Bob Chodos

Bob Chodos
Principal
Colliers International
Chicago

How much of an impact has Bob Chodos had on the Midwest commercial real estate industry? One number spells it out: 13 million.

As in, during his 30-year career, Chodos has completed tenant representation assignments totaling more than 13 million square feet. And if that number isn’t impressive enough, consider this one: 7 billion. Those career transactions have been valued in excess of $7 billion.

It’s little wonder, then, that Chodos, principal with the Chicago office of Colliers International, is considered such a valuable member of the area’s commercial real estate profession by both his peers and his loyal clients.

A quick look at Chodos’ career spells out just how significant his deals have been. Chodos, for instance, once closed a 411,000-square-foot lease for Jenner & Block LP, a 400,000-square-foot headquarters relocation for Sara Lee Corporation and a 217,000-square-foot lease restructure for Schiff Hardin.

Thanks in part to these big deals, Chodos has been an Office Broker of the Year nine  times at the Chicago Commercial Real Estate Awards event. He was also the 2005 winner of the NAIOP Suburban Office Transaction of the Year award, an honor he won thanks to his big Sara Lee headquarters relocation deal.

Chodos’ peers point to his tenacious negotiation style and market knowledge as two reasons for his success. They also credit his devotion to his clients; Chodos isn’t satisfied until he’s landed the best deal terms for his clients.

Outside of his career, Chodos hasn’t hesitated to support his community. He is a member of the board of directors and executive committee for Junior Achievement of Chicago. He also sits on the board of directors for the Chicago Central Area Committee and The American Red Cross.

Chodos supports his industry, too. He is a member of Colliers’ Executive Committee and a member of both SIOR and COLBA, the Chicago Office Leasing Brokers Association. He’s active, too, with the Executives Club of Chicago and the Economic Club of Chicago.

Paul Fisher

We may be on the verge of seeing the commonly understood expectation of the scope of liability under so-called “bad boy” guaranties in real estate loans being blown apart, with enormous implications to all parties in the real estate business.

There are two recent cases decided in Michigan that have held that one of the events triggering full recourse liability to the guarantor, based on the express terms of the loan documents, is the failure of the borrowing entity to remain solvent and to pay its debts as they become due. The cases are Wells Fargo Bank v. Cherryland Mall and David Schostak, decided by a Michigan state appellate court, and 51382 Gratiot Avenue Holdings v. Chesterfield Development Company and John D’Amico, decided by the Federal District Court, Eastern District.

The provisions in the loan documents in these cases are virtually identical to the triggering language in almost all CMBS loans and real estate loans that are made to “single purpose entities” (SPEs). These loans are likely in the hundreds of billions of dollars and they touch virtually every major developer and lender in the United States, as well as the attorneys representing them and loan originators and others.

One of the essential elements of CMBS loans and loans to SPEs is that the mortgaged asset is isolated from all other endeavors, creditors and liens other than nominal trade debt. Thus the loan documents in these loans will typically require that the borrowing entity be, at all times a “single purpose entity.” This is generally known as the separatedness covenant. Another essential element is that recourse against the guarantor is limited so that only in the case of specific acts and events will there be recourse liability. In a subset of these acts and events, liability for the entire debt (as opposed to just the damage caused by the act or event) will be triggered. As the term “bad boy guaranty” suggests, some type of bad act is commonly thought to be necessary as the trigger. Beware though what is commonly thought!

