Imported Posts from Real Estate Space

I turned the “lights out” on Real Estate Space, my blog on commercial real estate finance law. I decided I want to better own and control that content so I have imported nearly all the blog posts from Real Estate Space into All of the imported Real Estate Space posts are under the Real Estate Space blog posts category.

As long as Blogger is free, Real Estate Space will still stay on line.

Clash of the Utopias – The Story of Stuyvesant Town

New York magazine has a lengthy story on the largest real estate deal deal in US history: The $5.4 Billion sale of MetLife’s interest in the Stuyvesant Town and Peter Cooper Village residential complex. The complex is enormous: 80 acres of land on Manhattan’s East Side, 25,000 residents, 110 buildings, over 11,000 units, 2,260 enclosed parking spaces, and 110,000 square feet of retail space. The complex stretches from 14th Street to 23rd Street.

The article, Clash of the Utopias by Gabriel Sherman, starts with the history of the complex. It was an ambitious post-war slum reclamation project. It was intended as middle class oasis in the expensive heart of the city. The vast majority of units are rent-stabilized.

The purchase price was high. According to the story, the rent flow from the property was less than the debt payments. The new owners would need to kick-out illegal rent-stabilized tenants. They would need to raise rents.

Since the time of the acquisition, the real estate market has changed. The story points out that they had to decrease rents and offer incentives to get vacant units rented.

I believe most of the key people and investors in the transaction knew this was a long term deal that would not result in a quick flip for cash. A complex this big does not move quickly. But, it is hard to resist a tract of land this big in the middle of Manhattan. There were lots of bidders who wanted the project.

The story spends a big chunk of space talking about the Speyer family and their family business.

The comments to the story are biting and largely critical of the new owners and their stewardship of the complex.

[For full disclosure, my former firm represented parties in the transaction and played a significant role in the acquisition, financing and other items mentioned in the story. I had no active role. BlackRock/Tishman Acquires Stuyvesant Town and Peter Cooper Village for $5.4 Billion. Deal of the Year. Fund Formation of the year.]


REITs May Pay Dividends in Stock to Save Cash

In a Bloomberg story By Hui-yong Yu, REITs in U.S. Consider Paying Dividends in Stock to Save Cash, many publicly traded REITs may take advantage of a IRS ruling allowing them to pay dividends instead of cash.

On December 10, 2008 the Internal Revenue Service issued Revenue Procedure 2008-68 announcing that the IRS will treat a cash option stock dividend as satisfying a public REIT’s distribution requirements for 2008 and 2009 so long as shareholders can elect to take at least 10% of the dividend in cash.

According to a REIT Alert from Goodwin Procter, IRS Issues Guidance on Taxable Stock Dividends:

The Revenue Procedure provides that the IRS will treat a capped cash option stock dividend by a REIT as a taxable dividend, and will consider the amount of stock distributed to be equal to the amount of cash which could have been received instead, if:

  • the dividend is made by the REIT to its shareholders with respect to its stock;
  • the terms of the dividend allow each shareholder the right to elect to receive its entire distribution in either cash or stock of the REIT of equivalent value, provided that the REIT may impose a limitation on the amount of cash to be distributed in the aggregate to all shareholders of not less than 10% of the aggregate distribution; and
  • the number of shares to be distributed is determined as close as practicable to the payment date based upon a formula utilizing market prices.


Tenant-in-Common Interests are Securities

On January 14, the SEC issued a no-action letter to OMNI Brokerage, Inc., Argus Realty Investors, L.P., and PASSCO Companies, LLC regarding their tenant in common interest program. The SEC said no to the “no action.”

“Based on the facts presented, the Division disagrees with your view that the proposed offer and sale of undivided tenant in common interests pursuant to the Master Lease Transactions and Property Management Transactions (each as defined in your letter) do not involve securities within the meaning of Section 2(a)(1) of the Securities Act of 1933. As a result, the Division is unable to assure you that it would not recommend enforcement action to the Commission unless such offers and sales are registered under the Securities Act or exempt from registration.”

TIC sponsors will need to revisit their platform if they have not been treating their TIC interests like securities. In an article in National Real Estate Investor, Beth Mattson-Teig points out that the no-action letter is limited to the specific facts presented in the request for confirmation: SEC Confirms TICs as Securities.


