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  • HISTORIC PRESERVATION TAX CREDITS

    HISTORIC PRESERVATION TAX CREDITS

    Real Estate Development – Illinois

    Efforts to preserve the historical heritage of the United States have been ongoing for more than 200 years.[i] The National Historic Preservation Act of 1966,[ii] which created the National Register of Historic Places (“National Register”),[iii] formalized a national policy of preserving historic properties.[iv] 

    In 1976 Congress for the first time provided tax incentives for rehabilitation of historic buildings by allowing a tax deduction for certain expenditures to rehabilitate buildings listed in the National Register. In 1978 Congress enhanced the incentive by adopting a 10% historic preservation tax credit (F-HTC).[v]  

    A tax credit is a direct dollar-for-dollar reduction in taxes owed,[vi] making it significantly more robust than a tax deduction which serves to reduce taxable income.

    The F-HTC program has evolved over time. Effective December 22, 2017 the Internal Revenue Code of 1986, as amended[vii] (IRC) was further amended to increase the F-HTC to 20% of qualified rehabilitation expenditures in respect to a “qualified rehabilitated building.”[viii] The F-HTC is ratably allocated over a period of five (5) years.[ix] 

    To qualify for a rehabilitation tax credit, rehabilitation must comply with The Secretary of the Interiors’ Standards for the Treatment of Historic Properties.[x]

    The F-HTC Program, officially known as the Historic Preservation Tax Credit Incentive Program, is administered by the National Park Service (NPS) jointly with the U.S. Department of the Treasury.[xi] It is considered one of our nation’s most successful and cost-effective community revitalization programs, having leveraged $131.73 billion in private investment to preserve more than 49,000 historic properties since its inception.[xii]  The program has shown widespread bipartisan support,[xiii] with legislative efforts to expand the F-HTC Program continuing.[xiv]

    The F-HTC Program has become an effective source of funds for rehabilitation and adaptive reuse of historic buildings[xv] and has benefited projects in every state and the District of Columbia.[xvi] It is administered in each state through NPS delegation of authority to a State Historic Preservation Office (SHPO).[xvii]  In Illinois the SHPO is the Illinois State Historic Preservation Division of the Illinois Department of Natural Resources.[xviii]

    In addition to F-HTC, state level historic preservation tax credits are available in 39 states,[xix] including the State of Illinois. State historic preservation tax credits may be used in tandem with F-HTC. State tax credits can be applied as a credit against state income taxes and are not treated as income under the IRC.[xx]

    Illinois has enacted two state level historic tax credit programs, each administered under substantially the same rules as the F-HTC Program.

    • The River Edge Historic Tax Credit Program (RE-HTC)[xxi] enacted effective January 1, 2012 provides a state income-tax credit equal to 25% of a project’s qualified rehabilitation expenditures on certified historic structures located within River Edge Redevelopment Zones (Aurora, East St. Louis, Elgin, Peoria, and Rockford); and
    • The Illinois Historic Preservation Tax Credit Program (IL-HTC)[xxii] effective January 1, 2019 provides owners of certified historic structures a state income-tax credit equal to 25% of a project’s qualified rehabilitation expenditures, not to exceed $3 million per project.

    The F-HTC, RE-HTC, and IL-HTC programs (collectively, HTC) have had a positive economic impact in the State of Illinois with historic tax credit projects undertaken in 49 out of 102 counties.[xxiii] To name a few, in Peoria a vacant church has been transformed into a brewery, and a 27,000-square-foot factory in Peoria’s downtown warehouse district has be rehabilitated to provide office space and 18 luxury apartments; in Rockford an industrial building has been redeveloped as a hotel; and in Aurora a former hospital is now home to affordable senior housing.[xxiv] Close to 58% of all Illinois residents live within five miles of a historic tax credit project.[xxv]

                IMPORTANT DEFINITIONS

                As noted above, to qualify for historic preservation tax credits, the rehabilitation expenditures must be for a qualified rehabilitated building. 

    “Qualified rehabilitated building” [xxvi] means any building (and its structural components) if: (a) the building has been substantially rehabilitated; (b) the building was placed in service before the beginning of the rehabilitation; (c) the building is a certified historic structure; and (d) depreciation (or amortization in lieu of depreciation) is allowable with respect to the building.

    “Substantially rehabilitated” [xxvii] means that the qualified rehabilitation expenditures during an allowable 24-month period selected by the taxpayer (at the time and in the manner prescribed by regulation) must exceed the greater of:  (a) the adjusted basis of the building and its structural components as of the first day of the allowable 24-month period; or (b) $5,000.

    Alternate rules for substantial rehabilitation apply in the case of “phased rehabilitation[xxviii] or rehabilitation by lessees.[xxix] 

    “Rehabilitation” includes renovation, restoration, or reconstruction.[xxx]

    A “qualified rehabilitation expenditure” (subject to certain exclusions including notably, costs of acquisition and costs of enlarging an existing building),[xxxi] is an expenditure that is: (1) properly chargeable to a capital account for property subject to depreciation under IRC §168 (meaning, generally, an expenditure used in computing tax basis), which property must be: (a) nonresidential real property; (b) residential rental property: (c) real property which has a class life of more than 12.5 years: or (d) an addition or improvement to (but not an enlargement of)[xxxii] property described in sub-clause 1(a), (b), or (c); and  (2) the expenditure is made in connection with the rehabilitation of a qualified rehabilitated building.

    A “certified historic structure” means any building (and its structural components) which is: (a) listed in the National Register; or (b) located in a registered historic district and is certified by the Secretary of the Interior to the Secretary of the Treasury as being of historic significance to the district.

    TRANSFERABILITY

    An attribute that renders F-HTC, RE-HTC, and IL-HTC particularly valuable to developers is that historic tax credits under each program are transferrable,[xxxiii] making them available as a source of equity capital for historic preservation redevelopment projects. Neither federal historic tax credits nor Illinois historic tax credits may not be bought or sold directly, but may be transferred through syndication using an appropriate pass-through entity such as a limited partnership or limited liability company.[xxxiv]  

    While historic tax credits are a valuable source of capital by themselves, they can also be coupled with low income housing tax credits (LIHTC).[xxxv] Together they present an extraordinary opportunity to address the existing shortage of affordable housing in our communities, and provide jobs for community residents.  

