Situs Newswatch 10/18/2017

Prop 13 Provisions and Improperly Identified Ground Leases
Lease abstracts are an integral part of commercial real estate transactions. Developing and maintaining the integrity of lease data on a timely basis is essential to providing a solid foundation for due diligence, property ownership/investment and management. If the provisions in a lease are not abstracted accurately, there can be significant negative consequences for all parties involved in the CRE cycle; however, fast, accurate lease abstracting is not always readily available. Mining through numerous pages of complex lease documents and deciphering legal terms into a digestible summary is an art form that requires lease abstract specialists and demands hundreds of dedicated worker-hours – something most lenders, owners/investors and managers either do not have or cannot afford.

The level of detail and number of provisions needed in an abstract can vary depending on the end-user. For example, clients on the due diligence side generally need an accurate and concise snapshot of just the financial provisions of a lease, whereas owners/investors and managers may need more detailed information to properly manage and administer their lease portfolios. To receive quick and accurate lease abstracts, all parties in the CRE cycle should look for an abstracting partner that uses CRE subject matter specialists with legal expertise, have vast abstracting knowledge and robust data management and integration capabilities.

Issues
While lenders, owners/investors and managers may have different abstracting needs, the financial terms of a lease are at the core of every real estate transaction. Below are some of the most important elements to keep in mind to abstract accurately regardless of the ultimate end-user:

  • Prop 13 provisions vary from state to state: Proposition 13 (Prop 13) is a provision that governs whether the landlord is able to pass through the cost of any increase in real estate taxes on the property due to a change in ownership. It is extremely important for an abstractor to capture if the landlord is unable to pass through this cost, as this will decrease the landlord’s total recovery from the tenant. It is not unusual for a lease to prohibit the pass-through of increased property taxes, or alternatively, to limit the frequency of such pass-throughs during the term of a lease. While many CRE professionals are familiar with Prop 13 as a key provision to capture in California leases, the challenge lies in being aware that leases in other states may contain similar provisions that may not be as easily identifiable as the Prop 13 language. CRE lease specialists are aware of these provisions and can decipher very quickly whether these increased costs can be passed along to the landlord. Not accurately capturing Prop 13 provisions can lead to the same issues for lenders, owner/investors and managers as outlined above regarding reimbursements.
  • Improperly identified ground leases could introduce risk: A true ground lease on a property can be difficult to identify, as at times the lease forms will include “ground lease” language when referring to a build-to-suit lease. A build-to-suit lease resembles a ground lease because it identifies the land as the interest actually being leased. One of the key elements of which to be aware is who has ownership of the improvements – the building – during the term of the lease. In a ground lease, the tenant typically owns the building until the end of the lease term when ownership reverts back to the landlord. In a build-to-suit contract, the landlord retains ownership of the land and the development. A ground lease can have specific advantages and disadvantages for a landlord and tenant, which may affect a lender’s decision to proceed with lending on the property; thus, properly identifying a ground lease is a crucial aspect to underwriting a property. In a ground-lease scenario, the interests of the fee owner must often be subordinated to the ground lease in order for the ground lessee (tenant) to secure leasehold financing. A loan that is secured by a property, and that is subject to a ground lease, is often seen to have more risk than one that is secured by a fee-simple interest. As such, the existence of a ground lease can greatly affect the underwriting of a property and must be properly identified by the abstractor.

read more: Situs

China’s Embrace of Private Investment Is Getting Tighter
China’s president, Xi Jinping, wants to regain the private sector’s confidence even as he squeezes it more tightly. Aligning private investment with state priorities could grease the bureaucratic skids for some companies, but more official meddling in boardrooms is unlikely to produce good business decisions. Opaque party politics will confuse outside investors and blur the line between some state and private companies.

The private sector creates most of China’s jobs, generates the bulk of its gross domestic product and is by far the most efficient user of labor and capital. China’s economic growth miracle has occurred largely thanks to the ability of private companies to generate profit despite a shaky legal environment, entrenched official corruption and constant regulatory meddling.

Yet despite the country’s recent economic recovery, private investment is in a prolonged funk. It rose 6.4 percent for the year through August, in part because of a rebound in manufacturing and local government investment. That’s better than the dismal performance of last year, but still well off the 15 percent-plus growth rates of recent years.

The softness could in turn sap long-term growth: The International Monetary Fund reckons that private firms generate around seven to eight percentage points higher return on assets than their state-owned peers, but investment by the latter has far outpaced the former in the last two years.

read more: NYT

Tired of the office? Microsoft builds treehouses for its employees
There’s no daydreaming about being outside at Microsoft Corp.’s new meeting spaces. You literally are in the great outdoors.

