4074354188_a1981d42ec_s.jpgI attended the Colorado Real Estate Journal Industrial Owners & Managers Conference & Expo on Wednesday, September 15, 2010. 

There were several panels discussing various elements of the industrial real estate market in the Colorado Front Range.

  • The investment panel seemed to reach a consensus that new industrial development would not occur until the third or fourth quarter of 2011. 
  • They also noted that larger industrial properties are owned by public REITs, for which cash flow is important.  Some of those companies seem to be leasing for very low rates in order to maintain occupancy and cover operating expenses.
  • Ned White of Intergroup Architects led the engineering and design panel and noted that construction technology has improved so much that there is not a big difference between a fairly standard efficient building and a LEED certified building, except that the LEED certified building requires $50,000 to $75,000 additional cost (regardless of the size of the building) in order to process the paperwork to obtain the certification.
  • This same panel also noted that there is significant risk in the market of subcontractors defaulting during projects, resulting in delays and cost increases.  They suggested negotiating a final construction price with a pre-selected general contractor in order to balance price and strength of subcontractors, rather than using a “hard bid” approach to select a general contractor.
  • Two attorneys from our office, Tom Macdonald and Bill Kyriagis, spoke on legal aspects of medical marijuana facilities.  In summary, it is still against federal law to possess or sell marijuana, but the Justice Department has issued a memorandum that prosecution of owners or operators of medical marijuana facilities will not be a priority if the owners or operators comply with state and local law.  However, there is still a possibility that the property used for the medical marijuana facility could be subject to the broad federal forfeiture statute.  This is especially troublesome if the Justice Department’s priorities were to change.

There are still some challenges in the industrial market with lack of financing, low rents and relatively high construction costs.  It appears these could be in place for the next year or so.

 Photo by mrshife (flickr)

green-brick.jpgI recently attended a webinar in which Jacob Bart of Stroock & Stroock & Lavan LLP spoke about how the costs of going “green” can conflict with the provisions in many existing leases.  It is common for landlords to “pass through” operating expenses to their tenants, but those expenses are usually limited to non-capital expenditures.  However, any changes to make a building more energy efficient or to reduce carbon emissions will likely be capital in nature.  Therefore, it is difficult for a landlord to make those green changes because the landlord will not be reimbursed for the cost from the tenants.  One way to address this is to allow the landlord to pass through capital expenses if they result in a savings of operating expenses.  

But what if the new equipment is better for the environment, but won’t save much money?  I recently had a chance to speak with Lee Johnson and Michael Noyes from the Greenwood Village office of the accounting firm Clifton Gunderson LLP about a tax deduction for energy saving improvements in commercial buildings under Section 179D of the Internal Revenue Code.  This may provide an incentive for Landlord’s to make cost-saving capital improvements even if the landlord cannot pass them through to its tenants. 

As tenants desire green buildings, not only for cost savings, but also for prestige and marketing purposes, it will be interesting to see if there are changes in the traditional allocation in leases of capital and operating costs between landlord and tenant.

NAHB Logo.gifBuilder confidence in the mature-housing market remained weak, according to 2010 first-quarter data from the National Association of Home Builders’ 55+ Housing Market Index (55+ HMI) – a quarterly survey of the association’s builder members engaged in the production of mature-market housing.   

“The 55+ segment of the market is still stalled in most regions,” said NAHB’s Chief Economist, David Crowe. “Since the builders’ potential buyers are having difficulty selling their existing property, they are unable to move to a more appropriate home.” Noting that a large share of prospective buyers for active adult housing are still in the workforce, and expect to remain so, Crowe added that “many buyers and renters are concerned about their current job security, and may be holding off on any decision to move until the economy becomes more predictable.”

Read the entire report here.

Recently the Colorado legislature passed, and Governor Ritter signed, the Commercial Real Estate Brokers Commission Security Act (HB 10-1288), which allows a Colorado real estate broker to obtain a lien on commercial property if the broker earns a commission from the leasing (but not the sale) of such property under a written agreement with the owner or the owner’s agent and the commission is not paid.  To obtain and maintain the lien, the broker additionally must:

1. deliver to the owner written notice of intent to file the lien;

2. make good faith efforts to mediate the dispute with the owner during the following 30 days;

3. record a notice of lien in the county records no sooner than 30 days after delivery of the notice of intent to the owner and no later than 90 days after the later of (a) the date the tenant takes possession, and (b) the date the commission is due;

4. deliver to the owner a copy of the notice of lien within 10 days after recording; and

5. within 6 months after recording the notice of lien, start an action to foreclose the lien and record a notice of that action.

A lien arising under the law attaches to the property at the time the notice of lien is recorded; it does not relate back to the date of the listing agreement or the date services are rendered by the broker. The broker’s lien is subordinate to any unrecorded agreements of which the broker had knowledge and all prior recorded instruments. Also, the broker cannot assert a lien for a lease renewal commission if (a) the property has been sold to a party for value and without knowledge of the renewal commission obligation, and (b) a notice of the broker’s lien has not been recorded by the time the deed is recorded.

The new broker lien law applies to broker agreements entered into on or after August 11, 2010. Significantly, the act contemplates that brokers may give prospective waivers of their rights under this law if there is mutually acceptable consideration for the waiver. Real estate owners and property managers should consider including such waivers in listing agreements entered into on or after August 11, 2010.

Read more: Governor signs broker lien law – Denver Business Journal

A recent Wall Street Journal blog post  reports that New York courts are allowing more residential real estate buyers to rescind contracts pursuant to the Interstate Land Sales Full Disclosure Act (ILSFDA).  As noted in the post, and as we are also seeing here, many buyers are trying to get out of their contracts.  Those buyers with large earnest money deposits at stake have real incentive to find legal arguments that will allow them to both keep their earnest money and cancel the contract.  While this may not be surprising, some developers are shocked to learn that they may have unwittingly given buyers an easy way out of their contracts under ILSFDA.  

ILSFDA applies to the sale of real estate and is generally modeled after securities laws.  It requires that a real estate developer register its projects, unless the project qualifies under an exemption.  Rather than going through the elaborate (and lengthy) registration process, many developers choose to rely upon an exemption.  The exemptions are self-determining, meaning that there is no government sign-off on a developer’s compliance for a particular project.  This is where many developers get tripped up as compliance with exemption requirements can be very tricky.  If buyers successfully argue that a project was not registered and did not meet the requirements for a particular exemption, the buyers can rescind the contract for a two-year period, starting on the date of the buyer’s execution of the contract. 

This rescission right is a powerful tool and drives home the point that developers need to (a) carefully consider ILSFDA’s requirements, and (b) evaluate whether any of the pending sales contracts are at risk for rescission rights under ILSFDA.  In today’s market it is also important to consider the impact this could have on lenders.  As lenders deal with distressed development loans and negotiate loan workouts, they should make a serious assessment of whether any pending sales contracts are at risk of rescission under ILSFDA.  A representation of compliance with ILSFDA in a loan agreement given by a now nearly bankrupt development entity is really of no help in this context. 

We can all hope that this litigation will help developers and lenders more fully understand the magnitude of the risk of noncompliance with ILSFDA and will help real estate lawyers better counsel their clients on compliance issues.  Time will tell.