HARP – On This. . .

Author: Kymn Harp

  • BEYOND THE PANDEMIC – Opportunity Awaits

    If experience teaches us anything, it teaches that the COVID-19 pandemic will end.  Things we enjoyed before, will be enjoyed again. People still want to shop, travel, dine-out, go to theater, attend live concerts and sporting events, marvel at fireworks displays, celebrate family gatherings, and do all the things that enrich our lives.  Demand did not simply evaporate; it remains strong. Pressure is building. Pent-up demand is rising. It is waiting to be unleashed. Are you ready?

    Pundits speak of a “new normal” – but what does that even mean?

    Not long ago, during the Great Recession, we heard talk of a new normal as well. How long did it take for that new normal to become a faded memory once the economy rebounded and began to expand? (Not long.)

    Clearly, this pandemic has been devastating, with tragic loss of life, severe illness, and widespread economic devastation. New words and phrases have entered our lexicon, like asymptomatic, social distancing, bending-the-curve, intubation, N95, no-mask/no entry, quarantine, self-isolation, COVID-Lease amendments, COVID-abatements, PPP loans, sneeze-barriers, and the like. Although we learned in pre-school to “wash our hands”, we’ve gained new appreciation for this simple task since March 2020.

    office space

    Discussions now focus on a need to reconfigure health facilities, office space, restaurants, hotels, conference centers, congregate living facilities, schools, places of worship, public transportation, shopping centers, and more, to prevent the spread of infectious disease.  Some claim this pandemic will cause a seismic shift away from urban living and centralized business districts, in favor of far-flung regions linked together by Zoom or other remote video-conferencing technologies.

    But will it?  

    A growing number of medical experts believe that multiple effective vaccines and treatments will be available shortly, which could bring the COVID pandemic to an end by the third or fourth quarter of 2021. What then?

    When COVID cases are no longer in the news, will we remain preoccupied with social distancing, isolation, remote offices, and remote meetings? Or will be get back to business as usual?  Will we stay hunkered down in our suburban home-offices while our competition is out actively meeting with prospects and clients, looking for development opportunities, and doing business in person?

    Is the central business district dead? Is urban living to be no more? Will theaters, bars, and restaurants remain closed? Navy Pier? Magnificent Mile? The restaurant and shopping scene in Chicago’s West Loop, Fulton Market, Pilsen, Greektown, Streeterville, Chinatown, Little Italy, Bronzeville, River North, and neighborhoods and suburbs beyond?  Are they gone for good? 

    How long will it take before the “new normal” gives way to the “old normal” – with restaurants and banquet halls reopening, people dining out, going to live concerts, returning to the office, taking vacations, meeting in-person with customers, clients and friends, going to sporting events and live theater or the movies, spending money on leisure activities, buying urban condos, staying at downtown hotels, and doing all the things they recently enjoyed? 

    What are the implications for adaptive reuse of commercial space left vacant by this pandemic, and for commercial real estate investment and development, and for business in general? What will be in demand this next summer and fall? 

    What will be the turning point? Many of my clients are already looking past the pandemic to the next wave of opportunity. Are you?  

    How are you positioning yourself for the opportunities that are coming? Is your professional team still intact? Did they retire? Move away? Go out of business?

    What opportunity awaits?

                Are you ready for what comes next? Should we talk?

    Thanks for listening,

    Kymn

    Celebrating 50 Years of Excellence!
  • Past-Due Rent Owed to Prior Landlord Not Recoverable by New Owner

    Past-Due Rent Owed to Prior Landlord Not Recoverable by New Owner

    In 1002 E. 87th Street LLC v. Midway Broadcasting Corp., 2018 IL App (1st) 171691, the plaintiff (“87th Street”) filed suit to evict the defendant, Midway Broadcasting Corporation (“Midway”) for unpaid rent. 87th Street also sought to collect on a guaranty of the lease. The trial court dismissed, finding that 87th Street lacked standing to recover rent that accrued before it owned the property. The trial court also granted the tenant, Midway, attorneys’ fees in defending the action, as the prevailing party. The appellate court affirmed.

    commercial real estate article

    Under the facts of the case there was no question Midway was behind on its rent owed to the prior owner of the leased premises before the premises were conveyed to 87th Street by deed. The premises were sold however, and the new owner (87th Street) claimed Midway was in default by reason of past due rent owed to the prior owner.

      87th Street claimed that as a successor standing in the shoes of the landlord to which the tenant had a duty to attorn it had standing to sue under the provisions of the lease which provided that “[n]o failure of landlord to exercise any power . . . or to insist upon strict compliance . . . and no custom or practice of the parties . . . shall constitute a waiver of Landlord’s right to demand exact compliance with the terms . . . .”

