HARP – On This. . .

Category: White Papers

A compilation of white papers on topics related to commercial real estate and business.

  • TAX INCREMENT FINANCING – ILLINOIS

    TAX INCREMENT FINANCING – ILLINOIS

    A Valuable Development Tool For Developers

    Tax Increment Financing (TIF) is a development tool often misunderstood by real estate developers and the public at large.  TIF is authorized in every state (except Arizona) and the District of Columbia. TIF is authorized in Illinois by the Tax Increment Allocation Redevelopment Act.[i]

    WHY TIF?

    TIF is a public funding mechanism designed to help municipalities overcome and prevent commercial blight.[ii] Commercial blight leads to commercial properties becoming a drain on public revenue by producing a smaller share of taxes,[iii] and requiring excessive and disproportionate expenditures of public funds for crime prevention, public health and safety, fire and accident protection, and other public services.[iv] The eradication and prevention of commercial blight and the construction of redevelopment projects financed by private capital with financial assistance from governmental bodies is a public use essential to the public interest.[v]

    Areas of commercial blight are often situated in older and centrally located areas of town and, once existing, spread unless eradicated.[vi] Though intended primarily as a tool for municipalities to eliminate and prevent blight within its territorial boundaries, TIF can benefit real estate developers and investors as well by bridging the financial gap to make otherwise marginal projects feasible for development.

    COMMERCIAL BLIGHT

                Blighted areas are described as “areas where a major portion of the commercial buildings and structures are detrimental to the health, safety and welfare of the occupants and the welfare of the urban community because of age, dilapidation, overcrowding or faulty arrangement, or lack of ventilation, light, sanitation facilities, adequate utilities or access to transportation, commercial marketing centers or to adequate labor supplies.”[vii]  Use of TIF may be available if a blighted area encompasses at least 1½ acres.[viii]

    TIF can be also be used to prevent commercial blight through redevelopment of “conservation areas” – which are areas that do not yet constitute a blighted area but in which 50% or more of the structures have an age of 35 years or more and risk becoming a blighted area through the presence of 3 or more (out of 13) listed factors detrimental to the public safety, health, morals or welfare.[ix]

    PUBLIC PURPOSE

    Public funds may be used only for a public purpose.[x] Economic development to eliminate or prevent commercial blight is a legitimate public purpose.[xi]

    Before a redevelopment project[xii] can qualify for TIF reimbursement of redevelopment project costs[xiii] (“TIF Eligible Costs”) the municipality must have a comprehensive program (“Redevelopment Plan”)[xiv] for development or redevelopment to reduce or eliminate the existing conditions that qualified the redevelopment project area[xv] (“TIF District”) as a blighted area or a conservation area, or a combination of both.[xvi] TIF Districts have a statutory maximum duration of 23 years[xvii] but can be extended by the General Assembly for an additional 12 years[xviii].

    THE “BUT FOR” TEST

    A condition to using TIF funds for commercial development is that “but for” the TIF incentive the development project will not proceed. If the project will proceed in all events, no public purpose is served by allocating public funds.  The fact that the TIF incentive will also benefit private interests will not disqualify its use as a proper public purpose.[xix]

    HOW TIF WORKS – A (VERY) SIMPLE OVERVIEW

    TIF (Tax Increment Financing) allocates only incremental taxes generated within the TIF District for use in reimbursing TIF Eligible Costs. This means that if the equalized assessed valuation (“EAV”) of all property within a TIF District on the date the TIF District is established totals, for example, $1,500,000, property taxes derived from that EAV (the “Base EAV”) will continue to support local taxing districts throughout the term of the TIF District. Only taxes generated from EAV in excess of the Base EAV can be allocated to reimburse the developer for TIF Eligible Costs.

    Hypothetical Example:  

    • Assumption #1: The combined property tax rate in the county is 5.7% of EAV.

    Based on that assumption, the Base EAV ($1,500,000) multiplied by the assumed tax rate will generate $85,500 per year in property taxes.

    • Assumption #2: The TIF District is in Cook County, Illinois. Commercial property located in Cook County is assessed at 25% of fair market value (FMV).[xx]
    • Assumption #3: The state equalization factor (multiplier) for Cook County is three (3)[xxi]; resulting in commercial property in Cook County having an average EAV of 75% of FMV.[xxii]
    • Assumption #4: Developer proposes to build a new project within the TIF District at a cost of $20,000,000, with $6,000,000 of those costs incurred for demolition of functionally obsolete buildings, clearing the land, remediation of environmental contamination, installation of new sidewalks and drives, upgrading or replacing existing utility systems, resolving existing drainage and flooding issues, and adding a public gathering area as requested by the municipality. The project can be completed and stabilized within 36 months from the date the TIF District is established, leaving a remaining term of 20 years.
    • Assumption #5: Upon completion and stabilization the fair market value of the newly developed commercial property will be $24,000,000, implying a new EAV of $18,000,000 (“Total EAV”) based on 75% of FMV.

    Applying the Assumption #1 property tax rate of 5.7% to the Total EAV would generate total estimated annual real estate taxes of $1,026,000.

    Because TIF allocates only taxes from the incremental increase in EAV to pay TIF Eligible Costs, the annual TIF increment would be $940,500 ($1,026,000 on Total EAV minus $85,500 on Base EAV) – with the tax revenue from the Base EAV still reserved for the combined local taxing districts.