One of these triggering events in these loans is typically the failure of the borrower to remain an SPE. The standard definition of a single purpose entity used in CMBS loans and approved by the rating agencies is that the borrower must remain solvent and that it must pay its debts as they come due from its own assets. Note that, despite conventional thinking to the contrary, this standard definition does not say that the failure to remain solvent must be caused by some act or omission of the borrower or the guarantor or anyone associated with them. With a dramatic decline in real estate values, a substantial number of real estate borrowers are now insolvent. Likewise, despite conventional thinking to the contrary, the standard definition does not exclude the very mortgage debt that was the subject of the guaranty from the debts to be paid as they become due. As we know, a substantial number of real estate borrowers have not and will not pay their mortgage loans because the value of the property is now less than the mortgage debt. The conventional thinking has been that if a non-recourse loan was not paid but the borrower either voluntarily gave the lender a deed or didn’t resist a foreclosure and the borrower did not do some bad act to thwart the lender’s right to the property and the income from it, such as file a bankruptcy or collusively assist a bankruptcy filing, the guarantor would avoid the trigger and would not be liable. The holding in these cases directly contradicts that conventional thinking.

In the Cherryland case, the borrower stopped making mortgage payment and the lender foreclosed by advertisement or non-judicially. The borrower made no attempt to stop or interfere with the foreclosure sale. The day after the sale, the lender filed suit for a deficiency against the guarantor citing the trigger based on failure to remain an SPE, which in turn required that the borrower remain solvent and pay its debts as they become due. The guarantor claimed that neither the borrower nor guarantor had taken money improperly out of the project or done any other bad act. The Court, however, said it is unambiguous that no bad act is required in determining whether the borrower is solvent and whether it has paid its debts as they become due.  The Court said “[W]e recognize that our interpretation seems incongruent with the perceived nature of a nonrecourse debt and are cognizant of the [Commercial Mortgage Security Association’s] arguments and calculations that, if accurate, indicate economic disaster for the business community …” However, unambiguous language in a contract is enforced as it is written and words are taken in their common meaning, not as a party claims they were intended to be interpreted. The guarantor and Commercial Mortgage Security Association also said it would violate public policy to come to a conclusion that would upend the common understanding that the trigger required a bad act. The Court said public policy is made by the Legislature and not the Courts, and there is no evidence that enforcing this contract language as written is against a public policy of the Legislature.

In the Chesterfield case, after the borrower stopped making payments on the loan, the lender filed a foreclosure action that included a separate claim under the guaranty for the deficiency based on the trigger that the borrower must remain solvent and pay its debts as they become due. The guarantor said that surely this very mortgage debt can’t be one of the debts that was meant by this provision because to do so would defeat the purpose of the non-recourse provisions and nature of the loan. The Court however said there is nothing ambiguous about the term “its debts” and nothing to support excluding this mortgage debt from the term. The guarantor further argued that the effect of holding that the trigger had occurred would be that the exception to the non-recourse provisions would swallow the rule. The Court rejected the argument. As an indication of the certainty that the guarantor and its lawyers had that the Court could not possibly interpret the language to mean what it says, they argued that the result was “extremely absurd,” “ridiculous” and “draconian.”

Barring a reversal on appeal, what do these cases mean to you? Since they are the first reported cases interpreting these specific provisions defining an SPE by reference to the borrower remaining solvent and paying its debts as they come due, they are likely to be followed widely. One result is that a huge volume of these loans would be in default and the guarantors who previously expected not to have personal liability would in fact have personal liability for the entire debt. Not only would this be the case with loans that have not yet been foreclosed, but even the guaranties on those loans previously foreclosed or where a deed in lieu had been given could be pursued unless the lender had given a broad release in favor of the guarantor.

In some cases it might be better for a guarantor exposed in this fashion to inject equity into the borrower to avoid the insolvency and allow the borrower to continue to make payments, although that may just be making the death a bit slower. In many cases, parties who signed these guaranties signed them on many transactions, so some guarantors may find themselves insolvent as a result of recourse liability being triggered. All of the guarantors affected would have to restate financial statements, which might possibly trigger other defaults for misrepresenting their financial position. Lawyers will have to counsel their clients (where they are lenders) that they may have guaranty claims whether or not they expected to have them and (where they are borrowers/guarantors) that they might have exposure where they expected not to have exposure and in many cases were advised by their lawyers that they wouldn’t have exposure unless they committed a bad act. There would also potentially be no incentive for a borrower and guarantor to cooperate in a foreclosure or to make a voluntary deed to the lender unless the lender agreed to give a release to the guarantor. Where a guarantor has substantial assets, it might be a better strategy for the lender to refuse to give a release and deal with the contested foreclosure or bankruptcy filing but in response it might also be a reason for the borrower and guarantor to divert funds from the project or otherwise commit bad acts since full recourse would already exist.

