Why I'm skipping ICSC Chicago Deal Making

Several people have asked whether I would be at the Chicago ICSC Deal Making conference tomorrow and Friday.  I'm going to pass on this one, but will probably be at one or more in the future.  I am also skipping the legal conference this year as it is in Florida, but I do plan to attend next year's law conference as it will probably be somewhere in the west, where I prefer to travel. I also have some personal and business commitments that would limit my ability to be there anyway.

The ICSC conferences are great.  I love meeting people with whom I have been in touch, be they lawyers, deal people, brokers, clients and even people who were on the other side in past deals. (I have converted more than one of those into clients in the past.) But a lawyer's function, when the focus is major league deal making, is helping get that deal done.  Right now non-retail matters are keeping me busy.  On the off chance a deal was being worked out where I need to be involved I'd rather be near the office where I can literally crank out a first draft overnight and keep the ball rolling.

So what about RECon?  I'll probably go to that every few years or so, although I reserve the right to change my mind.  I see RECon as mainly a function of keeping my name out there and networking with people and learning more about the industry rather than actually getting anything substantive done.  My clients are rightfully too busy doing deals.  That is one down side to being the back room guy, so to speak. 

But for those heading to the conference, do me a favor: get some deals done!  Everyone keeps talking about the market picking up (yeah, tell me about the Water Tower Place refi...if that wasn't a no-brainer loan then they don't exist) but while I am busy personally I would sure like to see more evidence of it! (Case in point: I am blogging on a Wednesday, my usual day off.)

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Filling in the GAAPs?

Let me preface this post by saying I am NOT a CPA or tax lawyer (see the Disclamer for that) and no expert on matters pertaining to accounting.  But that said, I run across issues related to accounting all the time.  Many times in leases or loan agreements or other real estate documents you will encounter language requiring that financial matters be prepared in accordance with generally accepted accounting principles, or GAAP.

Some of my clients hate this language.  Why? Because they believe that while they are often close to GAAP reporting, it isn't "quite" GAAP and it rarely is in the real estate industry.  (Oh, and it can be expensive, especially for smaller players.) They fear that a tenant or lender could use this as a trap to find a ticky-tack default.  These clients often prefer seeing the language "sound accounting principles consistently applied."  Of course, there is a counter argument to that phrase; namely, what does it really mean?  Could "sound" mean "Enron?" GAAP, they contend, has sufficient flexibility to work in real estate without creating a trap; thus the word "generally."  And the counter to that is that sound accounting means just that -- something that is not tricked up but meets normal, everyday standards but is still more flexible and easier than GAAP without being bad.  In other words, sound does not mean Enron.

So who is right?  No one, in my view.  It can be deal dependent or negotiation dependent and sometimes even accounting firm dependent.  I personally tend to prefer not stating GAAP, but I have been persuaded otherwise, too.  And sometimes the opposite has occurred.  Lesson here for me?  Talk to the spreadsheet guys -- the CPAs.  They have their expertise and you have yours, and if you work together as a team you are far more likely to get to a common sense solution that works for your client.

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Capital Expenses, Laws and Cost Savings

When I saw a piece captioned "Building Owners Toss Equipment for New Technology" it reminded me of a lease I negotiated recently.

When negotiating a net lease, tenants will often request that a building's operating expenses will not include capital expenditures.  That makes sense.  But when I am representing the landlord and that is the business deal, I try to add two carveouts. 

The first is legal compliance costs. If you are saying, "Huh?" let me explain.  Say a new law comes into effect after the lease is signed requiring landlord to install a widget in the building and that widget costs $25,000.  While that is a capital expenditure, it was something that has to be installed to keep the building in compliance with the new code.  That in my humble opinion is an expense that can be amortized as a non-capital expense.  Now, if the code had already existed and the landlord just failed to comply -- that is a different story and should not generally be on the tenant's nickel.

The other cap ex that I think needs to be carved out is one that achieves actual cost savings.  There is a sound reason for this in my opinion because it helps encourage such savings.  Let's say a landlord opts to replace the old (but still working) HVAC system with a new, highly efficient one that costs $200,000 and will last twenty years.  (For simplicity we'll amortize it in a straight line without interest at $10K a year.)  If the new system saves $10K or more a year, then I think that cost should be passed through to the tenant. Why?  Because the tenant is in no worse position than if the system had not been installed at all, and it will be less likely to have an HVAC failure with a new system than an old, creaky one. And if the savings exceed $10K, then the tenant will still realize savings. 

But what if the savings are only $5,000?  I think the tenant has a strong argument that only the $5,000 should be passed through.  The point is to put tenant in the same position it would have been, and I think that is usually fair.  (There is always an exception to everything, from my experience.)

In any event, this just one of many, many issues that come up in commercial leases.  I find that a good balance between the landlord and tenant's needs will often get the job done, and in a fair and efficient manner to boot.  Yeah, that cuts down a little on my fees if I am billing at an hourly rate, but it just gets us to where we'd almost always end up anyway in the negotiation.

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An Interesting Poll

I'd be very interested in having all my readers participate in this poll at NREI Online:

What outcome in the midterm elections Nov. 2 would be best for the U.S. commercial real estate industry and the economy? 

• A GOP takeover of the House and Senate
• Democrats retain control of both the House and the Senate
• A GOP takeover of the House, while Democrats retain control of the Senate
• A purge of ineffective incumbents, Democrat or Republican
• This is all a sideshow. Only time will heal the ailing real estate market and economy.

Take a minute and answer the question at their website.  If you have your own thoughts, please comment (or not).

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On the CRE Podcast

I had a great time with Jason Sandquist and Duke Long yesterday recording the CRE Podcast with some thoughts on legal issues and real estate in Chicago.  You can find the podcast here.  Enjoy!

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The October 7, 2010 Post Lacking a Title

Creative, huh?

Lots going on but I will just touch on a couple quick items for now.  If there are ever any topics about which you'd like me to write, just let me know.


There has been a lot of commentary lately about the new GGP board(s).  It is a good bunch of people; almost a Who's Who.   And what about no Bucksbaums on the board -- is that fair in that they still own 7% of the company?  It isn't shocking in light of the turn of events that occurred.  That said, however, the company did turn out doing better in bankruptcy than many pundits expected and -- perhaps more important to many -- retained its independence (so far).  My thought?  Some day, maybe.  Right now, no. Let's get some wind under these sails.

Are the rumors I am hearing of a strong 4th quarter true?  And if so is that because more capital is coming in to save properties, more lenders are foreclosing, both or none?  But hey, we heard this all last year too.  Since I am trying to cut back on sodium I will take it with a grain of salt.

Not being an accountant and all, I will admit I am still trying to get up to speed on FAS 13 changes.  One take is that it will lead to shorter retail lease terms and less aggressive expansion.  Gee, thanks.  That'll do wonders for property values.  (Here is another view from earlier this year.)



Last and certainly not least, I will be appearing on the crePodcast next week, talking about ways a buyer or seller can make a contract better and general real estate type stuff.  I'll try to do a good job!

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