    Even small projects can benefit from historic preservation tax credits.  Roughly fifty percent of all HTC projects involve qualified rehabilitation expenditures of less than $1,000,000, while twenty-five percent involve less than $250,000.[xxxvi]

    CONCLUSION

                Historic preservation tax credits have proven to be an attractive financial incentive to encourage developers and investors to commit private capital needed to preserve and revitalize our communities.

    [i] https://www.dhr.virginia.gov/wp-content/uploads/2018/04/Historic-Preservation-in-America_2014_FINAL.pdf

    [ii] Now found at: 54 USC Division A—Historic Preservation (§ 300101 to § 307108)

    [iii] 54 USC § 3021

    [iv] https://www.nps.gov/subjects/archeology/national-historic-preservation-act.htm

    [v] https://www.irs.gov/pub/irs-mssp/rehab.pdf

    [vi] https://www.irs.gov/credits-and-deductions

    [vii] 26 USC  – Internal Revenue Code (IRC)

    [viii] IRC § 47(a)(2)

    [ix] IRC § 47(a)(1)

    [x] https://www.nps.gov/orgs/1739/secretary-standards-treatment-historic-properties.htm

    [xi] https://www.nps.gov/subjects/taxincentives/index.htm

    [xii] https://www.nps.gov/subjects/taxincentives/index.htm

    [xiii] https://savingplaces.org/historic-tax-credits/updates/senate-finance-committee-hearing-highlights-bipartisan-support-for-expanding-the-historic-tax-credit

    [xiv] https://savingplaces.org/historic-tax-credits/updates

    [xv] https://law.duke.edu/sites/default/files/clinics/cec/cote.pdf

    [xvi] https://savingplaces.org/tax-credit-projects-by-state

    [xvii] https://dnrhistoric.illinois.gov/preserve/taxcredits.html

    [xviii] 35 ILCS 5/228 and 35 ILCS 31/1 et seq.

    [xix] As of June 15, 2023, all states except Alaska, Arizona, Florida, Idaho, New Hampshire, Nevada, Oregon, Tennessee, South Dakota, Washington, and Wyoming have enacted state historic preservation tax credits.  https://savingplaces.org/state-historic-tax-credits

    [xx] https://www.irs.gov/pub/irs-wd/13-0009.pdf

    [xxi] 35 ILCS 5/221

    [xxii] 35 ILCS 5/228 and 35 ILCS 31/1 et. seq.

    [xxiii] See Report: The Impact of Historic Tax Credit Investment in Illinois https://dnrhistoric.illinois.gov/content/dam/soi/en/web/dnrhistoric/preserve/documents/illinois-and-river-edge-htc-economic-impact-report-2023.pdf

    [xxiv] https://search.app/KrxnBEjDGmnn8cCe9

    [xxv] See Report: The Impact of Historic Tax Credit Investment in Illinois, id.

    [xxvi] IRC § 47(c)

    [xxvii] IRC § 47(c)(1)(b)(i)

    [xxviii] IRC § 47(c)(1)(b)(ii)

    [xxix] IRC § 47(c)(1)(b)(iii)

    [xxx] IRC 47(c)(1)(C) https://www.irs.gov/pub/irs-sbse/qualified-rehabilitation-expenditures.pdf

    [xxxi] IRC § 47(c)(2)(B)

    [xxxii] IRC § 47(c)(2)(B)(iii).

    [xxxiii] IRC § 6418

    [xxxiv] See: Safe Harbor provisions in Rev. Proc. 2014-12 https://www.irs.gov/pub/irs-drop/rp-14-12.pdf

    [xxxv] https://www.irs.gov/pub/irs-sbse/Rehabilitation%20Credit%20and%20Low-Income%20Housing%20Credit%20Compared.pdf

    [xxxvi] https://www.hudexchange.info/programs/environmental-review/historic-preservation/tax-credit/

  • TAX INCREMENT FINANCING – ILLINOIS

    TAX INCREMENT FINANCING – ILLINOIS

    A Valuable Development Tool For Developers

    Tax Increment Financing (TIF) is a development tool often misunderstood by real estate developers and the public at large.  TIF is authorized in every state (except Arizona) and the District of Columbia. TIF is authorized in Illinois by the Tax Increment Allocation Redevelopment Act.[i]

    WHY TIF?

    TIF is a public funding mechanism designed to help municipalities overcome and prevent commercial blight.[ii] Commercial blight leads to commercial properties becoming a drain on public revenue by producing a smaller share of taxes,[iii] and requiring excessive and disproportionate expenditures of public funds for crime prevention, public health and safety, fire and accident protection, and other public services.[iv] The eradication and prevention of commercial blight and the construction of redevelopment projects financed by private capital with financial assistance from governmental bodies is a public use essential to the public interest.[v]

    Areas of commercial blight are often situated in older and centrally located areas of town and, once existing, spread unless eradicated.[vi] Though intended primarily as a tool for municipalities to eliminate and prevent blight within its territorial boundaries, TIF can benefit real estate developers and investors as well by bridging the financial gap to make otherwise marginal projects feasible for development.

