Browse Month: June 2013

Koontz: SCOTUS Rules In Favor Of Property Rights

U.S. Supreme Court building.

In a week filled with rulings that received more attention, the Supreme Court also handed down a decision in Koontz vs.St Johns River Water Management District,  a multi-decade legal saga over property rights and construction permitting that has implications for environmentalists and sustainable development programs across the country.

Bottom line: property owners won this one.

As reported here at The Source last December, Koontz pitted a Florida owner of wetlands against the local environmental protection district.  The blow-by-blow took over twenty years to resolve: developer applies for construction permit, includes offer to place 11 acres of land in a conservation easement, permit withheld unless developer agrees to improve wetlands (culverts, ditches, etc) located some miles away, developer cries foul, claims process constitutes takings under the fifth amendment, heads to local court, state court, Florida Supreme Court, and finally, SCOTUS.

The decision favoring the land owner, as spelled out at JDSupra:

What was the Supreme Court’s decision?

The Court ruled that the Fifth Amendment’s Takings Clause can be violated even when there is not an actual taking of property. The Court stated that “extortionate” demands for property (including demands for monetary exactions) in the land-use permitting context run afoul of the Takings Clause because “they impermissibly burden the right not to have property taken without just compensation.”

The decision seeks to remedy scenarios in which the government may use its substantial discretion in land-use permitting to pursue governmental ends that lack an “essential nexus” and “rough proportionality” to the effects of a land-development project, noting that such uncontrolled discretion can result in diminishing the value of the property without justification. The decision makes it clear that conditions sought to be imposed in land-development permits can violate the Takings Clause if they lack an essential nexus and rough proportionality to the effects of the proposed use of the property. This is true even when the government denies a permit application on grounds that an application does not acquiesce to the conditions, and even when the condition only requires the payment of money.

What is the impact of the decision?

The decision protects land owners from permit conditions sought to be imposed by government agencies that do not have an essential nexus to a proposed land development project. To be clear, the decision does not prevent the government from mitigating the impacts of a proposed development. It simply states that if the government requires mitigation or monetary exaction, such mitigation or exaction must have an essential nexus and rough proportionality to the impact of the proposed development. This opens the door for challenges on a federal level where state statutes or case law would not have required the application of an essential nexus and rough proportionality test. The decision can be expected to spur challenges to conditions imposed in land-development projects on grounds that the conditions lack an essential nexus to the development project.

Location, Location, Location

While Koontz has in no way called off the endless tug of war between advocates of property ownership and advocates of environmental stewardship, it has upheld a reasonable conception of fair requirements of developers.  The real estate industry’s fixation upon, well, fixation — upon location — is what made the core of this case and the argument on the side of property rights easy to understand.  If a developer wants to use their property and knows they must conform to use rules and regulations upon that property, then it’s fair to expect that those rules should apply to that property — not to somewhere else.

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The New Industrial Midwest: Chicago’s South Side Data Centers

Chicago Skyline
Chicago Skyline (Photo credit: Frank Kehren)

Giant commercial properties built in the early 20th century to handle the business of an entire country — to bake its bread or to print its mail-order catalogs — don’t often age well.  They meet their end close to a century later with a swing of the wrecking ball.  Some, spared that fate, languish in blight, abandoned testaments to market forces long having evolved.

The industrial midwest has plenty of of these empty shells shadowing communities that once depended upon them for economic vitality.  But in Chicago, the local stretch of the rust belt that girds North America is  being reshaped by new market forces and the fiber optic cable they travel upon. The next industrial midwest is rising in the old one’s walls: data center retrofits.

Setting The Tone

The terrific development and history blog Chicago Patterns has been taking a long, photography-rich look at the city’s recent evolutions in its industrialized property base.  To get a sense of the potential impact of gut rehabs on such venerable industrial inventory as Schulze Bakery building, definitely check out John Morris’s coverage at this excellent blog.

A keystone of South Side data center development is the South Loop’s 350 East Cermak.  An eye-popping 1.1 million sq. ft. project at the very edge of the central business district,  owned by Digital Realty Trust, this new industrial center in an old wrapper is the second-largest consumer of electrical power, trailing only O’Hare Airport in kilowatt hours.

