Summer 2009

Purchase and Sale: Flawed Properties
Income producing properties put up for sale are never perfect. In a seller's market, buyers can do little about existing flaws so they rarely are a significant impediment to a closing. In a buyer's market, such as at present, the seller may find it necessary to deal with such flaws in order to close the transaction. A "flaw" in this sense is considered a remediable condition that does not create any permanent impairment to the property. For example, a basically sound shopping center might have vacancies, might require major roofing repairs or have key tenants with short remaining terms. Read more...

Leases: Terminating a Retail Lease with Defensive Closures
In recent months we have witnessed landlord and retailer disruption caused by bankruptcy, foreclosures and slow sales. In an uncertain economic climate, negotiating a retail lease by both landlord and tenant calls for additional thinking about what may happen if either party runs into problems down the road. In particular, each party must decide under which circumstances the lease can be terminated because of the failure of the other party to meet specified requirements. Read more...

Refinancing: Property Under Pressure
As many individual properties, particularly hotels and office buildings, experience declining cash receipts, owners may be unable to pay operating expenses as well as debt service costs. An owner in this position should consider whether to seek a restructuring of the mortgage, particularly if the interest rate is significantly higher than current levels. How should an owner proceed in this situation? The first point to remember is that a lender will agree to restructure a loan only if convinced this is the least distasteful alternative in dealing with a loan under pressure. The lender also must have confidence in the borrower's ability to manage the property efficiently. Read more...

Investments: Land Purchase Leasebacks
For passive investors, land purchase leasebacks are attractive in an economic environment such as now, when the outlook is for low inflation and limited (if any) growth. Buying land already improved or about to be improved offers no depreciation deductions or other tax shelter and carries a return somewhat lower than that on improved real estate. On the other hand, well-located land is a very desirable commodity because of its permanence, the priority of its claim to rent over other participants in cash flow and its long-term appreciation prospects (provided the ground lease is carefully drawn). Traditionally, investors in land purchase leasebacks have been pension funds, educational institutions or other investors with no need for tax benefits. However, private investors with a long-term outlook (particularly in connection with family trusts) have built substantial fortunes in the past through the ownership of land subject to long-term ground leases. Read more...

Development: Vested Rights Doctrine
An Illinois appellate court ruled that under the vested rights doctrine, a developer could proceed with a project despite a down-zoning of the property by the municipality. Cribbin v. City of Chicago, 893 N.E.2d 1016 (Ill.Ct. App. 2008). Anthony Cribbin and his partner bought land in Chicago on which they planned a condominium project. Circumstances beyond their control caused delays for several years. Despite this, Cribbin proceeded with the plans, incurring significant expenses in the process. Finally, in October 2003, they sought building permits from the city. However, the alderman of the ward in May 2004 was successful in having the parcels down-zoned, rendering Cribbin's construction plans unfit and arguably precluding any profitable development of the land. Read more...

The United States: Demographic Trends
Population trends--who lives where--are the ultimate determinant of real estate values. A critical source of information about demographic trends are the periodic reports by The Brookings Metropolitan Policy Program. The most recent report calls upon the government to develop policies and programs reflecting the latest population trends, especially those shaping metropolitan areas that are the engines of economic growth and opportunity. An overview of these trends is given in this article. Read more...

In Other News...
2009 Seminars. Don't miss our popular Somerset Practical MBA Program, which includes a live webinar simulcast so those of you outside the Indianapolis area can participate. Upcoming topics include "Leadership" presented by Howard Cox on July 29 and "Investment Fundamentals" presented by Pat Early on August 26. Please go online to see the complete schedule and to register.

Somerset Client Satisfaction Survey. If you are a Somerset client, please take our survey concerning the services we have provided to you. Our goal is to improve our overall relationship and better serve you. Go to survey.

Somerset Blogs. We recently celebrated the one year anniversary of our Somerset Success Strategies blog and have created several new blogs--Successful Tax Strategies, The Business of Medicine, Driving Successful Dealerships and Women's Guide to Financial Success. Please visit www.SomersetBlogs.com and post your comments and questions.

Somerset publishes a variety of newsletters in addition to Real Estate Focus--such as Wherewithal, Work-In-Process, Tax Times and several others. Please visit the Newsletters page of our web site to read the archives and sign up to have new issues delivered to your email inbox.

Real Estate Focus is provided by Somerset’s Real Estate Team for our clients and other interested persons upon request. For additional information on the issues discussed, please contact Michael Fritton, CPA. Since technical information is presented in generalized fashion, no final conclusion on these topics should be made without further review. 

These articles were written by and published herein with the permission from professionals of BDO Seidman, LLP.  Somerset is a member of the BDO Seidman Alliance, a nationwide association of independently owned accounting and consulting firms.