    COMMERCIAL BLIGHT

                Blighted areas are described as “areas where a major portion of the commercial buildings and structures are detrimental to the health, safety and welfare of the occupants and the welfare of the urban community because of age, dilapidation, overcrowding or faulty arrangement, or lack of ventilation, light, sanitation facilities, adequate utilities or access to transportation, commercial marketing centers or to adequate labor supplies.”[vii]  Use of TIF may be available if a blighted area encompasses at least 1½ acres.[viii]

    TIF can be also be used to prevent commercial blight through redevelopment of “conservation areas” – which are areas that do not yet constitute a blighted area but in which 50% or more of the structures have an age of 35 years or more and risk becoming a blighted area through the presence of 3 or more (out of 13) listed factors detrimental to the public safety, health, morals or welfare.[ix]

    PUBLIC PURPOSE

    Public funds may be used only for a public purpose.[x] Economic development to eliminate or prevent commercial blight is a legitimate public purpose.[xi]

    Before a redevelopment project[xii] can qualify for TIF reimbursement of redevelopment project costs[xiii] (“TIF Eligible Costs”) the municipality must have a comprehensive program (“Redevelopment Plan”)[xiv] for development or redevelopment to reduce or eliminate the existing conditions that qualified the redevelopment project area[xv] (“TIF District”) as a blighted area or a conservation area, or a combination of both.[xvi] TIF Districts have a statutory maximum duration of 23 years[xvii] but can be extended by the General Assembly for an additional 12 years[xviii].

    THE “BUT FOR” TEST

    A condition to using TIF funds for commercial development is that “but for” the TIF incentive the development project will not proceed. If the project will proceed in all events, no public purpose is served by allocating public funds.  The fact that the TIF incentive will also benefit private interests will not disqualify its use as a proper public purpose.[xix]

    HOW TIF WORKS – A (VERY) SIMPLE OVERVIEW

    TIF (Tax Increment Financing) allocates only incremental taxes generated within the TIF District for use in reimbursing TIF Eligible Costs. This means that if the equalized assessed valuation (“EAV”) of all property within a TIF District on the date the TIF District is established totals, for example, $1,500,000, property taxes derived from that EAV (the “Base EAV”) will continue to support local taxing districts throughout the term of the TIF District. Only taxes generated from EAV in excess of the Base EAV can be allocated to reimburse the developer for TIF Eligible Costs.

    Hypothetical Example:  

    • Assumption #1: The combined property tax rate in the county is 5.7% of EAV.

    Based on that assumption, the Base EAV ($1,500,000) multiplied by the assumed tax rate will generate $85,500 per year in property taxes.

    • Assumption #2: The TIF District is in Cook County, Illinois. Commercial property located in Cook County is assessed at 25% of fair market value (FMV).[xx]
    • Assumption #3: The state equalization factor (multiplier) for Cook County is three (3)[xxi]; resulting in commercial property in Cook County having an average EAV of 75% of FMV.[xxii]
    • Assumption #4: Developer proposes to build a new project within the TIF District at a cost of $20,000,000, with $6,000,000 of those costs incurred for demolition of functionally obsolete buildings, clearing the land, remediation of environmental contamination, installation of new sidewalks and drives, upgrading or replacing existing utility systems, resolving existing drainage and flooding issues, and adding a public gathering area as requested by the municipality. The project can be completed and stabilized within 36 months from the date the TIF District is established, leaving a remaining term of 20 years.
    • Assumption #5: Upon completion and stabilization the fair market value of the newly developed commercial property will be $24,000,000, implying a new EAV of $18,000,000 (“Total EAV”) based on 75% of FMV.

    Applying the Assumption #1 property tax rate of 5.7% to the Total EAV would generate total estimated annual real estate taxes of $1,026,000.

    Because TIF allocates only taxes from the incremental increase in EAV to pay TIF Eligible Costs, the annual TIF increment would be $940,500 ($1,026,000 on Total EAV minus $85,500 on Base EAV) – with the tax revenue from the Base EAV still reserved for the combined local taxing districts.

    • Assumption #6:  Developer has established to the satisfaction of the municipality that it cannot proceed with the project unless it receives reimbursement for $6,000,000 of the TIF Eligible Costs plus interest[xxiii] at 9% per annum (approximately $8,000,000 through full repayment), for a total TIF payout to developer over the life of the TIF District aggregating $14,000,000, with 100% of the incremental taxes applied to the TIF payout until full reimbursement.
    • Assumption #7: The first TIF payment will be 24 months after substantial completion of the project.[xxiv]
    • Assumption #8: If redevelopment does not occur, the commercial blight will continue, limiting property taxes to those generated by the Base EAV.

    If everything goes as planned, the developer will receive the full TIF reimbursement in approximately 15 years ($14,000,000/$940,500 per year = 14.88 years) once TIF payments commence, which in this hypothetical is 17 years after substantial completion and 20 years after the TIF District was established. After full reimbursement or expiration of the TIF District all real estate taxes generated by the property will inure to the combined taxing districts encompassing the TIF District.

    If the TIF District were to rapidly increase in value generating an average of, say, $1,100,000 per year in taxes on the incremental EAV during the remaining 20-year life of the TIF District, the TIF Eligible Costs could be fully reimbursed in approximately 13 years after substantial completion.[xxv]

     If real estate taxes on incremental EAV were to, instead, average only $640,000 per year, the developer would recover only $12,800,000 over the 20 year post-completion period without further recourse against public funds because the sole source of payment of the TIF reimbursement obligation is the incremental increase in property taxes during the life of the TIF District.[xxvi]

    CONCLUSION

    Elimination of commercial blight within Illinois communities is in the public interest. Tax Increment Financing is a valuable tool to eradicate and prevent commercial blight.    

    [i] 65 ILCS 5/11-74.4-1 et seq.   

    [ii] 65 ILCS 5/11-74.4-2(b)

    [iii] 65 ILCS 5/11-74.2-1(c)

    [iv] 65 ILCS 5/11-74.2-1(d)

    [v] 65 ILCS 5/11-74.2-1(f)

    [vi] 65 ILCS 5/11-74.2-1(b)

    [vii] 65 ILCS 5/11-74.2-1(a); the indices of which are detailed in 65 ILCS 5/11-74.4-3(a).

    [viii] 65 ILCS 5/11-74.4-3(p)

    [ix]  65 ILCS 5/11-74.4-3(b)

    [x] Illinois Constitution, Article VIII § 1(a)

    [xi] Kelo v. City of New London, Connecticut 545 U.S. 469 (2005); People ex rel. City of Urbana v. Paley, 368 N.E. 2d 915, 920-21 (Ill. 1977).