Once used to house the printing presses for the R. R. Donnelly company – the name that produced the Sears mail-order catalog to a growing nation – the facility still produces revenue by pushing words from point A to point B.  It’s just that this time, no trees are harmed in the process.

New Rails

The essential railroad links that drove Chicago’s commercial 19th and 20th century growth took advantage of the city’s geography and made it the hub for the United States.  Geography again looms large in Chicago’s 21st century renaissance, and for similar reasons of geography.  Where material traveled on rail through the town, data now travels on fiber optic cable through Chicago, the metro area that boasts the nation’s third-largest fiber optic capacity behind New York and Washington, DC.

That capacity means a competitive advantage: customers who pick a central location to host their data — their websites, their customer databases, their remote storage, their videos — enjoy the greatest speed of access.  This matters to everybody who clicks a mouse and waits for the page to load or refresh.

Not Especially Bubbly

With a whopping $550 million slated for near South Side data center projects, it’s instructive to note that capital constraints felt by many (if not most) commercial real estate sectors and specialties and locales seem to have far less effect upon Chicago’s data center development.  Some of this is undoubtedly chalked up to the psychology behind internet investment, which enjoys — perhaps more than any other broad type of investment  —  a benefit of the doubt and inclination toward enthusiasm.  The wider trend is approaching its third decade and has already outpaced its history.  Its lowest point – the 1999 internet stock bubble – is a distant memory more associated with specious branding plays and Super Bowl tv spending profligacy.

Today’s data center expansions and gut rehabs, on the other hand, have far more to do with infrastructure and logistics, making it a race to match capital to the raw demand of wireless services and devices. and sock puppets on TV have nothing to do with it this time around.  This time, it’s actual business.


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NAR Economists Yun And Raitu Tackle Jobs And Commercial Market

NAR’s foremost sorters of tea leaves both produced interesting commercial market data recently.  NAR Chief Economist Lawrence Yun took a look at state jobs creation data and Georges Raitu ran down the most recent NAR Commercial Survey data.

Lawrence Yun: Which States Are Creating Jobs?  

Interpreting Bureau of Labor Statistics monthly numbers, Lawrence Yun grants the job-creation accolades to Ohio, Texas and Michigan, with downturns spotted in Florida, South Carolina and Pennsylvania.  Get the full range of charts after the jump.

NAR Research Economist George Raitu: Cash Deals On The Rise, Indicators Getting Stronger

In a video, along with Research Marketing and Communications Director TJ Doyle, NAR Research Economist George Raitu went wide where Lawrence Yun went local. Raitu characterized the  commercial market recovery as “gaining momentum”.  For the top markets in the country investment activity has been quite strong, a 35% year-over-year increase  with a good chunk in portfolio transactions   Prices are increasing.

On the leasing side, demand remains strong, and in the postitive for the year for all core property types,  with apartments strongest.  Nonetheless, there’s a slight slowdown in apartments witha  a slowdown in vacancy declines and flat rents.  Leasing activity is improving.

Reviewing the most recent Commercial Market Survey, data sourced from NAR members shows  improved activity in both sales and leasing. 64% of NAR members had a transaction in last quarter.   Financing “remains a concern”  per the yearly lending survey.  Lending and underwriting standards remain tight and capital available is restricted – a key stat addressing this: 33% of all transactions in realtor markets were concluded with  cash – a rise from 27% last year.




Beneficiaries Of Showrooming: Showrooming Panic Is Overblown

Image representing BizRate as depicted in Crun...


As a business trend and a disruptive force in retailing, e-commerce seems to move in only one direction: toward displacing brick and mortar retail business.  The line on e-commerce is that it upends all our industry’s careful research tying profitability to location, and that it promotes “showrooming”, where consumers, armed with smartphones and cutthroat price standards, use retail floor space only to browse products, placing the actual orders only when the lowest price has been found online  – even a couple of bucks and any competitor will do.

We’ve reported lots of research about showrooming here, none of it especially good news for people who are invested in retail using 1990s-era assumptions about commercial real estate.  There’s not been much pushback from the e-tailing community about the fundamental assumptions concerning showrooming.  Until now.

