Are you planning to purchase, finance or develop any of the following types of Commercial or Industrial Real Estate?

• • Shopping Center?
• • Office Building?
• • Large Multifamily residential?
• • Parking Lot/Parking garage?
• • Retail Store?
• • Mixed-Use?
• • Restaurant/Banquet property?
• • Sports and Entertainment Venue?
• • Intermodal Logistics Terminal?
• • Medical Building?
• • Gas Station?
• • Distribution Center?
• • Manufacturing facility?
• • Pharmacy?
• • Special Use facility ?
• • Other?

A KEY element to successfully investing in commercial or industrial real estate is performing an adequate Due Diligence Investigation prior to becoming legally bound to acquire the property. An adequate Due Diligence Investigation will assure awareness of all material facts relevant to the intended use or disposition of the property after closing.

 The following checklists will help you conduct a focused and meaningful Due Diligence Investigation.

 BASIC DUE DILIGENCE CONCEPTS

 Caveat Emptor: Let the Buyer beware.

Consumer protection laws applicable to home purchases seldom apply to commercial real estate transactions. The rule that a Buyer must examine, judge, and test for himself, applies to the purchase of commercial real estate.

Due Diligence:

“Such a measure of prudence, activity, or assiduity, as is proper to be expected from, and ordinarily exercised by, a reasonable and prudent (person) under the particular circumstances; not measured by any absolute standard, but depending upon the relative facts of the special case.” Black’s Law Dictionary; West Publishing Company.

Contractual representations and warranties are NOT a substitute for Due Diligence. Breach of representations and warranties = Litigation, time and $$$$$.

The point of commercial real estate due diligence is to avoid transaction surprises and confirm the Property can be used as intended.

 WHAT DILIGENCE IS DUE?

The scope, intensity and focus of any Due Diligence Investigation of commercial or industrial real estate depends upon the objectives of the party for whom the investigation is conducted. These objectives may vary depending upon whether the investigation is conducted for the benefit of: (i) a Strategic Buyer (or long-term lessee); (ii) a Financial Buyer; (iii) a Developer; or (iv) a Lender.

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.

GENERAL OBJECTIVES:

 (i) A “Strategic Buyer” (or long-term lessee) is acquiring the property for its own use and must verify that the property is suitable for that intended use.

 (ii) A “Financial Buyer” is acquiring the property for the expected return on investment generated by the property’s anticipated revenue stream, and must determine the amount, velocity and durability of the revenue stream. A sophisticated Financial Buyer will likely calculate its yield based upon discounted cash-flows rather than the much less precise capitalization rate (“Cap. Rate”), and will need adequate financial information to do so.

 (iii) A “Developer” is seeking to add value by changing the character or use of the property – usually with a short-term to intermediate-term exit strategy to dispose of the property; although, a Developer might plan to hold the property long term as a Financial Buyer after development or redevelopment. The Developer must focus on whether the planned change in character or use can be accomplished in a cost-effective manner.

 (iv) A “Lender” is seeking to establish two basic lending criteria:

 (1) “Ability to Repay” – The ability of the property to generate sufficient revenue to repay the loan on a timely basis; and

 (2) “Sufficiency of Collateral” – 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.

The amount of diligent inquiry due to be expended (i.e. “Due Diligence”) to investigate any particular commercial or industrial real estate project is the amount of inquiry required to answer each of the following questions to the extent relevant to the objectives of the party conducting the investigation:

I. THE PROPERTY:

 1. Exactly what PROPERTY does Purchaser believe it is acquiring?

• Land?

• Building?

• Fixtures?

• Other Improvements?

• Other Rights?

• The entire fee title interest including all air rights and subterranean rights?

• All development rights?

 2. What is Purchaser’s planned use of the Property?

 3. Does the physical condition of the Property permit use as planned?

• Commercially adequate access to public streets and ways?

• Sufficient parking?

• Structural condition of improvements?

• Environmental contamination?

• Innocent Purchaser defense vs. exemption from liability

• All Appropriate Inquiry

 4. Is there any legal restriction to Purchaser’s use of the Property as planned?

• Zoning?

• Private land use controls?

• Americans with Disabilities Act?

• Availability of licenses?

• Liquor license?

• Entertainment license?

• Outdoor dining license?

• Drive through windows permitted?

• Other impediments?

 5. How much does Purchaser expect to pay for the property?

 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?