    [xii] 65 ILCS 5/11-74.4-3(o)

    [xiii] 65 ILCS 5/11-74.4-3(q).  Not all redevelopment costs qualify for reimbursement.  In fact, Illinois is significantly more restrictive than many other states, including the nearby states of Indiana and Wisconsin, in that, generally, Illinois does not permit reimbursement for the cost of construction of any new privately-owned buildings while other states do. 65 ILCS 5/11-74.4-3(q)(12).

    [xiv] 65 ILCS 5/11-74.4-3(n)

    [xv] 65 ILCS 5/11-74.4-3(p)

    [xvi] 65 ILCS 5/11-74.4-3(n)

    [xvii] 65 ILCS 5/11-74.4-3.5(a)

    [xviii] 65 ILCS 5/11-74.4-3.5(c)

    [xix] Clayton v. Village of Oak Park; 453 N. E. 2d 937, 943 (Illinois 1st Dist. 1983).  

    [xx] Property Classification Codes  https://www.cookcountyassessor.com/classifications-real-property  

    [xxi] In 2023 the Cook County equalization factor was 3.0163

    [xxii] 35 ILCS 200/17-25 requires average property values in each Illinois county to be assessed at 33 1/3% of Fair Market Value (FMV).  To provide uniformity between counties, the Illinois Department of Revenue (IDOR) is required to calculate an equalization factor for each county. Unlike all other Illinois counties, Cook County is permitted to assess property at different levels based on differing property types (Property Class). In Cook County, there are numerous Property Classes. At the low end are residential and vacant properties assessed at 10% of FMV; and at the higher end, commercial and industrial properties assessed at 25% of FMV. With much more residential property than commercial/industrial property in Cook County, the weighted average assessment of all Cook County property is roughly 11% of countywide FMV.  IDOR has assigned an equalization factor of just over three (3) for Cook County, meaning that whatever the determined assessed value is for any property, the equalized assessed value (EAV) will be roughly three (3) times that amount.

    [xxiii] The developer would have incurred most or all the TIF Eligible Costs early in the construction period. It is typical to reimburse Developer for the time value of money (interest) as permitted at 65 ILCS 5/11-74.4-3(q)(6). Interest at 9% per annum accrues during the 24 to 36 month construction period on the $6,000,000 in TIF Eligible Costs as incurred (estimated. $1,000,000) and another estimated $1,000,000 in interest between substantial completion of the project and the first bi-annual payment from TIF proceeds 24 months after substantial completion, and then an estimated $6,000,000 in interest paid during the reimbursement period = $14,000,000 total payment amount from incremental taxes.

    [xxiv] Property taxes will be based upon the completed project, which in the hypothetical is assumed to occur 36 months after creation of the TIF District. Illinois taxes are assessed one year in arrears – and Cook County taxes are payable to two installments.

    [xxv] Assumes the taxes average the higher amount throughout the first 13 years, which may not be likely, but any material increase in taxes over the projected $940,400 per year will shorten the payment period.

    [xxvi] 65 ILCS 5/11-74.4-8

  • New Year, New Office – Chicago

    R Kymn Harp Joins Buchalter – January 2025

    Buchalter is pleased to announce the opening of its newest office in Chicago, Illinois
    with the addition of lawyers and staff previously comprising the Chicago office of Robbins DiMonte, Ltd joining Buchalter. The Chicago office has 25 attorneys and support staff, including Shareholders Thomas Jefson, Steven Jakubowski, Patrick Owens, David Resnick, R. Kymn Harp, James Mainzer, Justin Weisberg, and Thomas Yardley Jr. Joining them are Jennifer Barton, Emily Kaminski, Teresa Minnich, Christine Walsh, Marko Van Buskirk, Timothy Hameetman, and Richard Stavins. In addition, Shareholder Pamela Webster will also spend a significant amount of time in the Chicago office. The team of highly experienced attorneys have deep roots and a long history of achieving exceptional results for clients.

    “As the third-largest city in the country, having a Chicago office has been a long-term goal for the firm,”
    said Adam Bass, President and Chief Executive Officer of Buchalter. “The city’s thriving real estate,
    financial services, private equity, and technology sectors, along with its ideal geographic location,
    present tremendous opportunities and strengthens Buchalter’s national presence. Finding the right
    lawyers was essential, and the highly respected group joining us in Chicago are an excellent business and
    cultural fit.”

    Buchalter’s expansion into Chicago marks a strategic move as the firm continues to bolster its national
    footprint in key markets across the country. The firm established a presence in the Southeast with the
    opening of its Nashville office in 2023 that has grown to 25 lawyers, followed by an office in Atlanta in 2024.

    With the additions of the new lawyers in Chicago, the firm offers clients a deeper bench in practices it is well-known for, including real estate, banking and finance capabilities, trusts and estate matters, and complex litigation.

    As the Office Managing Shareholder of Buchalter’s Chicago office, Thomas Jefson has extensive experience handling all aspects of complex trust and estate matters including, estate planning for High and Ultra-High Net Worth families, asset protection, probate and trust administration services, complex litigation involving disputed trusts and estates, claims against decedents as well as designing strategies to maximize tax savings. As a trusted legal advisor for over 22 years, Jefson regularly represents families, business owners and executives, investors, and individuals in sophisticated matters to preserve wealth and protect assets that help achieve their objectives for years to come. Additionally, he counsels financial institutions, business leaders within diverse industries in the areas of tax planning, charitable endeavors, fiduciary duty compliance, and other business transactional matters. 

    “We are thrilled to join Buchalter, and I’m honored to lead the Chicago office,” said Jefson. “Joining
    Buchalter provides us with the perfect opportunity to strengthen the support we provide to our clients, expand the services they count on, and collaborate with an impressive team of attorneys.”

    R. Kymn Harp has over 40 years of experience representing investors, developers, business owners, and
    other stakeholders in all aspects of commercial real estate transactions and development. He applies a
    practical approach to project and transaction management through clear identification of transaction
    objectives and challenges, focused due diligence and creative problem-solving, and personal hands-on
    transaction management. He also is actively engaged in the complementary practice of business
    management law, representing businesses, and business owners and investors.