If these decisions stand on appeal and are followed generally, the CMBS market, already weak, and a large part of the real estate finance market beyond the CMBS market would be upended. All transactions in the future would require specific negotiation and revised language to avoid the results discussed here and the revised language and structure would (in the case of the CMBS loans) require rating agency blessing that in turn would require that they can get a legal opinion that the new provisions in the SPE definition replacing or modifying the provisions that the borrower remain solvent and pay its debts as they come due would not diminish the benefits in a bankruptcy proceeding of having an SPE borrower.

It would be a good idea for all parties potentially affected by this development to go back and read their documents. While the language discussed is widespread, you can only determine how it affects you by checking your documents.

Paul Fisher is a partner with Chicago law firm McGuireWoods LLP. He can be reached at 312-849-8244 or by e-mail at pfisher@mcquirewoods.com.

According to statistics released by the government and compiled by SomerCor 504, an Illinois Certified Development Corporation, 412 loans totaling more than $275 million were approved for the fiscal year ended Sept. 30, 2011 allowing plenty of opportunity for small businesses to grow and expand their operations.

The SBA 504 loan program provides long-term, fixed rate, government-guaranteed loans for small businesses to finance the purchase, construction and renovation of commercial real estate, as well as the acquisition and installation of heavy machinery and equipment. It also provides refinancing programs for small business borrowers.

“If you are a solid-performing business with a well-conceived business plan, it is a great time to be a real estate buyer,” said David Frank, president SomerCor 504. “The SBA 504 program is creating opportunities for businesses to grow and expand their businesses without many of the restrictions of conventional financing programs.”

The $275 million in approved SBA 504 loans represented an increase of 14.86 percent from the same period one year ago when approved loans totaled just more than $240 million. The increase from 2010 levels was an even further increase in the value of approved loans when compared to 2009 when $229.1 million in loans were approved.

The number of deals completed in fiscal year 2011 was 412, which represented a decline of 5.7 percent. It still represents an increase from 2009 when 366 loans were approved in the State of Illinois.

Based on this volume and level of activity, the value of the average loan approved in fiscal year 2011 was $669,200, a 21.8 percent increase from 2010 when the average was $549,300. The 2009 average loan value was $626,030, an amount that is 6.9 percent lower than 2011.

According to Frank, a variety of factors contributed to an increase in 2011 activity because they made funds more attractive and readily available. Among the factors making the SBA 504 loan programs attractive included increasing the amount of the guaranteed loan that can be made by a Certified Development Company like SomerCor 504 increased to $5.5 million from $4.0 million and the net worth requirements of the borrowing company expanded to $15 million from $8.5 million. Additionally, for a period of time, until September 2012, new regulations are making it possible to use SBA 504 loans for refinancing purposes.

“The aggregate of these features and benefits made SBA 504 financing the best financing alternative in the market,” Frank said.

Commenting on expectations for 2012, Frank said he is optimistic that 2012 will be a better year than 2011. He noted that the refinancing component of the SBA lending program will end in September, giving businesses an opportunity to lock in interest rates for the long-term.

Goldstein brings more than 10 years experience in commercial real estate development, sales, management and analysis to his new position. He also brings more than 17 years as consultant, expert witness and appraiser for the financial industry.

According to company president Dale Strauss, “Goldstein brings the type of depth and experience that is representative of Strauss Realty. We’re pleased that he has joined our team. ”

Strauss adds that as CBD analyst, Goldstein will focus on the Chicago Loop commercial properties for sale and purchase as well as redevelopment projects.