      The lease provided that Midway would pay rent “without abatement, demand, deduction or offset whatsoever . . .” and also provided that the landlord “shall include the party named as such in the first paragraph hereof, its representatives, assigns and successors in title to the Premises.” The lease further provided that when an original owner conveys the property, the “tenant agrees to attorn to such new owner.” Additionally, this provision of the lease provided that when the original landlord conveys the property, all liabilities and obligations of the original landlord “shall be binding upon the new owner.” The lease further provided that the prevailing party in enforcing the lease “shall be entitled to recover from the nonprevailing party any costs, expenses and reasonable attorneys’ fees incurred.”

    The appellate court in 1002 E. 87th Street LLC held as follows:

    In general, a landlord has standing to sue for unpaid rent. 735 ILCS 5/9-209 (West 2014), American Management Consultants, LLC v. Carter, 392 Ill. App. 3d 39, 44 (2009). If a landlord conveys property by warranty deed without reserving any rights, he or she also conveys the leases for the property, as well as the right to receive unaccrued rent. Pros Corporate Management Services, Inc. v. Ashley S. Rose, Ltd., 228 Ill. App. 3d 573, 580 (1992). If a tenant fails to pay rent that becomes due, the new landlord has standing to sue for it. Id. at 580-81; American Management Consultant, LLC, 392 Ill. App. 3d at 44; Dasenbrock v. Interstate Restaurant Corp., 7 Ill. App. 3d 295, 298 (1972). But the new landlord does not have a right to recover rent due from before it owned the property. Lipsultz v. Robertson, 407 Ill. 470, 474 (1950) (conveyed lease gives right to receive unaccrued rents). The original landlord retains any right to recover past due rent. Dasenbrock, 7 Ill. App. 3d at 302.


    1002 E. 87th Street, 2018 IL App (1st) 171691, ¶ 17.

    The court went on to note: “Unlike credit card debt and future rent that can be assigned, Illinois courts routinely hold that rent in arrears is not assignable.” [Internal citations omitted] 1002 E. 87th Street LLC, Id. at ¶ 24

    Additionally, the 1002 E. 87th Street court held that because 87th Street must be able to prove a breach of contract claim to collect on the guaranty, and 87th Street cannot prevail on its breach of lease claim for past due rent owned to the prior owner, 87th Street could not bring an action to collect on the lease guaranty. Id. ¶ 27

    Finally, because the tenant, Midway, prevailed on its defense of the claims by the successor landlord seeking to evict Midway and to collect past due rent under the lease and under the guaranty, Midway was entitled to recover from 87th Street, Midway’s costs, expense and reasonable attorneys’ fees incurred in defense of the successor landlord’s action.  

    This outcome is not what most people (including many attorneys I know) expect. It can catch owners of newly acquired rental property off-guard, and can result in expensive unexpected consequences.

    Thanks for listening,

    Kymn

  • DASS v YALE Overruled – Manager and Member Immunity No Longer the Law

    serious young man supervisor analyse financial report of responsible worker pay attention on mistakes propose correction

    For all attorneys and others planning for or litigating liability issues in relation to Illinois limited liability companies BEWARE that important substantive amendments to the Illinois Limited Liability Company Act have been enacted as Pubic Act 101-0553. The amendments, which become effective January 1, 2020, makes several meaningful modifications to the LLC Act.

    Particularly for those relying upon Dass v. Yale, 2013 IL App (1st) 122520 for member and manager immunity from liability, that case has been expressly overruled by statute.

    See the following amendment to 805 ILCS 180/10-10, effective 1-1-2020:


    (a-5) Nothing in subsection (a) or subsection (d) limits the personal liability of a member or manager imposed under law other than this Act, including, but not limited to, agency, contract, and tort law. The purpose of this subsection (a-5) is to overrule the interpretation of subsections (a) and (d) set forth in Dass v. Yale, 2013 IL App (1st) 122520, and Carollo v. Irwin, 2011 IL App (1st) 102765, and clarify that under existing law a member or manager of a limited liability company may be liable under law other than this Act for its own wrongful acts or omissions, even when acting or purporting to act on behalf of a limited liability company. This subsection is therefore intended to be applicable to actions with respect to which all timely appeals have not exhausted before the effective date of this amendatory Act of the 101st General Assembly as well as to all actions commenced on or after the effective date of this amendatory Act of the 101st General Assembly.