    James Mainzer also has over 40 years of experience practicing in the areas of taxation, business
    representation, real estate, and trusts and estates. His federal tax practice includes a heavy emphasis on
    sophisticated partnership taxation and tax deferred exchanges. He represents private sector clients in
    tax collection defense, audit, income tax, and estate tax matters. He also has substantial experience
    dealing with IRS agents, revenue officers and IRS tax counsel regarding audits, tax appeals, and Federal
    Tax Court matters.

    David Resnick maintains a national practice concentrated in commercial real estate development, and
    leasing and finance matters. He has over 24 years of experience handling all facets of commercial real
    estate transactions, including the acquisition, sale, financing and leasing of industrial, office, residential,
    retail and mixed-use properties. He also provides legal services to hospitality clients with respect to their
    real estate, finance and operational matters.

    Steve Jakubowski concentrates his practice in distressed financings and workouts, bankruptcies,
    receiverships, and related ancillary litigation. He has been lead and co-counsel in bankruptcy cases
    nationwide, stretching from Delaware to Hawaii, including in multiple high profile cases nationwide on behalf of lenders, debtors, creditors and equity committees, acquirers, and litigation targets. These matters have involved a variety of industries, including: biotech; commercial real estate; premium fitness clubs; farming; department stores; restaurant chains; convenience stores; metal fabricators; equipment lessors; and wholesale food manufacturing, packaging, and distribution.

    Patrick Owens possesses extensive expertise in estate planning for young professionals to established
    high net worth clients.  This experience also extends to managing a diverse array of estates, from
    modest, nontaxable ones to those that are significantly large and complex, involving tax liabilities. His
    involvement spans the full spectrum of trust and estate administration and oversight. He expertly
    navigates these trusts and estates through their lifecycle, handling or overseeing all requisite income,
    gift, and estate tax filings with meticulous attention to detail.

    Justin Weisberg has over 30 years of legal experience with a national construction law and commercial
    litigation practice. He represents private, public, local, and international clients in a variety of
    construction-related transactions and litigation matters. His legal experience has included contract
    negotiation and drafting of design, design-build, IPD, P3, and construction contracts as well as
    mediation, arbitration and litigation including both bench and jury trials of numerous disputes involving
    design and construction matters.

    Thomas Yardley Jr. concentrates his practice in the areas of litigation, business transactions, creditors’
    rights and bankruptcy, and employment and construction law. With over 30 years of experience, he has
    handled diverse litigation matters for small business owners, high net worth individuals and
    corporations. He has successfully represented clients in both state and federal court including:
    commercial and contractual disputes, corporate litigation, minority shareholder oppression matters,
    other employment cases, construction matters, condominium and real estate disputes, bankruptcy and
    creditors’ rights matters, among others.

    “We are thrilled to welcome Tom and the entire Chicago team to Buchalter,” added Bass. “We have
    immediate plans to expand the office and are looking forward to the future.”

    The Chicago office of Buchalter is located in Chicago’s central business district, at 180 N. LaSalle St., Chicago, Illinois 60601 – temporarily in Suite 3300, while it awaits completion of its new ultra-modern suite of offices on the 23rd floor of the same building, expected to be ready for occupancy in late Spring 2025,

    Buchalter is a full-service business law firm representing local, regional, national, and international
    clients in a multitude of practice areas and their subspecialties, among them: Bank and Finance,
    Corporate, Health Care, Litigation, Insolvency and Financial Law, Intellectual Property, Labor and
    Employment, Real Estate, and Tax and Estate Planning. Buchalter has approximately 550 attorneys with
    offices in California, Arizona, Colorado, Georgia, Illinois, Oregon, Tennessee, Utah, and Washington. For
    more information about the firm, visit: buchalter.com.

  • PRIVATE INVESTOR ALERT – FinCEN ID

    UPDATE: On December 7, 2024 FinCEN issued the following ALERT UPDATE regarding enforcement of the Corporate Transparency Act:

    “On Tuesday, December 3, 2024, in the case of Texas Top Cop Shop, Inc., et al. v. Garland, et al., No. 4:24-cv-00478 (E.D. Tex.), a federal district court in the Eastern District of Texas, Sherman Division, issued an order granting a nationwide preliminary injunction that: (1) enjoins the CTA, including enforcement of that statute and regulations implementing its beneficial ownership information reporting requirements, and, specifically, (2) stays all deadlines to comply with the CTA’s reporting requirements. The Department of Justice, on behalf of the Department of the Treasury, filed a Notice of Appeal on December 5, 2024.

    Texas Top Cop Shop is only one of several cases in which plaintiffs have challenged the CTA that are pending before courts around the country. Several district courts have denied requests to enjoin the CTA, ruling in favor of the Department of the Treasury. The government continues to believe—consistent with the conclusions of the U.S. District Courts for the Eastern District of Virginia and the District of Oregon—that the CTA is constitutional.

    While this litigation is ongoing, FinCEN will comply with the order issued by the U.S. District Court for the Eastern District of Texas for as long as it remains in effect. Therefore, reporting companies are not currently required to file their beneficial ownership information with FinCEN and will not be subject to liability if they fail to do so while the preliminary injunction remains in effect. Nevertheless, reporting companies may continue to voluntarily submit beneficial ownership information reports.”

    The referenced injunction was temporarily lifted by the U.S. Court of Appeals for the Fifth Circuit – but on December 26, 2024 the INJUNCTION against enforcement has been REINSTATED. Enforcement of the CORPORATE TRANSPARENCY ACT is again ON HOLD.

    CONTINUED MONITORING IS ADVISED. If you choose not to submit a beneficial ownership information (“BOI”) report at this time, it is recommended that the required information be compiled internally in case the injunction is lifted, requiring compliance in the future.

    Corporate Transparency Act Compliance – Obtain your FinCEN ID NOW

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

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

    Beneficial Owners

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

    Substantial control

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

    Beneficial Ownership Information Report

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

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

    Deadline for Reporting:

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

    BOI Report Contents:

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

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

    FinCEN Identifier (FinCEN ID):

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

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

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

    Don’t delay. The clock is ticking.

