d Dist. 1979); <em>St. George Chicago, Inc. v. George J. Murges & Associates, Ltd</em>., 296 Ill.App.3d 285, 695 N.E.2d 503, 506 – 507, 230 Ill.Dec. 1013 (1st Dist. 1998); F<em>ord v. Dovenmuehle Mortgage, Inc</em>., 273 Ill.App.3d 240, 651 N.E.2d 751, 745 – 755, 209 Ill.Dec. 573 (1st Dist. 1995). Whether ambiguity exists is a question of law for the court. Advertising Checking Bureau, supra, 427 N.E.2d at 1042; Pioneer Trust & Savings Bank v. Lucky Stores, Inc., 91 Ill.App.3d 573, 414 N.E.2d 1152, 1154, 47 Ill.Dec. 36 (1st Dist. 1980).</p>
<p>It is well-settled in Illinois that, when construing a written lease, the court must give words their commonly accepted meaning and must construe every part with reference to all other portions of the lease “so that every part may stand, if possible, and no part of it, either in words or sentences, shall be regarded as superfluous or void if it can be prevented.” <em>Kokenes v. Cities Service Oil Co</em>., 24 Ill.App.3d 483, 321 N.E.2d 338, 340 (1st Dist. 1974), quoting <em>Szulerecki v. Oppenheimer,</em> 283 Ill. 525, 119 N.E. 643, 646 (1918). See also <em>Southland, supra</em>, 443 N.E.2d at 297.</p>
<p>In construing a lease, the instrument is to be considered as a whole and the primary object is to derive the intent of the parties. However, a contract must be enforced as written, and when the terms of a lease are clear and unambiguous, they will be given their natural and ordinary meaning. <em>Gerardi v. Vaal</em>, 169 Ill.App.3d 818, 523 N.E.2d 1327, 1331, 120 Ill.Dec. 416 (3d Dist. 1988).</p>
<p>The foregoing sounds pretty straightforward, but unless attorneys and their clients draft leases with a comprehensive understanding of the interplay between particularly drafted provisions and every other part of the lease — including so-called “standard boilerplate” provisions — they may find themselves surprised by what they have “agreed to.”</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<h3 class="wp-block-heading">PRACTICE POINTER</h3>
<p> Drafting a commercial real estate lease is similar to drafting any other commercial document, except that the meaning and intent of contractual lease provisions are colored by an extensive body of underlying real property law that has developed over the centuries.</p>
<p>A commercial real estate lease should say what the parties mean and mean what it says. Words have meaning; phrases have meaning; each provision has meaning. The interplay of words, phrases, and all provisions in a lease will help determine the meaning of each other word, phrase, or provision. See <em>Kokenes, supra</em>, 321 N.E.2d at 340; <em>Szulerecki, supra</em>, 119 N.E. at 646.</p>
<h3 class="wp-block-heading">PRACTICE POINTER</h3>
<p> Be sure the words and phrases you use mean what your client believes they mean before proceeding.</p>
<p> If there are provisions of a commercial real estate lease you do not fully understand — including provisions you believe are “standard boilerplate” provisions — you need to learn what they mean and how they affect other parts of the lease, and your client’s rights, duties and remedies, before advising your client to proceed.</p>
</blockquote>
<p>The following discussion highlights some areas in which the rights, duties, and remedies of the commercial real estate tenant (and, by mirror image, the landlord) appear not to have been what one or the other party thought they were.</p>
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<h2 class="wp-block-heading">LEASEHOLD EASEMENTS</h2>
<p>An easement creates an interest in land and must, therefore, be founded on a deed or other writing, or on prescription, which presumes a previous grant. <em>Brunotte v. De Witt</em>, 360 Ill. 518, 196 N.E. 489, 495 (1935); <em>The Fair v. Evergreen Park Shopping Center of Delaware</em>, 4 Ill.App.2d 454, 124 N.E.2d 649, 654 (1st Dist. 1954). It may be created by covenant or agreement as well as by grant, for such agreements are in legal effect grants. <em>Chicago Title & Trust Co. v. Wabash-Randolph Corp</em>., 384 Ill. 78, 51 N.E.2d 132, 136 (1943); <em>D.M. Goodwillie Co. v. Commonwealth Electric Co.</em>, 241 Ill. 42, 89 N.E. 272, 283 (1909); <em>The Fair, supra</em>, 124 N.E.2d at 654.</p>
<p>“No particular words are necessary to constitute a grant, and any words which clearly show the intention to give an easement, which is by law grantable, are sufficient to effect that purpose.” <em>Wabash-Randolph, supra</em>, 51 N.E.2d at 136. See also <em>The Fair, supra</em>, 124 N.E.2d at 654. The agreement must be construed so as to carry out the plain intent of the parties. <em>Barber v. Allen</em>, 212 Ill. 125, 72 N.E. 33, 36 (1904).</p>
<h3 class="wp-block-heading">A. Parking</h3>
<p>Parking rights are fertile ground for disputes between commercial tenants and landlords. A significant source of litigation is imprecise drafting, which can result in the creation of implied easements having a scope larger than the developer intended.</p>
<div class="wp-block-image">
<figure class="alignleft"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_29466233.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="300" height="228" data-attachment-id="519" data-permalink="http://harp-onthis.com/commercial-real-estate-development-life-lessons-and-residential-neighbors/httpwww-dreamstime-comstock-photos-walking-shopping-center-image29466233/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_29466233.jpg?fit=1982%2C1512" data-orig-size="1982,1512" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"(c) Amsis1 | Dreamstime.com","focal_length":"0","iso":"0","shutter_speed":"0","title":"http:\/\/www.dreamstime.com\/stock-photos-walking-shopping-center-image29466233"}" data-image-title="http://www.dreamstime.com/stock-photos-walking-shopping-center-image29466233" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_29466233.jpg?fit=300%2C228" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_29466233.jpg?fit=1024%2C781" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_29466233.jpg?resize=300%2C228" alt="http://www.dreamstime.com/stock-photos-walking-shopping-center-image29466233" class="wp-image-519" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_29466233.jpg?resize=300%2C228 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_29466233.jpg?resize=1024%2C781 1024w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_29466233.jpg?resize=393%2C300 393w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_29466233.jpg?w=1982 1982w" sizes="auto, (max-width: 300px) 100vw, 300px" /></a></figure></div>
<p>As illustrated in the cases discussed below, the law in Illinois is that when the landlord makes no reservation of the right to alter the common areas in the lease, and when the site plan attached to the lease accurately and clearly delineates the common areas, the tenant has an easement in the particular configuration of common space delineated by the lease and plats.</p>
<h4 class="wp-block-heading">1. Shopping Center Parking</h4>
<p>– In <em>Madigan Bros. v. Melrose Shopping Center Co</em>., 123 Ill.App.3d 851, 463 N.E.2d 824, 79 Ill.Dec. 270 (1st Dist. 1984), a shopping center tenant sought a permanent injunction to prevent a landlord from constructing a restaurant or other building in the shopping center’s parking area, without consent of the tenant.</p>
<p>The lease included a provision that stated:</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p>this lease includes the non-exclusive right to Tenant and its agents, servants, successors, assigns, licensees, invitees, customers, suppliers and patrons to use and enjoy throughout the term of this lease the “common areas” of the Shopping Center, to-wit, the driveways, entrances, exits, roadways, parking areas, sidewalks, malls and other features and facilities provided for the general uses and purposes of the Shopping Center. 463 N.E.2d at 826.</p>
</blockquote>
<p>The lease further provided: “The location and arrangement of said parking areas, sidewalks, pedestrian malls, entrances and exits and roadways will substantially conform with the plat attached hereto and shall be kept open at all times<em>.</em>” <em>Id.</em></p>
<p>Additionally, the lease provided that the landlord would provide, operate, manage, and maintain all parking areas “together with any enlargement or rearrangement thereof required by enlarging the Shopping Center” and provided that the tenant shall “have, hold and enjoy the demised premises and the entire . . . building together with all other improvements and all easements, rights and appurtenances which are a part of the demised premises during the full term the lease and any extensions thereof, without hindrance or ejection by any persons lawfully claiming under Landlord.” <em>Id.</em></p>
<p>Attached to the lease as exhibits were (a) a plot plan of the shopping center showing the leased space; (b) a legal description of the shopping center; and (c) an exhibit showing “the number and area of existing and proposed automobile parking spaces in the Shopping Center together with existing and proposed driveways, entrances, exits and roadways.” Id. The third exhibit was subsequently amended to show the exact location of the parking area and indicate the specific number of parking spaces being provided in the shopping center. The lease was also amended to permit the landlord to construct a bank in the parking area in return for the landlord waiving a restriction against the tenant opening a new store within four miles of the shopping center.</p>
<p>The tenant sought to enjoin the landlord’s construction of the restaurant or other buildings in the shopping center’s parking area, claiming the lease created for the benefit of the tenant a nonexclusive easement in and to the shopping center parking areas. The landlord denied that the tenant had any easement rights under the lease and otherwise denied interfering with any of tenant’s rights under its lease. The landlord claimed that the landlord had reserved the right to make changes to the location or configuration of the parking areas and that the lease required only that the landlord maintain the specified ratio of parking spaces to leasable area, which would be done under the landlord’s construction plan.</p>