  • OPPORTUNITY ZONE INVESTMENT – 2019 – In a Nutshell

    OPPORTUNITY ZONE INVESTMENT – 2019 – In a Nutshell

    property taxes and real estate market growth

    Opportunity Zones are among the hottest of Hot Topics in real estate investment today.  With the December 22, 2017 enactment of the Tax Cuts and Jobs Act that added Section 1400Z to the Internal Revenue Code, Opportunity Zones were authorized as a potentially powerful tax deferral and tax exclusion incentive to develop predominantly low-income communities. The tax issues related to Opportunity Zone investment are multilayered and complex, but the essential tax benefits are reasonably straightforward and easy to understand. The potential tax benefits of investment in Opportunity Zones are serving as an exciting foundation for investment in community redevelopment. Opportunity Zones are not, however, the tax and investment panacea some imagine.

    STATUTORY AUTHORIZATION

    Authorization to create Qualified Opportunity Zones was set forth in new IRC Section 1400Z-1. Special rules for treatment of capital gains invested in Qualified Opportunity Zones are set forth in Section 1400Z-2.

    DESIGNATION OF OPPORTUNITY ZONES

    As of December 2018, all Qualified Opportunity Zones have been designated. Each Opportunity Zone corresponds to a Census Tract meeting certain low-income guidelines. There is currently no mechanism to create any additional Qualified Opportunity Zones or to expand or modify any existing Qualified Opportunity Zone.  Various mapping tools are available online to enable you to locate Qualified Opportunity Zones and to determine whether any specific property is located within a Qualified Opportunity Zone and therefore eligible for the special tax treatment authorized by IRC 1400Z-2. 

    THREE KEY TAX BENEFITS OF OPPORTUNITY ZONE INVESTMENT

    The three principal tax benefits of investment in a Qualified Opportunity Zone, assuming the technical rules required by IRC 1400Z-2 and the implementing regulations are satisfied, are as follows:

    1. Tax Deferral. Tax on capital gain reinvested in a Qualified Opportunity Zone is deferred until December 31, 2026 (unless the investment is sold or exchanged prior to that time).  See: IRC §1400Z-2 (B). The capital gain subject to deferral is not limited to just capital gains from the sale of real estate, but also includes other capital gains, including those derived from the sale of stock and partnership interests as well.
    2. Partial Exclusion of Deferred Gain; 5 Year and 7 Year Holding Periods. A portion of the deferred gain reinvested in a Qualified Opportunity Zone for five years or seven years is excluded from taxation by increasing the tax basis of the investment by a percentage of the reinvested gain. In the case of an investment held for at least five (5) years, the tax basis of the investment is increased by an amount equal to ten percent (10%) of the amount of the deferred gain. In the case of an investment held for at least seven (7) years, the tax basis of the investment is increased by an amount equal to an additional five percent (5%) of the amount of the deferred gain, with the result that after seven (7) years of gain deferral the basis of the property will have increased by an aggregate of fifteen percent (15%) of the deferred gain. Since the recognition date for deferred gain is December 31, 2026 pursuant to IRC §1400Z-2(B), as referred to above, in order to receive the maximum tax benefit the gain must be reinvested in a Qualified Opportunity Zone on or before December 31, 2019 (seven years before December 31, 2026). But still, the tax benefits for the five (5) year holding period remains available for investments made through December 31, 2021. See: IRC §1400Z-2(B).
    3. Stepped-Up Basis For Post-Investment Gain; 10 Year Holding Period. Perhaps the most powerful incentive is the special rule for investments held for at least ten (10) years. Pursuant to IRC §1400Z-2(C), in the case of a qualifying investment in a Qualified Opportunity Zone held by the taxpayer for at least 10 years, upon election by the taxpayer the basis of the investment will be stepped-up to its fair market value as of the date the investment is sold or exchanged. The effect of this provision is to exclude all appreciation in the investment from taxation (although it should be noted that the taxpayer would have been obligated to recognize and pay tax on 85% of the initially deferred gain (7-year holding period) or 90% of the initially deferred gain (5-year holding period) as of December 31, 2026).  If there has been substantial appreciation during the holding period of ten or more years, no tax on that gain will be owed if the taxpayer elects to have the tax basis stepped-up to the fair market value of the investment as of the date it is sold or exchanged. See:  IRC §1400Z-2(C).

    EXAMPLE:   Suppose QOZ investor sells an asset and realizes a capital gain of $500,000 on October 1, 2019, and then decides to invest that $500,000 in gain in a Qualified Opportunity Zone investment on or before November 1, 2019.   The tax on that gain is deferred until December 31, 2026 or until the investment is sold, whichever first occurs.  If the investment is held at least five years, as of November 1, 2024, the basis in the investment will be increased by 10%, meaning $50,000 of the originally invested $500,000 gain is excluded from taxation. If the investment is held at least another two years (for a total of seven years), as of November 1, 2026 the basis in the investment will be increased by another 5%, meaning an additional $25,000 of the originally invested $500,000 is excluded from taxation.  As of December 31, 2026, the remaining deferred gain of $425,000 ($500,000 minus $50,000 (the 5-year exclusion) and minus $25,000 (the 7-year exclusion) will be realized, with the result that taxes shall be due on $425,000 of the originally deferred gain as of the investor’s tax filing date in 2027.  