• Property owner’s assessments?

• Real estate tax in line with value?

• Special Assessment?

• Required user fees for necessary amenities?

• Drainage?

• Access?

• Parking?

• Other?

 7. Any encroachments onto the Property, or from the Property onto other lands?

 8. Are there any encumbrances on the Property that will not be cleared at Closing?

• Easements?

• Covenants Running with the Land?

• Liens or other financial servitudes?

• Leases?

9. If the Property is subject to any Leases, are there any:

• Security Deposits?

• Options to Extend Term?

• Options to Purchase?

• Rights of First Refusal?

• Rights of First Offer?

• Maintenance Obligations?

• Duty of Landlord to provide utilities?

• Real estate tax or CAM escrows?

• Delinquent rent?

• Pre-Paid rent?

• Tenant mix/use controls?

• Tenant exclusives?

• Tenant parking requirements?

• Automatic subordination of Lease to future mortgages?

• Other material Lease terms?

10. New Construction?

• Availability of construction permits?

• Soil conditions?

• Utilities?

• NPDES (National Pollutant Discharge Elimination System) Permit?

• Permit required if earth is disturbed on one acre or more of land.

• If applicable, Storm Water Pollution Prevention Plan (SWPPP) is required.

II. THE SELLER:

1. Who is the Seller?

• Individual?

• Trust?

• Partnership?

• Corporation?

• Limited Liability Company?

• Other legally existing entity?

2. If other than natural person, does Seller validly exist and is Seller in good standing?

3. Does the Seller own the Property?

4. Does Seller have authority to convey the Property?

• Board of Director Approvals?

• Shareholder or Member approval?

• Other consents?

• If foreign individual or entity, are any special requirements applicable?

• Qualification to do business in jurisdiction of Property?

• Federal Tax Withholding?

• US Patriot Act compliance?

5. Who has authority to bind Seller?

6. Are sale proceeds sufficient to pay off all liens?

III. THE PURCHASER:

1. Who is the Purchaser?

2. What is the Purchaser/Grantee’s exact legal name?

3. If Purchaser/Grantee is an entity, has it been validly created and is it in good standing?

• Articles or Incorporation – Articles of Organization

• Certificate of Good Standing

4. Is Purchaser/Grantee authorized to own and operate the Property and, if applicable, finance acquisition of the Property?

• Board of Director Approvals?

• Shareholder or Member approval?

• If foreign individual or entity, are any special requirements applicable?

• Qualification to do business in jurisdiction of the Property?

• US Patriot Act compliance?

• Bank Secrecy Act/Anti-Money Laundering compliance?

5. Who is authorized to bind the Purchaser/Grantee?

IV. PURCHASER FINANCING:

A. BUSINESS TERMS OF THE LOAN:

1. What loan terms have the Borrower and its Lender agreed to?

• What is the amount of the loan?

• What is the interest rate?

• What are the repayment terms?

• What is the collateral?

• Commercial real estate only?

• Real estate and personal property together?

• First lien?

• A junior lien?

• Is it a single advance loan?

• A multiple advance loan?

• A construction loan?

• 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?

• Are there reserve requirements?

• Interest reserves?

• Repair reserves?

• Real estate tax reserves?

• Insurance reserves?

• Environmental remediation reserves?

• Other reserves?

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?

3. Is the Borrower required to pledge business accounts as additional collateral?

4. Are there early repayment fees or yield maintenance requirements (each sometimes referred to as “pre-payment penalties”)?

5. Are there repayment blackout periods during which Borrower is not permitted to repay the loan?

6. Is a profit participation payment to Lender required upon disposition?

7. Is there a Loan Commitment fee or “good faith deposit” due upon Borrower’s acceptance of the Loan Commitment?

8. Is there a loan funding fee or loan brokerage fee or other loan fee due Lender or a loan broker at closing?

9. What are the Borrower’s expense reimbursement obligations to Lender? When are they due? What is the Borrower’s obligation to pay Lender’s expenses if the loan does not close?

B. DOCUMENTING THE COMMERCIAL REAL ESTATE LOAN

Does Purchaser have all information necessary to comply with the Lender’s loan closing requirements?

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.

As guidance to what a commercial real estate lender may require, the following sets forth a typical Closing Checklist for a loan secured by commercial real estate.