    • Assumption #6:  Developer has established to the satisfaction of the municipality that it cannot proceed with the project unless it receives reimbursement for $6,000,000 of the TIF Eligible Costs plus interest[xxiii] at 9% per annum (approximately $8,000,000 through full repayment), for a total TIF payout to developer over the life of the TIF District aggregating $14,000,000, with 100% of the incremental taxes applied to the TIF payout until full reimbursement.
    • Assumption #7: The first TIF payment will be 24 months after substantial completion of the project.[xxiv]
    • Assumption #8: If redevelopment does not occur, the commercial blight will continue, limiting property taxes to those generated by the Base EAV.

    If everything goes as planned, the developer will receive the full TIF reimbursement in approximately 15 years ($14,000,000/$940,500 per year = 14.88 years) once TIF payments commence, which in this hypothetical is 17 years after substantial completion and 20 years after the TIF District was established. After full reimbursement or expiration of the TIF District all real estate taxes generated by the property will inure to the combined taxing districts encompassing the TIF District.

    If the TIF District were to rapidly increase in value generating an average of, say, $1,100,000 per year in taxes on the incremental EAV during the remaining 20-year life of the TIF District, the TIF Eligible Costs could be fully reimbursed in approximately 13 years after substantial completion.[xxv]

     If real estate taxes on incremental EAV were to, instead, average only $640,000 per year, the developer would recover only $12,800,000 over the 20 year post-completion period without further recourse against public funds because the sole source of payment of the TIF reimbursement obligation is the incremental increase in property taxes during the life of the TIF District.[xxvi]

    CONCLUSION

    Elimination of commercial blight within Illinois communities is in the public interest. Tax Increment Financing is a valuable tool to eradicate and prevent commercial blight.    

    [i] 65 ILCS 5/11-74.4-1 et seq.   

    [ii] 65 ILCS 5/11-74.4-2(b)

    [iii] 65 ILCS 5/11-74.2-1(c)

    [iv] 65 ILCS 5/11-74.2-1(d)

    [v] 65 ILCS 5/11-74.2-1(f)

    [vi] 65 ILCS 5/11-74.2-1(b)

    [vii] 65 ILCS 5/11-74.2-1(a); the indices of which are detailed in 65 ILCS 5/11-74.4-3(a).

    [viii] 65 ILCS 5/11-74.4-3(p)

    [ix]  65 ILCS 5/11-74.4-3(b)

    [x] Illinois Constitution, Article VIII § 1(a)

    [xi] Kelo v. City of New London, Connecticut 545 U.S. 469 (2005); People ex rel. City of Urbana v. Paley, 368 N.E. 2d 915, 920-21 (Ill. 1977).

    [xii] 65 ILCS 5/11-74.4-3(o)

    [xiii] 65 ILCS 5/11-74.4-3(q).  Not all redevelopment costs qualify for reimbursement.  In fact, Illinois is significantly more restrictive than many other states, including the nearby states of Indiana and Wisconsin, in that, generally, Illinois does not permit reimbursement for the cost of construction of any new privately-owned buildings while other states do. 65 ILCS 5/11-74.4-3(q)(12).

    [xiv] 65 ILCS 5/11-74.4-3(n)

    [xv] 65 ILCS 5/11-74.4-3(p)

    [xvi] 65 ILCS 5/11-74.4-3(n)

    [xvii] 65 ILCS 5/11-74.4-3.5(a)

    [xviii] 65 ILCS 5/11-74.4-3.5(c)

    [xix] Clayton v. Village of Oak Park; 453 N. E. 2d 937, 943 (Illinois 1st Dist. 1983).  

    [xx] Property Classification Codes  https://www.cookcountyassessor.com/classifications-real-property  

    [xxi] In 2023 the Cook County equalization factor was 3.0163

    [xxii] 35 ILCS 200/17-25 requires average property values in each Illinois county to be assessed at 33 1/3% of Fair Market Value (FMV).  To provide uniformity between counties, the Illinois Department of Revenue (IDOR) is required to calculate an equalization factor for each county. Unlike all other Illinois counties, Cook County is permitted to assess property at different levels based on differing property types (Property Class). In Cook County, there are numerous Property Classes. At the low end are residential and vacant properties assessed at 10% of FMV; and at the higher end, commercial and industrial properties assessed at 25% of FMV. With much more residential property than commercial/industrial property in Cook County, the weighted average assessment of all Cook County property is roughly 11% of countywide FMV.  IDOR has assigned an equalization factor of just over three (3) for Cook County, meaning that whatever the determined assessed value is for any property, the equalized assessed value (EAV) will be roughly three (3) times that amount.

    [xxiii] The developer would have incurred most or all the TIF Eligible Costs early in the construction period. It is typical to reimburse Developer for the time value of money (interest) as permitted at 65 ILCS 5/11-74.4-3(q)(6). Interest at 9% per annum accrues during the 24 to 36 month construction period on the $6,000,000 in TIF Eligible Costs as incurred (estimated. $1,000,000) and another estimated $1,000,000 in interest between substantial completion of the project and the first bi-annual payment from TIF proceeds 24 months after substantial completion, and then an estimated $6,000,000 in interest paid during the reimbursement period = $14,000,000 total payment amount from incremental taxes.