    Suppose also that in the ten or more years following the initial investment of gain on October 1, 2019 the Qualified Opportunity Zone property in which the investment was made appreciated substantially, with the result that the post-investment gain attributable to the initial $500,000 investment (i.e. the gain after October 1, 2019) is $2,000,000.  Under IRC §1400Z-2(C), at the election of the taxpayer to step-up the basis of the property to fair market value, the $2,000,000 post-investment gain is excluded from taxation.

    OPPORTUNITY ZONES AS SOCIAL-IMPACT LEGISLATION

    The challenge for Opportunity Zone investing is that it is not enough to simply “invest” and hold in an Opportunity Zone. Instead, either (i) the original use of qualified opportunity zone business property must commence with the investment of qualified opportunity funds, or (ii) if the property is already in use, it must be substantially improved within thirty (30) months.  Generally speaking, “substantial improvement” means improving the property by an amount equal to the cost basis of the property upon acquisition by purchase after December 31, 2017, less any amounts reasonably allocated to land. See: IRC §1400Z-2(d)(2)(D).

    Opportunity Zones were designed to inspire social-impact projects. Investment projects in Opportunity Zones are supposed to make a positive difference for the low-income community in which it is situated. The investor seeking the tax advantages of investing in a Qualified Opportunity Zone must put its funds to work to create economic opportunity in the community. Merely investing in an existing property or business is not enough.

    SECTION 1031 TAX BENEFIT vs. OPPORTUNITY ZONE TAX BENEFIT

    A question I am often asked is whether an Opportunity Zone Investment is better than a tax-deferred exchange pursuant to IRC Section 1031? The short answer is that one is not inherently better than the other, they are just different. It’s like asking whether penicillin is better than a sandwich. Clearly, if you are merely starving a sandwich is better. If you have a bacterial infection, you might be better off using penicillin.  The tax benefits of investing in a Qualified Opportunity Zone are different from the tax benefits offered by a tax deferred exchange of like-kind property pursuant to IRC Section 1031, and the circumstances under which each may be beneficial are different. Each has its place. I will be posting an updated article on IRC Section 1031 tax-deferred exchanges shortly.

    OPPORTUNITY ZONES AS ECONOMIC DEVELOPMENT INCENTIVE

    Qualified Opportunity Zone investments in real property require significant capital improvements and the acceptance of a substantial degree of investment risk. The investment risk is that the property must yield acceptable investor returns to sustain the project over a holding period of at least 5 years, but ideally 10 years, and that during the 10-year holding period the property will substantially appreciate in value, making the promised exclusion of gain taxation meaningful.  Because of the substantial investment required to substantially improve property (i.e. double the basis of the existing improvements) and the uncertainty that the primary tax benefit to be derived from appreciation in value over 10 or more years will be achieved, today’s value of property is not automatically enhanced merely because it is located within an Opportunity Zone as some existing owners seem to believe. The project itself must make substantial economic sense on its own – just as if it were not in an Opportunity Zone. The tax benefits available through a Qualified Opportunity Zone investment will not make a poor investment or a marginal investment good. They will only make a good investment better. 

    What makes a Qualified Opportunity Zone investment similar to a IRC Section 1031 Exchange is that they both provide for tax deferral. Tax deferral for a Section 1031 investment is potentially without end. Tax deferral for a Qualified Opportunity Zone investment is temporary, but carries with it the additional benefit of potential exclusion of gain from taxation.  Section 1031 exchanges have been part of the Internal Revenue Code for nearly 100 years and are well understood as a tax deferral tool. Qualified Opportunity Zone investments are a brand-new tax mitigation tool authorized in December 2017, with the rules for their use still being written.

    The potentially powerful tax incentives offered by Qualified Opportunity Zone investment, coupled with their focus on revitalizing economically distressed communities, is what has made investing in Opportunity Zones one of the hottest topics in real estate.

    END*

    *NOTE: The foregoing article is for educational purposes and is not intended as tax advice. Taxation of Opportunity Zone investments is highly technical and fact sensitive. Consult with your own tax advisor when applying the subject matter of this article to any specific tax scenario.

