Friday, February 29, 2008

Radius Clause

Ambiguity – radius clause and go dark clause

from DIRT, October 4, 2006

"Radius clause requiring that tenant not during the term of the lease, own, operate, manage or have any financial interest in, any store or business located within a radius of seven miles… that is similar to that then being conducted upon the demised premises is ambiguous when applied to tenant's operation of branch of its store after it had gone dark in the shopping center subject to the restriction, and trial court may take additional evidence to ascertain whether parties intended to lock out competing activities even when the protected space was dark.

The purpose of radius clauses in percentage rent leases is to protect the landlord's interest in having the highest possible percentage rents.
If a store opens too close, it has the potential to cannibalize sales at the subject store with the radius clause. The business... then being conducted kills the landlord's argument.

Because there was no business being conducted, there were no sales to be cannibalized. The landlord had no losses as a result so even if he won the argument he would have had no damages.

Wells Fargo v. Diamond Point Plaza, L.L.P. 2006 Westlaw 2788385 (Md.
App. 9/29/06)

This clause appeared in a lease to Sam's Club. Sam's Club, like all Wal Mart operations, negotiated a tough go dark clause in its favor. The clause indicated that Sam's Club made not representation that it would conduct any business at the location and reserved the right to go dark.

As it was shutting down the operations at the Diamond Point location protected by the radius clause, Sam's was stocking and preparing to open a store at another location within seven miles, and ultimately did open that location just as it closed at Diamond Point.
The shopping center's lender claimed that it suffered significant damages as a consequence of Sam's Club's violation of the radius clause covenant. Although the trial court found against Sam's Club on many counts, on this issue it granted summary judgment to Sam's Club, on the notion that the clause was not intended to protect dark space from competition. As Sam's Club had the right to go dark, it also had the right to open another location after it had done so.
The appeals court did not agree that this language was so clear. It concluded that summary judgment was inappropriate here. The lender argued that then being conducted unambiguously referred to the term of the lease, and that the radius clause protected the space from competing operations within seven miles whether or not the space was dark.

The lender claimed that the court's interpretation rendered the clause illusory and couldn't possibly have been the expectation of the parties.
It noted that, elsewhere in the lease, the tenant reserved the right to operate other stores which are in competition with such store subject to what else might appear in the lease (such as the radius clause). It argued that this permissive language to the tenant somehow bolstered its argument that the radius clause went beyond merely protected against competing store operations, but rather was intended to protect the space itself from competition.

Apparently counsel for the lender did a very impressive dance around the word then in the above caption that impressed the appeals court, which found that there was sufficient ambiguity in the clause to warrant a trial on the merits.
Sam's Club argued that to protect the operating store from competition was a perfectly valid purpose of the radius clause, and was not nonsensical. The lease was a percentage lease, and the landlord clearly had an interest in protecting the store from competition while it had the possibility of generating percentage rents. When the store was dark, however, that interest went away." See or

Thursday, February 28, 2008

Big Apartment Buyers

Redwood Capital Partners, the Chicago-based firm led by David Carlson and Mark Isaacson, acquired two multifamily properties totaling nearly 1,000 units in Illinois and Texas. Laramar Group, a Chicago-headquartered firm, sold the 730-unit Woodlands of Crest Hill at 1615 Arbor Lane in Crest Hill, IL. Alliance Holdings LLC, another Chicago-based company, sold the 228-unit Edgewater Apartments at 514 That Way in Lake Jackson, TX, about one hour outside of Houston. Redwood is a multifamily investment and management firm that was formed late last year. Its portfolio consists of about 80% value-add properties and the other 20% being tenant-in-common properties. Redwood added Woodlands of Crest Hill to its value-add portfolio. The 36-year-old property measures 465,041 square feet and included studio, one-bedroom and two-bedroom units. The Will County property is 94% leased with rents ranging from $600 to $950. Redwood plans to spend between $4,000 and $4,500 renovating apartment interiors. The Edgewater complex was added to the tenant-in-common portfolio. Redwood said it chose the property for its age, construction, limited competition, steady employment base and above-market yield potential. The property, built in 2005, includes one- and two-bedroom units and has a single-digit vacancy rate. The average rental rate is $965. The majority of Redwood’s portfolio remains in value-add investments in the Midwest, Southeast and Sunbelt states. "Demand remains strong for apartments in markets across the U.S., due to the downturn in the single-family housing market and a migration of homeowners back to renting," said Isaacson. "Interest rates are low, capital is still available and there are good deals out there. We're well-positioned for what we think will be a strong investment period in 2008 and 2009." The company plans to acquire $300 million in properties this year. Westdale, a Dallas-based investment and property management company, will manage the properties. for more information see : or

Tuesday, February 19, 2008

Sublease and Assignment

When preplanning for offering excess space in the subleasing or secondary space market, tenants should make certain appropriate language is reflected in their leases.