<p>The court held that the lease was clear and unambiguous in granting the tenant the use and enjoyment of the shopping center’s parking facilities. The court stated that “[t]he principal function of a court in construing a written contract is to discern and to give effect to the intention of the parties as expressed in the language of the document when read as a whole” and that “[w]hen the terms of a contract are clear and unambiguous, they must be enforced.” 463 N.E.2d at 828.</p>
<p>After considering the documents presented, the court concluded that the intent of the parties was to grant the shopping center tenants an easement in the parking areas for ingress, egress, and parking, as set out in the site plan, noting, “[i]t is the law in Illinois that where no reservation by the landlord of the right to alter the common areas is made in the lease and where the site plan attached to the lease accurately and precisely delineates the common areas, the tenant has an easement to the particular configuration of common space delineated by the lease and attached plats.” Id.</p>
<p>– In <em>Walgreen Co. v. America National Bank & Trust Company of Chicago,</em> 4 Ill.App.3d 549, 281 N.E.2d 462 (1st Dist. 1972), Walgreens was a tenant in the Village Green Shopping Center in Park Ridge. Walgreens filed an action to enjoin the landlord and Fotomat from permitting or causing construction of a structure of any kind in the parking area. In particular, Walgreens sought to enjoin the erection of an approximately 40-square-foot kiosk within an area comprising roughly three parking spaces that was to be operated by Fotomat for the sale of photographic equipment and supplies and for film processing. The trial court granted the injunction requested by Walgreens, and the landlord appealed. The principal issue on appeal was whether the landlord breached its lease with Walgreens by leasing an area in the parking lot of the shopping center to Fotomat for construction of a kiosk.</p>
<p>Article 7(a) of the lease to Walgreens provided in part as follows:</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p>It is an express condition of this lease that at all times during the continuance of this lease, Landlord shall provide, maintain, repair, adequately light when necessary during Tenant’s business hours, clean, supervise and keep available the Parking Areas as shown on the attached plan (which Parking Areas shall contain at least 150,000 square feet and shall provide for the parking of at least 400 automobiles), and also adequate service areas, pedestrian malls, sidewalks, curbs, roadways and other facilities appurtenant thereto. Said Parking Areas shall be for the free and exclusive use of customers, invitees and employees of Tenant and of other occupants of said Shopping Center, shall have suitable automobile entrances and exits from and to adjacent streets and roads, shall be level and shall be suitably paved and pitched to streets for surface water run off. 281 N.E.2d at 465.</p>
</blockquote>
<p>The lease provided that Walgreens would pay its proportionate share of costs for operating and maintaining the parking facilities in proportion to the relative square footage of the Walgreens to the total area of all retail facilities in the shopping center. Also, Walgreens was not obligated to open its store or pay rent until “[a]ll the parking and other facilities described in Article 7 have been completed, paved and lighted and are available for use.”<em> Id</em>.</p>
<p>The Fotomat kiosk was to be placed in a part of the shopping center designated on the plan attached to the Walgreens lease as a parking lot. It was designed to serve customers who drove up on either side of it in a motor vehicle. The kiosk was to have dimensions of 9 feet × 4½ feet, eliminating three parking spaces. Even with the elimination of the three parking spaces, the parking lot would still have in excess of 150,000 square feet and sufficient space for more than 400 parking spaces.</p>
<p>The landlord claimed that the plot plan attached to the Walgreens lease was only descriptive and illustrative, since Article 7(a), by stating “which Parking Areas shall contain at least 150,000 square feet and shall [provide for the parking of] at least 400 automobiles,” set forth the landlord’s contractual obligation. 281 N.E.2d at 466. The landlord argued that there was no other way to give meaning and effect to this language in Article 7(a) that specified the minimum square footage of the parking area and minimum number of parking spaces.</p>
<p>The court held that the rules of contract construction apply to written leases and that</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p>(t)he principal function of a court in construing a written agreement is to discern and to give effect to the intention of the parties as expressed in the language of the document when read as a whole. . . . A court cannot remake a contract and give a litigant a better bargain than he himself was satisfied to make; and when the terms of a contract are clear and unambiguous, they must be enforced. (Citations omitted.) <em>Id</em>.</p>
</blockquote>
<p>The court noted that “the lessor foresaw the possibility of a need to expand the retail facilities and as a part of the plot plan reserved the right to rearrange interior walls of one of the buildings in the shopping center, and in addition it reserved the right to expand the retail establishments into two specified areas. No provision, however, was made for diminishing the designated number of parking lots.” 281 N.E.2d at 467.</p>
<p>The court found from the language in the lease and the attached plot plan that the lease was clear and unambiguous. “The plot plan set forth with exactitude the location of the retail facilities, the pedestrian mall, the sidewalks, the roadways, the service drives, the parking areas, and 463 parking places.” Id.</p>
<p>The lease provided under Article 7(b) that Walgreens was to pay its proportionate share of costs to operate and maintain the parking lots and under Article 7(a) that the customers, invitees, and employees of Walgreens and other shopping center tenants were to be given free and exclusive use of the parking areas. After considering the evidence presented, the court concluded that the lease granted Walgreens and other tenants in the shopping center “an easement in the parking areas for ingress, egress, and parking as set out in the plan” and upheld the injunction against constructing the Fotomat kiosk. Id.</p>
<h4 class="wp-block-heading">2. Office Building Parking</h4>
<div class="wp-block-image">
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<p>In <em>Mutual of Omaha Life Insurance Co. v. Executive Plaza, Inc.</em>, 99 Ill.App.3d 190, 425 N.E.2d 503, 54 Ill.Dec. 638 (2d Dist. 1981), the tenants in a multistory commercial office building sued the manager and owner for breach of parking rights provisions in a lease. At the time of execution of the lease, a parking lot was provided adjacent to the office building, consisting of approximately 148 spaces for use by all tenants in the building and their clients. The parking lot had five points of ingress and egress: two on North Court Street (a two-way street) and one each on Park Street and Locust Street (two-way streets) and North Church Street (a one-way street). Parking was available to the general public on three of the five streets.</p>
<p>Subsequently, the landlord entered into a lease with Coopers and Lybrand (C & L) for 27 percent of the total rentable area. As part of the C & L lease, the landlord granted C & L employees exclusive access and use of 32 parking spaces in the previously existing common parking lot and an additional 18 spaces in a newly constructed parking lot on Locust Street across from the premises. The restricted parking areas were cordoned off by chains, and access to the restricted parking areas was controlled by plastic pass cards inserted into a gate mechanism to raise a gate. The access gate to the 32 restricted parking spaces in the former common lot was one of the two access points on North Court Street previously providing common access to the common parking lot.</p>
<p>The trial court ruled that the lease had been breached by partially restricting access to parking that was required under the lease to be available to all tenants, but concluded that removal of the parking restriction would not solve the claimed harm of inconvenience, that no direct economic or money loss to tenants had been proved, and that injunctive relief was not appropriate under these circumstances. The tenants appealed.</p>
<p>The appellate court reversed the ruling of the trial court and held: “The rule in Illinois is now clearly that language such as we have in the lease in question creates an easement appurtenant over a parking area in a shopping center, and this is the law elsewhere as well.” 425 N.E.2d at 507. Although the parties did not cite any authorities that specifically applied the rules that have developed in the shopping center cases (see §9.5 above) to parking appurtenant to an office building, the court determined that there was “no logical basis for having one set of rules for shopping centers and a different set of rules for other contractual relationships.”<em> Id</em>., quoting <em>Crest Commercial, Inc. v. Union-Hall, Inc</em>., 104 Ill.App.2d 110, 118, 243 N.E.2d 652, 657 (2d Dist. 1968).</p>
<p>The court noted:</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p>It might, of course, be argued that the furnishing of customer parking is absolutely essential to the tenants’ business in a shopping center whereas parking in connection with the less competitive setting of an office building a mere convenience. . . However, here the tenants have been found to have an easement appurtenant by express contract and from that contractual relationship it follows, in our opinion, that the use of the appurtenant parking areas may not be reduced or substantially altered during the term of the lease. (Citation omitted.) Id.</p>
</blockquote>
<p>The court went on to state that “the grant of an easement appurtenant as found by the trial court is a proper subject of mandatory injunction even if only minor interference is shown.” 425 N.E.2d at 507 – 508, citing <em>Ogilby v. Donaldson’s Floors, Inc</em>., 13 Ill.2d 305, 148 N.E.2d 758, 760 – 761 (1958). The court noted that to show irreparable injury, a party is not required to show that the injury is beyond the possibility of compensation, nor must the injury be very great, and “the fact that no actual damages could be proved and the jury could award only nominal damages ‘often furnishes the very best reason why a court of equity should interfere.’ ” 425 N.E.2d at 508, quoting <em>Newell v. Sass</em>, 142 Ill. 104, 31 N.E. 176, 180 (1892).</p>