  • JOIN US at #CRETrends2019

    JOIN US at #CRETrends2019

    Tuesday, September 10, 2019
    One North Wacker Conference Center – Chicago (UBS Tower)
    and Live Webcast

    https://elearn.iicle.com/iicle/library/video_presentations/276

    About this Program

  • Before Closing: Consider a Sec. 1031 Tax Deferred Exchange

    Before Closing: Consider a Sec. 1031 Tax Deferred Exchange

    If commercial real estate is being sold and the seller is planning to buy again, the seller should seriously consider a tax-deferred exchange. So long as the closing has not yet occurred, it is not too late. Why pay taxes on sale proceeds when it’s not necessary? Invest those funds as equity instead.


    WHAT IS A TAX-DEFERRED EXCHANGE?

    coins money setting growth up increase to house

    Section 1031 of the Internal Revenue Code allows any real estate in the USA held for investment or for use in the taxpayer’s trade or business to be exchanged for other like-kind property without payment of federal income taxes. Most states tax codes provide likewise. There are technical rules for completing the exchange, but it is a straightforward process with clear-cut rules expressly authorized by law.

    Taxes that can be deferred include all capital gains taxes, all depreciation recapture taxes, all passive-investment taxes (so called “Obamacare taxes”), and, in most cases, state income taxes. In many circumstances, these taxes can add up to in excess of 30%. Why not reinvest those funds in another like-kind property instead, and continue to receive an investment return on those funds?


    HOW IS LIKE-KIND PROPERTY DEFINED?

    A concept that is often misunderstood is “like-kind” property. The definition is much broader and simpler that some might expect. Basically, any real estate located in the USA and held for investment or for use in the taxpayer’s trade or business can be exchanged for any other USA real estate held for investment or for use in the taxpayer’s trade or business without paying taxes. That means, for example, an apartment building could be exchanged for a warehouse, retail store, or farm, and vice versa. Vacant land held for investment could be exchanged for a shopping center. An apartment building could be exchanged for an office building. The physical use of the real estate is not what makes it like-kind; rather, all real estate located in the USA is like-kind to all other real estate located in the USA. Likewise, foreign real estate is like-kind to other foreign real estate, but it is not like-kind to USA real estate. The condition is that the real estate being sold must have been held for investment or for use in the taxpayer’s trade or business, and the real estate being acquired must likewise be acquired for investment purposes or for use in the taxpayer’s trade or business.


    ARE THERE TIME CONSTRAINTS?  

    At the time of closing, the taxpayer does not need to know exactly what property will replace the property being sold. The taxpayer has 45 days to identify potential replacement property, and up to 180 days after closing to acquire the replacement property. A key, however, is that the selling taxpayer cannot come into physical or constructive possession of the sale proceeds during the exchange period. To satisfy this condition, the seller will designate a qualified intermediary to hold the funds under an exchange trust agreement. This can be done quickly, often within a day or two before closing if necessary. Although the seller/taxpayer does not have the right to access the funds during the exchange period, the seller/taxpayer does have the right to direct the qualified intermediary to apply the funds toward the taxpayer’s purchase of any replacement property which is identified by the taxpayer during the 45-day identification period.

    For all taxes to be deferred, the entire sale proceeds of the real estate being sold must be used to acquire the replacement property. For this purpose, “sale proceeds” includes all cash received at closing and any mortgage indebtedness that was paid off.


    ADVANTAGES AND DISADVANTAGES

    There are many advantages and not many disadvantages to structuring a sale as a tax-deferred exchange. The rules are technical but not very difficult to apply. It has virtually no impact on the buyer and provides extraordinary benefits to the seller.  

    For a broker, an exchange provides a direct lead-in to the next transaction, with an opportunity to broker the purchase of replacement property of equal or greater value that must close within 180 days.

    Our tax code provides this benefit; it is up to real estate professionals to take advantage.

  • Adaptive Reuse Panel at REOMAC July 19, 2018 – Chicago

    REOMAC to Host Top CRE Leaders in Panel Discussion 

    July 19, 2018 at River Forest Country Club, Elmhurst, Illinois

    industrial commerce office buildings

    I am pleased to be participating in the REOMAC a panel discussion on adaptive reuse of big box properties and other underutilized commercial and industrial real estate on July 19, 2018 at River Forest Country Club, in Elmhurst, Illinois.  Joining me on the panel will be Jim Terrell of A&G Realty, former COO of Sear Holdings Real Estate Portfolio, and Scott Henry of Celadon Holdings, a leading developer of affordable housing in the Greater Chicago region.  As many of you know, my practice focuses heavily on commercial real estate due diligence and the practical design and implementation of redevelopment plans from inception through entitlement, acquisition, financing, closing, and beyond. The panel will be moderated by Mark Paniccia, Vice President of Business and Commercial Lending for TREO Asset Services–East Coast Division and Managing Member of Signal Asset Management LLC.