Health Care REIT, Inc. Added to S&P 500

Standard & Poor’s announced that Health Care REIT Inc. (NYSE:HCN) will replace Sovereign Bancorp Inc.(NYSE:SOV) in the S&P 500. Standard & Poor’s Announces Changes to U.S. Indices [.pdf] Sovereign is being acquired by Banco Santander SA, leaving a vacancy in the index.

Health Care REIT, Inc. is an equity real estate investment trust that invests across the full spectrum of senior housing and health care real estate, including independent living/continuing care retirement communities, assisted living facilities, skilled nursing facilities, hospitals, long-term acute care hospitals and medical office buildings.


Government Seizes 650 Park Avenue

According to the Wall Street Journal, the United States Attorney for the Southern District of New York has filed a forfeiture proceeding against 650 Fifth Avenue in New York.

In its press release: United States files civil forfeiture action against ASSA corporation’s interest in Manhattan office tower (.pdf), the DOJ claims that a 40% interest in the building is held by the ASSA Corporation which is acting as a front for Bank Melli. The Government of Iran controls Bank Melli and ownership is considered an export under the Iraninan Transaction Regulations (Title 31 CFR, part 560)


Stealing the Empire State Building

The New York Daily News tried to show that it is easy to “steal” property by filing fake deeds. The story is rather foolish, but if you want to read it: It took 90 minutes for Daily News to ‘steal’ the Empire State Building.

The reporters think that by filing a forged deed, they somehow could control the building and get a mortgage. Sure it is possible to try to steal money by going through this exercise. Of course you are just leaving a paper trail that makes it easy to figure out what happened and get caught. I could also jump into a car and drive off. That is stealing too.

What is wrong with the story? The property manager is unlikely to turn over the bank accounts to some unknown person just because they have a deed. Tenants are unlikely to redirect rent payments without more evidence of a transfer. A mortgage lender is not going to turn over loan proceeds based on mere deed. One reason to insert lawyers into the real estate conveyance process is to prevent scams like this.

Mortgage lenders demand lots of documentation because they try to avoid scams like this. Mortgage lenders get title insurance to protect against fraud and scams.

It was a stunt and created an interesting headline. However, someone is likely to pay a fine or go to jail for it. I am not a New York lawyer but I would guess that there is a law against filing fake documents.

Image is by David Shankbone from Wikimedia Commons

Tenant Allowance and Build-Out Obligations When a Tenant Files for Bankruptcy

Sutherland published a timely legal alert on what a landlord can do with a tenant allowance and tenant build-out obligations when a tenant goes bankrupt: Obtaining Relief From Tenant Allowance and Build-Out Obligations When a Tenant Files for Bankruptcy.

The alert points out that lease provisions that allow the landlord to stop completion or funding upon the tenant filing bankruptcy are largely unenforceable as ipso facto provisions under section 365(e).

The alert notes two cases which came down with different results on tenant accommodations.

In re Postle Enterprises, Inc., 48 B.R. 721, 724 (Bankr. D. Ariz. 1985) found an improvement allowance to be a financial accommodation under 11 U.S.C. § 365(c)(2),(e)(2)(B). Therefore allowing the landlord to limit its exposure.

In re United Press International, Inc., 55 B.R. 63, 66 (Bankr. D. D.C. 1985), that court found a landlord’s build-out of a tenant’s premises to a tenant’s specifications did not rise above “an ordinary lease” and as such was not a financial accommodation.

Thanks to James B. Jordan, David J. Rabinowitz and Garland L. Reid of Sutherland for putting together an alert on a topic that is on the mind of landlords.


Not Not Creating a Title Insurance Behemoth

The off and on combination of Land America Financial Group with Fidelity National Title Title is back again. LandAmerica press release: LandAmerica Signs Stock Purchase Agreement for Underwriters.

The two signed a merger, then Fidelity terminated, now they restructured the transaction again. This time, Fidelity is purchasing the Lawyers Title and Commonwealth Land Title subsidiaries.

The parent holding company and its 1031 exchange company are filing for bankruptcy. That sounds like bad news for anyone with cash sitting in a LandAmerica 1031 account. It turns out that the company had $290 million invested in auction rate securities as part of the its 1031 business.[Fitch Downgrades LandAmerica’s IFS to ‘BB’; on Watch Negative] Perhaps that is what Fidelity saw during its diligence and decided to cancel the original deal.

That means Commonwealth Land Title Insurance Company and Lawyers Title Insurance Corporation will combine with Fidelity National Title, Chicago Title, Ticor Title, Security Union Title and Alamo Title.