“Goldstein’s previous experience as a consultant and court-qualified expert in financial matters will be of considerable resource to our existing and new clients,” Strauss said.

The NAI Global network includes NAI companies across the Midwest, including such familiar names as Chicago’s NAI Hiffman, NAI Ruhl & Ruhl Commercial Company in Iowa, NAI DESCO in St. Louis and NAI Daus in Cleveland.

Commercial real estate services company C-III specializes in primary and special loan servicing, loan origination, fund management, CDO management, principal investment, title services and multi-family property management.

Andrew Farkas, the chief executive officer who leads C-III, was also the founder and chairman and chief executive officer of Insignia Financial Group. C-III is based in Irving, Texas, with additional offices in New York; Greenville, S.C.; McLean, Va.; Chicago; Dallas; and Nashville.

The acquisition doesn’t appear likely to change the way NAI affiliates across the Midwest will operate. NAI Global will continue to operate as a separate company under its current management. C-III officials, though, did say in a press release that the company will look to grow NAI Global by exploring business opportunities in strategic locations, including New York, London, Singapore and other primary global business centers.

“The completion of this transaction represents a significant step forward in our strategy to build a fully diversified commercial real estate services company,” Farkas said in a written statement. “With the NAI Global acquisition, we are gaining the world’s leading commercial real estate network and a tremendous foundation for future growth.”

Officials with NAI Global also expressed excitement over the new arrangement.

“We are thrilled to be joining forces with C-III and excited about the opportunity to deliver an even broader range of services to our members and add greater value to our collective corporate and investment clients,” said Jeffrey Finn, president and chief executive officer of NAI Global, in a written statement. “We look forward to tapping into their extensive resources and expertise to assist all of our clients in strategically optimizing their commercial real estate assets.”

NAI Hiffman chief executive officer Dave Petersen said that he expects the benefits of the transaction will translate to new real estate assignments for the company’s local office and will create added opportunities for existing clients and shareholders.

“The best aspect of this transaction is that its greatest value will be seen at the ground level in the form of property management, leasing and investment sales opportunities,” Petersen said.

Founded in 1977 by Gerald Finn, NAI Global has grown from covering 15 countries in 1999 to a network that now boasts 350 offices in 55 countries, with more than 300 million square feet of commercial space under management.

C-III started its operations when it purchased Centerline Capital Group’s institutional real estate debt fund management and commercial mortgage loan servicing businesses in March of 2010. Since that time, C-III has launched mortgage origination, investment sales and title insurance businesses, and expanded its principal investment, loan origination, fund management and primary and special loan servicing businesses, including acquiring the special servicing and CDO management businesses of JER Partners in August of 2011.

And little wonder: As Cydney White, first vice president of investments for Chicago’s Equity Residential, said, these younger adults are actually faring better in today’s economy than are most others. The unemployment rate for the Echo Boomers actually stands at a low 4.4 percent. These Echo Boomers, then, have enjoyed the benefits of most of the jobs created in 2011 and early 2012.

Because of this, these consumers are driving many commercial real estate trends today, including the solid performance of the Midwest’s multi-family market. The Echo Boomers are in their household formation years. But instead of buying single-family homes, a large number of these consumers are choosing to rent.

“The Echo Boomers are delaying marriage. They are more interested in renting. They want to be more flexible,” White said during the panel discussion.

In fact, White said, many of the Echo Boomers are putting off buying their first homes until they hit 30 or beyond.

The message for commercial developers is clear: Multi-family will remain hot well beyond 2012. And when it comes to financing, multi-family projects will be some of the most attractive to commercial lenders.

Illinois ranked third among all states when it came to the LEED-certified space it boasted per capita according to a study by the U.S. Green Building Council. Minnesota also performed well, ranking 10th among all states in this study.