    Adaptive Reuse of Big Box Properties, and more:

    REOMAC adaptive reuse panel – Top CRE Thought-leaders

    A vital concern in many communities is the challenge of filling underutilized and vacant commercial and industrial space. Whether from recent store closings, bankruptcies, or a still-lagging recovery from the Great Recession, finding solutions for adaptive reuse of commercial and industrial real estate is a top priority.

    What do we do with this property? How can it be put to productive use? What are other communities and property owners doing? How do we know the property can be used as planned? What steps must be taken to get from where we are today to the fully functioning project we envision? How do we pay for it? Will municipal governments help with redevelopment by abating or sharing taxes, or providing development funds to private developers though so-called “public-private partnerships”?

    Want answers?

    Gain insights on adaptive reuse from CRE thought-leaders on the the front line by attending this REOMAC panel discussion. The public is invited to attend.

    Register Here

    REOMAC Members: $70 / Nonmembers: $95

  • Your Real Estate Contract – Two Points to Consider

    Two Things You Need to Know

    R. Kymn Harp
    Robbins, Salomon & Patt, Ltd.

    As my readers know, I often represent real estate investors. When I draft a real estate contract I strive to make each provision absolutely clear in its meaning, and try to have it serve as a workable road map to closing.  Occasionally a client will draft a real estate contract on its own (or have a broker draft it), and sign it without my review or input. The client will then send it to me “to close the transaction“.  Though I counsel clients that this can be a remarkably risky practice, some clients . . . being clients . . .  do as they wish and ignore my advice. Such is life.

    When faced with closing a transaction governed by a real estate contract I did not have a hand in preparing, I do my best.  It is usually not a complete disaster, but there are often misunderstandings because of provisions that are not entirely clear.

    real estate agent Delivering sample homes to customers

    There are also situations where a provision in a real estate contract may be legally sufficient, but the seller and/or its attorney simply don’t understand the actual meaning of the provision.  With a clearer provision the misunderstanding could be avoided, but the legal ramifications of certain provisions still are what they are, rather that what some imagine them to be. The following are two examples I have run into in the last week that I believe deserve comment and explanation:

    NO MORTGAGE CONTINGENCY:     Contrary to the understanding by some Seller’s attorneys and their clients, the fact that a real estate contract does not include a mortgage contingency – and may even expressly state that the transaction is not contingent upon the Buyer obtaining a mortgage – does not mean that the Buyer is not obtaining a loan and using mortgage financing.  It simply means that the Buyer’s obligation to proceed to closing under the real estate contract is not contingent upon the Buyer obtaining a mortgage loan.

    Many investor Buyers have strong relationships with their lender. They know what their lender requires, and know that the property they are acquiring will qualify as collateral for a mortgage loan from their lender. Consequently, they do not make obtaining a mortgage a contingency to closing in the real estate contract. Be that as it may, the Buyer may still obtain a mortgage loan, and may fund the property purchase using loan proceeds.

    This is the practical equivalent to the situation where a real estate contract does contain a mortgage contingency, but the contingency has been satisfied because the Buyer has been approved for a mortgage loan. At that point the contingency expires and the contract is no longer subject to a mortgage contingency. The Buyer will still be closing using its lender and the proceeds of its mortgage loan. Probably no one disputes that.

    Likewise, in a real estate contract where there is no mortgage contingency from the beginning, the absence of a mortgage contingency does not, without more, imply at all that there will be no mortgage lender.  If the parties intend to provide that a contract is to be a cash transaction with no lender, that should be expressly provided in the real estate contract. Otherwise, the mere absence of a mortgage contingency does not mean there will be no lender – it simply means the Buyer is taking the legal and financial risk that a mortgage will be obtained.

    2.   AN “AS IS” CLAUSE DOES NOT MEAN NO INSPECTION:  As with the absence of a mortgage contingency clause, as discussed in point 1 above, there seems to be some confusion about what an “AS IS” provision in a real estate contract means.

    It has recently been suggested to me by Seller’s counsel that since the Buyer is purchasing property in “AS IS” condition that there is no need for the Buyer to have an inspection period with the right to inspect the condition of the property. To the contrary, where a Buyer has agreed to acquire property in AS IS condition, it is absolutely vital for the Buyer to have an opportunity to inspect the property, with the right to terminate the transaction if the condition of the property is materially worse than the Buyer expected. The AS IS provision in a real estate contract simply means that the Buyer does not expect the Seller to make any repairs to the property, or expect the Seller to provide closing credits for defective conditions in the property, and that the Buyer will not come back to the Buyer after closing seeking recourse for undisclosed defects.