Commercial Real Estate Loan Closing Checklist

1. Promissory Note

2. Personal Guaranties (which may be full, partial, secured, unsecured, payment guaranties, collection guaranties or a variety of other types of guarantees as may be required by Lender)

3. Loan Agreement (often incorporated into the Promissory Note and/or Mortgage in lieu of being a separate document)

4. Mortgage (sometimes expanded to be a Mortgage, Security Agreement and Fixture Filing)

5. Assignment of Rents and Leases.

6. Security Agreement

7. Financing Statement (sometimes referred to as a “UCC-1”, or “Initial Filing”).

8. Evidence of Borrower’s Existence In Good Standing; including :

(a) Certified copy of organizational documents of borrowing entity (including Articles of Incorporation, if Borrower is a corporation; Articles of Organization and written Operating Agreement, if Borrower is a limited liability company; certified copy of trust agreement with all amendments, if Borrower is a land trust or other trust; etc.)

(b) Certificate of Good Standing (if a corporation or LLC) or Certificate of Existence (if a limited partnership) or Certificate of Qualification to Transact Business (if Borrower is an entity doing business in a State other than its State of formation)

9. Evidence of Borrower’s Authority to Borrow; including:

(a) Borrower’s Certificate

(b) Certified Resolutions

(c) Incumbency Certificate

10. Satisfactory Commitment for Title Insurance (which will typically require, for analysis by the Lender, copies of all documents of record appearing on Schedule B of the title commitment which are to remain after closing), with required commercial title insurance endorsements, often including:

(a) ALTA 3.1 Zoning Endorsement modified to include parking [although if the property is a multi-user property, such as a retail shopping center, an ALTA 3.0 Zoning Endorsement may be appropriate]

(b) ALTA Comprehensive Endorsement 1

(c) Location Endorsement (street address)

(d) Access Endorsement (vehicular access to public streets and ways)

(e) Contiguity Endorsement (the insured land comprises a single parcel with no gaps or gores)

(f) PIN Endorsement (insuring that the identified real estate tax permanent index numbers are the only applicable PIN numbers affecting the collateral and that they relate solely to the real property comprising the collateral)

(g) Usury Endorsement (insuring that the loan does not violate any prohibitions against excessive interest charges)

(h) other title insurance endorsements applicable to protect the intended use and value of the col- lateral, as may be determined upon review of the Commitment for Title Insurance and Survey or arising from the existence of special issues pertaining to the transaction or the Borrower.

11. Current ALTA/ACSM Land Title Survey (3 sets), prepared in accordance with the 2011 (or current) Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys

12. Current Rent Roll

13. Certified copy of all Leases (4 sets – 1 each for Buyer, Buyer’s attorney, Title Company and Lender)

14. Lessee Estoppel Certificates

15. Lessee Subordination, Non-Disturbance and Attornment Agreements [sometimes referred to simply as “SNDAs”]

16. UCC, Judgment, Pending Litigation, Bankruptcy and Tax Lien Search Report

17. Appraisal -complying with Title XI of FIRREA (Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended)

18. Environmental Site Assessment Report (sometimes referred to as Environmental Phase I and/or Phase 2 Audit Reports)

19. Environmental Indemnity Agreement (signed by Borrower and guarantors)

20. Site Improvements Inspection Report

21. Evidence of Hazard Insurance naming Lender as the Mortgagee/Lender Loss Payee; and Liability Insurance naming Lender as an “additional insured” (sometimes listed as simply “Acord 27 and Acord 25, respectively)

22. Legal Opinion of Borrower’s Attorney

23. Credit Underwriting documents, such as signed tax returns, property operating statements, etc. as may be specified by Lender

24. Compliance Agreement (sometimes also called an Errors and Omissions Agreement), whereby the Borrower agrees to correct, after closing, errors or omissions in loan documentation.

* * * * *

It is useful to become familiar with the Lender’s loan documentation requirements as early in the transaction as practical. The requirements will likely be set forth with some detail in the lender’s Loan Commitment – which is typically much more detailed than most loan commitments issued in residential transactions.

Conducting the Due Diligence Investigation in a commercial real estate transaction can be time consuming and expensive in all events.

If the loan requirements cannot be satisfied, it is better to make that determination during the contractual “due diligence period” – which typically provides for a so-called “free out” – rather than at a later date when the earnest money may be at risk of forfeiture or when other liability for failure to close may attach.

CONCLUSION

Conducting an effective Due Diligence Investigation in a commercial or industrial real estate transaction to discover all material facts and conditions affecting the Property and the transaction is of critical importance.

