Walter | Haverfield partner David Ricco advised commercial property owners to be proactive in managing potential environmental liability risks, in an article published in Properties magazine.
Walter | Haverfield partner Jack Waldeck addressed the recent tax reform law and its impact on “like-kind exchanges” of property in Crain’s Cleveland Business.
The Music Settlement’s newest location in Ohio City is a significant enhancement to the arts and education network on the near West Side. In an article in Properties magazine, Jack Waldeck explains how Walter | Haverfield’s behind-the-scenes efforts helped to make this project a reality.
The Johnson Controls Hall of Fame Village in Canton is considered to be one of the most complex real estate developments in the region in recent history.andnbsp; Walter | Haverfield has been a key player in the project since it began, and Crain’s Cleveland Business highlights the firm’s collective bench strength in completing the required legal work.
Irene MacDougall, a partner at Walter | Haverfield in the public and structured finance group, is one of 15 Northeast Ohio women to be recognized for her work in finance by Crain’s Cleveland Business.
MacDougall received the recognition on the basis of her extensive legal experience, her continued success in the field, her commitment to clients and her involvement in the Northeast Ohio community.
She is among an elite group that includes bankers, accountants, private equity principals, analysts, financial planners and other lawyers.
“It is an absolute honor to be acknowledged for the work I love to do,” said Irene MacDougall, who brings more than 30 years of legal experience to Walter | Haverfield. “I’m equally honored to be recognized alongside such impressive women.”
MacDougall manages complex, multi-party finance and development transactions in real estate, healthcare lending and public finance. Her many accomplishments include her work as developer’s counsel on the first phase of the Flats East Bank project. That phase, which totaled $275 million, consisted of 33 sources of funds, which MacDougall managed. Her success on the project earned her the Impact Award by the Commercial Real Estate Women (CREW) Network.
“No doubt, Irene is an influential woman in finance,” said Ralph Cascarilla, managing partner of Walter | Haverfield. “She is an extremely valuable leader at our firm and a highly skilled attorney whose abilities easily top those in her field.”
In an article titled “A Historic Move in Downtown Sandusky,” which appeared in the October 2017 issue of Properties magazine, Jack Waldeck discussed the creation of a new and expanded Downtown Historic District in the city of Sandusky, Ohio.
The ability to rent out your property to travelers has never been easier with the advent of websites such as AirBnB, VRBO and HomeAway, among many others.
Through these sites, property owners are able to rent out a spare room, an apartment that’s rarely used, or a vacation home. However, as short-term rental options are becoming more common, cities across the country are responding in different ways. It is important for property owners to be aware of where their city stands.
Ranging from near-outright bans of the practice to embracing the concept, there appears to be no unified front. Many cities, including Cleveland, have largely remained silent on the regulation of short-term rentals. Their municipal codes do not yet expressly permit or prohibit them. Only time will tell as to which option proves to be the most successful.
Cities that choose to regulate short-term rentals often have a licensing requirement. Denver requires that property owners obtain both a lodger’s license and a short-term rental business license if they are looking to rent out their property. The fee is $50 for every two-year period for the lodger’s license and $25 each year for the short-term rental business license. New Orleans distinguishes between the nature and location of the rental property and requires a fee of $50 to $500 a year, depending on which license is required. Fort Lauderdale recently lowered its short-term rental fees by a significant amount. While a standard vacation registration application used to cost $750, it now only costs $350.
Some cities focus on location, density and time period requirements in regulating short-term rentals. Time period requirements can come in the form of the number of days a property can be rented out in a year or on a consecutive basis. The requirements also address the minimum amount of time for the rental.
For example, Chicago prohibits rentals of less than 10 hours. Palm Springs limits the number of consecutive days a home may be rented out to 28. New Orleans restricts the renting of houses to no more than 90 rental nights per license year and bans short-term rentals entirely in the French Quarter. Las Vegas only allows rentals that are at least 660 feet from each other and even forbids short-term rentals in certain large areas outside of the central city.
