Illinois court rules against tenant exclusive

Crain's moved a story this morning regarding a dispute over a tenant exclusive involving the InterContinental Hotel in Rosemont. As I understand it, Capital Grille occupied a standalone pad in the project under a lease that prohibited another “high-end steakhouse themed restaurant concepts serving liquor with price points above $22.00 per entrée” in the project. Apparently several types of competing restaurants were named.

Apparently an Italian restaurant was supposed to go into the hotel but then blew out of the deal. Along came Wildfire, which was not listed among the competitors although it does sell steaks above $22.00 per entree and is a pretty classic supper club type atmosphere, though certainly noisier and more lively than Capital Grille, in my opinion. The developer's hand was forced because the franchisor declared a breach under its franchise agreement for not having a restaurant on site (and then granted an extension), although you wonder in this market if you can raise the old impossibility/force majeure defense like everyone else is or make it go away through other means....

I haven't read the exclusive language, but in this case Cook County Circuit Court Judge Rita Novak on Feb. 13 denied the preliminary injunction, in part because she found the provision — which singled out a number of restaurants, but not Wildfire — too vague to be enforced in this case." In short? Wildfire gets to open, unless Capital Grille tries to take this up on appeal.

Lawyer lesson? If you are a tenant, you'd better try as hard as you can to make the exclusive as air-tight as possible, and even then remember that litigation can sometimes be a crapshoot.

Finally, I guess the upside for a meat lover is that you get your choice between two more fine restaurants in Rosemont!

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Which way do we go, George...which way do we go?

Please pardon the Dennis Miller-esque references to Looney Tunes cartoons, but I was listening to his show this morning. Anyway....

Where are we going? No one, of course, really knows. And that shows in some opinions out there right now.

For instance, here is a story on the rest of the year and looking into 2010. The gist?

Call it optimistically hopeful, but federal policymakers this week said the national recession could end this year, with the beginnings of recovery possibly taking hold in 2010. A pair of recent reports suggests that all is not lost for battered commercial real estate investors as well. In fact, the reports predict that a window of opportunity will probably open up within months for shrewd and well-capitalized investors as troubled assets begin to enter the disposition pipeline.

In particular, analysts expect institutional investors to be in a good position this year to take advantage of changing conditions in a market that has swung hard over to the downside, according to a report by Prudential Investment Management (PIM), the asset management arm of Prudential Financial, Inc., titled "Turbulent Markets: Challenges and Opportunities for the Institutional Investor."

That would be nice, but what do you do without credit? And the utter lack of liquidity is what is disturbing many institutional clients right now. That is what is a little more pessimistic.

For more than 18 months, the commercial mortgage industry has been in a deep freeze. Now, industry experts are hoping for a thaw this year, but much has to occur in the minds of both lenders and investors for the action to begin.

"I think 2009 is still going to be frosty," says Jeff Friedman, co-CEO of Mesa West Capital, a privately held commercial real estate lender based in Los Angeles.

John Pelusi, CEO of HFF Inc., a publicly traded mortgage banking and investment sales firm headquartered in Pittsburgh, agrees: "Unfortunately, we have a way to go. More losses are coming and financial institutions balance sheets are in need of additional equity capital just to keep the doors open and even more to start new lending. Hopefully, the financial institutions will complete their de-leveraging by mid-2010; however, at the asset level, it may take until 2014."

2014? Let's hope not.

I'm going to say it again, in three words: mark to market. Suspend that and the Dow rises 1000 points in my opinion.

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Auction Action!

I think that is what the PBS station used to say here when they did fund raising auctions every year back in the day. And I think you will see more of that in real estate, too.

Deal Junkie reports that you may see a few prominent auctions in the next few weeks (including the John Hancock Tower in Boston that was the subject of this post recently). The post also cites a New York Times story stating that an auction trade association has reported a sharp increase in activity.

Auctions in Chicago are not infrequent, due in no small part to the activities of Sheldon Good & Co., a national real estate company headquartered here. I am sure Shelley is doing well, notwithstanding the sad loss of Steven Good early this year.

But remember one thing: not all auctions are public. Take the EOP deal. That was essentially a private auction for the whole portfolio, followed by additional private auctions for some of the pieces. This is a great opportunity to maximize value when the time is ripe. Could that happen again? Sure. I could even see it with GGP, bankruptcy or not.

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Impossibility of performance - thoughts?

You may have heard that Younan Properties did not close on the acquisition of 180 North LaSalle in Chicago. There had already been three months of extensions granted and apparently Prime Group Realty Trust had had enough.

In anticipation of being unable to meet the latest deadline Younan filed an action in the Chancery Division of the Cook County Circuit Court apparently seeking the return of its $6 million in earnest money. The case is 2009-CH-06451 if you want to see the docket.