Its unclear how the transactions will impact employees and agents of LandAmerica, Lawyers Title and Commonwealth Title. David Stejkowski of the The Dirt Lawyer’s Blog thinks it will be good for agents to “have the backing of the 800 pound gorilla in writing policies.”

The combined company will have almost half of the real estate title insurance market, based on the Demotech Performance of Title Insurance Companies 2008 Edition.

See my prior posts:


Not Creating a Title Insurance Behemoth

Fidelity National Financial, Inc. (NYSE: FNFNews) canceled its plans to acquire LandAmerica Financial Group, Inc. (NYSE: LFGNews) . The combination would have created a behemoth that controlled almost half of the title insurance market.

Under the agreement, Fidelity National had discretion to terminate the merger on or before Nov. 21 under its contractual due diligence termination right. Fidelity exercised that termination.

LFG’s stock price plunged over 80% today on that news. On Nov. 10, LandAmerica reported in its third-quarter results that it was no longer in compliance with financial debt covenants and hadn’t yet obtained waivers, putting into a growing list of companies with “growing concern doubts.”

See also:


Creating a Title Insurance Behomoth

Fidelity National Financial, Inc. (NYSE: FNFNews) and LandAmerica Financial Group, Inc. (NYSE: LFGNews) today announced the signing of a definitive merger agreement under which FNF will acquire LFG. [Press Release]

That means Commonwealth Land Title Insurance Company and Lawyers Title Insurance Corporation will combine with Fidelity National Title, Chicago Title, Ticor Title, Security Union Title and Alamo Title.

The combined company will have almost half of the real estate title insurance market, based on the Demotech Performance of Title Insurance Companies 2008 Edition.


FinCEN Withdraws Proposed Rulemaking for Unregistered Investment Companies

On September 26, 2002, Financial Crimes Enforcement Network issued a notice of proposed rulemaking, proposing to require unregistered investment companies to establish and implement anti-money laundering programs. (Anti-Money Laundering Programs for Unregistered Investment Companies, 67 FR 60617 (Sep. 26, 2002))

In that notice of proposed rulemaking, FinCEN proposed to define the term “unregistered investment company” as (1) an issuer that, but for certain exclusions, would be an investment company as that term is defined in the Investment Company Act of 1940, (2) a commodity pool, and (3) a company that invests primarily in real estate and/or interests in real estate. FinCEN proposed requiring these companies to file a notice so that FinCEN could readily identify such companies and require them to establish and implement anti-money laundering programs.

I have been watching that rule-making process because it could have a profound impact on buying and selling real estate. For big commercial transactions we keep an eye on the parties to see if there is a reason to be wary and to see if they on the Specially Designated Nationals and Blocked Persons List. But I had some concern that they could extend the “know your customer” rules deep into real estate transactions imposing lots of administrative overhead for little benefit. 

Yesterday, FinCEN gave notice under 31 CFR Part 103 Withdrawal of the Notice of Proposed Rulemaking for Anti-Money Laundering Programs for Unregistered Investment Companies . FinCEN is not abandoning the possibility of pursing the rulemaking. Given the six year span since the notice, they feel it has gone stale. If (or when) they decide to proceed with an anti-money laundering program requirement for unregistered investment companies, they will publish a new notice.

Emerging Trends in Real Estate

The Urban land Institute’s  Emerging Trends in Real Estate for 2009 came out with a picture of doom and gloom, predicting that in 2009, commercial real estate will suffer its worst year since the industry’s crash of 1991-92, with a noticeable rebound unlikely until 2011 at the earliest. It also forecasts a decline of 15% to 20% in property values, on average, from their 2007 peaks, with even sharper declines coming in weaker markets.

Of the 50 markets tracked, the study found only Dallas and Houston have prospects for investment and development in 2009 that should be better than in 2008, thanks to their exposure to the energy industry. All other markets face deteriorating conditions next year, the study said.

But, the report does point out that there are opportunities to be found.


Economic Emergency Stabilization Act of 2008

The White House and Congressional Leaders finalized the Bailout Bill: Current draft of the Economic Emergency Stabilization Act of 2008. (from the Wall Street Journal) It will be interesting to see how it progresses through the House and Senate. I expect to see a lot of salesmanship as politicians try to weave into their current political campaigns.

What does it actually do?  Read this summary from the Shape of Massive Bailout Bill Starts to Develop Definition


When Life Hands You Lehman, Make Lehman-Aid

Over the weekend, Lehman Brothers lost its interested buyers and got ready to file for bankruptcy. According to the New York Times, interested buyers wanted the federal backstop that was put into place for JP Morgan Chase purchase of Bear Stearns: 2 Wall St. Banks Falter; Markets Shaken.