Many cities also make the distinction between “hosted” and “unhosted” stays. A hosted stay is similar to the nature of a bed-and-breakfast. It is an owner-occupied rental where a guest rents out a room in the host’s home while the host is also living there and in a sense, acting as a chaperone. An unhosted stay occurs when a renter is renting out the entire apartment or house, and the host is not present. It is similar to a hotel, although the host may not even be present in the same city where the home is being rented.
Certain cities have regulations that distinguish between these two types of stays.
For instance, Fort Lauderdale offers a lower renewal fee of $80 for properties that are hosted compared to the $160 renewal fee charged for those rental properties that are unhosted. Las Vegas distinguishes between hosted and unhosted stays in its permitting requirements. An owner-occupied property in a permitted district with fewer than three bedrooms, located at least 660 feet away from another rental, may simply obtain a conditional use verification.
However, if a rental property does not meet these requirements, the owner is required to obtain a special use permit, which requires notifying neighboring property owners and engaging in a two-part hearing process before the planning commission and city council.
For property owners, it is especially important to be aware of your city’s regulations on short-term rentals prior to beginning the rental process. Many cities that have regulations in place have sections on their municipal websites outlining these requirements. Whether it be a license requirement or a limit on the number of days you can rent out your property, it is important to know the potential limitations and how you can comply.
Emily S. O’Connor is an associate in Walter | Haverfield’s Real Estate Services practice group.
This article was published in Crain’s Cleveland Business on October 2, 2017.
Chances are, if you see a large commercial real estate development project going up in the region, our real estate team was likely involved. We are fortunate to be partnering with some of the most reputable developers, owners and lenders in the real estate business to maintain a large book of business that’s having a major economic impact throughout Northeast Ohio and beyond.
Some of our higher visibility projects include Pinecrest in Orange Village, the Johnson Controls Hall of Fame Village in Canton, the Bowery and Goodyear East End Projects in Akron, the Link59 Project in MidTown, the IBM Building in Opportunity Corridor, the Columbus Avenue Project in Sandusky, the Playhouse Square Foundation Apartment Project in Downtown Cleveland, the Scranton Peninsula Project in the Flats, and the Church and State and Music Settlement Projects in Hingetown. These projects represent billions of dollars in development costs, some of which have already been expended and some that are yet to be spent over the next several years.
Here’s a quick snapshot of the progress being made at these noteworthy projects:
Pinecrest is well underway and slated to open in 2018. This upscale mixed-use district has captured tenants such as Whole Foods, REI, and Williams Sonoma, along with a Marriott AC Hotel and residential apartments. Our lawyers have represented the developer in every aspect of the project, from land acquisition to TIF to zoning, financing and leasing. It’s a truly inspiring project.
Our representation of developer Stu Lichter and Industrial Realty Group, the master developer of the Johnson Controls Hall of Fame Village, has been on the fast track since the inception of the project. It recently hit a milestone with completion of Phase 2 of the Tom Benson Hall of Fame Stadium which opened to rave reviews at the Hall of Fame Game between the Cowboys and Cardinals in August. Ground has broken for a 4-5 star Hilton Hotel-Curio Collection adjoining the Stadium and Center for Excellence. The Youth Field Complex has been busy, and our lawyers have been working on development of and financing for the balance of the project, including the organization of and related financing for the State’s first Tourism Development District.
The Bowery Project in Downtown Akron will be a mixed-use development financed in part with both Historic Tax Credits and New Market Tax Credits. This transformative project will also have a TIF aspect as part of its capital stack.
The Link59 Project in MidTown between East 59th and East 61st is under construction with a spec office building fronting on Euclid Avenue, a renovated office building on East 61st, and a new ground-up Dave’s Supermarket. A very complex capital stack has been assembled for the Dave’s project, including multiple NMTC allocations, grants and conventional loans. It will bring a full-service supermarket and new jobs to this food desert in an economically distressed part of the City.