<h3 class="wp-block-heading">PRACTICE POINTER</h3>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p> If a commercial lease describes available parking — and especially if it makes reference to a plot plan/site plan that delineates the location of buildings, roads, parking, curb cuts, etc. — and the landlord thereafter attempts to alter the parking or access rights without a clear and unequivocal right to do so, the tenant will have a legal right to assert a breach of lease and obtain a mandatory injunction to prevent the change, or require that the <em>status quo ante</em> be restored. For the landlord to avoid this outcome, it is important to provide in the lease an express reservation of the right to alter existing or planned parking at the landlord’s discretion, if that is the landlord’s intent.</p>
</blockquote>
<h4 class="wp-block-heading">B. Obstruction and Reduction of Passageways</h4>
<p>Construction of a glass bay entrance to a tenant’s store in a shopping center that extended five feet beyond the building lines depicted on a site plan attached to other tenant leases, and which disrupted sightlines to adjacent stores, was found to constitute an unpermitted obstruction or reduction of a private passageway created by the site plan. <em>The Fair v. Evergreen Park Shopping Plaza of Delaware, Inc</em>., 4 Ill.App.2d 454, 124 N.E.2d 649, 652 (1st Dist. 1954).</p>
<p>The court found that when a right of passageway is granted over a strip of land having definite boundaries, the right extends over the full width of the tract described. The Fair (a major tenant facing the mall in the shopping center) was entitled to use the entire mall. The court concluded that the injury was a continuing one, and because there was no adequate remedy at law, “the remedy for the obstruction or reduction of a private passageway is by injunction.” 124 N.E.2d at 656, citing <em>Carpenter v. Capital Electric Co.</em>, 178 Ill. 29, 52 N.E. 973, 975 (1899).</p>
<h4 class="wp-block-heading">C. Building Corridors</h4>
<p>As with parking rights, a floor plan attached to a lease may establish an implied easement in favor of tenants that would bar the landlord from relocating corridors reflected on the floor plan; however, express language in the lease clearly permitting a landlord to relocate the corridors will overcome any contrary implication arising from the floor plan. <em>Advertising Checking Bureau, Inc. v. Canal-Randolph Associates,</em> 101 Ill.App.3d 140, 427 N.E.2d 1039, 1042 – 1043, 56 Ill.Dec. 634 (1st Dist. 1991).</p>
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<p><em>COMING UP . . .<br /></em></p>
<p>We hope you have found the foregoing discussion useful. Coming up, in <strong>Part 2</strong> of this series, we will discuss the often misunderstood leasehold “<em><strong>Covenant of Quite Enjoyment”</strong></em> in the context of commercial leases.</p>
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<title>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>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p>“[o]n application by a transferee of a member’s interest, a judicial determination [may be made] that it is equitable to wind up the company’s business.”</p>
</blockquote>
<p>. . . arguing that the claimed breach of the manager’s fiduciary duty to distribute available income creates a circumstance that would make it equitable to wind up the company’s business.</p>
<p>Consider, however, §15-15, which provides:</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p>“In discharging the duties of their respective positions, members and individual managers may, in considering the best long term and short term interests of the limited liability company, consider the effects of any action (including without limitation, action that may involve or relate to a change or potential change in control of the limited liability company) upon employees, suppliers, and customers of the limited liability company or its subsidiaries, communities in which offices or other establishments of the limited liability company or its subsidiaries are located, and all other pertinent factors.”</p>
</blockquote>
<p>If an LLC manager can make a plausible case that it is in the best long-term or short-term interests of the LLC to build cash reserves for reinvestment in the company to grow its business or to fund capital improvements, such case may likely serve as reasonable justification for a manager’s decision to withhold distributions of cash flow to interest holders in the faithful discharge of its duties — notwithstanding that interest holders may incur phantom income tax liability.</p>
<p>If the case can be made that the manager is acting within the scope of its authority under the operating agreement and discharging its duties in accordance with the statutory standard established by §15-15, a powerful argument would likely exist that it would be an abuse of the court’s discretion to determine that the manager’s exercise of such expressly granted authority creates an equitable ground to wind up the LLC’s business under §35-1(5).</p>
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<h5 class="wp-block-heading">PRACTICE NOTE</h5>
<p>If an LLC member is subject to claims of creditors that may mature into a charging order, consider whether an LLC operating agreement that does not grant a manager full discretion to determine whether to make distributions may be amended to grant the manager full discretion.<em> Query:</em> Does such an amendment constitute a fraudulent transfer within the meaning of the Uniform Fraudulent Transfer Act (UFTA), 740 ILCS 160/1, <em>et seq.</em>? Can a fraudulent transfer ever occur when there has been no transfer or encumbrance of an asset? If the ability to be a manager is not a property interest in a manager-managed LLC (see <em>Grochocinski v. Campbell (In re Campbell)</em>, 475 B.R. 622 (Bankr. N.D.Ill. 2012)), can amending the scope of the manager’s authority constitute the transfer or encumbrance of an asset or property interest within the meaning of the UFTA?</p>
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<h4 class="wp-block-heading">E. The Springing Member</h4>
<p>The foregoing argument notwithstanding, if the judgment debtor were to be the sole member of a manager-managed limited liability company, with the result that upon foreclosure of the charging lien under 805 ILCS 180/30-20 the judgment creditor became the sole economic interest holder as owner of 100 percent of the distributional interest, a compelling case might be made that equity requires the business of the LLC to be wound up if requested by such 100% owner.</p>
<p>But what if, after foreclosure of the charging order on 100 percent of the distributional interest of the judgment debtor, the judgment creditor was, in fact, still not the owner of 100 percent of distributional interests in the LLC? What if, as of the time the foreclosure and transfer occurred, there was another distributional interest holder — which was, in fact, the sole member? Might that make a difference in the court’s determination that it is equitable to wind up the LLC’s business?</p>
<p>Based on the hypothetical facts we have been examining (i.e., foreclosure of 100 percent of the distributional interest held by all LLC members), how could this factual twist ever come into play?</p>
<p><em>Here’s how:</em></p>
<p>Consider §35-3(c)(2) of the Illinois LLC Act, which permits the articles of organization or operating agreement to provide for a new member to, essentially, spring into existence effective as of the dissociation of the last remaining member. (Transfer of all of a member’s distributional interest is an act of dissociation. See 805 ILCS 180/35-45(3).)</p>
<p>Suppose the operating agreement provides that within six months after dissociation of the last remaining member, the manager has the right to cause the LLC to issue, say, a one-percent distributional interest in the LLC to the manager, upon contribution by the manager to the LLC of an amount equal to one percent of the aggregate balance of all capital accounts, and that upon such occurrence the manager shall be admitted as a member? Upon being admitted as a member owning a one-percent distributional interest, the manager would be the sole member, with the ability to give unanimous approval to all actions requiring approval of the members. Might that make a compelling case that the LLC remains as a fully functioning entity capable of carrying out its business purpose? Consider, particularly, if the LLC operates a business as a going concern, with employees, vendors, and community stakeholders who benefit from the LLC’s continued existence and operation. Is it likely a court will find equitable grounds to order that the business of the LLC be wound up?</p>
<p>Obviously, each case must be judged on its own merits. But once again, from the standpoint of negotiating on behalf of a judgment debtor, plausible arguments well-grounded in fact and warranted by existing law that can create doubt in the mind of a judgment creditor as to the likely success of its enforcement efforts are valuable tools in reaching a favorable settlement.</p>
<h4 class="wp-block-heading"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/IMG_01561.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="84" data-permalink="http://harp-onthis.com/illinois-llcs-the-asset-protection-advantage/img_0156-2/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/IMG_01561.jpg?fit=537%2C720" data-orig-size="537,720" data-comments-opened="1" data-image-meta="{"aperture":"2.8","credit":"","camera":"iPhone 4","caption":"","created_timestamp":"1310642963","copyright":"","focal_length":"3.85","iso":"80","shutter_speed":"0.00149925037481","title":""}" data-image-title="IMG_0156" data-image-description="<p>RKH iPhone photo – Chicago – from USFDLG offices</p>
" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/IMG_01561.jpg?fit=223%2C300" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/IMG_01561.jpg?fit=537%2C720" class=" size-medium wp-image-84 alignright" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/IMG_01561.jpg?resize=223%2C300" alt="IMG_0156" width="223" height="300" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/IMG_01561.jpg?resize=223%2C300 223w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/03/IMG_01561.jpg?w=537 537w" sizes="auto, (max-width: 223px) 100vw, 223px" /></a>F. How Do These LLC Provisions Aid a Commercial Real Estate Borrower?</h4>