    [xxiv] Property taxes will be based upon the completed project, which in the hypothetical is assumed to occur 36 months after creation of the TIF District. Illinois taxes are assessed one year in arrears – and Cook County taxes are payable to two installments.

    [xxv] Assumes the taxes average the higher amount throughout the first 13 years, which may not be likely, but any material increase in taxes over the projected $940,400 per year will shorten the payment period.

    [xxvi] 65 ILCS 5/11-74.4-8

  • AIR RIGHTS DEVELOPMENT – Chicago, Illinois

    WHY DEVELOP AIR RIGHTS?

    Prime commercial land is limited. Prices per square foot can be astronomical. Demand for efficiency to maximize return on investment is growing. No wonder developers and property owners are looking to the sky, with varying degrees of success, to capture all the value they can from each urban parcel. Air rights development may be the solution you are looking for.

    http://www.dreamstime.com/stock-image-chicago-skyline-image2898031

    Owners and developers, and people in general, are conditioned to think of potential development sites as flat surfaces with essentially two dimensions: north/south and east/west. They see only the surface of the land, and envision the building they will construct for the particular purpose they have in mind; a bank, a drugstore, a restaurant, a strip mall, a parking garage, an office building. If the parcel is larger than they need, they may envision subdividing the parcel to make two or more lots. In most cases, however, they think primarily in terms of land coverage for the type of building they need. They visualize only the two dimensional space depicted on their Site Plan or Plat of Survey.

    In 30 out of 50 states, including Illinois and all other Mid-Western states, the “Rectangular Survey System” is in effect. The Rectangular Survey System was adopted in 1785 to meet the needs of the Federal Government as it faced the challenge of dividing vast areas of undeveloped land lying west of the original 13 colonies. The system, developed under the direction of Thomas Jefferson, essentially divides the United States into rectangles, measured in relation to lines known as Meridians and Base Lines.

    Development lots are instinctively viewed as the two-dimensional surface of land visually representing a potential development parcel. Descriptions of a parcel typically refer to “a parcel of land X feet by Y feet” located in relation to an intersection or other identifiable landmark.

    Once a parcel is “developed”, or designated for development, by construction of improvements on the land, it is natural to think of the parcel as being unavailable for further development (unless the existing improvements are to be demolished).

    Classic examples of this are single story commercial buildings at prime commercial locations, a multi-deck parking garage or mid-rise building in a downtown development area, railroad tracks or spurs cutting across valuable urban land and, in some cases, roadways and alleys.

    Each of these situations represent, potentially, under-utilization of valuable real estate. Finding a way to develop the “air” above these existing or planned improvements maximizes the economic utility of these parcels and can be like creating “money from thin air.”

    The practice of finding ways to utilize the “space above” is often referred to as “air rights development”. Air rights development requires thinking in three dimensions, and requires serious design consideration and legal planning but, when land values are at a premium and zoning permits, the economic return may be dramatic.

    Though often overlooked, virtually all of Chicago’s downtown business district is a “city in the air“. People tend to think of streets and street level entrances to buildings in the downtown Chicago “loop” as being at “ground level”. This is simply not the case. Most of what is thought of in the Chicago Loop as being at “ground level” is located 12 to 22 feet above the earth’s surface. This explains the vast network of “lower” streets and passageways in downtown Chicago, such as “Lower Wacker Drive”, “Lower Dearborn Street”, “Lower State Street”, etc. which most people seldom traverse. It also explains why, in 1992, the Chicago Loop business district was virtually shut down by “the Great Loop Flood of ’92”, but few people got wet or even saw any water as office and retail buildings were closed and workers were sent home because of “flooding”.

    The point of these observations is to reveal that “development of air rights” is not new. It is also not “. . . some exotic legal manipulation of doubtful efficacy dreamed up by big city lawyers for use only in big cities”. Development of so-called “air rights” is little more than efficient use of a limited resource when use becomes economically feasible and beneficial.

    WHAT ARE “AIR RIGHTS”?

    looking up at the city's dense real estate properties

    “Air rights” are part of the “bundle of rights” constituting fee simple title to real estate. The term “air rights” generally refers to the right of the owner of fee simple title of a parcel of land to use the space above the land. If this right did not exist, it would not be possible to

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  • COMMERCIAL LANDLORD-TENANT: Duty to Repair – Illinois Law

    COMMERCIAL LANDLORD-TENANT: Duty to Repair – Illinois Law

    When something breaks in a commercial space, who is obligated to make the repair?

