Cadwalader layoffs

Apparently another 96 lawyers are being let go at Cadwalader today, meaning the total loss count this year is, if I can count, in excess of 130 people.

CWT is well known as one the major, major players in the CMBS market. I've worked with all three of their US offices (NY, DC and Charlotte), usually on the same deal. For whatever reason, CWT had this thing about running deals from multiple offices when I was borrower's counsel.

While I found the CWT people professional and thorough almost to a fault, my clients were sometimes unhappy, especially when the lender's counsel's bill (which the borrower pays) came out. We used to try to predict the amount as a little game. At least one client, as I recall, was so irked that it resolved to ask their lenders in the future to find other, more cost-effective firms to run the deals. And in the climate that was a few years back the lenders usually complied, moving the legal work to other firms -- sometimes outside New York -- where the lawyering was still excellent but the overhead was much lower.

Now, that didn't hurt CWT at the time because they were so crazy busy that it hardly mattered. And they got more than their share of the very best deals, which is befitting a top firm of smart lawyers. But now that the capital markets practice is at a virtual standstill there's nothing for this army of lawyers to do. And CWT makes no bones about its desire to be aggressively profitable.

“It’s exactly the shark tank that everybody says it is,” said former partner Robert Vitale, “If you’re a shark, it’s great.”

Layoffs are painful, but, at a shop like this, probably inevitable. You know what you sign up for here. And almost 100 lawyers are about to be much less comfortable than they were yesterday.

Finding money in vacant space

When times are tougher it pays to be a little creative. And since I've been working on some sign leasing lately I found this story interesting.

In short? Outdoor ad companies are paying retail landlords money to use the vacant storefronts for advertising. From what I gather it is sort of like the ads you see wrapping buses. The ads can look pretty creative. Some even include motion sensors that trigger the projection of images as you walk by.

If you are a landlord you still have to be careful about these types of deals. The tenant has to get all the necessary permits, perhaps within a given time frame. What if the city demands that the ads be removed? What about content? You also need to make sure there is flexibility to terminate the deal if a tenant comes in to play. Found money is great and all that, but not at the cost of losing a long-term retail tenant.

Bye-bye, Bennigans

No more Monte Cristo sandwiches for me, I guess. Here's another retailer biting the dust, this time in the food category. According to this report, Bennigan's, once a favorite chain of mine, has closed all its corporate-owned outlets, and along with the Steak & Ale brand, is looking to Chapter 7 to liquidate. The franchised outlets are still in business.

In Chicago, this means two prominent sites on Michigan Avenue are dark today, at 150 S. and 225 N. I've been to both, and IIRC, the South Michigan facility was the busiest in the whole chain ('s supposedly where Michael Jordan met his now ex-wife).

It'll be interesting to see how they re-tenant these and other locations. Will other national retailers of that ilk step to the plate and jump in, or will you have to find a completely different use? Will someone try to jump into some or all of the dirt? Company owned land could be an interesting medium term play. Just remember there are many complex issues to consider in a bankruptcy sale of real estate interests. Part of the problem is that some of the logical competitors may not currently have the resources to jump in. This is where creative real estate people can make money.

Oh, if you have a subscription, here's more detail from the WSJ. They are also reporting that Outback Steakhouse and Ruby Tuesday (which just imo ruined its menu last year, so much so that I'll never go back) are in trouble.

All courtesy of Traffic Court.

Best Buy - my new source for drum equipment?

You probably don't know this about me, but I also dabble as a percussionist, my primary instrument being the timpani (yes, the big kettle shaped drums in the back). And my father was a professional musician, so I've been playing music since I was, oh, three or four?

Anyway, the announcement that Best Buy would start devoting a 2500 sf portion of its stores to selling music equipment caught my eye, mainly because they are selling real product. Yeah, you can get a few things at Wal-Mart, but not Fenders, Gibsons and Rolands.

I like this idea. First of all, Best Buy can become my source for equipment that I need right away; for instance, if I break sticks or lose something I can run down the street and probably get something at a reasonable price instead of paying full price at the local retailers.