<p>Narrowly speaking, one might wonder how everything discussed above helps in the typical commercial loan scenario in which the limited liability company is the borrower, with direct liability, and the LLC members are guarantors, also with direct liability. If the LLC members have a single project with a single loan from a single lender, the point is well taken. The lender does not need to go through the members to get to the LLC’s income and assets. It can simply enforce its judgment against the LLC, while simultaneously, if it so chooses, also pursuing the guarantor members.</p>
<p>But what if the guarantor members are active real estate investors/developers (or other investors/professionals) who don’t have just one project (or business) through one LLC and one lender, but rather have two or more projects (or businesses) through two or more separate LLCs with loans from two or more separate lenders?</p>
<p><em>EXAMPLE</em>: Consider this fact scenario:</p>
<p>Project A is owned by LLC A and financed by Lender A for $5,000,000 (Loan A).</p>
<p>Project B is owned by LLC B and financed by Lender B for $8,000,000 (Loan B).</p>
<p>The members of LLC A are X and Y, who jointly and severally guaranty Loan A.</p>
<p>The members of LLC B are X and Z, who jointly and severally guaranty Loan B.</p>
<p>LLC A and LLC B are each manager-managed LLCs, in each case managed by XYZ Management LLC, which is owned by X, Y, and Z as equal members. XYZ Management LLC is not a member of either LLC A or LLC B. XYZ Management LLC is jointly managed by X, Y, and Z.</p>
<p>Project B is doing well and has equity of $7,000,000, with annual net cash flow after debt service of $650,000, with taxable profits after depreciation of $600,000.</p>
<p>Project A is in default and facing a $3,000,000 deficiency after sale of the collateral, resulting in a personal judgment in favor of Lender A against members X and Y on their personal guaranties.</p>
<p>Assume X and Y have no other attachable assets.</p>
<p>Applying the asset protection-friendly provision of the Illinois LLC Act, (coupled with a thoughtfully structured operating agreement) what may be the likely outcome of Lender A’s efforts to enforce its judgments?</p>
<p>Lender A obtains a $5,000,000 judgment against LLC A and pursues members X and Y on their personal guaranties. After disposing of the collateral owned by LLC A for $2,000,000, Lender A obtains a $3,000,000 joint and several judgment against members X and Y on their personal guaranties.</p>
<p>Through a citation to discover assets or otherwise, Lender A learns that X is a 50-percent member of LLC B, which has net equity of $7,000,000. Lender A also learns that X and Y are members of XYZ Management LLC, each owning 33.3 percent of that LLC.</p>
<p>Lender A wishes to satisfy its $3,000,000 judgment by attaching the 50-percent membership interest of X in LLC B.</p>
<p>Pursuant to §30-20 of the Illinois LLC Act, 805 ILCS 180/30-20, Lender A’s exclusive remedy relative to the LLC interest of member X is to obtain a charging order, which is a lien against distributions payable to X. With LLC B having net cash flow after debt service of $650,000 per year, the most Lender B expects to receive is $325,000 per year, based on the 50-percent membership interest of X.</p>
<p>In fact, XYZ Management LLC (the manager of LLC A) decides to reserve $650,000 per year for capital repairs and improvements and as a reserve against possible tenant vacancies and other contingencies. XYZ Management LLC elects not to make any distributions to members. As a consequence, pursuant to Lender A’s charging order, Lender A gets nothing, because X is not entitled to receive any distributions from LLC B on its distributional interest.</p>
<p>Lender A is unhappy. Lender A contemplates foreclosing its lien on the distributional interest of X pursuant to §30-20(b). If it does so, Lender A will become the owner of the 50-percent distributional interest of X in LLC B and will be subject to taxable phantom income of $300,000 per year (50 percent of the hypothetical $600,000 per year in taxable income) as the owner of a 50-percent distributional interest. Instead of being better off, Lender A may be worse off, having incurred a substantial income tax liability.</p>
<p>As an alternative, Lender A decides to try to force a liquidation of LLC B, so that it will receive 50 percent of the hypothetical $7,000,000 in equity in the project owned and operated by LLC B. To do this, Lender A decides to pursue the interests of X and Y in XYZ Management LLC. Since X and Y each owns 33.3 percent of XYZ Management LLC, Lender A assumes it can take control of XYZ Management LLC by obtaining a charging order on the interests of X and Y in XYZ Management LLC and then acquiring 66.6 percent via foreclosure of its charging order lien pursuant to §30-20(b).</p>
<p>Lender A contemplates that by acquiring the ownership interests of two out of three members of XYZ Management LLC, including the interests of two out three of its managers, Lender A will control XYZ Management LLC and, through that control, will be the manager of LLC B and can direct a sale or liquidation of LLC B’s assets.</p>
<p>Unfortunately for Lender A, it discovers that by foreclosing on the interests of X and Y in XYZ Management LLC, Lender A acquires, pursuant to §30-20(b), only the interests of a transferee, with no right to vote as a member and no right to participate in management of XYZ Management LLC per §30-10(d). Therefore, Lender A still has no management authority with respect to LLC B.</p>
<p>Query: Based on the foregoing hypothetical facts and likely outcome of its enforcement efforts, might the lender be willing to consider settlement with X and Y for less than full payment?</p>
<h4 class="wp-block-heading">G. What Is the Defaulted Borrower’s Exit Strategy?</h4>
<p>Asset protection can be more an “art” than a science. There is no magic formula for success in protecting the assets and income of commercial real estate borrowers when a loan goes bad, but there are effective strategies that can help facilitate settlement upon favorable terms that may avoid catastrophic financial ruin.</p>
<div class="wp-block-image">
<figure class="alignleft"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_28551060.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="206" height="300" data-attachment-id="518" data-permalink="http://harp-onthis.com/the-little-known-two-year-rule-for-employment-restrictive-covenants-illinois/httpwww-dreamstime-comstock-photo-confused-business-man-thinking-wich-way-to-go-image28551060/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_28551060.jpg?fit=1437%2C2087" data-orig-size="1437,2087" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"(c) Feedough | Dreamstime.com","focal_length":"0","iso":"0","shutter_speed":"0","title":"http:\/\/www.dreamstime.com\/stock-photo-confused-business-man-thinking-wich-way-to-go-image28551060"}" data-image-title="http://www.dreamstime.com/stock-photo-confused-business-man-thinking-wich-way-to-go-image28551060" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_28551060.jpg?fit=206%2C300" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_28551060.jpg?fit=705%2C1024" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_28551060.jpg?resize=206%2C300" alt="http://www.dreamstime.com/stock-photo-confused-business-man-thinking-wich-way-to-go-image28551060" class="wp-image-518" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_28551060.jpg?resize=206%2C300 206w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_28551060.jpg?resize=705%2C1024 705w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2013/06/dreamstimemedium_28551060.jpg?w=1437 1437w" sizes="auto, (max-width: 206px) 100vw, 206px" /></a></figure></div>
<p>A principal objective of asset protection — and even most defensive efforts on behalf of a commercial real estate borrower in the event of default on a commercial real estate loan — is typically to motivate the lender to settle on favorable terms. What terms a borrower or guarantor may consider favorable depends on the facts and circumstances of the particular case.</p>
<p>Often, the favorable outcome being sought is a release of the loan guarantors from personal liability on their loan guaranties. This may require the payment of some money by the guarantors, but ideally substantially less that the full exposure on the personal guaranty.</p>
<p>Generally, the lender is seeking to maximize its recovery. If it can recover the entire indebtedness and costs of collection, the lender will seek full recovery. If full recovery becomes doubtful, however, most lenders will settle for an approximation of what the lender reasonably expects it will net through continued forced collection efforts. The lender’s objective of maximizing recovery has been expressly incorporated into financial institution supervisory guidance through the joint financial regulators’ <em>Policy Statement on Prudent Commercial Real Estate Loan Workouts</em>, <a href="http://www.fdic.gov/news/news/financial/2009/fil09061a1.pdf" target="_blank" rel="noopener">www.fdic.gov/news/news/financial/2009/fil09061a1.pdf</a>.</p>
<p>Weighing the costs of recovery against the amount of recovery likely to be obtained is a relevant factor for lenders to consider in maximizing their recovery. Money has “time value” as well. The more quickly money is recovered, the more value it has. The fact that a judgment may be accruing interest at nine percent per annum, or that the borrower and its guarantors are liable to pay costs of collection, including reasonable attorneys’ fees, becomes fairly meaningless if the borrower and guarantors have no assets or income from which the lender can readily recover its claim. If the borrower and/or guarantors are properly positioned to borrow funds from friends or family to pay even a modest settlement that is equivalent to, or slightly exceeds, what the lender can readily recover through forced collection efforts, settlement is a plausible outcome.</p>
<p>The more difficult and doubtful collection efforts become, the more likely one may be to obtain favorable settlement terms.</p>
<h4 class="wp-block-heading">H. Timing Consideration for Asset Protection</h4>