According to Crain's,

Mr. Younan filed the lawsuit Feb. 13, claiming he was unable to close the $124-million deal after the global recession and frozen credit markets prompted a key lender to back out of talks to finance the purchase. Prime Group issued a statement Thursday saying the deal, due to close by Feb. 18, was terminated and that the Chicago-based REIT was entitled to keep the earnest money. Mr. Younan’s lawsuit says the credit freeze means the “doctrine of impossibility and the impracticability of performance” should void the purchase contract and therefore the $6 million should be returned.

Impossibility and impracticability are two of those contract defenses you read about in the first year of law school and while preparing for the bar exam. In short, there has to be no way for the contract to be completed for performance to be excused. As I recall the growing trend is to excuse performance if it is objectively impossible to perform and not just impossible for a given party to perform.

Presumably Younan's argument will be that no one can do this deal right now with the credit markets frozen. And with a lot of money on the line, I'm sure Neal Gerber (Younan's counsel, and where I have a few former colleagues) will fight hard to get that money back or work out a settlement and Prime's lawyers will fight equally hard to keep it. (No title company was listed as a defendant or real party in interest, so perhaps the money was at some point paid to Prime as a deposit. I have seen many deals where that happens.) This could be an interesting case, and I will try to monitor the developments.

Have a good weekend!

UPDATE: With thanks to Doug Cornelius, I should have pointed out the striking similarity between this case and the Donald Trump defense over at Trump Tower Chicago. Thanks again, Doug.

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Thursday Tidbits - 2/19/09 Edition

I'm under the weather and also under the gun on several projects (it never fails), so just a few quick thoughts for the day.

On the gloomy side:

In case you missed it, commercial and multifamily loan originations are in the tank.

Mezz lenders are getting slaughtered, too.

What is it with Chicago and luxury Asian hotels? First the Shangri-La has its problems, and now it looks like the Mandarin Oriental may not get off the ground, foreclosure and all that. The speculators say it is a matter of time, but my thought is that people will try to buy time until October for obvious reasons.

And even the Fed is talking about CRE problems, although the hope is that the problems will not be as bad as the early 1990s.

On the less gloomy side:

Rob Bagguley of Transwestern has a great post at CPN about the encouraging signs of the market. I have to be reminded that there are good things going on and I thank Rob for doing so. Anecdotally I am seeing a slight uptick and thinking that perhaps people are seeing opportunity and possible bargains. I still really honestly think there's money out there that wants to buy notes and distressed deals. Here is an example in the retail sector.

I like my office in Chicago, but the thought of being on the 84th floor of Sears Tower sounds very cool. Executive suite operator has inked a 30,000 sf deal for 100 offices, a bunch of workstations and a videoconferencing center.

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When is a junket a junket? Not when it is Congress, that's when

I'm getting fed up with government hypocrisy. Case in point: companies left and right are being criticized for holding "lavish parties" for key salespeople, or retreats, conventions or other corporate outings. I understand why. But I also know that we could be hurting the hospitality and convention industry more and more by canceling all these events.

But if our government officials do it? No, that is a "serious working session." Both parties had trips to nearby resorts, with different sources of money.

Republican lawmakers paid for their travel and lodging [at The Homestead], mostly with campaign funds. Staffers' bills and the rest of the tab was picked up by the Congressional Institute, which is funded by 54 "patrons," including General Electric Co. and the National Association of Home Builders. About 45 lobbyists attended a dinner on opening night.

A few days later, as the stimulus bill inched forward, Democrats held a two-day issues conference at the Kingsmill Resort & Spa in Williamsburg, Va., a property owned by brewer Anheuser Bush-Inbev NV and whose spa is known for its hops and chamomile massage. Taxpayers helped foot the bill, which was paid partly with money appropriated for congressional office expenses.

Once again, beam me up. And take the COLA pay raise with it, too.

Tony LoPinto hit the nail on the head with these comments:

This is amid hypocritical Congressional reprimands of Wells Fargo and other corporations, which have recently planned business meetings and retreats at resort locations, and were forced to cancel them. Business is going to drive the recovery, and meetings and conferences will be essential to collaboratively working our way out of the current economic mess--but these gatherings should be paid for by the individual companies, not special interests, lobbyists or our taxes.

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Post-Black Thursday thoughts

I know everyone and his or her mother has already commented on the layoffs at many firms yesterday. This is something we haven't seen since the early 90s and even then probably not on this scale. Nonetheless, to close out the week I do have a few comments on the situation. (There is also a good summary here that contains many of these ideas.)

• The layoffs had to happen not only because of a lack of work but also because of a lack of normal attrition in a down market. Of course, the fact that some law firm managers plan on and expect 25% attrition is entirely another problem.
• We've let our profession become a business driven by profit and loss. Because of the business model, some move around like nomads either because of it and/or because they know they are almost as fungible as associates. I'm not sure we can close Pandora's Box, but it is food for thought.
  