    Having a provision in an real estate contract providing for an inspection period during which the Buyer can thoroughly inspect the property and terminate the contract within that period if the property is physically deficient is not at all inconsistent with a provision that the Buyer is agreeing to acquire the property in AS IS condition.  The need to inspect is a matter of due diligence for the Buyer. If the Buyer inspects the property (or fails to inspect the property) and does not  exercise its right to terminate within the inspection period provided in the real estate contract, then the Buyer is bound to close regardless of the condition of the property – with the possible exception of additional damage occurring to the property after the contract date, or at least after expiration of the inspection period.

    These are simple points, but they are misunderstood more frequently than one would hope or expect. To avoid needless misunderstandings, careful and meticulous drafting is a solution.  But still . . . this is not rocket science.

    Thanks for listening. . .

    Kymn

  • COMMERCIAL REAL ESTATE BOOT CAMP

    NEW – COMMERCIAL REAL ESTATE BOOT CAMP- April 24, 2018- presented by the Illinois Institute for Continuing Legal Education

    I’m pleased to tell you about a terrific CLE program I’ll be speaking at and moderating: the IICLE® Commercial Real Estate Boot Camp, which will be held on Tuesday, April 24, 2018, at the One North Wacker Conference Center (UBS TOWER) in Chicago .  A SPRINGFIELD SIMULCAST and LIVE WEBCAST will also be available.

    portrait of new business owners by empty office window

    This program is a “boot camp” for commercial real estate transactions, intended as intensive, fast-paced, basic training. The goal is to provide practical knowledge fundamental to everyday commercial real estate transactions practice, including basic forms. This course is designed for (i) lawyers with one to seven years of experience handling commercial real estate transactions; and (ii) lawyers at any level of experience seeking to learn the fundamentals of everyday commercial real estate transactions.

    In this program you will learn about (a) client intake and engagement letters; (b) drafting/reviewing a letter of intent to purchase; (c) drafting the purchase and sale agreement; (d) obtaining and reviewing a suitable ALTA survey; (e) commercial title insurance with typically required commercial endorsements; (f) three common types of escrows; (g) types of deeds typical to commercial real estate transactions; (h) required governmental notices; (i) due diligence in preparing for closing; (j) documenting party authority; (k) the basic opinion of borrowers’ counsel; and (l) common closing issues.

    You can view the full e-brochure here: PROGRAM BROCHURE

    Check out the full agenda (the program provides 6 hours of CLE, including 1 hour of Professional Responsibility) and register now at http://www.iicle.com/crebc18 or call IICLE® at 800-252-8062.

    As you may know, there is a shortage of commercial real estate attorneys with mid-level experience. Not because attorneys are not interested, but because during the commercial real estate crash that began with the collapse of Lehman Bros. on September 15, 2008, and the following Great Recession with its lingering effects on the commercial real estate market until just the past two or three years, there were few commercial real estate transactions upon which new attorneys could gain experience. Times have changed. Commercial real estate practice is booming. We need more attorneys who actually know what they’re doing. This Commercial Real Estate Boot Camp is a great start!

    R. Kymn Harp
    Robbins, Salomon & Patt, Ltd.

    I hope to see you on April 24th!

  • EXERCISING REAL ESTATE OPTIONS

    WHEN EXERCISING REAL ESTATE OPTIONS – Strict Compliance is Your Only Option

    Options affecting real estate are commonly found in two circumstances: options to purchase real estate and options to extend the term of a lease. A recent decision by the Illinois Appellate Court filed February 28, 2018 in the case of  Michigan Wacker Associates, LLC v. Casdan, 2018 IL App (1st) 171222 concerns an option to extend the term of a lease, but its reasoning is instructive for real estate options generally. Strict compliance is required.

    The Option to Extend Lease

    In Casdan, the lease had an initial term ending December 31, 2011, but provided for two additional options to extend the lease, stating as follows:

    “Tenant shall have the option to extend the term of this Lease for two additional five (5) year periods . . . the First Extension Option (expiring December 31, 2016) . . . and the Second Extension Option, (expiring December 31, 2021). The option to renew shall be exercised with respect to the entire Demised Premises only and shall be exerciseable by Tenant delivering the Extension Notice to Landlord, in the case of the First Extension Option, on or prior to January 1, 2011, and in the case of the Second Extension Option, on or prior to January 1, 2016, in all cases, time being of the essence.”

    Required Notice

    The lease also contained a provision governing notices that provided, in part, that “Except as otherwise expressly provided in this Lease, any . . . notices . . . or other communications given or required to be given under this Lease . . . shall be deemed sufficiently given or rendered only if in writing . . . sent by registered or certified mail (return receipt requested) addressed to the Landlord at Landlord’s address set forth in this Lease . . .; or to such other address as . . . Landlord . . . may designate as its new address for such purpose by notice given to the other in accordance with the provisions of this Article 27.”