In his piece for, Doug Stephens mentions that Bizrate,  a major name in e-tailing business, has conducted a survey of 9,000 online shoppers and found that fears about showrooming are overblown.

A recent and relatively robust survey from Bizrate of 9,000 shoppers who had just consummated an online purchase, concluded that even among the relatively small percentage of shoppers who actually showroom (almost 80 percent do not), the majority end up buying from that same retailer’s online store — not from a competitor, as we are often led to believe.

Now, does this mean that consumers aren’t making better use of the data at their disposal via mobile devices? Certainly not. Plenty of studies have confirmed the growing influence of mobile on pre-purchase and in-purchase behavior. And that’s only likely to continue. What it does suggest however, is that just like restless leg syndrome isn’t the likely cause of most lost sleep, showrooming isn’t the cause of most lost sales — not yet anyway.

So what’s the real problem?

From my point of view, it’s that we live in a world of one-click convenience and no one really needs what you sell anymore. They do however, need why and how you sell it. But if your store isn’t substantially differentiated or remarkable enough to hold a distinct and powerful position in the consumer’s mind and win their love and loyalty, you’re going to lose sales to online players every day. Not because consumers are sneaky, not because showrooming is rampant and not because technology is evil. But because your business and the shopper experience you’ve offered simply aren’t compelling enough to command the sale.

So don’t be taken in to believing that you’re being afflicted by some new, obscure condition. And don’t look for a pill to miraculously cure you. There isn’t one I’m afraid. Instead, go back to the drawing board and ask,”What does my business offer the world that it can’t get elsewhere?”

If you can’t come up with an exceptionally good answer, showrooming isn’t your real problem at all.

Frankly, I have a hard time taking at face value the e-commerce industry’s findings that it’s just off in the corner doing it’s own thing and not poaching business from retailers.  The problem is complex and convenience absolutely affects choice in ever-expanding terms.

But the bolded part above – about consumer value – seems to me to be an eternal law of all commerce, whether e- or…not-e.



REIS Economist Escapes Office, Calls Pace Of Recovery “Glacial”, Office Indicators Flat

With the last three years’ job growth numbers resembling a sideways line more than a incline, office real estate market indicators have been held to similarly less-than-spectacular showings.  With an average job growth of 190,000/month through April ’13, office vacancies and rents can only trail and never overtake the leading indicator. On the new product side, construction and new completions are also at low levels, says REIS VP of Research & Economics Victor Calanog.  How low?   Most remarkable: REIS’s numbers showed onlu 1.7 million square feet of new office space coming online in 1Q 2013, the lowest level of new completions REIS has published on a quarterly basis since they began publishing quarterly numbers in 1999.

Economist Spotted In The Wild

In a move that some* might say subtly reflects the persistent malaise in the office space market, Dr. Calanog’s video was apparently not shot in the office interior setting customary to videos looking at market data.  Instead, a lively park bustles behind the economist, bringing to mind how the internet and wireless access has become nearly universal, freeing consumers of office space from their cubes in previously unheard-of numbers.  While it’s easy to make too much of the trend,  outdoor sightings of economists among the squirrels leads one to imagine that, speaking broadly,  space demand must be held down to at least some degree by the evolving workplace expectations of “digital-native” millennial generation workers.

*Okay, nobody says this but me.  “Some” actually means “I”.  Also, judging by the audio, he almost certainly wasn’t actually outdoors and used a chroma-key instead.



Investing in REITs: The What And The Why From NPR

The purpose and the process of investing in a real estate investment trust (REIT) is unclear to many, even though it’s the most cut-and-dried way to put capital into commercial real estate.  Some struggle with understanding the notions of portfolio management, and questions about what properties are being invested in and why keep an investor from making the leap.  Others wonder about returns: how do rents and other building cash flows become dividends or push the REIT share price in one direction or another?

The personal perspective on these aspects of REITs is not often explored by mainstream media, and when it happens, it’s worth checking out. National Public Radio’s Uri Berliner recently produced an excellent program on the REIT scene by letting us follow along with his journey as an investor.