The Columbus Avenue Project in Downtown Sandusky is a twinned HTC/NMTC transaction that will bring three older buildings to life and transition the City of Sandusky offices to the renovated buildings in Sandusky’s newly formed Historic District. Market rate apartments and ground-floor retail will also be part of the innovative development in a City which has not previously enjoyed the benefit of tax credit allocations and financing.
Massive and exciting is the only way to describe Playhouse Square Foundation’s announced market rate apartment project at E. 17th Street and Euclid Avenue across from the Connor Palace Theatre. At 34 stories, it will bring apartment living in the City to new heights, along with a new 550-space parking garage. Construction is slated to begin towards the end of 2017.
The announced sale of Forest City Realty Trust’s Scranton Peninsula property to a group of local investors is a harbinger of development to come for this prime piece of real estate that has been on the waiting list for decades. Our attorneys represented the developer group which acquired the property and will be a team member as plans move forward for the property.
Last but not least, the Hingetown area situated between Ohio City to the north and Gordon Square to the west continues on its rapid pace of development and redevelopment. Our real estate attorneys represent the joint venture which will construct the Church and State apartment project on the south side of Detroit Avenue between West 28th and 29th Streets. Our attorneys also represent The Music Settlement (TMS) in connection with its new Hingetown location in the mixed-use project being constructed by The Snaveley Group and other investors at the northwest corner of W. 25th Street and Detroit Avenue. TMS will take 19,000 sf. of space on the first floor of the building and open six early childhood classrooms, music instruction rooms, a music therapy room, a dance studio, and much more.
We thank our great clients for their vision and their work. We are proud to be team members with them in bringing these projects to life.
Jack can be reached at (216) 928-2914 or jwaldeck@walterhav.com.
In a Crain’s “Real Estate Guest Blog,” dated 6/13/17 and titled, “New Ohio plywood ban impacts limited number of properties, may set trend for future legislation,” Ellen Kirtner-LaFleur discussed Ohio’s plywood ban and the circumstances under which it takes effect.
In a Crain’s “Real Estate Guest Blog,” dated May 31, 2017 and titled, “New title curative statute will facilitate deals getting done, but beware of possible risks,” Joshua E. Hurtuk discussed the potential ramifications of a recent amendment to Ohio’s title curative statute.
In a Crain’s “Real Estate Guest Blog,” dated May 15, 2017 and titled, “Prohibited use clauses should make sense for the landlord and tenant,” Megan C. Zaidan asserted that prohibited use clauses in commercial leases can benefit both the landlord and tenant, but they must contain language which is flexible enough to balance the needs of both parties.
On February 28, 2017, Charles T. Riehl will be speaking on the topic, “Fracking and Local Governments – What Can Be Regulated?,” at the NBI Seminar (“Local Government Law from Start to Finish”), in Akron, Ohio.
In a Crain’s “Real Estate Guest Blog,” published on October 29, 2016 and titled, “Expanded Motion Picture Tax Credits could impact real estate dealings,” John W. Waldeck, Jr. noted that Ohio’s recent increase of the Motion Picture Tax Credit could eventually lead to the construction of permanent sound stages and production studios in Northeast Ohio.
A class action lawsuit dating back to 2004 has finally been settled involving the owners of property bordering Lake Erie in Ohio who filed against the State of Ohio (State), in conjunction with the Ohio Department of Natural Resources (ODNR). As part of the settlement, affected current and past landowners may qualify for reimbursement if they file the necessary claim form by October 12 of this year.
At the heart of the lawsuit was the State’s claim of public trust ownership up to the Ordinary High Water Mark (OHWM) of Lake Erie. It was back in 2011 that the Ohio Supreme Court weighed in with its opinion that the State’s title in trust to Lake Erie is actually the natural shoreline and not the OHWM. This led to years of litigation and fact finding between the various parties, resulting in the current settlement.