Illinois had 2.69 square feet of LEED-certified space for every person to take home the third spot. Ranking ahead of Illinois was the District of Columbia, which 31.50 square feet of LEED-certified space for every person, and Colorado, with 2.74 square feet.

Minnesota — ranking in the top 10 for the second straight year — had 1.81 square feet of LEED-certified space for every person.

This is good news for the Midwest: It’s nice to see states not just talking about green building, but actually putting environmentally friendly techniques into place.

A 1,700-square-foot Weight Watchers opened at Annex of Arlington, a retail center in Arlington Heights, Ill.

Anthony Gamez of David King & Associates in Oak Park, Ill., represented Weight Watchers. Brad Ratajczak represented Brixmor.

Also in Illinois, a 1,680-square-foot Weight Watchers location opened at the High Point Centre retail center in the Chicago suburb of Lombard. Gamez again represented Weight Watchers, while Ratajczak again represented Brixmor.

A 1,280-square-foot lease was executed for a Weight Watchers at Moorland Square, a retail center located just 10 miles southwest of Milwaukee in New Berlin, Wis. Tom Kohl of The Boerke Company, Inc., represented Weight Watchers. Dana Meadowcroft represented Brixmor.

“There was a time during the housing boom when people got out of college, found a job and then bought a condo the very next day,” Zell said. “I remember thinking, ‘What are these young people doing tying themselves down that way?’ That’s changing now. Young people are realizing that they don’t have to get on that track.”

Zell made his comments during his fireside chat with Debra Cafaro, chief executive officer of Chicago-based seniors housing and healthcare REIT Ventas Inc., during the 10th annual Commercial Real Estate Forecast Conference Jan. 24.

During the Chicago event, hosted by Illinois Real Estate Journal and the Real Estate Publishing Group, Zell and Cafaro drew a crowd of more than 1,000 attendees to their kick-off discussion.

The strength of multi-family housing played a part in this chat. The fact that Zell pronounced multi-family as the strongest segment of the commercial real estate business was no surprise. But his thoughts on the future of single-family housing and homeownership were.

For decades, the federal government pushed homeownership. The thought went like this: Homeowners are more likely to invest in their neighborhoods than are renters. This means that homeownership is good for the country.

Of course, this doesn’t hold when mortgage lenders pass out mortgage money to borrowers who can’t afford to pay it back. All that does is lead to the surge in foreclosures that is now swamping the economy and helping to prevent a more robust recovery.

During his discussion with Cafaro, Zell said that the multi-family market today is benefitting from the single-family market’s woes.

“The thought was that as soon as you were able to, you should buy a house,” Zell said. “Everyone said that homes always go up in value. You should then buy as big a home as you can to take advantage of this. Of course, that turned out to be …” (I’ll let you fill in the rest of that sentence. But here’s a hint: Zell’s word starts with a “bull” and ends with a “t.”)

The single-family market will recover, of course. And multi-family will eventually lose some of its appeal. But Zell wondered during this week’s forecast conference just how long it will take before consumers regain that warm feeling that the American Dream of homeownership once gave them.

“The single-family market will get better. We will absorb the oversupply,” Zell said. “But there will be a long-term bitter taste left by what has happened with single-family housing. In our lifetime, we might not see housing return to its former hallowed place.”

If this is the case? Expect multi-family to remain the top-performing commercial segment for a long time.

Bordner-Riney’s career in commercial real estate and business development has taken her from Chicago to Taipei and throughout the United States.

Bordner-Riney’s career in commercial real estate began with the leasing and sale of shopping centers for Coldwell Banker in Oklahoma and Cushman & Wakefield of Florida.

While at the Resolution Trust Corporation, she worked with management companies and brokerage firms to manage, market and sell properties. Bordner-Riney was instrumental in liquidating more than $2 billion worth of commercial assets. During her tenure at General Growth Properties, she specialized in the leasing of properties owned by third parties. Bordner-Riney was responsible for leasing more than 3 million square feet of retail space.