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

    Absent a covenant in a lease obligating the landlord to make repairs, a landlord generally has no obligation to repair the leased premises, unless the landlord has actual knowledge of a defect at the time of entering into the lease and fraudulently conceals it. Baxter v. Illinois Police Federation, 63 Ill.App.3d 819, 380 N.E.2d 832, 835, 20 Ill.Dec. 623 (1st Dist. 1978); Elizondo v. Perez, 42 Ill.App.3d 313, 356 N.E.2d 112, 113, 1 Ill.Dec. 112 (1st Dist. 1976).

    diverse busy business group meeting at table, working on project together

    It is clear, however, that when a lease provides express covenants assigning responsibilities between landlord and tenant for repair and maintenance of leased property, those covenants will supersede any implied or common-law covenants and shall determine the responsibilities and liability of the respective parties. McGann v. Murray, 75 Ill.App.3d 697, 393 N.E.2d 1339, 1342, 31 Ill.Dec. 32 (3d Dist. 1979); Hardy v. Montgomery Ward & Co., 131 Ill.App.2d 1038, 267 N.E.2d 748, 751 (5th Dist. 1971). An express covenant to repair will not be enlarged by construction. Kaufman v. Shoe Corporation of America, 24 Ill.App.2d 431, 164 N.E.2d 617, 620 (3d Dist. 1960). The ordinary meaning of the word “repair” is to fix, mend, or put together that which is torn or broken. It involves the idea of something preexisting that has been affected by decay. Sandelman v. Buckeye Realty, Inc., 216 Ill.App.3d 226, 576 N.E.2d 1038, 1040, 160 Ill.Dec. 84 (1st Dist. 1991).

    A general covenant of a tenant to keep the premises in repair merely binds the tenant to make only ordinary repairs reasonably required to keep the premises in good condition. Quincy Mall, Inc. v. Kerasotes Showplace Theatres, LLC, 388 Ill.App.3d 820, 903 N.E.2d 887, 230, 328 Ill.Dec. 227 (4th Dist. 2009); Sandelman, supra, 576 N.E.2d at 1040. It does not make the tenant responsible for making structural repairs. Kaufman, supra, 164 N.E.2d at 620; Expert Corp. v LaSalle National Bank, 145 Ill.App.3d 665, 496 N.E.2d 3, 5, 99 Ill.Dec. 657 (1st Dist. 1986); Mandelke v. International House of Pancakes, Inc., 131 Ill.App.3d 1076, 477 N.E.2d 9, 12, 87 Ill.Dec. 408 (1st Dist. 1985).

    Alterations or additions of a structural or substantial nature that are made necessary by extraordinary or unforeseen future events not within the contemplation of the parties at the time of lease execution are ordinarily the responsibility of the landlord. Expert Corp., supra, 496 N.E.2d at 5. Likewise, renewals or replacements that would last a lifetime rather than maintain the condition of the premises are extraordinary repairs outside the scope of a tenant’s obligations under a general covenant of repair. Sandelman, supra, 576 N.E.2d at 1040; Schultz Bros. v. Osram Sylvania Products, Inc., No. 10 C 2995, 2011 WL 4585237 at *3 (N.D.Ill. Sept. 30, 2011). When a deficiency is so substantial and unforeseen that it would be unreasonable to expect the tenant to make repairs that basically benefit not the tenant but the landlord, those repairs may be deemed structural. Baxter, supra, 380 N.E.2d at 835.

    In order to shift to the tenant the responsibility to make structural or extraordinary repairs to the leased premises, a lease must

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  • Keys to Closing A Commercial Real Estate Transaction

    Keys to Closing A Commercial Real Estate Transaction

    Commercial Real Estate Closings

    Anyone who thinks closing a commercial real estate transaction is a clean, easy, stress-free undertaking has never closed a commercial real estate transaction. Expect the unexpected, and be prepared to deal with it.

    Harp Author Photo PID 732110

    I’ve been closing commercial real estate transactions for over 35 years. I grew up in the commercial real estate business.

    My father was a “land guy”. He assembled land, put in infrastructure and sold it for a profit. His mantra: “Buy by the acre, sell by the square foot.”  From an early age, he drilled into my head the need to “be a deal maker; not a deal breaker.” This was always coupled with the admonition: “If the deal doesn’t close, no one is happy.” His theory was that attorneys sometimes “kill tough deals” simply because they don’t want to be blamed if something goes wrong.

    A key point to understand is that commercial real estate Closings do not “just happen”; they are made to happen. There is a time-proven method for successfully Closing commercial real estate transactions. That method requires adherence to the four KEYS TO CLOSING outlined below:

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  • DUE DILIGENCE CHECKLISTS for Commercial Real Estate Transactions

    DUE DILIGENCE CHECKLISTS for Commercial Real Estate Transactions

    R. Kymn Harp Robbins, Salomon & Patt, Ltd.
    R. Kymn Harp
    Robbins, Salomon & Patt, Ltd.
     2016 Updat

    Are you planning to purchase, finance, develop or redevelop any of the following types of commercial real estate in the USA?

    • Shopping Center
    • Office building
    • Large Multifamily/Apartments/Condominium Project
    • Sports and/or Entertainment Venue
    • Mixed-Use Commercial-Residential-Office
    • Parking Lot/Parking Garage
    • Retail Store
    • Lifestyle or Enclosed Mall
    • Restaurant/Banquet Facility
    • Intermodal logistics/distribution facility
    • Medical Building
    • Gas Station
    • Manufacturing facility
    • Pharmacy
    • Special Use facility
    • Air Rights parcel
    • Subterranean parcel
    • Infrastructure improvements
    • Other commercial (non-single family, non-farm) property
    RSP_LogoHD (3)

    A KEY element of successfully investing in commercial real estate is performing an adequate Due Diligence Investigation prior to becoming legally bound to acquire or finance the property.  Conducting a Due Diligence Investigation is important not just to enable you to walk away from the transaction, if necessary, but even more importantly to enable you to discover obstacles and opportunities presented by the property that can be addressed prior to closing, to enable the transaction to proceed in a manner most beneficial to your overall objective. An adequate Due Diligence Investigation will assure awareness of all material facts relevant to the intended use or disposition of the property after closing. This is a critical point. The ultimate objective is not just to get to Closing – but rather to confirm that the property can be used or developed as intended after Closing.