<p>Asset protection strategies are most effective when planned far in advance. Transfers of assets into a limited liability company or other asset protection-friendly vehicle can come too late if not completed well in advance of financial difficulties. The statute of limitations for a transfer constituting a fraudulent transfer is four years. 740 ILCS 160/10. Fortunately for most commercial real estate borrowers, Illinois business owners and Illinois licensed professionals, no transfer may be necessary for them to avail themselves of the asset protection advantages of an Illinois LLC since most commercial real estate projects financed in the past several years, and most Illinois based businesses, and many Illinois licensed professions, have been owned from the outset in an Illinois LLC. Creative amendment to an existing operating agreement may be sufficient to increase the level of asset protection.</p>
<p>Planning ahead is the ideal solution — but sometimes you just have to take what the statute gives you. For Illinois LLCs, the Illinois LLC Act actually gives quite a lot.</p>
<h3 class="wp-block-heading"><span style="text-decoration: underline;">PART II</span>: Immunity from Liability of Members and Managers</h3>
<p>In Part I of this article, we discussed the key sections of the Illinois LLC Act which protect the LLC, its business, and other members, if any, by limiting recovery <em>vis-à-vis</em> the LLC of a judgment entered against an LLC member.</p>
<p>Of equal or greater value is 805 ILCS 180/10-10, as interpreted and sustained in Dass v. Yale, 2013 IL App (1st) 122520; 3 N.E.3d 858.</p>
<p>A. <strong>805 ILCS 180/10-10</strong> provides, as follows:</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p>“(a) Except as otherwise provided in subsection (d) of this Section, the debts, obligations and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company. A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager.</p>
<p>(b) (Blank)</p>
<p>(c) The failure of a limited liability company to observe the usual company formalities or requirements relating to the exercise of company powers or management of its business is not a ground for imposing personal liability on the members of managers for liabilities of the company.</p>
<p>(d) All or specified members of a limited liability company are liable in their capacity as members for all or specified debts, obligations, or liabilities of the company if:</p>
<p>(1) a provision to that effect is contained in the articles of organization; and</p>
<p>(2) a member so liable has consented in writing to the adoption of the provision or to be bound by the provisions.”</p>
</blockquote>
<h4 class="wp-block-heading"><strong>B. <em>Dass v. Yale</em></strong>, 2013 IL App (1st) 122520; 3 N.E.3d 858, cert. denied.</h4>
<p>In <em>Dass v. Yale</em>, the plaintiff claimed that Yale, the sole managing member of Wolcott LLC, an Illinois limited liability company, defrauded the plaintiff in connection with the sale of a condominium unit by making false representations plaintiff claimed constituted, <em>inter alia</em>, common law fraud. <em>See id</em>., ¶ 2.</p>
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<p>Yale moved to dismiss the claims against him, asserting he was insulated from liability under Section 10-10 of the Illinois LLC Act. The plaintiff objected, claiming the legislature never intended Section 10-10 of the Illinois LLC Act to shield limited liability company members or managers who commit fraud. The trial court disagreed, and sided with defendant Yale, finding that members and managers are immune from liability under Section 10-10 of the Illinois LLC Act and granted Yale’s motion to dismiss. <em>Id.</em> ¶ 3. The plaintiff appealed.</p>
<p>The Appellate Court noted that plaintiff Dass was not asserting a right to pierce the LLC entity veil, using any recognized piercing test (which will be discussed in Part II – C, below), but rather was asserting liability of Yale based, essentially, upon the general notion (as incorporated in the legislative comments to Section 303 of the Uniform Limited Liability Company Act (the “Uniform Act”)) that an agent, even while acting on behalf of a principal, is jointly and severally liable for tortious conduct committed by the agent. Id. ¶¶ 36, 40. Arguing that Section 10-10 of the Illinois LLC Act is substantively similar to Section 303 of the Uniform Act, plaintiff Dass asserted that Yale should be liable for the claimed fraud (or, at least, should have to answer for the claim, rather than be dismissed pursuant to Yale’s motion to dismiss).</p>
<p>The Appellate Court also noted that Section 303 of the Uniform Act and the comments accompanying Section 303 may normally be persuasive authority in interpreting Section 10-10 of the Illinois LLC Act due to similar language used in each, even though neither Section 303 nor the comments are formally a part of the Illinois LLC Act. Id., ¶¶ 40-41.Taking into consideration of the history of the Illinois LLC Act and other cases interpreting the history, however, the Appellate Court determined that the trial court was correct in finding that Yale is shielded from liability. The court stated:</p>
<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p>“Indeed, examining the history of the LLC Act itself demonstrates that the trial court was correct in interpreting section 10-10 to shield Yale from liability. The current language of section 10-10 has been in effect since January 1, 1998. See Pub. Act. 90-0424 (eff. Jan. 1, 1998). Prior to that, section 10-10 read:</p>
<p>(a) A member of a limited liability company shall be personally liable for any act, debt, obligation or liability of the limited liability company or another member or manager to the extent that a shareholder of an Illinois business corporation is liable in an analogous circumstance under Illinois law.</p>
<p>(b) A manager of a limited liability company shall be personally liable for any act, debt, obligation or liability of the limited liability company or another member or manager to the extent that a shareholder of an Illinois business corporation is liable in an analogous circumstance under Illinois law. 805 ILCS 180/10-10 (West 1996).</p>
<p>Generally, a change to the unambiguous language of a statute creates a rebuttable presumption that the amendment was intended to change the law. Here, the language of the LLC Act was changed by removing language explicitly providing for personal liability. As we noted in <em>Puleo,</em> “[a]s we have not found any legislative commentary regarding that amendment, we presume that by removing the noted statutory language, the legislature meant to shield a member or manager of an LLC from personal liability.” <em>Dass</em>, 2013 IL App (1st) 122520, ¶ 41 (internal citations omitted).”</p>
</blockquote>
<p>The court also noted that “the express language of section 10-10 (currently) provides that ‘the debts, obligations, and liabilities of a limited liability company, <em>whether arising in contract, tort, or otherwise</em>, are solely the liabilities of the company.’ We see no reason why the reasoning of <em>Puleo</em> and <em>Carollo</em>, which focused on the language of the LLC Act and its amendment, would not apply to a liability arising in tort, as in the case at bar, when such a scenario is expressly contemplated by the language of section 10-10. Accordingly, we affirm the trial court’s dismissal of plaintiffs’ complaint.” <em>Id</em>. ¶ 44 (emphasis in original) (internal citations omitted).</p>
<p>The plaintiff petitioned the Illinois Supreme Court for leave to appeal, which was denied on March 26, 2014. 2014 WL 1385161, 5 N.E.3d 1123 (Ill. Mar. 26, 2014). Thus, the decision stands as the binding law of Illinois.</p>
<h4 class="wp-block-heading">C. Piercing the LLC Entity Veil</h4>
<p>In a footnote, the Appellate Court in <em>Dass v. Yale</em> stated as follows: “We note that <em>Puleo</em> was somewhat limited in <em>Westmeyer v. Flynn</em>, 382 Ill. App. 3d 952, 960, 321 Ill. Dec. 406, 889 N.E.2d 671 (2008), where we found that section 10-10 did not bar actions involving piercing the</p>
<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>
<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>POP QUIZ! — Commercial Real Estate Due Diligence</title>
<link>http://harp-onthis.com/pop-quiz-commercial-real-estate-due-diligence/</link>
<comments>http://harp-onthis.com/pop-quiz-commercial-real-estate-due-diligence/#comments</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Fri, 13 Feb 2015 00:06:29 +0000</pubDate>
<category><![CDATA[Commercial Real Estate]]></category>
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<description><![CDATA[I read once that if you took all the lawyers in the world and laid them end to end along the equator — it would be a good idea to leave them there. That’s what I read. What do you […]]]></description>
<content:encoded><![CDATA[<div class="wp-block-image">
<figure class="alignleft"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="199" height="300" data-attachment-id="1145" data-permalink="http://harp-onthis.com/due-diligence-checklists-for-commercial-real-estate-transactions-3/harp-3_17_15-019/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?fit=2848%2C4288" data-orig-size="2848,4288" data-comments-opened="1" data-image-meta="{"aperture":"9","credit":"","camera":"NIKON D300","caption":"","created_timestamp":"1426589698","copyright":"","focal_length":"52","iso":"200","shutter_speed":"0.008","title":"","orientation":"0"}" data-image-title="Harp 3_17_15-019" data-image-description="" data-image-caption="<p>R. Kymn Harp<br />
Robbins, Salomon & Patt, Ltd.</p>
" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?fit=199%2C300" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?fit=680%2C1024" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?resize=199%2C300" alt="R. Kymn Harp Robbins, Salomon & Patt, Ltd." class="wp-image-1145" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?resize=199%2C300 199w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?resize=680%2C1024 680w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/04/Harp-3_17_15-019.jpg?w=2000 2000w" sizes="auto, (max-width: 199px) 100vw, 199px" /></a><figcaption class="wp-element-caption">R. Kymn Harp<br />Robbins, Salomon & Patt, Ltd.</figcaption></figure></div>
<p>I read once that if you took all the lawyers in the world and laid them end to end along the equator — it would be a good idea to leave them there.</p>
<p>That’s what I read. What do you suppose that means?</p>
