Green Building Contracting

Every developer knows that self-protection in the drafting of a construction contract is a key to success (and a good way to avoid financial disaster). But in a new environment of green building incentives and regulation, there are some new twists and turns to be navigated. Navigating this rather uncharted territory will determine the winners and losers in the real estate development world.

In each construction contract to which they are a party, Owners will need to protect the green building-related tax incentives and other benefits they may have built into their budgeting for a given project. In this context, examples of contract-related damages would be loss of rental income, forfeiting of tax credits or deductions and rescission of density bonuses granted due to meeting green building criteria. Because of the nature of these potential losses, Owners should be careful not to agree to limiting damages in the construction contract to direct damages.

Making sure that a project complies with green building regulations that are popping up in cities and states all across the U.S. is essential. With respect to construction contracts, Owners will need to do their own diligence with respect to their contractors to verify that they are aware (and have experience) with navigating green building requirements in a given jurisdiction. This not only affects legal compliance, but also project budgeting. Owners would be wise to shift as much liability as possible to the contractor in the construction contract, and make sure that the contractor’s insurance policies cover losses due to failure to comply with green building legal requirements.

(This entry posted by Mark Polston, a member of the Real Estate Development group)

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Beware of Loan Purchase Transactions

I continue to look on a daily basis for the transactional light at the end of this very long and dark tunnel that is virtually devoid of any real estate deals. I have recently seen some sparks and flickers involving transactions focused on the purchase of debt instead of the underlying collateralized real estate. A client recently called me to discuss how to structure a deal involving the purchase of a loan to obtain control of a fractured condominium project. Another contact at a large global brokerage firm advised me that his firm is increasingly involved in a number of transactions involving the sale of loan paper. And, only a few days ago, The New York Times ran an article underscoring that loans on distressed properties present not just a burden, but also an opportunity. http://www.nytimes.com/2008/12/24/business/24loan.html?ref=business

The proposition for all of these deals is that the purchaser of a loan and the associated documentation can position itself to take ownership of the underlying property serving as collateral for the loan through a foreclosure process, should the borrower under the loan default. Cash hungry lenders are increasingly considering the sale of loans to both get the non-performing debt assets off of their books and to increase their liquidity positions.

It remains to be seen whether these loan purchase transactions actually amount to a meaningful shift in the commercial real estate market, as reported by The New York Times, or simply just some sparks and flickers in an otherwise dead deal market. In any event, I caution anyone who is contemplating a loan purchase to be mindful of the significant risks involved in these transactions, not the least of which is an intervening bankruptcy filing by the borrower that can be extremely costly to resolve and can stall the transaction for months. An analysis of these issues is reflected in an article that my partner, Jeff Tarkenton, and I recently published in The Real Estate Finance Journal. http://www.wcsr.com/resources/pdfs/real040408.pdf

In today’s dark economic times, loan purchase transactions may present an meaningful opportunity to gain control of valuable real estate assets at distressed prices. However, there is no doubt that if you are not careful about properly understanding and managing the risks associated with a loan paper transaction, you may end up owning just a bunch of legal documents and nothing more. And, who needs to own more legal documents?

(This entry posted by Pamela V. Rothenberg, a member of Womble's Real Estate Development group)

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Real Estate Developers Ask for a Bailout

The WSJ and the Washington Post report that some of the country's biggest commercial property developers (including developers of multifamily real estate) have sought out government assistance as debt comes due.

Although the numbers vary by source, roughly $530 billion in commercial mortgages will be coming due in the next three years, with $160 - $400 billion coming due in 2009. Delinquency rates have begun to rise as rent prices fall and vacancies rise for commercial properties; despite the rise, delinquency rates are still below historic levels (i.e the vast majority of these loans are performing).

The problem is these types of loans are underwritten for five, seven, or 10 years with a balloon payment due at maturity. At maturity the loan is typically refinanced by the property owner. But the credit markets are virtually frozen (in large part because hardly anyone is securitizing commercial mortgages) and little, if any credit is available for refinancing (except for loans being made by HUD, Fannie Mae, and Freddie Mac).