Last week, Microsoft unveiled a network of treehouses on its Redmond, Wash., campus, as part of an effort to boost employees’ creativity and happiness. Sitting 12 feet off the ground, the treehouses feature skylights, WiFi, hidden wall plugs and even a gas fireplace. Two structures are now open for use, with a third opening later this year. There’s also a “Crow’s Nest” observation post.

“People said, given the opportunity, they would work more outside,” project manager Bret Boulter said in a Microsoft blog post. “The first thing (you notice) when you walk into the space is that everyone is really quiet. You stop talking and are just present,” he said. “It’s fascinating. People absorb the environment, and it changes the perception of their work and how they can do it.”

The treehouses feature meeting rooms open to all employees and lounge spaces. ”Nothing formal,” said Genise Dawson, a Microsoft administrator who helped plan the project. “A place you can chill inside or out of, sit, work.”

read more: Marketwatch

Slow Growth, Plentiful Promise in Fort Lauderdale
After years of dormancy in the wake of the financial crisis, Fort Lauderdale’s office market is starting to come alive. Over the past four years, only one new office property — a 143,535-square-foot building in Miramar — was delivered. However, developers have recognized the market’s strengthening economic conditions, solid job growth among office-using sectors and increasing investor appetite. As a result, construction is sprouting.

More than 585,000 square feet of office space is expected to come online by the end of the year, adding to Fort Lauderdale’s total stock of 30 million square feet, and another 2.2 million square feet is in the pipeline.

The dearth of new product has resulted in a growing need for up-to-date space, translating into low vacancy in established submarkets and fueling leasing momentum in sought-after locations like South Fort Lauderdale and Airport-Dania Beach. Those were also Fort Lauderdale’s most expensive submarkets, with lease rates hovering between $40.68 and $58.88 per square foot as of July. However, rates for premium office assets were down 8.4 percent across the metro during that same period, and decreased by 13.1 percent in Class B office buildings.

read more: CPE

Taylor Impresses Trump for Fed Chairman; Warsh Slips
Stanford University economist John Taylor, a candidate for Federal Reserve chairman, made a favorable impression on President Donald Trump after an hour-long interview at the White House last week, several people familiar with the matter said.

Former Fed board governor Kevin Warsh has meanwhile seen his star fade within the White House, three of the people said. They would not say why but Warsh’s academic credentials are not as strong as other candidates, and his tenure on the Fed board has been criticized by a diverse group of economists ranging from Scott Sumner to Nobel laureate Paul Krugman.

Trump gushed about Taylor after his interview, one of the people said. The president has always been prone to hiring people with whom he has a good relationship. However, he told the Wall Street Journal in July that he would “like to see rates stay low,” and Taylor is the namesake of a well-known monetary policy rule that would generally advocate higher interest rates.

Warsh remains on Trump’s shortlist of candidates to lead the central bank along with Taylor, the people said. The others are the current Fed Chair Janet Yellen, Trump’s chief economic adviser Gary Cohn and Fed governor Jerome Powell.

read more: Bloomberg

2-year yields highest since 2008 on news of Trump-Taylor meeting
U.S. Treasury yields rose on Monday after a report that President Donald Trump was favoring Stanford economist John Taylor to head the Federal Reserve, and Fed Chair Janet Yellen’s weekend comments that the economy remained strong.

Yields for the two-year note, most affected by expectations for Fed rate hikes, rose to 1.546 percent, the highest since November 2008. Yields on notes from two to five years rose, outpacing longer-dated maturities as the yield curve flattened.  Benchmark 10-year Treasury notes dropped 5/32 in price to yield 2.300 percent.

Taylor impressed Trump during their meeting at the White House last week, Bloomberg reported on Monday.

The former Fed board member is seen as more hawkish than Yellen and other names being considered to take over the central bank next year.

“You would see that the Fed would be a little faster in tightening” interest rates, said Cantor Fitzgerald Treasury analyst Justin Lederer. “You’d see a bit more aggressive, hawkish Fed.”

read more: Reuters

Nordstrom Ends Buyout Talks
The financially troubled department store Nordstorm has run into a roadblock on its quest to go private.

After scurrying to raise financing for what could be a $10 billion leveraged buyout, Nordstrom announced that it has suspended plans to take itself private, according to the New York Post.

The Nordstrom family originally planned to put up its 31 percent stake in the company, which as of Aug. 1 was valued at $2.5 billion, and private-equity firm Leonard Green & Partners was to contribute another $1 billion in equity. But now it won’t try again until after the holiday season.

“The Special Committee … is prepared to thoroughly evaluate such a proposal from the Group at that time, if one is made,” the company said in a statement. “In the meantime, the company and its employees will remain focused on running the business and delivering the best shopping experience for customers”

read more: The Real Deal

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