<p>I have written before about the need to exercise due diligence when purchasing commercial real estate. The need to investigate, before Closing, every significant aspect of the property you are acquiring. The importance of evaluating each commercial real estate transaction with a mindset that once the Closing occurs, there is no going back. The Seller has your money and is gone. If post-Closing problems arise, Seller’s contract representations and warranties will, at best, mean expensive litigation. CAVEAT EMPTOR! [“<em>Let the buyer beware!</em>”]
<p>Paying extra attention at the beginning of a commercial real estate transaction to “get it right” can save tens of thousands of dollars versus when a deal goes bad. It’s like the old <em>Fram</em>® oil filter slogan during the 1970’s: “<em>You can pay me now – or pay me later</em>”. In commercial real estate, however, “later” may be too late.</p>
<div class="wp-block-image">
<figure class="alignright size-full is-resized"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="1845" data-permalink="http://harp-onthis.com/pop-quiz-commercial-real-estate-due-diligence/entrepreneurs-meet-the-broker-and-they-hand-shake/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/entrepreneurs-meet-the-broker-and-They-Hand-Shake.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="entrepreneurs-meet-the-broker-and-They-Hand-Shake" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/entrepreneurs-meet-the-broker-and-They-Hand-Shake.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/entrepreneurs-meet-the-broker-and-They-Hand-Shake.jpg?fit=1000%2C667" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/entrepreneurs-meet-the-broker-and-They-Hand-Shake.jpg?resize=400%2C267" alt="entrepreneurs meet the broker and they hand shake" class="wp-image-1845" width="400" height="267" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/entrepreneurs-meet-the-broker-and-They-Hand-Shake.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/entrepreneurs-meet-the-broker-and-They-Hand-Shake.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/entrepreneurs-meet-the-broker-and-They-Hand-Shake.jpg?resize=768%2C512 768w" sizes="auto, (max-width: 400px) 100vw, 400px" /></figure></div>
<p>Buying commercial real estate is NOT like buying a home. It is not. It is not. It is NOT.</p>
<p>In Illinois, and many other states, virtually every residential real estate closing requires a lawyer for the buyer and a lawyer for the seller. This is probably smart. It is good consumer protection.</p>
<p>The “problem” this causes, however, is that every lawyer handling residential real estate transactions considers himself or herself a “real estate lawyer”, capable of handling any real estate transaction that may arise.</p>
<p>We learned in law school that there are only two kinds of property: real estate and personal property. Therefore – we intuit – if we are competent to handle a residential real estate closing, we must be competent to handle a commercial real estate closing. They are each “real estate”, right?</p>
<p><em>ANSWER</em>: Yes, they are each real estate. No, they are not the same.</p>
<p>The legal issues and risks in a commercial real estate transaction are remarkably different from the legal issues and risks in a residential real estate transaction. Most are not even remotely similar. Attorneys concentrating their practice handling residential real estate closings do not face the same issues as attorneys concentrating their practice in commercial real estate.</p>
<p>It is a matter of experience. You either know the issues and risks inherent in commercial real estate transactions – and know how to deal with them – or you don’t.</p>
<p>A key point to remember is that the myriad consumer protection laws that protect residential home buyers have no application to – and provide no protection for – buyers of commercial real estate.</p>
<p>Competent commercial real estate practice requires focused and concentrated investigation of all issues material to the transaction by someone who knows what they are looking for. In short, it requires the experienced exercise of <em>due diligence</em>.</p>
<p>I admit – the exercise of due diligence is not cheap, but the failure to exercise due diligence can create a financial disaster for the commercial real estate investor. Don’t be “<em>penny wise and pound foolish</em>”. If you are buying a home, hire an attorney who regularly represents home buyers. If you are buying commercial real estate, hire an attorney who regularly represents commercial real estate buyers.</p>
<p>Years ago I stopped handling residential real estate transactions. As an active commercial real estate attorney, even I hire residential real estate counsel for my own home purchases. I do that because residential real estate practice is fundamentally different from commercial real estate.</p>
<p>Maybe I do <em>harp</em> on the need for competent counsel experienced in commercial real estate transactions. I genuinely believe it. I believe it is essential. I believe if you are going to invest in commercial real estate, you must apply your critical thinking skills and be smart.</p>
<h2 class="wp-block-heading"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="1041" data-permalink="http://harp-onthis.com/illinois-llcs-the-asset-protection-advantage/rsp_logohd-3/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?fit=963%2C350" data-orig-size="963,350" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"1"}" data-image-title="RSP_LogoHD (3)" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?fit=300%2C109" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?fit=963%2C350" class=" wp-image-1041 aligncenter" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/02/RSP_LogoHD-3.jpg?resize=250%2C91" alt="RSP_LogoHD (3)" width="250" height="91" 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: 250px) 100vw, 250px" /></a></h2>
<h2 class="wp-block-heading"> </h2>
<h2 class="wp-block-heading"><span style="color: #008080;">POP QUIZ:</span></h2>
<p>Here’s a simple test of YOUR critical thinking skills:</p>
<p>Please read the following Scenarios and answer the questions TRUE or FALSE: </p>
<span id="more-1033"></span>
<p><em><strong>Scenario No. 1:</strong></em> It’s Valentine’s Day. You are in hot pursuit of the love of your life. A few weeks ago, she confided in you that all she ever dreamed of for Valentine’s Day was that her lover would show up at her door, dressed in a white tuxedo with tails and a top hat, and present<br />her with a beautiful bouquet of flowers. You’ve rented the tuxedo, but now you are concerned about how much money you are spending.</p>
<p><strong>TRUE OR FALSE?:</strong> Since flowers are pretty much all the same, it is OK for you to skip the roses and show up with a bouquet of fresh yellow dandelions.</p>
<p><em><strong>Scenario No. 2:</strong></em> For several years your eyesight has deteriorated to the point where you can barely see your alarm clock. You are now considering corrective eye surgery so you won’t need glasses. Your sister-in-law had corrective eye surgery and has had spectacular results. She recommends her eye surgeon, but mentions the cost is about $5,700 for both eyes and that the surgery is not covered by insurance. A few years ago, you had surgery to correct your hemorrhoids and it cost you only eight hundred bucks.</p>
<p><strong>TRUE OR FALSE?:</strong> Since surgeons all went to medical school and are all medical doctors, you are being frugal and wise by asking the surgeon who performed your hemorrhoid surgery to perform your corrective eye surgery.</p>
<p><em><strong>Scenario No. 3: </strong></em> Several years ago, when you first got married, you asked a former classmate who is a lawyer to represent you in the purchase of your town home. The cost was only $375. A year later, you started a family and decided you needed a Will. The same attorney prepared Wills for you and your spouse for a total cost of $700. You started your own business and your attorney friend formed a corporation for you and charged you only $600 plus the cost of the corporate minute book. Years later, when your son was arrested for misdemeanor reckless driving, your attorney friend handled the criminal case and got your son off with supervision for only $1,500.</p>
<p>Your business has been successful and you have built a pretty sizable nest egg, but you are tired of working for every dime and want to try investing in real estate. You have your eye on a strip shopping center. It includes a grocery store, bank, hardware store, dry cleaners (on a month to month tenancy), a couple of fast food restaurants, a gift shop, dental office, bowling alley (with a lease about to expire), and wraps behind a gas station/mini-mart on the corner. The purchase price is $8,000,000, but the net operating income looks pretty good. You figure if you turn the bowling alley into a full service restaurant/banquet facility, and convert the dry cleaners into a 24-hour coin laundry, the net operating income will increase and the shopping center will turn into a spectacular investment. You plan to pull together much of your life savings and put down $2,000,000 to buy this strip shopping center, borrowing the balance of $6,000,000. You remember that your lawyer friend handled the purchase of your home several years ago, so you know he handles real estate.</p>
<p><strong>TRUE OR FALSE?:</strong> Commercial real estate is the same as residential real estate [Hey, its all dirt, isn’t it (?)], so you are being a shrewd businessperson by hiring your lawyer friend who will charge much less than a lawyer who handles shopping center purchases several time a year. [What is this “due diligence” stuff anyway?]
<h2 class="wp-block-heading"><span style="color: #008080;">ANSWERS:</span></h2>
<p>If you answered <em>TRUE</em> for any of the foregoing Scenarios . . .</p>
<p>…Well …</p>
<p>… you may NOT be quite ready for prime time. Perhaps you should stop and reflect a while on the course your life has taken.</p>
<p>If, on the other hand, you understand that the answer to each of the foregoing questions is <em>FALSE</em>, I am available to help you in <em>Scenario No. 3</em>.</p>
<p>For <em>Scenario No. 2</em>, you should follow your sister-in-law’s suggestion and contact her eye surgeon, or some other eye surgeon with equal skill.</p>
<p>For <em>Scenario No. 1</em>, you are on your own. [But, if you answered TRUE for Scenario No. 1, you may be FOREVER on you own.]