• First year associates are, by and large, overpaid and useless. I know. I used to be one. And now, of course, clients do not want first-years assigned to their matters. Can you blame them? How do you solve this problem?
• I actually like the idea of cutting salaries. But the problem is that law school has become so expensive that you will never be able to pay loans back. Making first years cheaper is the issue in my opinion.
• Medical schools have it right. There is a scarcity of them and thus a scarcity of doctors. We are cranking out too many JDs in this country, many of whom are doomed to have huge loans and no way of paying them back as lawyers. Personally, I'd reduce the number of schools drastically.
• I really, really like the idea of articling like they do in Canada. Have graduates intern (like doctors) at a law firm for a year -- working cheaply -- and learning the basics of actually being a lawyer. And this possibly solves the problem of untrained first year associates. Of course, that system is not perfect either and there have even been thoughts about getting rid of the practice in Ontario.

Anyway, I do not have all the answers. I'm not sure I have any. And I feel terrible for all the people that were let go. But maybe this is a good time to rethink business models and existing paradigms and look outside the box we have been in for so long.

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The death of deal toys?

Gosh, I hope not. But in these times, anything even remotely resembling a frill is going to get axed, as you can see from this story about the person responsible for most of Lehman's deal toys.

I always enjoy getting a tombstone or other memento of a deal I have done. My favorite is a Pepto-Bismol bottle that I have been tempted to open from time to time. One of my clients has an even better idea for free deal toys: they find mementos often left in the buildings they buy and tear down and put the mementos in their offices. There is some neat stuff to be found sometimes, and it is proof that one person's trash can be another's treasure!

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We're still lending -- really we are!

This is what you hear banks saying. But then you read that originations are down 80% from 4Q 2007, when things were already starting to slow. And this is across the board in commercial and multi-family sectors. Lenders say, however, that they are lending and have to lend to stay in business and make money. So who do you believe? I have my opinion :)

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Who wins? The lawyers, of course!

Perhaps that is an overstatement. But it is the first thing that came to mind when I read this story in the WSJ about Lehman's real estate holdings.

Having been involved with a few deals with Lehman, I was shocked when the company went down -- and the government let it. But that was then and this is now. There's a lot of negotiating and foreclosing and lawyering to be done with a portfolio this size. And in some cases money is even being thrown into deals that make (and made?) sense in order to preserve the asset, which I think is a good idea under the right circumstances.

Now I am playing wait and see on the so-called stimulus and whether it will have any impact on jump-starting our market. Only time -- which a lot of people don't have much of with so many loans coming due -- will tell.

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Wall Street, Junkets and Hotels

One interesting thought came to mind while reading this WSJ piece: what effect will the cancellation of all these Wall Street, banking and related conferences at resorts and other locations have on revenues in the hotel industry? Is it time to look for vacation bargains?

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Thursday Tidbits - 2/5/2009

Here's some random thoughts from my fellow bloggers that caught my eye and that I recommend you read:

Michael Mandel has a great piece on shadow space in the Manhattan market, which, alas, paints an even bleaker picture of market conditions.

I never see anyone at my local Pier 1. I cannot believe it is still open. Apparently, I'm not alone in this thought.

The ever-informative Deal Junkie, has a good little piece from the NYT Economix blog arguing that CRE will not have a crisis similar to that in the residential market. I've also always thought that, too, but all bets are off in this market and perception may be more important than reality. (And here is David Bodamer's analysis at Traffic Court. His points are, imho, spot on.)

According to Retail Chatter, mega-retailer Tesco is trying to cram down rents with landlords on one side while trying to buy the fee interest in ground leased land on the other -- and at a 9 cap! Nice deal (for Tesco, that is) if you can get it.

The Sibdu Blog posts some well-needed suggestions from ULI and others to get liquidity moving again. I think that is the biggest problem we face right now.

Finally, here's a link to the Allen Matkins/UCLA California Commercial Real Estate Survey, courtesy of Square Feet. The title will say it all.

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David Simon: new development is dead

Assuming anyone is still there, if you work in the development group at Simon Properties, you may want to polish your resumes.

While David Simon tried to assure analysts about the dividend, he also said the company doesn’t plan to begin construction on new projects or major redevelopments in 2009 and there will be little new U.S. retail construction for years to come.

“The new development business is dead for a decade,” Simon said on today’s call. “Maybe it’s eight years. Maybe it’s not completely dead. Maybe I’m over-dramatizing it for effect.”

That's probably overdramatic and hopefully limited to regional malls. But for big deals in the exurbs? It may be a while. In spite of rosy predictions in this article where I live, I doubt we'll see much dirt pushed this year.

H/T Traffic Court.

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