from Negotiating and Drafting Office Leases, Law Journal Press

Tenants should consider carefully the following issues:

(1) Ability to market and offer space with a minimum of lead time, pricing limitations and other regulation by the landlord;

(2) Ability to eliminate the need for landlord's consent in instances such as subleasing to affiliate or related entities, and assure consent quickly when the landlord's consent is required;

(3) Ability to trigger consent through intentions rather than formal
offers or fully executed sublease documents;

(4) Ability to offer space through commercial channels of tenant's choice, through brokerage firms, by advertising and using inter-company agreements, without landlord's interference of limitations;

(5) Ability to demise, later and install fixtures in the space without inappropriate limitations, roadblocks, or delayed landlord consents;

(6) Ability to preclude landlord limitations on or added criterion for pricing or marketing the space;

(7) Absence of limitations on type of use or type of subtenant for the space;

(8) Ability to preclude artificial limitations on the extent and duration of landlord's recapture rights;

(9) Right to recoup all installation and subleasing related costs before landlord's profit-sharing rights kick in;

(10) Ability to reoccupy the space and collapse the sublease in the event of economic cycle recovery without the landlord's consent or further economic sharing with the landlord;

(11) Ability to maximize the subleasing target market by providing for
an increase in the tenant's security under the direct lease to offset or alleviate any landlord concerns about the creditworthiness of the tenant's proposed subtenant; and

(12) Ability of the subtenant to further remarket and sublet the
space." for more information see ; or

Monday, February 11, 2008

New Kids on the Block

Seeing a void left by now-skittish investors burned by the subprime meltdown, Rob Banzhaf and Trey Halberdier opened BanDier Realty Partners in early January -- a commercial real estate investment, development and brokerage partnership based in The Woodlands.
"We really felt -- contrary to a lot of people -- that it was a pretty good time," Banzhaf says.
With a sunny outlook predicted for Houston's 2008 real estate scene, brokers are looking to capitalize on a strong economy and favorable market conditions.
Tyndall Yaap, managing director of the industrial division at Capital Commercial Investments, notes that in the industrial and offices markets, "we are at, or near, some historic low vacancy rates."
Strong growth in one industry -- oil and gas -- is creating a ripple effect, sparking growth in related businesses, Yaap notes.
"If you look at our office vacancy and our industrial vacancy, it's all tied together," says Yaap, who recently left Grubb & Ellis as an independent contractor to focus on development and acquisitions at Capital Commercial, in part lured by the strong market.
"You always have young people coming into the business and then they go and take on opportunities on their own," says Sam Scott, director of Commercial Gateway, the commercial division of the Houston Association of Realtors. "Firms in Houston are particularly fluid and people tend to make changes at the beginning of the year."
Strong fundamentals
Banzhaf and Halberdier say there's unusual movement because the market is ripe -- an optimistic view of the market supported by several weighty figures in Houston's real estate.
Despite 2007's problems in the capital markets, "If you look at the fundamentals of Houston, it is still strong from an investor standpoint," says Jeff Majewski, CB Richard Ellis Group Inc.'s senior managing director, who was one of the speakers at the company's year-end press luncheon last week.
With a 6.5 percent Class A office vacancy, the lowest since 1997, and rental rates at their highest since 1998, Sanford Criner, the firm's executive vice president, forecasts a positive 2008 for the office market.
Problems plaguing real estate markets across the nation have had a minimal effect, compared to the overall Houston market, Criner says. With oil near $100-per-barrel, a healthy energy industry has helped insulate the city from many economic woes affecting other parts of the country.
"In Houston we hang our hat on oil, which is good for the entrepreneurial buyer looking for a story," Craig LaFollette, multihousing specialist at CBRE, said at the luncheon.
Areas such as the Port of Houston and the Texas Medical Center are experiencing growth in industrial and health care facilities and are attracting the attention of investors, he adds.
In the office market, the fourth quarter posted a negative absorption, but 2007 closed with a total 3 million square feet of positive absorption. Vacancy citywide settled at 10.98 percent, with the Woodlands leading at 97 percent occupancy. In the Houston area, 29 office buildings are currently under construction, totaling 5.1 million square feet.
Real estate firm Grubb & Ellis sees positive indicators in each industry segment in its 2008 Real Estate Forecast. Participants in the report included James Arket, senior vice president of office tenant representation; Darrell Betts, senior vice president in the office investment group; George Cushing, senior vice president in the retail investment group; Jerald Dyer, vice president of the land investment group; Randy Moore, executive vice president and regional managing director; and John Nicholson, senior vice president of the industrial group.
The credit crunch is leading to an increased demand for rental properties, the report notes. Rents in all classes are on the rise, but particularly in the Class A market.
Grubb & Ellis predicts the office market will remain strong, with renters flooding to the Class B market as rents increase. The industrial sector saw nearly 8.1 million square feet of positive absorption, spurred by Houston's strong core industries.
Steady and stable
Compared to the rest of the nation, Houston has had steady growth over the past few years, providing a stability BanDier was looking for before it put down roots.
"In Central Florida and the West Coast, they had these huge spikes in real estate values," Banzhaf says. "We were looking for investment opportunities and, quite frankly, they didn't make any sense."
Banzhaf says their moment of opportunity was in part caused by out-of-town investors pushing capitalization rates low and prices high, but with the recent credit crunch those investors have slowed down or pulled out of the market altogether. Halberdier says that now there is a flight to quality to attract buyers back into the game; capitalization rates will rise, and reputable investors will be able to take advantage.
"We had lenders lending on speculative projects, loan to value; investors were basically coming out of town and not bringing a lot of cash to the table," Halberdier says.
"We had lenders lending on speculative projects, loan to value; investors were basically coming out of town and not bringing a lot of cash to the table," Halberdier says.
Even six months ago, Halberdier says, BanDier would have seen stiff competition from investors who simply aren't around anymore.
"Six to nine months ago, if we were in an income-producing deal, we would be competing with a dozen buyers," Halberdier says. "Today, we may be competing against half that."
With timing on their side, Banzhaf and Halberdier see a bright future for BanDier. Nevertheless, Banzhaf restates the need to always invest responsibly and to remain on the cutting edge, noting that the real estate market, as always, is cyclical.
"There is definitely a cautious optimism," Banzhaf says. "Are we going to experience something that we experienced in the '80's? That's why it's important to make smart investment decisions and to go after opportunities that may be off the radar."
Friends since grade school, Banzhaf and Halberdier completed their real estate licensing together while in college. The two later reunited after working at separate real estate firms, teaming up at the Houston office of a large privately held firm as brokers in 2005 before striking out on their own.
"We wanted to own and develop real estate, and to build wealth, not to broker for a living," Banzhaf says. "We were basically waiting for the right time in the market, and we feel that now is definitely the right time." For more information see: or