<p>Critical thinking skills are vital. Use them when dealing with Commercial Real Estate.</p>
<p><em>Thanks for listening . . . </em><br /><em>Kymn</em></p>
<p>P.S. Please excuse me for <em>harping</em> on due diligence. ~ It is my birthright. ~ With the last name “Harp”, I am entitled to <em>harp</em> on anything I wish.</p>
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<post-id xmlns="com-wordpress:feed-additions:1">1033</post-id> </item>
<item>
<title>STRATEGIES FOR ASSESSING COMMERCIAL TENANT CREDIT</title>
<link>http://harp-onthis.com/strategies-assessing-commercial-tenant-credit/</link>
<comments>http://harp-onthis.com/strategies-assessing-commercial-tenant-credit/#respond</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Thu, 22 Jan 2015 21:47:43 +0000</pubDate>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[checklist]]></category>
<category><![CDATA[Chicago]]></category>
<category><![CDATA[commercial leasing]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[conducting due diligence]]></category>
<category><![CDATA[consequences]]></category>
<category><![CDATA[development]]></category>
<category><![CDATA[due diligence checklist]]></category>
<category><![CDATA[enforcement actions]]></category>
<category><![CDATA[industrial property]]></category>
<category><![CDATA[investment]]></category>
<category><![CDATA[landlord concerns]]></category>
<category><![CDATA[leasing]]></category>
<category><![CDATA[tenant credit]]></category>
<category><![CDATA[transactions]]></category>
<category><![CDATA[what to look for]]></category>
<guid isPermaLink="false">http://harp-onthis.com/?p=1024</guid>
<description><![CDATA[GUEST BLOG BY DAVID RESNICK of ROBBINS, SALOMON & PATT, LTD. When considering a lease, tenants are usually focused on the location, size and quality of the leased space, and perform some minimal diligence on the landlord and property manager […]]]></description>
<content:encoded><![CDATA[<div class="wp-block-image">
<figure class="alignleft"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/01/Resnick_low_res_C_CSC2789.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="175" height="219" data-attachment-id="1023" data-permalink="http://harp-onthis.com/strategies-assessing-commercial-tenant-credit/resnick_low_res_c_csc2789/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/01/Resnick_low_res_C_CSC2789.jpg?fit=175%2C219" data-orig-size="175,219" data-comments-opened="1" data-image-meta="{"aperture":"8","credit":"","camera":"NIKON D7000","caption":"","created_timestamp":"1367315896","copyright":"","focal_length":"92","iso":"125","shutter_speed":"0.01","title":"","orientation":"1"}" data-image-title="Resnick_low_res_C_CSC2789" data-image-description="" data-image-caption="<p>David Resnick, Attorney<br />
Robbins, Salomon & Patt, Ltd.</p>
" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/01/Resnick_low_res_C_CSC2789.jpg?fit=175%2C219" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/01/Resnick_low_res_C_CSC2789.jpg?fit=175%2C219" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2015/01/Resnick_low_res_C_CSC2789.jpg?resize=175%2C219" alt="David Resnick, Attorney Robbins, Salomon & Patt, Ltd." class="wp-image-1023"/></a><figcaption class="wp-element-caption">David Resnick, Attorney<br />Robbins, Salomon & Patt, Ltd.</figcaption></figure></div>
<h3 class="wp-block-heading"><em>GUEST BLOG BY DAVID RESNICK of ROBBINS, SALOMON & PATT, LTD.</em></h3>
<p>When considering a lease, tenants are usually focused on the location, size and quality of the leased space, and perform some minimal diligence on the landlord and property manager to ensure fair treatment over the course of the term. Landlords have a more difficult task,however. A prospective tenant, and most importantly, that tenant’s ability to pay rent, is often unknown to the landlord. In recent years, real estate professionals have witnessed expansion in the array of users of commercial space and at the same time, property owners have been compelled to seek out new types of tenants. Increasing numbers of start-ups and new ventures are seeking to lease space, many of which are backed by various types of equity financing. As a result of these changes, landlords should be particularly vigilant in understanding how their tenants make money, as well as the financial identities of the parties backstopping the obligations of those tenants.</p>
<h2 class="wp-block-heading">Analyze Tenant Credit</h2>
<div class="wp-block-image">
<figure class="alignright size-full is-resized"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="1847" data-permalink="http://harp-onthis.com/strategies-assessing-commercial-tenant-credit/businessmandoingpaperworkathomereadingfinancialreportlearn/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/reviewing-taxes.jpg?fit=1000%2C666" data-orig-size="1000,666" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"Shutterstock","camera":"","caption":"","created_timestamp":"0","copyright":"Copyright (c) 2022 fizkes\/Shutterstock. No use without permission.","focal_length":"0","iso":"0","shutter_speed":"0","title":"Business,Man,Doing,Paperwork,At,Home,,Reading,Financial,Report,,Learn","orientation":"1"}" data-image-title="Business,Man,Doing,Paperwork,At,Home,,Reading,Financial,Report,,Learn" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/reviewing-taxes.jpg?fit=300%2C200" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/reviewing-taxes.jpg?fit=1000%2C666" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/reviewing-taxes.jpg?resize=400%2C267" alt="reviewing taxes" class="wp-image-1847" width="400" height="267" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/reviewing-taxes.jpg?w=1000 1000w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/reviewing-taxes.jpg?resize=300%2C200 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2023/03/reviewing-taxes.jpg?resize=768%2C511 768w" sizes="auto, (max-width: 400px) 100vw, 400px" /></figure></div>
<p>Landlords should always analyze tenant credit in the context of the lease. After all, the success of leased real estate, as well as the property owner’s ability to borrow against that asset, is dependent upon the stability of its tenants. While rent is the primary economic factor in any lease transaction, other factors such as term (including rights of extension), area of the premises (including rights of expansion and rights of first refusal on additional space) and the scope of tenant improvements create the platform upon which a tenant’s credit can be evaluated. For example, substantial build-out (regardless of who pays for it) that may inhibit the re-letting the space following a default. Therefore, landlords should be mindful of the tenant’s capacity to pay its construction obligations, which capacity is usually encapsulated in the tenant’s credit and litigation history.</p>
<p>A proper underwriting of a tenant’s credit requires a thorough understanding of that tenant’s business. A prudent landlord will pay attention not only to the tenant’s sources of revenue, but to the market upon which the tenant relies and the business plan upon which the tenant charts its future success. What are the contours of the business model? Is the revenue sustainable? What is the plan for future growth? Has the tenant gone through restructuring or been forced to lay off personnel? Landlords can avoid doing business with troubled or unstable tenants by performing background, lien and litigation searches on the tenant parties as part of the underwriting process. This kind of diligence can usually be completed in a short time-frame at a reasonable cost, and may save substantial time and money if the landlord is forced to evict a tenant it should have known to be at increased risk of default.</p>
<p>Technology has given rise to new products which enhance the process of underwriting tenant credit. For example, the Chicago firm (RE)Meter has created the first “credit score” for commercial tenants, which captures and synthesizes proposed lease transaction terms and basic tenant financial information with exclusive data maintained by a number of federal agencies, including the U.S. Census Bureau, the Department of Labor and the Internal Revenue Service ((RE)Meter is the first firm to access IRS information in this context). The end product, called the TIL Report, can be completed in a mere 15 minutes and offers landlords a sector- and market-specific analysis of its prospective tenants, reflecting a number of detailed metrics including growth trends, profitability and rent per employee. Innovations like these have altered the landscape of tenant underwriting and will enable landlords to make more prudent decisions when marketing space and assessing the risk of potential tenants.</p>
<h2 class="wp-block-heading">Tenant Credit Enhancements</h2>
<p>Conventionally, several mechanisms exist to enhance the credit of a prospective tenant who fails on its own to meet the underwriting criteria of the landlord. The first and foremost of these is the security deposit, which is posted by the tenant in the form of cash or letter of credit and held by the landlord for all or part of the duration of the lease. The deposit may be applied by the landlord towards unpaid amounts payable under the lease like rent, proportionate common area expenses or taxes, or reimbursement of amounts expended to repair damage to the premises. A stronger credit tenant may receive the benefit of a return of all or part of the deposit held by landlord over time, provided the tenant has not defaulted.</p>
<h2 class="wp-block-heading">Security Deposits</h2>
<p>While cash security deposits have historically been the industry standard in commercial leasing, landlords are increasingly requiring letter of credit security deposits instead. For many landlords, the benefits of cash on hand are overshadowed by the security of an obligation issued by a third-party bank, particularly when the landlord is able to draw on the letter of credit following a default without notice to or consent by the tenant. Letters of credit also may bear advantages to the landlord following a bankruptcy by the tenant, as the obligation of the issuing bank to pay on the letter of credit is independent of the tenant’s obligations under the lease. However, some courts have found that letter of credit security deposits are part of the tenant’s bankruptcy estate and thus subject to the cap on a landlord’s claim for damages under Section 502(b)(6) of the United States Bankruptcy Code.</p>
<h2 class="wp-block-heading">Lease Guaranties</h2>
<p>Guaranties are a common alternative for securing the credit of a commercial tenant. In the context of commercial leasing, a guaranty is a legally enforceable undertaking by a third party to fulfill the payment or performance obligations of the tenant under a lease. A guaranty may be given by an entity, such as a corporate parent or affiliate, or an individual, such as a majority owner or other key principal of the tenant. To most effectively backstop the credit of the tenant, a guaranty should be a guaranty of payment as opposed to a guaranty of performance. This distinction ensures that the landlord will not be forced to exhaust its remedies against the tenant before pursuing enforcement of the guaranty. Rather, the landlord may pursue the tenant and guarantor simultaneously for unpaid amounts under the lease.</p>
<p>Once a landlord has determined that it will require a guaranty to secure the tenant’s obligations under the lease, what should the landlord look for in evaluating potential guarantors? The most straightforward factor, notwithstanding whether the proposed guarantor is an individual or an entity, is cash on hand and other liquid assets. In satisfaction of the landlord’s inquiry, an guarantors may produce income tax returns, bank statements, financial statements, balance sheets or other evidence of personal holdings. The review process for publicly traded companies is simplified in that pertinent financial information is publicly available. Of course, testing for liquidity has its flaws. There exists no iron-clad protection against fraud, and disclosures only present a snapshot of a party’s credit at the time of the test as opposed to a forecast of future liquidity and stability. A review of tenant and guarantor financial information, as well as credit reports for collections, pledging of material assets or opening of new lines of credit, should be performed at regular intervals throughout the term of the lease.</p>