    The following checklists – while not all-inclusive – will help you conduct a focused and meaningful Due Diligence Investigation.

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  • COMMERCIAL LANDLORD-TENANT – Part 2 – The Covenant of Quiet Enjoyment

    COMMERCIAL LANDLORD-TENANT – Part 2 – The Covenant of Quiet Enjoyment

    R. Kymn Harp Robbins, Salomon & Patt, Ltd.
    R. Kymn Harp
    Robbins, Salomon & Patt, Ltd.
    Catherine Cook Shareholder at Robbins, Salomon & Patt, Ltd.
    Catherine A. Cooke
     Robbins, Salomon & Patt, Ltd.

    This is Part 2 of a multi-part series of articles discussing the duties, rights and remedies of commercial real estate tenants in Illinois. Part 1, entitled “Getting It Right” discussed the importance of clarity in lease drafting, and the potential for unintended leasehold easements for parking, and other uses.

    In March 2015, the Illinois Institute for Continuing Legal Education (“IICLE”) published its 2015 Edition practice handbook entitled: Commercial Landlord-Tenant Practice. To provide best-practice guidance to all Illinois attorneys, IICLE recruits experienced attorneys with relevant knowledge to write each handbook chapter. For the 2015 Edition, IICLE asked R. Kymn Harp and Catherine A. Cooke to write the chapter entitled Tenant’s Duties, Rights and Remedies. We were, of course, pleased to oblige. Although each of us represent commercial landlords at least as often as we represent commercial tenants, a clear understanding of the duties, rights and remedies of commercial real estate tenants is critical when representing either side of the commercial lease transaction.

    The following is an excerpt (slightly edited) from our chapter in the 2015 Edition. We hope you find this excerpt, and the excerpts that will follow, informative and useful. Feel free to contact IICLE  directly to purchase the entire volume.

    The COVENANT OF QUIET ENJOYMENT
    What Is It? — General Principles

    successful female new flat apartment buyer rest at home feel pleasure

    It has long been the law in Illinois that a covenant of quite enjoyment is implied in all lease agreements. Blue Cross Ass’n v. 666 N. Lake Shore Drive Associates, 100 Ill.App.3d 647, 427 N.E.2d 270, 273, 56 Ill.Dec. 290 (1st Dist. 1981); 64 East Walton, Inc. v. Chicago Title & Trust Co., 69 Ill.App.3d 635, 387 N.E.2d 751, 755, 25 Ill.Dec. 875 (1st Dist. 1979); Berrington v. Casey, 78 Ill. 317, 319 (1875); Wade v. Halligan, 16 Ill. 507, 511 (1855).

    A covenant of quiet enjoyment “promises that the tenant shall enjoy the possession of the premises in peace and without disturbance.” [Emphasis in original.] Checkers, Simon & Rosner v. Lurie Co., No. 87 C 5405, 1987 WL 18930 at *3 (N.D.Ill. Oct. 20, 1987). This does not mean, however, that no breach of the covenant of quiet enjoyment may be found in a leasehold without a finding that the lessor intended to deprive the lessee of possession. Blue Cross Ass’n, supra, 427 N.E.2d at 27. It simply means that a tenant must actually be in possession of the premises to claim a breach of the covenant of quiet enjoyment. If the tenant has already vacated the premises before the disturbance has commenced, no breach of the covenant of quiet enjoyment occurs. Checkers, Simon & Rosner, supra, 1987 WL 18930 at *3.

    RSP_LogoHD (3)

    An implied covenant of quiet enjoyment includes, “absent a lease clause to the contrary, the right to be free of the lessors’ intentional interference with full enjoyment and use of the leased premises.” Infinity Broadcasting Corporation of Illinois v. Prudential Insurance Company of America, No. 86 C 4207, 1987 WL 6624 at *5 (N.D.Ill. Feb. 9, 1987), aff’d, 869 F.2d 1073 (7th Cir. 1989), quoting American Dairy Queen Corp. v. Brown-Port Co., 621 F.2d 255, 258 (7th Cir. 1980).

    If the landlord breaches the covenant of quiet enjoyment, the lessee may remain in possession and claim damages for breach of lease. In such case, the measure of damages is the difference between the rental value of the premises in light of the breached covenant of quiet enjoyment and the rent that the tenant agreed to pay under the lease, together with such special damages as may have been directly and necessarily incurred by the tenant in consequence of the landlord’s wrongful act. 64 East Walton, supra, 387 N.E.2d at 755.

    Although Illinois cases defining the precise scope of a covenant of quiet enjoyment are rare, BLACK’S LAW DICTIONARY, pp. 1248 – 1249 (6th ed. 1993) defines “quiet enjoyment” in connection with the landlord-tenant relationship as “the tenant’s right to freedom from serious interferences with his or her tenancy. Manzaro v. McCann, 401 Mass. 880, 519 N.E.2d 1337, 1341. (Ringing for more than one day of smoke alarms in an apartment building could be sufficient interference with the tenants’ quite enjoyment of leased premises to justify relief against the landlord.).”