The local independent music shops should be scared of this far more than of the category killing retailers such as Guitar Center that never did the job. Why? Best Buy is pervasive and people may buy there out of ease and price considerations. Yes, the indy store may have lessons and more knowledgeable people and niche products, but you can't ever discount price as a factor for many.

But that's exactly why Best Buy probably won't also become my first choice music store. I need a lot of equipment that just won't be carried in a 2500 sf shop, be it there or in an indy. I therefore buy from specialty shops out of state (such as here and here) that carry everything I want and at better prices. But for the casual player Best Buy should be a significant factor.

Let the bad times roll?

This is the title of an emailed article I received from Private Equity Real Estate magazine. Sorry, no link to the actual piece.

The gist of the story? We've been talking about distressed property and reading about distressed property and theorizing about distressed property, but there's been no chance to actually do anything about distressed property.

The PERE folks think that's about to change, as companies with assets are in trouble and soon will really need to sell. And the people who've had cash on the sidelines for what seems to be forever appear to be saying, "It's about time."

A telling quote:
The ultimate challenge though for both large and small firms is being able to assess each opportunity quickly and accurately. It is a manpower and skill set issue as much as anything else. Those firms which have staffed up to the appropriate level or which have individuals who can quickly zone in on the most attractive and achievable deals will have the advantage.
That goes for lawyers, too. If a firm laid off talent in this downturn it may be caught flatfooted. As one of the best real estate lawyers I know once said, he'd rather take a temporary profit hit than be caught with a shallow bench or no bench at all. What are the doldrums one day can be a firestorm the next, and it is better to take a little less money for a year than to risk losing clients if the storm hits and you are unprepared.

Dealing with the media

Larry Bodine is absolutely right: blogging can bring media attention. According to the Meyers-Briggs type people, I have a personality that is almost completely opposite of that of most lawyers.

Yes, I like my books and my work and sometimes even being in the office on an obvious golf day, but I also really like interacting with people. So when the media calls I try to be helpful with ideas, theories, concepts and even non-confidential examples of my work.

What I CAN'T do is break client confidences, disclose certain information regarding deals or dig dirt. It isn't ethical. So I tend not to respond to calls or questions about specific deals on which I am working. But I am always happy to talk about trends, legal issues, information that is public and analysis so long as it is not impacting a client. I had a good time the other week talking to a reporter about the subprime crisis.

Mid-Week Tidbits

Things have been crazy, so I've been remiss in not posting daily. I'll try to improve that. A few items from other blogs caught my eye this morning.

One is the passage of a green building code in California, voluntary until 2010 and mandatory thereafter. My take? The private sector is usually, in my opinion, the better way to go about making changes in how things are done. But then, California was the leader in the anti-smoking movement and I'm not sure those bans would ever have come into place without government intervention. We'll see whether this is a folly or a harbinger of things to come. I can already see the potential litigation coming out of this.

Commercial property prices are continuing their adjustment downward. Some of that may also have to do with the sales being predominantly in smaller properties where sellers are willing to take haircuts. People who can are holding on to their trophies.

Still more pressure on the retail side with Mervyn's on the verge of tanking. This can cause unforeseen problems on the legal side. How so? More than a few retail leases may have co-tenancy clauses that allow in-line tenants to walk or stop paying rent or pay reduced rent if anchors go away.

Real Estate Rudy?

Previously I lambasted Eliot Spitzer for wanting to start a vulture fund. Now, it's Rudy Giuliani's turn.

Am I going to bash Rudy? No. why not? Well, he's not a disgraced ex-governor, he's not Client #9, he's a decent guy from what I can tell, he was brilliant after 9/11 and, last but not least, he appears to be doing this right.

This is party of his diversification plan. And that's smart. He also has a VERY experienced partner in Berman Partners. Finally, by setting a high initial investment but a low threshold for his first fund, he's going to invest in smart plays and also have a limited number of investors to keep happy.