Unlike owner occupied residential real estate, when a house can nearly always be occupied as the purchaser’s home, commercial and industrial real estate acquired for business use or for investment is impacted by numerous factors that may limit its use and value.

The existence of these factors and their impact on a Purchaser’s ability to use the Property as intended can only be discovered through diligent and focused investigation and attention to detail.

Exercise Due Diligence.

If you need assistance, please ask for help.

Commercial Real Estate Closings

Since 1978, I have represented borrowers and lenders in commercial real estate transactions. Throughout the process of negotiating the sale contract, all parties must keep their eye on what the Buyer’s lender will reasonably require as a condition to financing the purchase. This may not be what the parties want to focus on, but if this aspect of the transaction is ignored, the deal may not close at all.

Sellers and their agents often express the attitude that the Buyer’s financing is the Buyer’s problem, not theirs. Perhaps, but facilitating Buyer’s financing should certainly be of interest to Sellers.  How many sale transactions will close if the Buyer cannot get financing?

This is not to suggest that Sellers should intrude upon the relationship between the Buyer and its lender, or become actively involved in obtaining Buyer’s financing. It does mean, however, that the Seller should understand what information concerning the property the Buyer will need to produce to its lender to obtain financing, and that Seller should be prepared to fully cooperate with the Buyer in all reasonable respects to produce that information.

Basic Lending Criteria

Lenders actively involved in making loans secured by commercial real estate typically have the same or similar documentation requirements.  Unless these requirements can be satisfied, the loan will not be funded.  If the loan is not funded, the sale transaction will not likely close.

 For Lenders, the object, always, is to establish two basic lending criteria:

 1.         The ability of the borrower to repay the loan; and

 2.         The ability of the lender to recover the full amount of the loan, including outstanding principal, accrued and unpaid interest, and all reasonable costs of collection, in the event the borrower fails to repay the loan.

In nearly every loan of every type, these two lending criteria form the basis of the lender’s willingness to make the loan. Virtually all documentation in the loan closing process points to satisfying these two criteria.  There are other legal requirements and regulations requiring lender compliance, but these two basic lending criteria represent, for the lender, what the loan closing process seeks to establish.  They are also

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The Time to Decide – Commercial Real Estate Litigation

A sage once said, “The time to worry about where the ball will drop is before the wheel is spun”.  He was speaking about roulette, of course, but the wisdom of these words has much broader application.  The point is, worry about the outcome before you place the bet, when you can still do something about it.

Commercial litigation, especially commercial real estate litigation, is in some respects like roulette. Once your lawsuit is filed, the wheel is spinning.  Unlike roulette, you may still have a measure of control over the outcome — but you are in it until the ball drops. 

In CRE litigation there is seldom an insurance company prepared to write a check.  There is a substantial risk the case will proceed to trial.  There is no guaranty you will collect anything – especially if payment of money is not the relief you seek. Consequently, there is very little chance your attorney will accept your commercial dispute on a contingent fee basis. A third of nothing is still nothing. 

Lawyers handling commercial litigation are not your partners. Commercial litigators charge by the hour.  Except in rare cases where you can negotiate a hybrid fee arrangement, you will assume the entire financial risk – not your lawyer. Your lawyer is serving as your paid professional advocate; a hired gun, so to speak.

As long as you are willing and able to pay your lawyer to apply his or her skill and training to your cause, your lawyer is bound to represent you with zeal and vigor. If you do not pay, you should expect your lawyer to stop work.  The fact that the practice of law is a profession does not make it a charitable enterprise. It is both a profession and a business.  There is no moral or ethical imperative for a lawyer to work without pay while advocating a commercial dispute.  CRE litigation is business litigation – and the business being advanced is yours.

I am not a big fan of commercial litigation. It is expensive for my clients and distracts them from their core business.  It is in their core business where they make money.  It is because of their core business that I am their lawyer.  Still, if you are going to litigate, then commit to litigate. Do not file a lawsuit unless you intend to see it through and win.

If you know anything about law firm profitability, it may surprise you to hear me say I am not a huge fan of litigation. Lawsuits can be very profitable for lawyers. Lawsuits are labor intensive and can take on a life of their own.  Huge legal fees can be run up in a hurry.  If that is how you determine to spend your money then, by all means, call me.  My law firm has an outstanding group of litigators.  In commercial litigation, including CRE litigation, we combine our transactional knowledge with litigation prowess and are unsurpassed. I just think you ought to make an informed and seriously calculated decision before you decide to spend your money in this way.