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

  • MITIGATION OF DAMAGES IN IL COMMERCIAL LEASE DISPUTES

    MITIGATION OF DAMAGES IN IL COMMERCIAL LEASE DISPUTES

    Synopsis:

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

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

    The General Duty to Mitigate

    discussing and signing agreement contract with approved application form

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

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

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

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

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

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

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

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

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

          Liquidated Damages Provision Makes Mitigation Irrelevant. 

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

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

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

                The Summary Rule regarding Mitigation

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

  • IMPOSSIBLE, IMPRACTICAL, FRUSTRATING, OR SIMPLY UNFORTUNATE: Enforcing Illinois Commercial Leases in the COVID Age*

    commercial Lease agreement with money on a table

    On March 18, 2022, the Illinois Appellate Court issued its first opinion addressing efforts by a commercial tenant to escape liability under its lease by reason of the COVID-19 pandemic.  55 Jackson Acquisitions, LLC v. Roti Restaurants, LLC, 2022 IL App (1st) 210138 is lengthy, factually detailed, and instructive. It is useful because it lays out the issues to be considered when the doctrines of impossibility, impracticability, and frustration of purpose are interposed as defenses to commercial lease enforcement.

    The facts are not unusual for COVID era lease disputes.

    Landlord and tenant entered into a multi-year commercial lease commencing on January 1, 2017 for the operation of a restaurant to sell “food for on and off premises consumption, including the sale of beer, liquor and wine, and ancillary items and uses found in other Roti establishments.”  The lease obligates tenant to conduct and operate its business in a “proper, lawful, and reputable manner”, and to “comply in all matters with all laws, ordinances, rules, regulations, orders, and public authorities or officers exercising any power of regulation or supervision over tenant or the premises, or the use or operation thereof.” Tenant timely opened its restaurant and operated its restaurant in compliance with the lease.

    Fast forward to March 2020.  On March 9, 2020, JB Pritzker, Governor of Illinois, declared all counties in the State of Illinois as a disaster area in response to the outbreak of COVID-19. On March 11, 2020, the World Health Organization characterized the COVID-19 outbreak as a pandemic. On March 13, 2020, President Trump declared a nationwide emergency pursuant to Section 501(b) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5127-5207 (the “Stafford Act”) covering all states and territories, including Illinois. On March 18, 2020 the Commissioner of Health of the City of Chicago issued a Shelter in Place For COVID-19 Order. On March 20, 2020, the Governor of Illinois issued Executive Order 2020-10 directing Illinois residents to stay at home.  On March 26. 2020 the Commissioner of Health of the City of Chicago issued Order No. 2020-3 applying the Governor’s Stay-At-Home Order closing numerous public areas, restricting public and private gatherings, and restricting travel. On March 26, 2020, President Trump declared a major disaster in Illinois pursuant to Section 401 of the Stafford Act.  In the midst of the onset of the COVID-19 disaster, the tenant, Roti, “closed the premises” on Mach 18, 2020 and stopped paying rent.

    In August 2020, the landlord filed suit for eviction and rent, alleging that Roti entered into a lease to rent the premises but failed to pay rent under the lease since March 2020. The landlord sought possession and $79,173.88 in past due rent as of the date of filing the complaint.

    Roti defended the lawsuit by admitting it was a party the lease but arguing that it was essentially dispossessed on the premises in March 2020 and excused from performance of the lease because it was complying with public health orders. It also claimed that it was excused from performance because of civil unrest resulting in looting and rioting that began on May 28, 2020. Roti asserted that both the public health orders and the unrest “made it illegal and impossible or impractical for Roti to operate a restaurant at the premises as anticipated under the lease, its sole permitted use of the Premises.”

    Roti raised five affirmative defenses. An affirmative defense claiming COVID-19 constituted a physical casualty was rejected based upon the language of the lease. The other four affirmative defenses, as well as two counterclaims, were based upon the common law doctrines of impossibility or impracticability of performance, and commercial frustration of purpose. There was no applicable force majeure provision in the lease, resulting in only common law defenses being available.   

    Eventually, both the landlord and the tenant filed cross motions for summary judgement, which were heard on January 8, 2021.

    Tenant Roti’s motion for summary judgment was based primarily upon the common law doctrines of impossibility and frustration of purpose. It was supported by a sworn declaration alleging facts in support of its defense that the public orders relating to COVID-19 made it impossible or impractical to conduct business as a restaurant from the premises.

    Landlord’s motion for summary judgement argued that Roti had not established impossibility or frustration of purpose, and that Roti was in default, without legal excuse, for failure to pay rent as required by the lease.  In support of Landlord’s motion for summary judgment the Landlord filed a sworn declaration alleging that other restaurants or cafes in the vicinity of the premises remained open and operating during the COVID-19 pandemic and, in fact, a Potbelly and a Starbucks in the same building a the premises “are currently open for business and have been open during much of the pandemic.”  Roti responded that Landlord’s sworn declaration did not specifically refute Roti’s declaration that the public orders made it impossible and impractical to operate its business and noted that other businesses “have different physical setups, business models, and management decision-making”.

    The trial court granted Roti’s motion for summary judgment and denied Landlord motion for summary judgement based upon the doctrines of impossibility and frustration of purpose, noting that restaurants cannot make enough money to pay their staff during governmental restrictions for COVID-19 and opined that restaurants would not be profitable until they could return to full operational capacity.   The trial court ruled that “the lease remains in full force and effect except that all rent payments by Roti are abated until the public health orders are lifted such that Roti can return to full operational capacity.” The Landlord appealed.  

    Addressing the doctrines of impossibility, impracticability, and frustration of purpose, the Appellate Court spelled out the conditions for application of each doctrine, noting that in each case the doctrines of impossibility, impracticability and commercial frustration are to be narrowly construed.