At times both enlightening and worrying, Uri’s piece explores the basic financial plumbing behind the REIT concept and sets REITs up in comparison to other means of real estate investment in a compelling way.  The worrying part: the reappearance of the “B” word: bubble.

Josh Dorkin runs a real estate investment website called Bigger Pockets. I asked him what kind of real estate bet I can make for $1,000. His advice: Be careful.

“We’re kind of in a bubble once again,” he says. “We’ve got these low interest rates; we’ve got the big money funds coming into the market. And of course if you’re savvy and know what you’re doing, there’s always going to be an opportunity.”

Dorkin runs me through my options.

“You could go and flip a house. Of course, you’d need to go out and take out a high-risk loan more likely than not to do that and of course doing that is really kind of like running a job in itself.”

Scratch that.

“Other options include crowdsourcing or syndication.”

Too complicated.

“And I think the final option is really to go out and buy shares of a REIT — real estate investment trust.”

REITs are sold like stocks, and they’re held by many individuals and institutional investors. You might have a REIT in your retirement fund. REITs are trusts that own and develop property and earn rental income. Most of it gets passed on to investors.

“They are forced by law — a law created in 1960 — that provides that real estate investment trusts have to meet certain tests,” says Brad Thomas, editor of the Intelligent REIT Investor. “And if they do, they are forced to pay out 90 percent of their taxable income in the form of dividends.”

Those dividends are a regular stream of income, and they’re what make REITs attractive to investors. In a rising real estate market, they’re what clinch it for me.

I put down $513.94 on a REIT index fund. It’s basically a smorgasbord of many different REITs. It contains what you might expect — REITs that own apartment buildings and shopping centers. But Thomas says the range of REITs today goes far beyond that, “from billboards to prisons to cell towers, campus housing. Even solar is on the horizon potentially.”

With so many kinds of businesses seeking to become REITs, the Internal Revenue Service has begun reviewing some conversion applications to determine whether the companies truly qualify as real estate firms. In other words, are they really landlords? The REIT structure can allow companies to significantly reduce their tax bills. The fund I’ve bought only includes existing REITs, not firms hoping to convert to them.


To hear the entire NPR program How To Invest In Real Estate Without Being A Landlord, follow the link.


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Delaware Enacts Commercial Brokers’ Lien Law

governor ceremonial bill signing one okay (Large)

In April, the Delaware legislature passed the “Commercial Real Estate Brokers’ Lien Act.” Pictured behind Governor Jack Markell are the Delware REALTOR® team at the bill signing ceremony this week.  The Act is a victory for commercial brokers and managers, putting into law the right to recover unpaid compensation for managing, selling or purchasing commercial real estate. Well done, First State!

The “Lien Act” or the “Brokers’ Lien Act” applies to real estate “ Brokers” who hold a broker license from the Delaware Real Estate Commission with respect to the sale or rental of real estate in the State of Delaware. The Act applies to Brokerage “Agreements,” which means any written agreement for the payment for brokerage services of a broker for the management, sale, purchase, lease or other conveyance or acquisition of commercial real estate. Commercial real estate does not include single family residential units such as residential condominiums, townhomes and mobile homes.

The Act provides the broker with the right to place a lien upon commercial real estate that is the subject of a brokerage agreement for the unpaid amount of compensation due the broker as stated in the brokerage agreement, provided that the brokerage agreement expressly states the following:

  1. The amount or the method of calculating the amount of compensation for the services of the broker; and
  2. That the brokerage agreement is a binding contract under state law; and
  3. The identity of the real estate that is covered by the brokerage agreement by description and/or tax parcel number.

Section 26.04 of the Act provides that the brokers’ lien shall attach to the commercial real estate upon the broker filing an Affidavit and Notice of Brokers’ Lien in the form required by the office of the Recorder of Deeds in the county where the commercial real estate is located. The broker must then, within 10 days, cause a copy to be served upon the person or entity charged by certified mail, return receipt requested or process server. The Affidavit and Notice of Brokers’ Lien may only be filed by an attorney admitted to the Bar of the Supreme Court of the State of Delaware.