It is virtually impossible to predict with accuracy how much a lawsuit will cost.  Typically, it will cost much more than you imagine. This is because, unlike a business or real estate transaction you can choose to walk away from if it ceases to make economic sense, lawsuits, once filed, are not so easy to escape.  It’s like choosing to dance with an 800 pound gorilla.  As the joke goes, “When do you stop?  When the gorilla decides to stop.”  Once you have filed a lawsuit, or have taken a position in a dispute that will lead to your adversary filing a lawsuit, you have reached the dance floor and may very well find yourself cheek to cheek with an 800 pound gorilla.

Don’t get me wrong.  There are times when litigation is necessary and appropriate.  There are times when an adversary is so brazenly interfering with your business or trampling on your rights and interests that the benefits of litigation will far exceed your costs.  There are times when litigation is your only reasonable choice. 

In making the decision to proceed, however, understand the tangible and intangible costs.  Attorneys’ fees may run into tens of thousands of dollars, and in a complicated case perhaps even into the hundreds of thousands of dollars. The litigation may also distract you from your core business and subject you to significant emotional strain and sleepless nights.  Do not underestimate these add-on intangible costs. 

If you are going to litigate, be sure to hire a  lawyer experienced in the type of litigation you intend to  pursue.  Litigation strategy is based on game theory.  Each move you make must anticipate your adversary’s next several moves. Your strategy and its implementation must be designed to win and be agile enough to adapt to changing circumstances if your adversary moves forward in an unanticipated way.  Knowledge is power.

Part of what makes litigation emotionally draining is a lack of understanding about how the process works.  It is not as mysterious as clients sometimes seem to believe.

The bones of litigation are this:  You and your adversary are in disagreement. You are convinced your position is superior.  Your adversary is convinced its position is superior. You are unable to reach a compromise that works for you both.  Filing a lawsuit is a decision to let someone else decide. 

The litigation process is a process of gathering useful information to support your position and to undermine your opponent’s position. Your adversary is engaged in the same process. Some of this information is applicable law. Much of the information is supporting facts. Ultimately, you will each present your compiled information to an independent decision maker.  A judge or jury will decide.

If you are going to litigate, the decision to do so should be based upon a sober determination of the benefits likely to be achieved, the costs of obtaining those benefits, and your likelihood of success.  You may have the greatest case in the world; your lawyer may tell you it will be a “slam dunk”; but if it is going to cost you more than you reasonably expect to gain – measuring both tangible and intangible costs – at least consider the choice of not proceeding. The decision to proceed or not to proceed is yours. It is very much a business decision.  

In making the decision to litigate, use the same skills of economic analysis you use to make real estate investment decisions. If you know it will cost you $2,000,000 to develop and market a project, but your likely return is only $1,500,000, would you proceed?  If your disputed claim is for $50,000 but it will cost you $60,000 to $100,000 to collect, should you proceed?  The answer may depend upon other factors as well but, all else being equal, the rational economic choice is obvious.

Too often lawsuits are filed as an emotional response to a perceived slight rather than being based upon an objective determination that the lawsuit is in your best economic interest. Do not let elevated testosterone levels get in the way of making a rational economic decision.  The  lawsuit is likely to continue long after your passions have faded.  By that time, you may be wrapped in the arms of that 800 pound gorilla.  If you have not made the decision to litigate based upon legitimate and dispassionate commercial considerations, you may find that your only way out is to settle on highly unfavorable terms.  This will not help you prosper.

A common mistake clients make is to assume that if a dispute is over only $10,000 to $50,000, the attorneys’ fees for pursuing or defending the case will be proportionately less than if the lawsuit involved $100,000 to $1,000,000.  This is not necessarily so.  The amount of time it takes to prove your case has very little to do with the amount in dispute.  The facts and issues, and the response of your adversary, determine the amount of time involved.  Since commercial litigation is typically billed by the hour, more time means higher attorneys’ fees regardless of the amount in dispute.  This reality should be taken into consideration when deciding to file suit, and likewise when considering an offer of settlement.