<h2 class="wp-block-heading">Financial Disclosure Challenges</h2>
<p>Financial disclosures may be problematic or some privately-held concerns. Particularly in the modern era of start-up firms financed by venture capital and private equity interests, tenants and proposed guarantors may be limited by investor confidentiality. With this in mind, parties to a lease should clarify in the lease or guaranty the form of any future disclosures to be made. Tenants and guarantors may resist delivering full-fledged audited financial statements in favor of reduced balance sheets or nominal form of profit and loss statement. Depending on the profile of the market and building, landlords may be willing to accept less than full disclosure if the statements deliver a reasonable picture of the financial health of the party delivering them.</p>
<h2 class="wp-block-heading">Tenant Stability and Performance Incentives</h2>
<p>As lease term and the disclosure provisions are negotiated, tenants may push the landlord for a variety of concessions that effectively incentivize and reward tenant stability. Perhaps the most common examples of this request are limitations on the security deposit, pledged assets or the liability under or the term of the guaranty. Limitations like these can take a variety of forms, from a fixed term to a cap on the guarantor’s liability based upon a fixed dollar-figure or factor of rent payable under the lease, to an automatic reduction of either the security deposit or the cap on the guarantor’s liability over time. In each instance, the landlord should be cognizant of the hurdles the tenant party must overcome to receive the benefit of these limitations, none more important than the uninterrupted timely payment of rent without default.</p>
<h2 class="wp-block-heading">Tenant Credit is a Key to Successful Lease Performance</h2>
<p>In light of the crises our industry has withstood in recent years, a landlord’s exuberance in welcoming new tenants is understandable. But in the current era of increasing economic growth, landlords should adopt a cautious approach in understanding and monitoring the business of their tenants. No landlord can predict with certainty the success or failure of its tenants; however, perhaps now more than ever, a thorough and complete examination of tenant credit is essential to the financial success of any leased real estate.</p>
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<post-id xmlns="com-wordpress:feed-additions:1">1024</post-id> </item>
<item>
<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>
<category><![CDATA[White Papers]]></category>
<category><![CDATA[banks]]></category>
<category><![CDATA[closing]]></category>
<category><![CDATA[closings]]></category>
<category><![CDATA[commercial real estate]]></category>
<category><![CDATA[conducting due diligence]]></category>
<category><![CDATA[default]]></category>
<category><![CDATA[due diligence checklist]]></category>
<category><![CDATA[finance]]></category>
<category><![CDATA[investing]]></category>
<category><![CDATA[investment]]></category>
<category><![CDATA[investor]]></category>
<category><![CDATA[property]]></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/commercial-real-estate/value-investing-vs-momentum-investing/</guid>
<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>Raising Capital for Real Estate Investment</title>
<link>http://harp-onthis.com/raising-capital-real-estate-investment/</link>
<comments>http://harp-onthis.com/raising-capital-real-estate-investment/#comments</comments>
<dc:creator><![CDATA[Kymn Harp]]></dc:creator>
<pubDate>Thu, 18 Sep 2014 11:11:53 +0000</pubDate>
<category><![CDATA[Commercial Real Estate]]></category>
<category><![CDATA[#commerical real estate]]></category>
<category><![CDATA[#CRE]]></category>
<category><![CDATA[#raising capital]]></category>
<category><![CDATA[accredited investor]]></category>
<category><![CDATA[checklist]]></category>
<category><![CDATA[Chicago]]></category>
<category><![CDATA[closing]]></category>
<category><![CDATA[crowdsourcing]]></category>
<category><![CDATA[funding]]></category>
<category><![CDATA[investment]]></category>
<category><![CDATA[investors]]></category>
<category><![CDATA[keys to closing]]></category>
<category><![CDATA[PPM]]></category>
<category><![CDATA[private placement memorandum]]></category>
<category><![CDATA[real estate]]></category>
<category><![CDATA[Regulation D]]></category>
<category><![CDATA[transactions]]></category>
<category><![CDATA[what to look for]]></category>
<guid isPermaLink="false">http://harp-onthis.com/?p=706</guid>
<description><![CDATA[At long last, the real estate investment market is beginning to show signs life. Commercial and industrial property transactions are increasingly common, and multifamily properties of all sizes are being snapped up by investors. Historically low interest rates, high occupancy […]]]></description>
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< ![endif]--><span style="font-size: 11.5pt; line-height: 200%; font-family: 'Times New Roman','serif'; mso-ascii-theme-font: minor-latin; mso-hansi-theme-font: minor-latin; mso-bidi-theme-font: minor-latin;">At long last, the real estate investment market is beginning to show signs life. Commercial and industrial property transactions are increasingly common, and multifamily properties of all sizes are being snapped up by investors. Historically low interest rates, high occupancy rates, increasing rental rates, and rising property values are contributing factors.</span></p>
<div class="wp-block-image">
<figure class="alignleft"><a href="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2014/07/RSP.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" width="300" height="95" data-attachment-id="884" data-permalink="http://harp-onthis.com/section-1031-like-kind-exchanges-part-1-of-3/rsp/" data-orig-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2014/07/RSP.jpg?fit=334%2C106" data-orig-size="334,106" 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" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2014/07/RSP.jpg?fit=300%2C95" data-large-file="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2014/07/RSP.jpg?fit=334%2C106" src="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2014/07/RSP.jpg?resize=300%2C95" alt="RSP" class="wp-image-884" srcset="https://i0.wp.com/harp-onthis.com/wp-content/uploads/2014/07/RSP.jpg?resize=300%2C95 300w, https://i0.wp.com/harp-onthis.com/wp-content/uploads/2014/07/RSP.jpg?w=334 334w" sizes="auto, (max-width: 300px) 100vw, 300px" /></a></figure></div>
<p><span style="font-size: 11.5pt; line-height: 200%; font-family: 'Times New Roman','serif'; mso-ascii-theme-font: minor-latin; mso-hansi-theme-font: minor-latin; mso-bidi-theme-font: minor-latin;">Early transactions have often been <i style="mso-bidi-font-style: normal;">cash deals</i>, where the investor paid cash for the property rather than seek financing. This can be a great opportunity to achieve high yields for investors flush with cash, but what about everyone else?<span style="mso-spacerun: yes;"> </span>What about potential investors who have limited cash on hand?</span></p>
<p><span style="font-size: 11.5pt; line-height: 200%; font-family: 'Times New Roman','serif'; mso-ascii-theme-font: minor-latin; mso-hansi-theme-font: minor-latin; mso-bidi-theme-font: minor-latin;">Unlike the easy-credit days preceding the <i style="mso-bidi-font-style: normal;">Great Recession</i>, real estate investment financing is more difficult to obtain and requires a significantly higher equity contribution by investors.<span style="mso-spacerun: yes;"> </span>Common loan to value ratios are 60% to 65%, which means that for each $1,000,000 the investor needs, the investor can likely borrow only $600,000 to $650,000. Consequently, the investor must come up with between $350,000 and $400,000 in equity for each $1,000,000 of purchase price. For many investors, this may not be an easy task.</span><wp-block data-block="core/more"></wp-block></p>
<p><i style="mso-bidi-font-style: normal;"><span style="font-size: 11.5pt; line-height: 200%; font-family: 'Times New Roman','serif'; mso-ascii-theme-font: minor-latin; mso-hansi-theme-font: minor-latin; mso-bidi-theme-font: minor-latin;">Solution?</span></i><span style="font-size: 11.5pt; line-height: 200%; font-family: 'Times New Roman','serif'; mso-ascii-theme-font: minor-latin; mso-hansi-theme-font: minor-latin; mso-bidi-theme-font: minor-latin;"> Go back to the way we did things in the <i style="mso-bidi-font-style: normal;">old days</i> – before the days of easy, near 100% financing: pool funds with other like-minded investors.</span></p>
<p><span style="font-size: 11.5pt; line-height: 200%; font-family: 'Times New Roman','serif'; mso-ascii-theme-font: minor-latin; mso-hansi-theme-font: minor-latin; mso-bidi-theme-font: minor-latin;">When raising capital from investors, keep in mind that you are engaged in a <i style="mso-bidi-font-style: normal;">securities</i> offering governed by state, and perhaps federal, securities laws. This is true even if the money is being invested by <i style="mso-bidi-font-style: normal;">friends and family</i>. A private placement memorandum (“PPM”) is advisable to protect against claims by investors that the investment turned out to be other than what it was portrayed to be. This is particularly important if the investment goes bad – as investments sometimes do. </span></p>
<p><span style="font-size: 11.5pt; line-height: 200%; font-family: 'Times New Roman','serif'; mso-ascii-theme-font: minor-latin; mso-hansi-theme-font: minor-latin; mso-bidi-theme-font: minor-latin;">PPM’s for real estate investments need not be particularly complicated, but they need to comply with applicable securities laws and include the disclosures and information necessary to protect the promoter from liability. The promoter must be particularly cautious if funds are being obtained from investors other than “<a title="Accredited Investor - Reg D definition" href="https://www.sec.gov/answers/accred.htm" target="_blank" rel="noopener"><i style="mso-bidi-font-style: normal;">accredited investors</i></a>” as that term is defined by Rule 501 of Regulation D. Helping promoters comply with the law while raising capital is a key function for lawyers.</span></p>
<p><span style="font-size: 11.5pt; line-height: 200%; font-family: 'Times New Roman','serif'; mso-ascii-theme-font: minor-latin; mso-hansi-theme-font: minor-latin; mso-bidi-theme-font: minor-latin;">In September 2013, as required by the <a title="Jumpstart Our Business Startups Act (Jobs Act)" href="http://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf" target="_blank" rel="noopener"><i style="mso-bidi-font-style: normal;">Jumpstart Our Business Startups Act</i> (JOBS Act)</a>, new rules were established by the <a title="SEC Highlights re JOBS ACT" href="http://www.sec.gov/spotlight/jobs-act.shtml" target="_blank" rel="noopener">U.S. Securities and Exchange Commission</a> to permit general solicitation or general advertising for certain securities offerings limited to accredited investors only. While this may prove helpful to promoters’ efforts to find investors and raise funds, the importance of a carefully crafted PPM has not diminished. Thoughtful promoters and lawyers will recognize that a well-crafted PPM may now be more important than ever.</span></p>
<p><span style="font-size: 11.5pt; line-height: 200%; font-family: 'Times New Roman','serif'; mso-ascii-theme-font: minor-latin; mso-hansi-theme-font: minor-latin; mso-bidi-theme-font: minor-latin;">Raising capital through a private offering of securities is a viable strategy for real estate investment, but it must be done with skill and great care.<span style="mso-spacerun: yes;"> </span>Failure to fully comply with the law can be financially catastrophic.<span style="mso-spacerun: yes;"> </span>Take care to do it right.</span></p>
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