According to the Wall Street Journal, the lack of a backstop scared off Bank of America and Barclays PLC: Ultimatum by Paulson Sparked Frantic End. Most people think various buyers will swoop in and buy individual pieces of Lehman.

On Sunday afternoon, a trading session was opened to allow firms to try to unwind their derivatives transactions with Lehman by finding other parties to step into Lehman’s shoes: Lehman Risk Reduction Trading Session and Protocol Agreement.

It should be an interesting Monday and an interesting week.

Thanks to Rob Hyndman for coming up with this blog post title. I stole it from one of his Twitter Post (@rhh)

All of these companies are clients of The Firm, but I am not aware of The Firm’s participation in any of the weekend’s events. If The Firm was involved, I was not. 

Opportunity Funds Overfloweth

National Real Estate Investor published a story by Joe Gose on the flow of capital into distressed property funds: Opportunity Funds OVERFLOWETH.

“Opportunity funds concentrating on distress intend to take advantage of the seized-up debt markets in a few different ways. Many funds are buying debt at a discount from investment banks stuck with billions of dollars of loans they can’t securitize. Other investors believe loose underwriting and over-leveraged properties will soon lead to maturity defaults, essentially defaults that occur when a landlord can’t refinance a property because it isn’t worth the loan coming due or because a landlord can’t come up with a slug of equity that lenders want. Those funds intend to buy up that real estate, or at least gain a position in the assets.”

It will be interesting to see if the capital markets come back into time to avoid a commercial real estate crash.  The loose underwriting standards we saw eighteen months ago are gone (for the foreseeable future). But most commercial property owners have enough cash flow to pay the monthly debt payments.

The problem will come at maturity. Commercial property owners may have a hard time rounding mortgage debt to replace the maturing debt. It was the short maturity on Mr. Macklowe’s debt that forced him to sell the GM Building. More commercial property owners are going to be faced with mortgage debt maturity. Will there be mortgage debt there to replace it?


Blockshopper is trying to make news out of residential transactions. The site has launched in Chicago, St. Louis, South Florida and Las Vegas, trolling the listing services and registries of deed to find what notable people are doing with their real estate.

According to, some lawyers at Jones Day are not happy that their real estate purchases are making headlines: Lawyers Shrink From Web Real Estate Spotlight. They have sued Blockshopper. Of course, that is just more publicity for Blockshopper. Not free publicity since they will need to pay the lawyers.

Will the suit go anywhere? I thought real estate records were public documents and open for anyone to see. So what is the problem?


Floor Area Ratio and Residential Property

Floor Area Ratio has longed been used as a way regulate building density under zoning laws.  The owner of the property can choose to build a short building on most of the property or a taller building on less of the property.

Although Floor Area Ratio has been used to regulate commercial properties, there was some uncertainty as to whether you could use it for single family residential property in Massachusetts. Floor Area Ratio restrictions is one way to limit McMansions.

In the case of 81 Spooner Road LLC v. Town of Brookline (SJC-10104), the Massachusetts Supreme Judicial Court ruled that towns and cities can use Floor Area Ratio to regulate the density of single-family residential properties.

The uncertainty comes from M.G.L. c.40A, §3 that provides in part:

 “No zoning ordinance or by-law shall regulate or restrict the interior area of a single family residential building . . . provided, however, that such . . . structures may be subject to reasonable regulations concerning the bulk and height of structures and determining yard sizes, lot area, setbacks, open space, parking and building coverage requirements. . . .”

A property owner challenged the Town of Brookline’s imposition of a 0.3 Floor Area Ratio on a single family house the owner proposed to build on a vacant lot.

The Massachusetts Supreme Judicial Court ruled in part:

“that regulation of single-family residences pursuant to the authority in the proviso of G. L. c. 40A, § 3, second par., including bulk regulation by floor-to-area ratio, is a proper exercise of the zoning power, provided the effect of such regulation on the interior area of such structures is incidental.  Although the town’s bylaw requires consideration of gross floor area of single-family residences for purposes of calculating floor-to-area ratio, this is not a prohibited direct regulation of interior area.  Its effect is only incidental.”

It looks like Massachusetts cities and towns can use Floor Area Ratio to limit McMansions from sprouting up, with over-sized houses growing in existing neighborhoods.