    HOW THE COVENANT OF QUIET ENJOYMENT MAY APPLY— CASE LAW

    In Blue Cross Ass’n v. 666 N. Lake Shore Drive Associates, 100 Ill.App.3d 647, 427 N.E.2d 270, 273, 56 Ill.Dec. 290 (1st Dist. 1981), the First District Appellate Court discussed the covenant of quiet enjoyment in the lease as granting the tenant a right of quiet and peaceful possession and enjoyment of the whole premises and equated a breach of quiet enjoyment under a lease to a private nuisance. “A private nuisance in a leasehold situation is ‘an individual wrong arising from an unreasonable, unwarranted or unlawful use of one’s property producing such material annoyance, inconvenience, discomfort, or hurt that the law will presume a consequent damage.’ ” Id., quoting Great Atlantic & Pacific Tea Co. v. LaSalle National Bank, 77 Ill.App.3d 478, 395 N.E.2d 1193, 1198, 32 Ill.Dec. 812 (1st Dist. 1979).

    The tenant had entered into a five-year lease on August 22, 1978, with a five-year renewal option, for approximately 53,000 square feet of the

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  • Commercial Landlord-Tenant Issues – PART 1 – Getting it Right

    Commercial Landlord-Tenant Issues – PART 1 – Getting it Right

    R. Kymn Harp Robbins, Salomon & Patt, Ltd.
    R. Kymn Harp
    Robbins, Salomon & Patt, Ltd.
    Catherine Cook Shareholder at Robbins, Salomon & Patt, Ltd.
    Catherine Cooke
     Robbins, Salomon & Patt, Ltd.

    In March 2015, the Illinois Institute for Continuing Legal Education (“IICLE”) published its 2015 Edition practice handbook entitled:  Commercial Landlord-Tenant Practice. To provide best-practice guidance to all Illinois attorneys, IICLE recruits experienced attorneys with relevant knowledge to write each handbook chapter. For the current edition, IICLE asked R. Kymn Harp and Catherine Cooke of Robbins, Salomon & Patt, Ltd., Chicago, Illinois, to write the chapter entitled Tenant’s Duties, Rights and Remedies. We were, of course, pleased to oblige. Although each of us represent commercial landlords at least as often as we represent commercial tenants, a clear understanding of the duties, rights and remedies of commercial real estate tenants is critical when representing either side of the commercial lease transaction.

    The following is an excerpt (slightly edited) from our chapter, Tenant’s Duties, Rights and Remedies appearing in the 2015 Edition of IICLE Commercial Landlord-Tenant Practice. We hope you find this excerpt, and the excerpts that will follow, informative and useful. Feel free to contact IICLE directly to purchase the entire volume.

    How Commercial Lease Issues Commonly Arise – Getting it Right

    successful deal Real estate lease or home purchase

    Commercial real estate leases, like virtually all documents and agreements relating to commercial real estate transactions and interests, are, to a very large extent, consistent only in their variety. In commercial real estate practice, there are few, if any, “standard form” documents or agreements. To be sure, there are provisions in commercial real estate leases that any experienced practitioner would expect to see, and there are some generally applicable legal concepts that apply, but the variety of issues that may arise — and the language used in each commercial lease — will directly and materially impact the “duties, rights, and remedies” of a tenant under any commercial lease.

    The best answer to most questions about what are the rights, duties, and remedies of a tenant under a commercial real estate lease is “It depends.” What does it depend on? It depends primarily on what the parties to the lease — the landlord and tenant — intended, as (presumably) reflected by the express terms and conditions of the lease. However, two common challenges frequently exist, and they apply equally to commercial tenants and commercial landlords. They are (a) poorly written lease provisions that do not clearly and definitively set forth the intention of the landlord and tenant in a way that cannot reasonably be misunderstood and (b) inclusion of perceived “standard boilerplate” provisions in a lease without fully understanding their legal or practical affect on the leased premises, the parties, and the greater project of which the leased premises may be a part. When the intent of the parties is not abundantly clear, a court may find the answer implied by the facts and circumstances.

    GENERAL LEASE PRINCIPLES AND RULES OF CONSTRUCTION

    A “lease” is generally described as a contract for exclusive possession of land and improvements for a term of years or other duration, usually for a specified rent or other compensation. Urban Investment & Development Co. v. Maurice L. Rothschild & Co., 25 Ill.App.3d 546, 323 N.E.2d 588, 592 (1st Dist. 1975); Feeley v. Michigan Avenue National Bank, 141 Ill.App.3d 187, 490 N.E.2d 15, 18, 141 Ill.Dec. 187 (1st Dist. 1986).

    In determining the duties, rights, and remedies of a tenant under a commercial lease in Illinois, the general rules of contract construction will apply. Walgreen Co. v. American National Bank & Trust Company of Chicago, 4 Ill.App.3d 549, 281 N.E.2d 462, 465 (1st Dist. 1972); Feeley, supra, 490 N.E.2d at 18; Chicago Title & Trust Co. v. Southland Corp., 111 Ill.App.3d 67, 443 N.E.2d 294, 297, 66 Ill.Dec. 611 (1st Dist. 1982). Interpretation of a lease is a question of law when the terms are plain and unambiguous. Madigan Bros. v. Melrose Shopping Center Co., 123 Ill.App.3d 851, 463 N.E.2d 824, 828, 79 Ill.Dec. 270 (1st Dist. 1984).