Wednesday, February 6, 2008

Global Commercial market Strong

The global commercial real estate market is on a roll, while the U.S. holds with bated breath and New York City takes a pause, noted experts at NAI Globals Global Market Outlook 2008, held this morning at the New York Athletic Club in Manhattan. Jeffrey Finn, president & CEO of NAI Global (pictured), began the presentation, noting the unusual dichotomy the market is experiencing with solid fundamentals, high construction and land costs, and the credit markets impacting the financial markets and trading. Although cap rates have increased 50 basis points across in all categories, the strong fundamentals should continue throughout 2008. European properties are strong across the board, while Asia Pacific offers new opportunities as neighboring countries benefit from the burgeoning growth in India and China. Latin America is also in a period of strong economic growth, while in Canada, foreign investors have broken the Canadian hold on prime investment properties. The U.S., on the other hand, will be in a "wait and see" mode in 2008, Finn noted. In New York City, Andrew Simon, senior managing director of NAI Globals New York City office, noted that he has heard talk of "doom and gloom" affecting the city market, but pointed out that it is seeing numbers unheard of in the past 25 years. Large blocks of space are becoming increasingly difficult to find, while the recent annual rental rate growth of 15 percent may begin to flatten out. "Its hard pressed to continue its growth," he said, "but supply and demand may give it another push." And with the credit markets, it is more difficult to get larger deals done in Manhattan, although smaller deals are still moving. "However, the value of the dollar is making it more affordable for international investors," Simon noted, pointing out additional interest from pension funds and REITs. "New York is healthy, but there may be a bit of a pause," he concluded. "Whether its a year or two, its a temporary glitch." And how did the commercial real estate market get to this point? Dr. Peter Linneman, NAI Globals chief economist & principal of Linneman Associates, said that there was "a confluence of more money than brains," noting that between 2005 and the first half of 2007, "everybody shortcut due diligencesome ridiculously, some at the margin." Long-term assets and long-term liabilities were also mismatched, and when the market entered a period where asset values fell, an owner received a margin call and sold the asset. "It just rippled," he said. Additionally "there was a fundamental battle between fear and greed … and greed won again," Linneman said, warning that the market should be prepared for greed to win again, as it will come sooner than the market thinks. And lastly, he noted, is that people tend to forget that the Fed is made up of nine human beings who make mistakes that affects the price of risk-free money around the world "until they change their minds." As a result, many investors are not as rich as they thought they were, and capital went on strike. But he noted that no one can make money on both sides of the deal if a strike continues. And will the market ever get back to the first half of 2007? "Not for a long time," he said, noting, however, that the market will work through it. "If you dont have to refinance or sell, dont," he said. And do not count on a recession either, he continued, noting that his data shows that 40 percent of the overall economy is up, 40 percent of the market is down and 20 percent is flat. "In a really great economy, youll have 45 percent up, 35 percent down and 20 percent flat." For more information see ; or