To address this problem, property owners are asking the Treasury and the Federal Reserve to include the commercial real estate industry in the $200 billion loan program to rescue the consumer debt market, money intended to help investors purchase securities backed by those assets. Property owners hope that including commercial real estate will encourage banks to refinance mortgages coming due because the banks could securitize the mortgages. Some property owners have gone one step further and asked the Treasury to set up a separate fund just for commercial real estate.

The Treasury and Federal Reserve have said they will consider including commercial real estate in the $200 billion loan program.

Unfortunately, including commercial real estate in this loan program may not be enough to save the industry if only $200 billion is available and $160-400 billion in loans are coming due in 2009. Even if the program includes enough money to cover commercial real estate, Lenders may not be able to underwrite the loans; they may not be able to accurately price the assets because of plummeting property values.

Permalink: http://womblemultifamilyandmixeduse.blogspot.com/2008/12/real-estate-developers-ask-for-bailout.html

Night, night; don't let the bed bugs bite. When Personal Parasites Get Out of Control, what are companies to do?

Bed Bugs are more than just a common nuisance; owners and operators of residential properties, including university and college housing, apartments, hotels and resorts, are learning that bed bugs do not discriminate and are facing costly expenditures for eradication. In fact, responsibility for remediating bed bug infestation is falling squarely on the shoulders of property managers and exposing companies to new levels of liability. With the rise in reported complaints, the housing industry faces increased costs for extermination, property destruction, rent abatement, and sometimes legal economic, non-economic, and punitive damages. Bed bug related cases are quickly becoming more common place as Plaintiffs advance a variety of legal theories, including claims for overexposure of pesticide, gross negligence, battery, breach of warranty, and emotional distress.

Laws addressing the bed bug boom are also in flux because courts continue to modify owner and operator liability, and state and local housing departments are in the process of implementing and revising regulations. Some cities have even set forth strict protocols governing extermination and disposal procedures, subjecting noncompliant properties to fines, inspection orders, and even jail time. Because the law is in a constant state of change, property owners and operators should consult legal counsel to learn the applicable law, their responsibilities, if any, and develop an action plan to respond to tenant allegations of bed bug infestation.

Because bed bugs are transitory, property managers need to remain vigilant of signs of infestation and resident complaints. Teaming up with a local and reputable extermination company to treat infestation as soon as noticed can help prevent the spread. Quick investigatory responses to resident complaints will go a long way and help minimize liability.

(This entry posted by Erin Miller, John Sweeney and Sky Woodward, all members of Womble Carlyle's Products Liability Litigation team)

Permalink: http://womblemultifamilyandmixeduse.blogspot.com/2008/12/night-night-dont-let-bed-bugs-bite-when.html

Cohousing Projects -- An Unlikely But Viable Opportunity In These Troubled Times

I just read an article in the New York Times about how a developer was able to unload an unfinished project in Brooklyn that was intended to be high-end condominiums. A group of Brooklyn residents incorporated as Brooklyn Cohousing L.L.C., has contracted with the developer to buy the unfinished project (known as Carlton Mews) and, to quote the article, "fill it with families whose lives revolve around the courtyard and 6,000 square feet of common space where residents can cook together, play together, do woodworking or take an art class together." The idea is to create a thriving community that allows its participants to be as private or social as they like.

According to the article, there are about 110 cohousing projects in the United States and Canada, most in areas more rural than New York City, but there are a handful of other urban cohousing ventures, for example in Boston, Seattle and Oakland, CA. Not to be confused with the hippie communes of earlier days, cohousing projects are for sophisticated people who know what they are getting into, who have enough money to live elsewhere, but who intentionally choose to live in a community where they know their neighbors, their children can play with other children and have friends and neighbors of all ages, where they can share meals with one another frequently and where the adults can hang out together.

The reason cohousing projects may be an opportunity for some developers who have stalled projects on their hands is that, as with the project in Brooklyn, the development can be sold to one entity, instead of having to attempt piecemeal sales. Also, it appears that present-day cohousing ventures, unlikely as it may seem, may well have the financial wherewithal to do a deal.

To read the full article from the Times, go to http://www.nytimes.com/2008/11/30/realestate/30cov.html?_r=1&pagewanted=2

(This entry posted by Karen Estelle Carey, a member of Womble Carlyle's Real Estate Development and Construction group.)

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