    “An ambiguous contract is one capable of being understood in more senses than one; an agreement obscure in meaning, through indefiniteness of expression, or having a double meaning.” Advertising Checking Bureau, Inc. v. Canal-Randolph Associates, 101 Ill.App.3d 140, 427 N.E.2d 1039, 1042, 56 Ill.Dec. 634 (1st Dist. 1991), quoting First National Bank of Chicago v. Victor Comptometer Corp., 123 Ill.App.2d 335, 260 N.E.2d 99, 102 (1st Dist. 1970). However, the mere fact that the parties to a lease “dispute” the meaning of a lease provision and assign conflicting interpretations does not render the provision “ambiguous.” McGann v. Murry, 75 Ill.App.3d 697, 393 N.E.2d 1339, 1342 – 1343, 31 Ill.Dec. 32 (3d Dist. 1979); St. George Chicago, Inc. v. George J. Murges & Associates, Ltd., 296 Ill.App.3d 285, 695 N.E.2d 503, 506 – 507, 230 Ill.Dec. 1013 (1st Dist. 1998); Ford v. Dovenmuehle Mortgage, Inc., 273 Ill.App.3d 240, 651 N.E.2d 751, 745 – 755, 209 Ill.Dec. 573 (1st Dist. 1995). Whether ambiguity exists is a question of law for the court. Advertising Checking Bureau, supra, 427 N.E.2d at 1042; Pioneer Trust & Savings Bank v. Lucky Stores, Inc., 91 Ill.App.3d 573, 414 N.E.2d 1152, 1154, 47 Ill.Dec. 36 (1st Dist. 1980).

    It is well-settled in Illinois that, when construing a written lease, the court must give words their commonly accepted meaning and must construe every part with reference to all other portions of the lease “so that every part may stand, if possible, and no part of it, either in words or sentences, shall be regarded as superfluous or void if it can be prevented.” Kokenes v. Cities Service Oil Co., 24 Ill.App.3d 483, 321 N.E.2d 338, 340 (1st Dist. 1974), quoting Szulerecki v. Oppenheimer, 283 Ill. 525, 119 N.E. 643, 646 (1918). See also Southland, supra, 443 N.E.2d at 297.

    In construing a lease, the instrument is to be considered as a whole and the primary object is to derive the intent of the parties. However, a contract must be enforced as written, and when the terms of a lease are clear and unambiguous, they will be given their natural and ordinary meaning. Gerardi v. Vaal, 169 Ill.App.3d 818, 523 N.E.2d 1327, 1331, 120 Ill.Dec. 416 (3d Dist. 1988).

    The foregoing sounds pretty straightforward, but unless attorneys and their clients draft leases with a comprehensive understanding of the interplay between particularly drafted provisions and every other part of the lease — including so-called “standard boilerplate” provisions — they may find themselves surprised by what they have “agreed to.”

    PRACTICE POINTER

     Drafting a commercial real estate lease is similar to drafting any other commercial document, except that the meaning and intent of contractual lease provisions are colored by an extensive body of underlying real property law that has developed over the centuries.

    A commercial real estate lease should say what the parties mean and mean what it says. Words have meaning; phrases have meaning; each provision has meaning. The interplay of words, phrases, and all provisions in a lease will help determine the meaning of each other word, phrase, or provision. See Kokenes, supra, 321 N.E.2d at 340; Szulerecki, supra, 119 N.E. at 646.

    PRACTICE POINTER

     Be sure the words and phrases you use mean what your client believes they mean before proceeding.

     If there are provisions of a commercial real estate lease you do not fully understand — including provisions you believe are “standard boilerplate” provisions — you need to learn what they mean and how they affect other parts of the lease, and your client’s rights, duties and remedies, before advising your client to proceed.

    The following discussion highlights some areas in which the rights, duties, and remedies of the commercial real estate tenant (and, by mirror image, the landlord) appear not to have been what one or the other party thought they were.

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  • Illinois LLCs – The Asset Protection Advantage

    Illinois LLCs – The Asset Protection Advantage

    Illinois LLCs – The Asset Protection Advantage

    A Technical Analysis

    Among sophisticated investors and other high-asset/high-net worth individuals and businesses, the topic of “asset protection” is bound to arise. As many became painfully aware during the recent Great Recession, bad things can happen to good people. In my article Asset Protection – Lessons Learned, I discussed how properly structuring one’s holdings could have prevented, or at least mitigated, much of the financial devastation and anguish experienced by business owners, investors, real estate developers, doctors and others caught off-guard by the drastic economic collapse of 2007-2010.

    RSP_LogoFull_2PMS

    Often, there is confusion about what the term asset protection really means. Some imagine a shadowy network of off-shore trusts and secret bank accounts in foreign lands set up by unscrupulous characters to cheat innocent creditors. This is simply not true. In this article I will not debate the claimed pros and cons of secret bank accounts and so-called off-shore asset protection trusts. I will say, however, that under most circumstances, they don’t work for U.S. citizens residing in the U.S.A.

    depicts buying protection plan for safety

    Legitimate asset protection is nothing more or less than properly ordering one’s business and financial affairs in a way that does not unnecessarily expose all assets to claims of creditors.