    The doctrine of impossibility, the Appellate Court noted, excuses performance only if the performance is rendered objectively impossible because the subject matter of the contract is destroyed or by operation of law. The doctrine applies only if the parties did not and could not anticipate the circumstances creating the impossibility, the party claiming impossibility did not contribute to the circumstance, and that party demonstrates it tried all practical alternatives to allow performance. The person claiming impossibility has the burden to prove it.

    The doctrine of impracticability applies only where, “after a contract is made, a party’s performance is made impractical without its fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made. . .” As with the doctrine of impossibility, a party claiming impracticability is expected to make a reasonable effort to overcome obstacles to performance and will be excused only if performance is impractical despite reasonable efforts. A party seeking to excuse performance by reason of impracticability must show that it can operate only at a loss and that the loss will be so severe and unreasonable that failure to excuse performance would result in a grave injustice.

    The doctrine of commercial frustration rests on the proposition that, “from the nature of the contract and surrounding circumstances” at the time the parties entered into the contract, the parties “must have known that it could not be performed unless some particular condition or circumstance would continue to exist.” The parties must be deemed to have entered into the contract on the basis that “the condition or circumstance would continue to exist, so that the contract is construed to be subject to an implied condition that the parties shall be excused from performance if performance becomes impossible from such condition or circumstance ceasing to exist.

    Applying the doctrines of impossibility, impracticability, and commercial frustration to COVID-19, the Appellate Court found “no genuine dispute that the parties did not and could not anticipate the circumstance allegedly causing impossibility – the COVID-19 pandemic and the public health orders – when they entered into the lease, nor that Roti did not contribute to the circumstances of the pandemic or the said orders”. Similarly, the Appellate Court found “no genuine dispute that the allegedly frustrating event – again, COVID-19 and the orders – were not foreseeable when the lease was formed.”

    The Appellate Court noted that summary judgment is a drastic means of disposing of litigation and should be granted only where there is no genuine issue of a material fact. In reversing the trial court, the Appellate Court found that a genuine issue of material fact prevented entry of summary judgment for either party. Roti claimed that operating a restaurant from the premises during the pandemic was impossible. Landlord claimed other restaurants in the vicinity, including restaurants in the same building as the premises, were open during the pandemic. The factual issue was whether Roti’s efforts established that Roti had tried all available practical alternatives to perform under the lease and that operating a restaurant during the pandemic was objectively impossible. To be excused, performance must be objectively impossible.  To be objectively impossible, the facts must show that “the thing cannot be done”.  If the facts show only that “I cannot do it”, the facts establish only subjective impossibility, which is not sufficient to excuse performance.

    Accordingly, the Appellate Court reversed and remanded for further proceedings on Landlord’s complaint and Roti’s affirmative defenses and counterclaim.

    *This article by R. Kymn Harp first appeared in the April 2022 Newsletter of the Illinois State Bar Association’s Section on Real Estate Law, Vol. 67, No. 9.

  • 2021 Chicagoland Repositioning Summit

    PLEASE JOIN US on November 16, 2021

    Register Now: 2021 CHICAGOLAND REPOSITIONING SUMMIT on Tuesday November 16, 2021

    Panelists:
    @Scott Kurinsky|Brian Hungerford|Charles Ditchman|Jamey Dix|Eric Wheeler|Sheyla Conforte, IIDA, NCIDQ, LEED AP|Kymn Harp|Michael Collins|Karyn Charvat|Mike Demetriou|Sarah Wicker|Jillian Brown|Andrea Upwood, WELL AP|Chad Firsel

    Register: https://lnkd.in/exwTQYcA

    Jeff Johnson
    Todd Phillips
    Alyssa Gawlinski
    Marianne Grierson
    Mark Menzies

    Sponsors:
    Wipfli LLP|BEAR Construction Company|Solomon Cordwell Buenz|Robbins, Salomon & Patt, Ltd.|Finishing Chicago

  • COOL PROJECTS – A Love Affair Revisited

    COOL PROJECTS – A Love Affair Revisited

    Adaptive Reuse Of Underutilized Real Estate

    Cool Projects – A Love Affair Revisited

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

    Looking to the Future

    old post office

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

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

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

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

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

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

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

    R. Kymn Harp

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

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

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

    Cool Projects Test

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

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

    (more…)
  • SECTION 1031 EXCHANGE BASICS – Planning for 2021

    SECTION 1031 EXCHANGE BASICS – Planning for 2021

    PREDICTION:  Tax rates will rise, and property values will increase.

    IRC Section 1031 allows sellers of qualifying real estate to exchange it for like-kind real estate and defer payment of taxes. . . possibly forever.

    R. Kymn Harp

    WHAT IS A TAX-DEFERRED EXCHANGE?

    section 1031

    Section 1031 of the Internal Revenue Code allows any real estate in the USA held for investment or for use in the taxpayer’s trade or business to be exchanged for other like-kind property without payment of federal income taxes. Most states tax codes provide likewise. There are technical rules for completing the exchange, but it is a straightforward process with clear-cut rules expressly authorized by law.

    Taxes that can be deferred include all capital gains taxes, all depreciation recapture taxes, all passive-investment taxes (so called “Obamacare taxes”), and, in most cases, state income taxes. In many circumstances, these taxes can add up to in excess of 30%. Instead of paying taxes, why not reinvest those funds as equity in another like-kind property instead, and continue to receive an investment return on those funds?

    HOW IS LIKE-KIND PROPERTY DEFINED?

    • A concept that is often misunderstood is “like-kind” property. The definition is much broader and simpler that some might expect. Basically, any real estate located in the USA and held for investment or for use in the taxpayer’s trade or business can be exchanged for any other USA real estate held for investment or for use in the taxpayer’s trade or business without paying taxes. That means, for example:
    • An apartment building could be exchanged for a warehouse, retail store, or farm, and vice versa.
    • Vacant land held for investment could be exchanged for a shopping center.
    • An apartment building could be exchanged for an office building.

    The physical use of the real estate is not what makes it like-kind; rather, all real estate located in the USA is like-kind to all other real estate located in the USA. Likewise, foreign real estate is like-kind to other foreign real estate, but it is not like-kind to USA real estate. The condition is that (i) the real estate being sold must have been held for investment or for use in the taxpayer’s trade or business, and not held primarily for resale, and (ii) the real estate being acquired must likewise be acquired for investment purposes or for use in the taxpayer’s trade or business and not primarily for resale.