So...well played, Rudy. I hope you make a mint.

What is $190 million among friends? A LOT of money!

That is how much Crain's estimates that Teng & Associates has plunked into the Waterview Tower/Shangi-La Hotel development on Wacker Drive. Other than a $20 million bridge loan from LaSalle Bank, that's apparently all cash we're talking here.

Neither I nor Crain's has seen any much activity there in weeks, and the trade reports that there are at least nine mechanic's liens that have been filed. (That is an UGLY statute in Illinois to deal with, by the way.) Often that's a sign of major league trouble. But the lender insists that the loan will be done and construction will then proceed. Good. I like staying at Shangri-La in Asia.

And, as you probably know, Teng is not alone. I have not heard anything about financing for the Chicago Spire either, but I assume Kelleher and Anglo-Irish (presumably a syndicate) will eventually do something to get that deal done as well. If you look at pictures, the hole in the ground is dug. There's a YouTube post with rumors (you can look it up if you care; no link here). Of course, I've seen holes dug and no building built thereafter for a looong time, but I don't know how this will turn out. I'm hoping, of course, the deal gets done.

The audacity of excellence?

I got a kick out of this story on lawyer frustration and how to strive to be "above average." Apparently, lawyers are part of an "unintended byproduct of a profession that confines its lawyers to prisons of bureaucracy, internal politics, dysfunctional interpersonal relationships, inefficient systems and ineffective leadership. It is heartbreaking to see people who expect so much from themselves and others toiling in environments that perpetuate underachievement."

I'm lucky. Even when I was in a big firm I didn't have too much of that, and now I am free to be as good as I want to be. David Freeman makes some excellent points, the best of which is to
Demand a maniacal focus on the client. I've been doing that as long as I can remember, so this is no big deal for me. It is nice to see it reinforced from time to time though. Sometimes it is hard to get over the fact that it isn't about you, it is about the client. Your success is often in tandem with that client, so work hard and get the deals done and mutually reap the benefit.

What a difference 37 years makes...Bolingbrook, Illinois

I moved to Bolingbrook, Illinois in April, 1971. I was 5. I consider it my hometown, and we still own property in town, right down the street from my old neighbor, Mayor Roger Claar.

When I was a kid, we didn't really want to admit we lived in Bolingbrook. It had a cheap tract home reputation and everyone thought it was in the middle of nowhere. And I suppose it was. And it was also known for the world's first indoor amusement park and shopping mall, Old Chicago. The concept in its execution was ill-conceived, but in theory it was a great idea, and you now see larger, grander versions of this idea all over the world. We had good (year-round!) schools and teachers, nice parks, friendly neighbors, clean streets and pink flamingos! (That last one's an inside joke for old timers.)

How things change. The village matured, and thanks in large part imo to Mayor Claar, Bolingbrook is #32 in Money Magazine's Best Places to Live 2008. The village beat out Wheaton, Aurora and Orland Park in the top 100, and was surpassed by our neighbor, Naperville, which was #3 in the survey. And it's a great place too.

So cheers to my hometown. I was there last week and visit frequently. There's great shopping, excellent recreational facilities, good infrastructure -- all in all, it's a pretty nice place to live. They try to keep a small town flavor in spite of a population of 70,000. Just because you hear about certain people in the news does not make it a bad place, and Money confirmed that.

One last thought for the day - specialty lenders

I ave not seen many stories about non-traditional lending sources. No, I'm not talking about Guido the Killer Pimp. Specialty lenders have their legitimate place in the market, either as lenders, mezz lenders, equity participants or combinations of the above. And guess what -- they are thriving in this credit market. I know -- you're shocked at this revelation.

But like Guido, be prepared to pay for the money and the speed in which a deal can get done. Everything comes at a price, and it isn't cheap. But if it beats the alternative....

Courtesy of Deal Junkie.

Wal-Mart Bombs? No, not really.