    The right of persons and businesses to limit their liability and exposure of their assets to claims of creditors is the well settled in the U.S.A. The United States of America, and each individual state, has a plethora of laws authorizing and recognizing the legitimacy of corporations and other limited liability entities as a means by which an investor can segregate assets and limit exposure to liability.

    No person has a legal or moral obligation to structure his or her affairs in a way that makes it easy for a creditor of one business or professional enterprise to attach assets of the investor not committed to that enterprise. This protection may be impinged if the person or business engages in conduct tantamount to fraud, but actions explicitly authorized by applicable statute can hardly be characterized as being fraudulent. Fraud is an intentional tort requiring, among other elements, intentional breach of a duty owed to the person claimed to be harmed. If a statute expressly authorizes conduct, it implicitly, if not explicitly, negates any duty to act in a manner contrary to that authorized by the statute.

    This article presents a technical analysis of certain asset protection attributes of an Illinois limited liability company expressly authorized by the Illinois Limited Liability Company Act, 805 ILCS 180/1-1 et seq (the “Illinois LLC Act”). The remarkably robust asset protection value of an Illinois limited liability company is measured by two key attributes:

    1. The ability, expressly authorized by the Illinois LLC Act, to include in an LLC operating agreement provisions that protect the limited liability company and its business and assets from claims owed to others by members of the LLC – an attribute that creates a huge advantage vs. a corporation, as discussed in Part I, below; and

    2. Enhanced protection of Members and Managers from liability for debts, contracts and torts incurred by the LLC, or resulting from acts or omissions of a Member or Manager while acting on behalf of the LLC, to an extent measurably greater than the protection afforded officers, directors and shareholders of a corporation.

    Although one might reasonably expect that the order in which these key attributes are discussed would be reversed, the Part I discussion precedes the Part II discussion because the matters to be discussed in Part I are best considered at the outset, when the operating agreement is being drafted; while the matters discussed in Part II will most directly apply later, once a judgment creditor is seeking to enforce its judgment.

    PART I: Key Statutory Provisions to Consider When Drafting the Operating Agreement

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  • Value Investing vs. Momentum Investing

    Value Investing vs. Momentum Investing

    As the commercial real estate market begins to pick up steam, beware the urge to follow a “momentum” investment strategy rather that a “value” investment strategy.

    http://www.dreamstime.com/royalty-free-stock-photography-skeleton-keys-image28661257Momentum investing relies on market increases to generate a return on investment. It is the “rising tide floats all boats” investment model. It is the investment model of which all “bubbles” are made.

    As momentum investing accelerates, investment fundamentals tend to get lost. Instead of evaluating cash on cash returns using discounted cash flows that underlie “value” investing, a casino mentality takes hold – whereby investors can justify acquiring assets generating even a negative cash return, with the notion that rising prices will yield a profit. As the saying goes: “Any fool can make a profit in a rising market – and many fools do”. The challenge, of course, comes when a market hits a plateau or, worse yet, the market declines.

    As a general proposition, value investing is significantly more prudent. If a project is cash flowing, and generating a positive return on investment, today and for the foreseeable future – which is a fundamental precept of a value investment strategy – the potential added return of any increase in value in the underlying asset caused by the “rising tide” effect is icing on the cake. Choose your cake with care.

    There are, of course, exceptions to every rule. But, employing an “exception” is wisely done only after sober reflection of the particular circumstance to determine that in that particular case the exception is warranted. When an exception is regularly employed, it is no longer an exception – but, rather, becomes the rule itself.

    As in all markets, there will be winners and there will be losers. It makes sense in the coming commercial real estate revival to position yourself and your company as a winner. You may not get another chance.

    Exercise all appropriate due diligence. Use readily available and appropriate asset protection strategies. Invest with intentional regard to reliably building wealth though a well conceived value investing strategy – not a roulette table strategy that, over time, is virtually certain to fail.

    If this recent economic debacle has taught us anything, it has taught that bad things can happen to good people who lose sight of the fundamentals. Good deals – even great deals – can be made if reliable commercial real estate investment fundamentals are employed.

    As a wise mentor once told me: “You have a good brain – use it.”

    Good luck.

    R. Kymn Harp
    Robbins, Salomon & Patt, Ltd.
    Chicago, IL
    www.rsplaw.com
    JOIN MY THOUGHTBOARD: www.Harp-OnThis.com

    REPORTING FROM THE FIELD. . .

  • Asset Protection – Lessons Learned

    Asset Protection – Lessons Learned

    “The best time to plant a tree was twenty years ago.

            The second best time is today.”

    Chinese proverb

    http://www.dreamstime.com/stock-image-empty-safe-image27096841

    For over 35 years, I have represented commercial real estate investors, developers and business owners. Most of that time has been spent helping them acquire, finance, expand, develop, manage and grow their assets and businesses. For the past 5 to 6 years, as we have struggled through the Great Recession, a huge amount of my time has been spent helping clients keep their assets.

    Growing up, I was steeped in the practical view that it is not so much what you acquire that counts, but, rather, what you keep. My parents and grandparents were not in the real estate business to make others wealthy. They were playing real life Monopoly®. They played to win. It was less about money for money’s sake than it was

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