Some protection may be provided by the documents if they provide for the successful party to recover attorneys’ fees and costs from the unsuccessful party. But note: (i) you had better be sure you will be the successful party, or you may end up paying your adversary’s attorneys’ fees as well as your own; and (ii) you should consider whether a judgment against this particular defendant is likely to be collected.  If the defendant is on the verge of bankruptcy, or otherwise insolvent, obtaining a judgment that includes all of your attorneys’ fees will do you little good.  You will have just spent more money that will  not be collectible.  As the saying goes: “When you find yourself in a hole – stop digging.”

Remember.  The commercial dispute forming the basis of your lawsuit is yours, not your attorney’s.  Your attorney’s business is to represent you as your skilled professional advocate. Attorneys are bound to zealously advocate for your success, but they can not guaranty success and collection.

Deciding to file a lawsuit in a commercial dispute should be like deciding to get a kidney transplant.  It should be a decision that is not entered into lightly, and should be made only if the benefits to be obtained are greater than the burdens the procedure will entail. If you decide on a new kidney and go under the knife, be prepared to see it through. If, after the procedure has begun and your kidney has been removed, you change you mind and decide against a transplant, your decision is a bit too late.  The time to make that decision was before you got on the operating table.

I am not saying you should never file a lawsuit.  Each circumstance merits its own evaluation. What I am saying is that the time to decide is before the suit is filed.  Once filed, be prepared to do what must be done to win.  It is too late to un-spin the wheel.

                                                                                    Thanks for listening,

                                                                                                 Kymn

 

 

 

Court Reaffirms that LLC Members Are Separate From the LLC and DO NOT Have An Ownership Interest In The LLC’s Property. Therefore Member Can File Lien.

Just a brief post regarding LLC Property:

On September 3, 2013, the Illinois Appellate Court for the Fifth District filed an opinion in the case of Peabody-Waterside Development, LLC v. Islands of Waterside, LLC, Regions Bank N.A., and Prairie Construction Management, LLC 2013 IL App (5^th) 120490.

The Court’s Opinion is consistent with Illinois law related to limited liability companies (LLC). The fact that the trial court got it wrong and had to be reversed, however, is not entirely surprising. Experience demonstrates that many lawyers, and courts, either don’t understand the law related to the separateness of an LLC from its members, or refuse to believe it.

The law in Illinois is quite clear. Members of an LLC have no ownership interest in the property or business of the LLC. Members own an economic interest in the distributable cash flow (if any) from the LLC, but no interest in the property or business that generates that cash flow. The LLC Act is clear. The case-law is clear. Like it or not, this is the law in Illinois (and in virtually all USA jurisdictions).

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Employment Restrictive Covenants

The issue of enforceability of employment restrictive covenants comes up often in business, including the business of commercial real estate.

A common scenario is as follows:  A person goes to work for a company and is required to sign a Noncompetition and Nonsolicitation Agreement. Typically, it will say something like “during the term of employment, and for a period of one year after termination of employment, the employee will not compete with or solicit any customer or vendor of the employer.”  Sometimes the Noncompetition/Nonsolicitation Agreement is required to be signed as a condition of being hired. Other times the employer will tell an employee who is already employed that signing the Noncompetition/Nonsolicitation Agreement is a condition to continued employment.

Are Employment Noncompetition/Nonsolicitation Agreements enforceable in Illinois?

As a general proposition, Noncompetition/Nonsolicitation Agreements are enforceable in Illinois, as long as they satisfy a three-pronged test:  They: (1) must be no greater in scope and duration than is required for the protection of a legitimate business interest  of the employer-promisee; (2) must not impose undue hardship on the employee-promisor, and (3) must not be injurious to the public.

In a decision filed December 1, 2011, the Illinois Supreme Court shook up the Illinois employment bar by overruling an extensive line of cases that had narrowed the three-pronged test described above to a two-pronged test created by Appellate Court decision in 1973. In a case referred to as the Kolar decision, (Nationwide Advertising Service, Inc. v. Kolar, 14 Ill. Ap. 3d 522 (1973), the Kolar court held that an employment restrictive covenant was valid if there were (i) a near permanent customer relationship with the employer, and (ii) the employee had gained confidential information through its employment. The Illinois Supreme Court emphasized in its December 2011 opinion that the Kolar test is not valid. (Reliable Fire Equipment Company vs. Arredondo 2011 IL 111871). The Illinois Supreme Court, instead, reaffirmed the legitimate business interest test, and clarified that “whether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case. Factors to be considered in the analysis include, but are not limited to, the near-permanence of customer relationships, the employee’s acquisition of confidential information through his employment, and time and place restrictions. No factor carries any more weight than any other, but rather its importance will depend on the specific facts and circumstances of the individual case.”