Thanks to Counter Culture for pointing out this cool video on Wal-Mart's expansion. It reminds me of the movie War Games. Global thermonuclear war, anyone? Or how about a nice game of chess?

And here go retail vacancy rates

This is before Steve & Barry's, but Crain's reports a hefty jump in vacancy rates in the second quarter. This is not developers bringing space on line, either. Some of the projects I wrote about last year are delayed or dead. Rather some retailers are retrenching and others, as we know, are liquidating.

Is it all bad news? No. Some of it was expected. Kane County and many of the suburban submarkets were expected to rise, because retail is perhaps ahead of the rooftops. And some "bad" news is just a sensible slowdown. Walgreens, for instance, is "only" planning to open 365 stores next year instead of 500. And where the bodies with money are? Vacancies actually dropped below 4% on the north side of Chicago. So...location and money and you are probably ok. I guess that means we should expect a slowdown where I live, too, even with Bed Bath and Dick's coming in and Petsmart just opening. I guess that might mean another year or two for Panera Bread, alas.

Things are tough all over, what do you do?

I know and hear that people with money are buying where prudent. This is notwithstanding more recession fears, Fannie and Freddie, huge numbers of retail store closings (including a Steve & Barry's BK and probable liquidation), record gas prices, war...good grief, is anything going well? And Anheuser Busch is going to be owned by WHO???

(Speaking of ICSC and retail BKs, here's a nifty little summary of the BK process after reform, which some say is just in time for landlords and other say leads to liquidations because of a lack of time to decide which leases to reject and keep.)

As we have all said countless times, real estate is about location. So if you only make money by buying, selling and leasing, and you can find a panicked or distressed seller (not as easy as it seems, bucko), then it is your business call. I can give you a few legal thoughts I see in my crystal ball.

First, involve your lawyer at the letter of intent stage, not once the main points are covered. We can make suggestions that might make your life easier.

Remember that unless you are a cash buyer your lender will drive the deal. Transactions are getting delayed a lot lately because of due diligence, committee approvals and just plain slowness, and you will need flexibility to meet your lender's needs.

Make sure your seller commits to obtaining high thresholds of estoppels and SNDAs that your lender requires (or negotiate this with your lender if posssible). Get as long of a financing contingency as you can. (Yes, the days of no free looks, no contingencies and close in fifteen days are gone for now.)

Find ways to get your earnest money back if a lender bails or significant problems arise. Be prepared for material changes that may occur during due diligence or the period between due diligence and the closing, such as tenant blowouts, bankruptcies and other similar issues.

Finally, be patient. Rome was not built in a day and, as we've said before, the real property market is probably not going to completely collapse (in which event I'll be out of a job and going back to graduate school or something!) Don't expect to find bargains on every street corner. (Also, this is just a summary of a few salient points. Keep that disclaimer in the sidebar in mind when reading this.)

P.S. If you are a seller, you ave legal issues of your own to consider, and perhaps I can cover that another time.

It's been a long and busy week

But I could not let Saturday morning go by without giving props to Jeff Brown, the Bawld Guy. Yes, we've been reading about banks being taken over and Fannie and Freddie in trouble. It's enough to scare you and me and many people, eh?

Jeff will help bring you back to earth with two posts here and here. The moral of the story? We're in the last act of a movie we've seen before, one where the country is going to hell in a handbasket. But guess what? The crisis ends and we start casting for the next gloom and doom movie. It's just been a while between showings.

In short, what is going on is a sequel to previous crises. The old-timers have seen this before, and we'll all see this again. Yes, there are different casts, and some movies are scarier than others (sometimes because of the persuasiveness of the critics), but this is not a time to jump out of a building. Actually, no time is a good time to do that.

Enjoy your weekend. It looks like the skies may clear up enough to sneak in some golf.

But then again...