    The lease also provided that landlord could waive strict performance of a lease term only by executing a written instrument to that effect and, even then, the waiver of one breach would not result in the waiver of subsequent breaches.

    Imprecise Exercise

    real estate agent make offer for couple selects housing options

    On November 9, 2010, the tenant, through its attorney, sent a written extension notice to extend the lease term for the First Extension Option via Federal Express rather than via registered mail or certified mail as provided under the express terms of the lease. Landlord did not dispute the notice and treated the notice as having effectively extended the term of the lease to December 31, 2016.

    Subsequently, the tenant claims to have effectively exercised the Second Extension Option to extend the term to December 31, 2021. On August 16, 2012, tenant, again through its attorney, emailed landlord raising matters tenant “would like to discuss”, and included the following statement: “We are now in the first of two (2) five (5) year options. Tenant would like to exercise the second option now, so we don’t have to do this again as soon. . .”

    There were additional proposals and suggestions in the email that create issues concerning the definiteness of the purported exercise of the Second Extension Option, but for purposes of the court’s ruling in Casdan, it is unnecessary to address that concern.

    Claim That Landlord Received Actual Notice

    Tenant’s position was that through various conversations and emails occurring prior to January 1, 2016, landlord received actual notice of tenant’s exercise of the Second Extension Option. Before and after January 1, 2016, tenant made clear to landlord that tenant wanted to remain in the Demised Premises, make various leasehold improvements, and renew the lease. Further, because the landlord had accepted notice of exercise of the First Extension Option by means other than as strictly provided under the terms of the lease, landlord could not insist upon strict adherence to the terms of the lease for exercise of the Second Extension Option.

    The Trial Court Ruled in Tenant’s Favor

    Following a hearing, the trial court entered summary judgment in tenant’s favor, finding that the August 16, 2012 email was a clear and unambiguous exercise of the Second Extension Option.

    The Appellate Court Reversed

    On appeal, the trial court’s summary judgment ruling was reviewed de novo, with the appellate court noting that “we review the court’s judgment, not its reasoning,” and reversed the trial court’s judgment in favor of tenant.

    The Appellate Court’s Reasoning

    In explaining its decision, the Casdan court stated as follows (omissions from text are not noted):

    Our supreme court’s seminal decision in Dikeman v. Sunday Creek Coal Co., 184 Ill. 546 (1900), remains the leading authority on option matters. The contractually mandated time for performance is generally an essential term of a contract. Unless that term is waived, an option is lost due to untimeliness. Discussing the nature of the option before it, Dikeman stated “[the] agreement was purely a privilege given to the lessee without any corresponding right or privilege of the lessor, and the only stipulation was that the right should be exercised at a certain time.” Id. at 551.

    Since Dikeman, courts have generally required strict compliance with options. See T.C.T. Building Partnership v. Tandy Corp. 323 Ill. App. 3d, 114, 115, 119-120 (2001) (treating the method for exercising an option as a condition precedent requiring strict compliance). Strict compliance is dictated not only by precedent, but by the needs of commercial transactions and fairness. Options to cancel or extend commercial leases are invaluable to a lessee, and a lessor generally does not receive consideration for the lessor’s agreement to be bound by an exercise of the option. Thus, a lessor may insist on a writing to further certainty as the lessor foregoes other opportunities to lease the space.

    Consequently, actual or oral notice is insufficient to exercise an option where a party has failed to provide timely notice. Furthermore, cases finding actual notice to be sufficient outside the options context have no bearing on notice in option cases.

    In addition, tenant does not dispute that it failed to strictly comply with the method of notice prescribed by the lease. Instead, tenant argues that actual notice is a sufficient substitute for the lease requirements and landlord waived strict compliance with the requisite method of notice.

    Dikeman and its progeny clearly defeat tenant’s assertion that actual notice is sufficient.

    See Casdan, 2018 IL App (1st) 171222, ¶¶ 33-37.

    Key Lesson Learned . . .

    One of the key lessons to be learned from Michigan Wacker Associates, LLC v. Casdan is that exercising an option – any option – is not a casual undertaking. Strict compliance with the method of exercise specified in the option instrument is essential. It must be specific, certain, and unconditional. It must also be timely, and the method of notice of exercise must strictly adhere to the notice requirements of the option instrument. Even actual notice of an attempted exercise of an option will not suffice if strict compliance with the method of exercise is not observed.

    Thanks for listening . . .

    Kymn