Although neither the State nor the ODNR have admitted any wrongdoing or legal liability in the case, the Plaintiffs and Defendants agreed to a settlement to avoid the additional costs and potential negative consequences of going to trial.
If you owned or co-owned property bordering Lake Erie (including Sandusky Bay and other areas previously determined to be a part of Lake Erie under Ohio Law) within the territorial boundaries of the State of Ohio, you are likely covered under this settlement agreement. Likewise, if you were a lessee under a submerged lands lease with ODNR between May 28, 1998 and May 20, 2015, that used OHWM as the boundary of the State’s public trust ownership, you are also likely covered and may qualify for compensation.
The Court in charge of this case has yet to approve the settlement. Assuming approval is granted and no appeals are filed, payments will be disbursed based on the terms of the Stipulation and the information you provide on the claim form. Payments will be calculated for each parcel of affected property and will be impacted by such considerations as length of frontage on Lake Erie, length of time you owned the property, alterations made to the property and the existence of rental payments, among others.
An official claim form must be received by October 12, 2016. Upon submitting a claim form, you will be bound by the terms of the settlement. You cannot receive a payment without submitting a claim form.
Full details of the settlement, along with a QandA, can be found at www.LakeErieSettlement.com. Or you can call 1-844-36-2770 for more information.
John W. Waldeck, Jr. is a partner in the Real Estate Services Group of the Cleveland-based law firm of Walter | Haverfield LLP.
In a Crain’s “Real Estate Guest Blog,” titled, “Three simple steps to minimize liability, legal delays and expenses during a residential construction project,” Rick L. Amburgey asserted that the parties involved in a residential construction project should prepare and adhere to a written contract in order to minimize the impact of changes or disagreements which could arise during the course of the project.
In a “Real Estate Guest Blog, published by Crain’s Cleveland Business on June 1, 2016 and titled, “Don’t take for granted casualty provisions in commercial leases, because disaster could actually strike,” Joshua E. Hurtuk emphasized that it is important to carefully negotiate – up front – casualty clauses in commercial leases.
In an article published in the May 2016 issue of Properties magazine and titled, “Facade Inspections Mandate Adopted – with Sunset Clause,” R. Todd Hunt discussed the provisions of a recently-passed Cleveland ordinance which mandated facade inspections of older buildings in the city.
In a “Real Estate Guest Blog,” published by Crain’s Cleveland Business and titled, “Restaurant and bar leases require special considerations,” Megan C. Zaidan noted that landlords should pay special attention when leasing space to restaurants or bars, due to the unique and critical provisions often required in their least agreements.
In a Crain’s “Real Estate Guest Blog,” published on March 18, 2016 and titled, “Focus on leasing basics now or suffer consequences later,” Sophia M. Deseran cautioned parties to commercial leases to pay attention to the details when the documents are being drafted, or face potential consequences down the road.
In an article published in the March 2016 issue of Properties magazine and titled, “Proposed City Ordinance Will Mandate Building Facade Inspections,” Jack Waldeck discussed the City of Cleveland’s effort to require building owners to conduct regular inspections of the facades of older buildings.
The local commercial real estate market continues to prosper and grow. Vacancies, on the whole, are generally down and new construction is ever expanding. Across the region deals are getting done. Leading the charge in new development is the hospitality industry which is largely energized by the need for greater capacity in order to handle demand from the upcoming Republican National Convention (RNC). The term “hotel mania” aptly describes the surge in new and renovated hotels in and around the downtown area. In 2016, we can expect to see all of those hotels coming online before the start of the Convention in July.
Hosting such a landmark event is good news, especially in the short-term. Cleveland and, in particular, the downtown area, previously had a shortage of hotel rooms which restricted our region’s ability to attract major events. Now we’ll have plenty. The long-term challenge will fall on our economic development and commerce organizations to attract sufficient events and crowds to ensure that all these new and revamped hotels maintain high occupancy rates.