Reports are that REIT prices are declining again:

According to the Wall Street Journal, real-estate investment trusts (REITs) saw a Q2 2008 that was basically opposite the first. The WSJ says the Dow Jones Equity All REIT Total Return index was down 4.9% in the second quarter. In Q1 of ‘08, it was up 1.4%.
I guess I am not surprised. The market on the whole has tanked lately. And also remember that REITs can be more volatile than stocks, especially the Dow or the S&P. They go diddley up-up, they go down diddley down-down. And let's not forget that the Dow in this case actually declined by more than the REIT index. So things could be worse. Oil and inflation are the dragging factors here.

All in all, it's still about the dirt

Here's a story about pension and endowment and other institutional investors looking toward so-called "next generation" investments. In short,
Investors already experienced with the traditional alternatives — private equity, real estate and hedge funds — are now open to newer alternatives such as real assets, infrastructure and 130/30 strategies, said John Garibaldi, managing director, heading the alternative strategies group at JPMorgan Asset Management, New York.
Yeah, let's take advantage of market disconnects and make lots of money. Sound like something you've heard before?

In short, what goes around comes around. And as catchy as some investments are, don't forget that there's no more dirt being manufactured in the world, unless you count land created by dikes.

Now, if you've gotten this far in the post, you'll find that I buried the lede, which is exactly what this story did imo. Get this:

Overall, 94% of all investors stated that real estate is meeting performance expectations compared to 92% for absolute-return strategies, 88% for private equity and 87% for hedge funds.
Is that because of low expectations, or misplaced expectations for other investments or because -- wait for it -- real estate is a fundamentally sound investment? Ding, ding, ding...good answer! I knew you'd get it right or you'd probably not be reading this post.

Hope you all had good holiday weekends. I did.

Is Orland Park blowing its new downtown? The Main Street Triangle may just be a sliver

I think they might be. Reports are that the village has decided to put off any bids for a new developer to take on the $100 million project until the fall. Why, why, why?

Related Midwest, based in Chicago, had been chosen approximately three years ago by the village to develop the triangle, but pulled out of the project in April, [village development services director Karie Friling] says. The village had a request for proposals, which was initially due in May and then pushed back until last month. “We had suspended it before we received any bids,” she says. The village halted the request because many of the interested developers had questions that village officials could not answer yet, she says.
These questions are presumably about the fate of a pretty old shopping center at the corner of 143rd and LaGrange that have some tenants with long term leases. about, buy them out?? And after all these years, how can the Village not only not have answers but need months and months of time to figure them out? The problem is that this project will lose traction and die on the vine. With business slow, now is the time to try and get developers at least interested in the project. They have time to think this through.

Let's face it, folks: Naperville this isn't, nor will it ever be. And support seemed awfully tepid, unless it was just the weather. I was at the ribbon cutting a couple of weeks ago, and the crowd for the ceremony and concert was almost outnumbered by the politicians in attendance. I will say this: the train station is very nice. But the pavilion they built in front of it is not especially attractive with oversize columns and a just plain feeling of "Why did they put this here?" It reminded me a little of Soldier Field. Blair Kamin would have a field day with this. And by the way, if this was pavilion was meant for concerts and music, the acoustics are just awful.

So, you south suburbanites, if you are waiting for a nice mixed-use, transit oriented development to go or even to live, don't hold your breath.

Not just law firms are consolidating. Will the average guy be squeezed out of the market again?

First we had Staubach and JLL. Now the rumors are GVA and Colliers joining forces. I understand the whole concept of one stop shopping, but I think this can go too far.

Are real estate pros going to end up like accounting firms, where you have a couple of large firms and a bunch of small ones? It sure seems that way.

What worries me is the little guy being squeezed out of effective representation in the marketplace. It is already happening in the legal profession and it could happen in others as well.