    ARE THERE TIME CONSTRAINTS?

    At the time of closing, the taxpayer does not need to know exactly what property will replace the property being sold. The taxpayer has 45 days to identify potential replacement property, and up to 180 days after closing to acquire the replacement property. A key, however, is that the selling taxpayer cannot come into physical or constructive possession of the sale proceeds during the exchange period. To satisfy this condition, the seller will designate a qualified intermediary to hold the funds under an exchange trust agreement. This can be done quickly, often within a day or two before closing if necessary. Although the seller/taxpayer does not have the right to access the funds during the exchange period, the seller/taxpayer does have the right to direct the qualified intermediary to apply the funds toward the taxpayer’s purchase of any replacement property which is identified by the taxpayer during the 45-day identification period.

    For all taxes to be deferred, the entire sale proceeds of the real estate being sold must be used to acquire the replacement property. For this purpose, “sale proceeds” includes all cash received at closing and any mortgage indebtedness that was paid off.

    INCIDENTAL PERSONAL PROPERTY

    Prior to January 1, 2018 tax-deferred exchanges of certain personal property were also permitted. The 2017 Tax Cuts and Jobs Act, effective January 1, 2018, ended this practice and limited tax-deferred like-kind exchanges to only real property. This raised concerns as to whether certain personal property commonly incidental to a sale of commercial property, such as appliances, carpeting, HVAC systems, security systems, Wi-Fi systems, trade fixtures, etc. would disqualify an exchange for tax deferral, or constitute taxable “boot”.

    Under Final Regulations published by the Treasury Department effective December 2, 2020, personal property that is incidental to real property acquired in an exchange will be disregarded and may therefore be included as part of the tax-deferred exchange. Personal property is considered “incidental” in commercial transactions if (a) it is the type of personal property typically transferred together with real property, and (b) the aggregate fair market value of the personal property transferred with the real property does not exceed 15% of the aggregate fair market value of the replacement real property received in exchange.   

    ADVANTAGES AND DISADVANTAGES

    There are many advantages and not many disadvantages to structuring a sale as a tax-deferred exchange. The rules are technical but not very difficult to apply. It has virtually no impact on the buyer and provides extraordinary benefits to the seller.

    For a real estate lawyer, besides providing a great service to your clients, an exchange provides a direct lead-in to the next transaction with an opportunity to handle the purchase of replacement property of equal or greater value that must close within 180 days.

    Our tax code provides this benefit; it is up to real estate professionals to take advantage.

    Thanks for listening . . .

    Kymn

    Celebrating 50 Years of Excellence!
  • COVID LEASE WORKOUTS

    COVID LEASE WORKOUTS

    These are troubled times. The COVID pandemic is crushing some segments of the commercial real estate industry, including particularly retail and restaurants.

    R. Kymn Harp

    In COVID-19 lease negotiations, I usually represent commercial landlords. When representing commercial tenants, knowing the challenges landlords face is useful.  Commercial tenants should recognize that when seeking rental abatements, or other rent relief, they are proposing to shift the financial burden of COVID from tenant to the landlord. Landlords may want to help; but they may be unable to do so and preserve ownership of their property.

    The good news is, there appears to be light at the end of the COVID tunnel. Vaccines are here. The bad news is, we have a long recovery ahead for small businesses and commercial landlords.

    Landlord

    The idea that most commercial landlords are “rich people”, large corporations, or REITS who can better weather the financial storm brought by COVID is not true. Most landlords rely on timely payment of rent to pay their mortgages and other expenses of ownership. And, unlike commercial tenants, landlords did not receive direct relief under the federal CARES Act. The forgivable PPP loans to small businesses allow commercial tenants to use up to 40% of the loan proceeds to pay rent. This was designed to help small businesses survive, and to indirectly help commercial landlords by giving commercial tenants funds to help pay rent. Frequently, commercial tenants have ignored this aspect of the PPP loan program.

    Strategically, tenants make a mistake when they approach their landlord with a sense of entitlement, and demand rent relief. COVID-19 is not the fault of the landlord any more than it is the fault of the tenant.  At a minimum, when asking the landlord for rent relief, a commercial tenant should be prepared to certify to landlord that tenant has suspended distributions to tenant’s owners and investors. The landlord is not the tenant’s business partner. Why should a landlord take a financial hit to enable a tenant to continue to pay tenant’s owners and investors?  Landlords have their own financial challenges.   

     Except in rare occasions where the lease terms provide otherwise, commercial tenants are not automatically “entitled” to rent relief because of COVID-19. It is not a right.  If a commercial tenant needs COVID rent relief, it must be willing to be financially transparent and able to make a compelling case to landlord as to how the landlord will benefit by granting the requested relief.  Even a compelling case may not be enough if landlord’s mortgage payments, real estate taxes, insurance, utilities, and necessary third-party vendor obligations cannot be paid or abated. Tenants need to provide information to landlord to enable the landlord to likewise make a compelling case to its lender and critical third-party vendors. 

    Plausible workout strategies may include:

    (a) temporary deferral of monthly base rent to be repaid later, with or without interest; or

    (b) temporary abatement of monthly base rent in exchange for an extension of the current lease term.

    Abatement is a forgiveness of rent. Deferral merely postpones the due date. A landlord will typically need corresponding relief from its lender to help fund the abatement or deferral, and to suspend applicable loan covenants.

    Often the best solution is a partial rent abatement (say, for example, a 25% to 50% base rent abatement for a short period) in exchange for extending the term of the lease at full rent. This helps give commercial tenants the rent relief they need in these difficult times, while preserving the value of the property for the landlord – and collateral value for its lender.

    Finding a solution that preserves the tenant as a viable occupant and preserves the value of the property for the landlord and its lender is the surest route to avoiding costly and catastrophic litigation.     

    Thanks for listening,

    Kymn