Real Estate Monitor: Summer 2010

This issue of the Real Estate Monitor includes the following articles:

What is Deconstruction?
By Joe Rettman & Mark Rabkin, Deconstruction Management, Inc.

Deconstruction is the comprehensive dismantlement of building components, specifically for re-use, re-sale, recycling and waste management. Deconstruction has also been defined as "construction in reverse" because of its careful and methodical disassembly of a structure. Compared to traditional demolition in which a structure is torn down as quickly as possible and waste is deposited into commercial landfills, careful consideration is given during deconstruction to waste re-direction through the entire process. Deconstruction focuses on giving salvageable materials a new life once the building as a whole can no longer continue and addresses appropriate disposal of waste.

Click here to learn the financial, social, and environmental benefits of deconstruction.

Understanding the Energy Efficient Tax Deduction
By David R. Walter, CPA

Designers (architects, engineers, environmental consultants, and in some cases, contractors) of government buildings may want to take note of the recently extended Federal Energy Efficient Tax deduction (Section 179D). It now includes units completed or renovated between December 31, 2005 and January 1, 2013, and more tax guidelines were passed to support these deductions.

According to the code section 179D, a taxpayer that builds or renovates a building could be entitled to speed up the depreciation for certain items that are part of that construction. This accelerated depreciation would be allowed for the costs of certain parts of the new building (HVAC, lighting, building envelope) that meet energy efficiency standards. The deduction is limited to the lesser of the costs of the items installed or $0.60 per improvement are multiplied by the square footage constructed (see the rest of the article for this calculation).

Real Estate Workouts: Cash Flow Mortgages

Thankfully, not all commercial properties are underwater or over-levered; however, even properties with relatively low loan-to-value ratios may experience extended bouts of cash shortfalls. A borrower failing to meet its debt-service obligations under existing commercial mortgage terms may negotiate with the lender to modify the loan to a cash flow mortgage. With a cash flow mortgage, the borrower's debt service obligation at any point during the loan term is measured by the availability of cash flow at that time. The scenario that most often calls for a cash flow mortgage is a property temporarily in distress such as a property with a large tenant vacating space and there are reasonable expectations to re-lease the space for comparable or higher rents. In this situation, a lender with an outstanding mortgage loan likely to be defaulted may be willing to convert to a cash flow mortgage rather than foreclose or take a deed in lieu of foreclosure. Alternatively, the owner of a distressed property may be able to sell it for a price somewhat above the amount of the existing mortgage, with the seller taking back a purchase money cash flow mortgage in lieu of cash.

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Leases: The Takeover Lease

When office building vacancies are high, as now, landlords are likely to use every means within the law to attract tenants from other properties. I n one technique, the takeover lease, an existing tenant is induced to sign a lease in another building because of the new landlord's promise to take over the existing lease, i.e., assume liability under the old lease for the balance of the term. The tenant's only concern is that its obligations not be increased because of any actions by the second landlord.

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Mortgage Loans: Buying and Selling

One fallout from the real estate crash is the development of market for the sale of existing mortgage loans. Banks and other lenders are motivated to sell troubled paper in order to avoid the time and expense of renegotiating or foreclosing loans. In particular, the sale of non-performing loans enables lenders to remove them from their books. This eliminates the need to tie up capital to satisfy risk-based capital requirements and maintains the lender's reputation in the marketplace.

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Mortgages: Buyer Contingency Clauses

Because the majority of estate buyers are not prepared to pay all cash for a property, a contract of sale frequently includes a mortgage contingency clause that permits the buyer to cancel the contract if a mortgage commitment is not obtained within a designated time period. Upon obtaining the mortgage, the buyer no longer has the right to terminate the contract because of lack of funds. However, risks still exist for the buyer.

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Loans: Prepayment Penalty Upheld

The Colorado Court of Appeals ruled that a large loan prepayment penalty was enforceable and not unconscionable in the case of Planned Pethood Plus v. Keycorp, Inc., 2010 WL 185414 (Colo. App.). Pethood is a veterinary clinic owned by two veterinarians. It obtained a commercial loan of $389,000 from Keybank at a fixed interest rate of 8.3 percent for a term of 10 years. The promissory note contained a clause, prominently displayed on the first page, allowing Pethood to prepay the loan in whole or part by paying the lender a penalty equal to (1) prepayment amount, (2) times the number of years remaining on the loan, (3) times 1-1/4 percent. After 16 months, Pethood prepaid the loan together with a prepayment penalty of $40,500. This represented a penalty of 10.7 percent of the principal balance. Pethood then began this suit. The trial court entered judgment in favor of Keybank and Pethood appealed.

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Metropolis: Five New Realties

Real estate ultimately is about people; with how many they are and what their ages are; where they live; how they earn a living; how they spend their money; and how they are divided by race and ethnicity. The Brookings Institution, in a new report, titled "The State of Metropolitan America," discusses the five "new realities" that are on the front lines of demographic transformation. These are briefly described in this article.

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Information courtesy: BDO

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If you have any questions about any of these articles, post a comment below or please contact our Real Estate & Construction Group at 440-449-6800.

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