It may even happen in the medical profession, so be afraid. For instance:

The Associated Press reports in an article that the Centers for Medicare & Medicaid Services will hold physicians Medicare claims for services furnished on or after July 1, 2008. According to the article, the holding of claims is intended to temporarily delay the implementation of the 10.6 percent reduction in the Medicare payment rate for physician services until Congress returns from the July 4 recess and has time to address the scheduled payment cut.
So, doctors stop getting reimbursed for the ostensible reason that the 106% cut will be rescinded. Yeah, right. There's government efficiency (one of my favorite oxymorons) hard at work for you. What might doctors do? I read an email the other day suggesting that doctors simply take their low reimbursing insurance patients -- such as Medicare -- and lump them all into brief clinic visits at limited hours on a first-come, first-served basis. This means that the doctors can spend the lion's share of time working on paying patients. (Sorry, I know this is off topic, but it is important!)

It may seem unfair, but think about it. If you have two people asking for your professional time -- one who pays and the other who does not -- whose call will you take? I thought so.

Will this happen in the legal and real estate professions? Probably not. The average person just won't have access to the system. But still: be afraid.

Another retail chain in trouble? A line on Steve & Barry's and some thoughts on defensive leasing

Boy, they weren't kidding about retail woes. Now I am reading that Steve & Barry's, a cheap chic chain, is talking to Weil Gotschal and thinking about closing 1/3 of its stores as it decides on its future.

I found the comment about defensive leasing from a Greenberg Traurig lawyer interesting. From a landlord's perspective I guess that means (for instance) watching out in a down market for big TI allowances and shelling out major money on a lease that could go south. Boy, have I seen that.

Defensive leasing also exists for tenants in an up market; this is a term I am more familiar with. In other words, tenants will sometimes take more space than needed or commit to so-called "must-take" options to add on space in the future in order to lock in possible expansion needs. This is, of course, seen more often in office leases.

I've heard about real estate developments being a bomb, but this is ridiculous

CNN is reporting about a subdivision in Orlando that apparently contains, oh, live bombs.

Yes, you read that right.

I don't know what the law is in Florida, but I can't see anything that would actually cover this on a disclosure report in Illinois. Maybe that's because no one in their right mind ever thought someone would build on a, um...bomb range. I've heard about unexploded ordinance in the UK many times, but here? Not so much.

Nearly two decades ago, the 1989 development order, in which the county granted the permission to develop the land, shows that builders and developers knew "of the site's history of military use."
Wouldn't the terms of a development order typically show up on a title report? Was this excluded, and why? I know I have seen development orders when reviewing title before? Of course, there will be inevitable lawsuits against the developer for failing to disclose this. No one wants to buy, no one wants to lend, so what will be the outcome? I'll be in touch with friends in Orlando to see if there's anything more here worth discussing.

Meanwhile, back in retail...and law law land....

I was sad to see that Whitehall Jewelers is calling it a day. But I guess it might have been inevitable. The family of a college classmate used to own Whitehall so I always cheered it on.

On another front, you can see the latest Marcus & Millichap report on the retail market here thanks to the Sibdu Blog. Ready for it? Holding your breath? "The retail commercial real estate market is softening … amid a slumping economy, the prolonged housing downturn … and, you guessed it … the credit crunch."

Sorry, no big surprise like the Chicago office numbers yesterday. Asset sales, like most other sectors, are way down. I guess the one thing moving is self-storage. And industrial also looks relatively healthy.

Oh, one other encouraging thought: law firms are BUSY. One friend canceled lunch with me last week because work is crazy busy with deals. Another firm I know is swamped with workouts. So there's hope yet, even if lawyers think they are going to be fired....

1031s -- down but not out and possibly set for a boom

If the capital gains tax goes up -- a possibility under McCain and a virtual certainly under Obama -- the 1031 market is going to go through the roof as people will try to defer their capital gains.

While in some sectors 1031s are still very popular, I don't see many of them in my practice -- maybe two a year these days. I expect that number to rise, and I am starting to bone up on current events in the field and various rulings and nuances of the law to make sure I am ready for that boom.

If you too are interested in thinking about 1031s, one website I stumbled across was this blog from the 1031 Alternatives Group. It is (as it ought to be) an ad for their services (which includes TIC deals), but I also found their information interesting, and I learned a ting or two about some recent developments. There are also some very basic concepts discussed for neophytes.