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May 2013 NAR Commercial Real Estate Market Survey Released

The REALTORS® Commercial Real Estate Market Survey measures quarterly activity in the commercial real estate markets. The survey collects data from REALTORS® who are commercial practitioners. The survey is designed to provide an overview of market performance, sales and rental transactions, along with current economic challenges and future expectations.

2013.Q1 Survey Highlights:

  • REALTOR® commercial markets recorded improved conditions for both sales and leasing.
  • Sixty-four percent of commercial REALTORS® closed a sales transaction during the quarter.
  • Sales volume rose 3.0 percent from a year ago.
  • Sales prices inched up 0.3 percent on a year-over-year basis.
  • Leasing activity advanced 5.0 percent from the previous quarter.
  • Rental rates increased 1.0 percent compared with the previous quarter.
  • Concession levels declined 5.0 percent on a quarterly basis.
  • Financing remains at the top of the current challenges list, followed by pricing gap between buyers and sellers.
  • The estimated average transaction slid from $1.2 million to $1.1 million from the prior quarter.

Commercial Real Estate Market Survey May 2013

View the entire report on

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Jargon Watch: Nonrecourse vs. Recourse Loans

Creditor's Ledger, Holmes McDougall

If the old maxim neither a borrower nor a lender be was taken seriously, there’d probably be no commercial real estate market. The capital that enables our industry’s transactions is overwhelmingly a borrowed commodity. To borrow usually means to pay back, and the many rules and rituals surrounding the promise of payback have filled books, consumed careers and rewarded careful study with an understanding of what makes the property market really tick.

[As always, take absolutely none of what you read here at The Source as legal or fiduciary advice and always, always retain qualified legal counsel!]

Borrowers with partners prefer to borrow in such a way as to limit liability to the bare minimum in the event of a foreclosure. Going in, it’s very important that parties choose and agree upon a set of outcomes in the event the property goes south.  Perhaps biggest among the issues is the question about what to do with foreclosure and default risk.

If a partnership is doing the borrowing, usually that risk is sought to be placed away from personal liability on the part of individual partners. As such, a nonrecourse loan is often requested.

A nonrecourse loan is where the borrower is not personally liable for any losses on the part of the lender associated with the foreclosure of a property.  It’s an agreement that says the lender’s only legal recourse to compensate against any such losses is to sell the property, as opposed to coming after the borrowing partnership for payment.  Nonrecourse loans are commonly limited to half of the loan-to-value ratio and are used to finance projects with high capital expenditures.

(Note however that lender losses caused by any fraud or misrepresentation on the part of borrowers may in many cases be recouped legally even if a nonrecourse loan is agreed to.  State law varies quite a bit here.)

Alternatively, a recourse loan is where the borrower is responsible unconditionally for any loss or deficiency incurred by the lender.   Collateral may or may not be in the cards for a recourse loan, but it’s generally always at the bottom of a nonrecourse loan.

When Retail Becomes (Secretly) Residential

Okay, this doesn’t exactly qualify as news, as it’s a six-year old story.  But I submit it nonetheless to retail property managers experiencing unusual and unexplained traffic and power consumption patterns.  The advice?  Check the entire floor for hidden apartments.

Man Builds Secret Apartment At Mall, Gets Away With It For Four Years

An artist in Providence, Rhode Island was apprehended the other day by mall security as he left the secret apartment he’d built almost four years ago, in an unused utility space in the mall’s parking garage. The apartment had no running water (they used mall bathrooms), but it did include “a sectional sofa and love seat, coffee and breakfast tables, chairs, lamps, rugs, paintings, a hutch filled with china, a waffle iron, TV and Sony Playstation 2,” according to the Boston Globe.

The man built the apartment with the help of seven other artists, and various people have lived in it over the past few years for up to three weeks at a time. The artist’s website about the project offers both an explanation of the “installation,” and a couple of long-winded apologies that sound suspiciously court-ordered—or to help him avoid [problems with the police] the next time he’s pulled over for speeding.


Link to story at The Consumerist

I know what you’re thinking, and I am too: that’s a lot more space than some sublets in Brooklyn.

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