For the most part, the Illinois employer’s bar hailed the Arrendondo decision as a victory, believing it gave employers a broader basis for enforcing employment restrictive covenants.  Ironically, many attorney’s representing primarily employees were encouraged by the Arrendondo decision as well, believing it gives employees more room to challenge enforceability by challenging, factually, whether a “legitimate business interest” is at stake.

“Little Known” Two-Year Rule for Employment Restrictive Covenants – Illinois

While the foregoing is all well and good, a fundamental concept of law is that employment

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Questions abound about where our commercial real estate market is headed. As many suspect, where we were prior to the Great Recession is not where we are now, and not where we’re headed as we move forward. Things have changed. We have entered an era where the so-called “Third Space” will dominate commercial real estate development.

What is the “third space“? Urban planners describe it generally as the space designed for creative social interaction, which lies, figuratively, between home and the workplace.

From a purely economic standpoint, it is difficult to see how brick and mortar retailers in today’s marketplace can effectively compete with internet retailers not burdened with comparable fixed costs. Internet retailers have a huge advantage when it comes to convenience, accessibility, and price-competitiveness as compared to fixed location, brick and mortar retailers. Unlike the pre-2008 marketplace, today’s shoppers enjoy virtually limitless access to online goods and services. Online shopping is easy and convenient.

To remind ourselves, the commercial real estate industry began its skid in the summer of 2008, after the collapse of the sub-prime residential lending market in the Spring of 2007. The commercial real estate market experienced a virtual death knell following the collapse of Lehman Brothers on September 15, 2008.

With this backdrop, and the ubiquity of iPhones and other smartphones in society today, we sometimes forget that the very first iPhone was not even released to the public until June 29, 2007.  The first Android smartphone was not introduced until October 2008.  Twitter and text messaging were in their mere infancy in 2008 as the commercial real estate market crash occurred. Today they are the leading means by which the discretionary income-rich millennial generation (those born between about 1980 and 2000) socialize and communicate.

Yes, technology and our retail culture have changed dramatically while the commercial real estate market has been on hiatus over the past several years. What does that mean to commercial real estate investors and developers?  It means our developments have to change too.

The leading takeaway from ICSC RECON 2013 is the need for commercial real estate developers, retailers, lenders and urban planners to grasp the immense changes to our culture borne by the lightning-speed proliferation of social networking and technology.  Commercial  real estate developments, whether new or retooled, will need to create a reason for consumers to come to our commercial projects to shop and spend. To be successful, our projects will need to be fully integrated, media rich environments providing prospective customers with a compelling reason to come to live, work and play. They will need to provide an enticing third space between home and work for consumers to spend their time and money.

The current push in Congress to mandate collection and remittance of sales taxes on internet-based out-of-state sales may help state and local governments fill their coffers, but imposing this tax will likely do little to help brick and mortar retailers.The fact that online sales may be taxed to the same extent as brick and mortar based sales is not likely to dissuade online shopping.

Rather than begrudge the impact of internet-based shopping on brick and mortar retail, developers and retailers alike will need to wholeheartedly embrace technology to create an enticing, in-person experience that integrates online social networks with face-to-face social interaction and shopping. This is the challenge of our time for retail and commercial real estate development.

Meeting this challenge will require, first, that we grasp it, and, second, that we envision how to effectively integrate fundamental real estate development concepts with new and emerging technologies. To get to the desired bottom line, we will almost certainly need to understand and focus on the third space.

Thanks for listening,

Kymn

May 20, 2013. ICSC RECON UPDATE. Today was an exhausting but productive day. My Fitbit recorded nearly 20,000 steps, or roughly 8.75 miles covered. My feet hurt, so I believe it.

It was great to see friendly, familiar faces, from past and present – happy to be making deals again.  There is, for the first time in a very long time, an upbeat mood in the CRE industry, and an abundance of new construction and redevelopment projects underway.

I was interested to hear what community development directors from communities around the country had to say. To a large extent they are “open for business”, fully expecting to hear from developers seeking development incentives, and prepared to be of assistance.

Interestingly, some communities question whether development incentives should be necessary with development coming back. . . To which I have to respond: Really?

My reminder to communities is that

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