So what else can we expect in 2016 beyond hotel development? Lots of other development and reconstruction are either focused on or are being forced to adjust as a result of the RNC. Preparations for and activities surrounding the RNC will likely dominate the headlines from both a business and real estate perspective at least through July.
The first half of the year will be characterized by a huge surge in construction as developers and landlords frantically work to complete projects to the Convention. In June, however, all construction work must halt in accordance with a City-imposed construction moratorium prior to and during the Convention. Between security concerns and the desire to provide an aesthetically pleasing view of the city showcasing Cleveland in a positive way for the thousands of delegates, media and outsiders that will be descending on our city, all cranes and exterior scaffolding will need to be removed prior to the RNC. Additionally, during the moratorium period, no construction materials can be transported in or out of downtown.
For downtown projects that are not directly related to the RNC, their start will likely be delayed until after the RNC has finished. Projects involving only interior work or buildouts will not be affected by the moratorium.
As to notable specific projects, one major milestone for downtown Cleveland will be the reopening of the Schofield Building at East Ninth and Euclid, that has been shrouded in scaffolding and other construction equipment for longer than many people can remember. Located at one of the busiest corners in downtown Cleveland’s business district, the building is expected to be renovated in time for the RNC. The Schofield reopening will also mark the debut of an attractive new hotel brand – The Kimpton – to the Cleveland area.
Just beyond the central business district, the Flats East Bank project continues to grow and expand its development mix, and slightly farther out, One University Circle is moving forward with anticipated construction throughout much of 2016.
The building boom that characterized Cleveland even before 2015 (but which became much more noticeable in the past 12 months) will also be reflected by a resurgence in retail activity, a direct result of the ever increasing downtown residential population. New retail stores have contracted to come downtown to give rise to a rebirth of street-level upscale retail. Heinen’s already opened with great fanfare in early 2015, Metro Home opened mid-year near E.9th and Superior, and Geiger’s opened on Euclid Avenue, just in time for the holiday shopping season. Beyond the Cleveland city limits, to the west, Crocker Park has added a hotel and is expanding its retail space and, to the east, development of the Pinecrest project near I-271 and Harvard is underway.
Another major factor affecting activity in 2016 will be interest rates. With the Federal Reserve having just increased its benchmark interest rate by a quarter point, there is an expectation that rates will continue to rise throughout the year. A rising interest rate environment will likely push investors and developers to refinance existing debt sooner rather than later.
The new year is shaping up to be exciting and prosperous for Northeast Ohio and, especially, for Cleveland. Our real estate market appears to be ahead of the national trend, largely as a result of the impact of the RNC. Moving past the time of the RNC, however, the future is a bit less certain and only time will tell which projects will continue to move forward. From a legal perspective, the overlying theme is that of optimism but a heads up to proceed responsibly since nothing this good lasts forever.
Contact: Geoffrey S. Goss
The vision for the redeveloped Pro Football Hall of Fame in Canton, known as the Hall of Fame Village, has been described by some people close to the project as the Disney World of football. While football fanatics and other visitors to the Pro Football Hall of Fame will likely marvel at the many projected improvements, they likely have little understanding of everything that had to happen behind the scenes of the $500 million redevelopment project in order to make it a reality. By the time the first phase of the project was announced last fall, Walter | Haverfield real estate attorneys were already deeply immersed in the sizable complexities of the project.
A major challenge facing our real estate team was the structuring of the deal, not only because of the large number of parties involved, but also the complexities of a true public-private partnership involving a private developer, the Pro Football Hall of Fame, the City of Canton, Stark County Port Authority and two school districts (Canton and Plain Local). The fact that a large portion of the project involves land owned by the Canton City School District presented another set of complications because school districts are subject to special rules and restrictions regarding the transfer of real property. Such ownership made the public financing component of the project twice as complex.
Another challenge was that Walter | Haverfield’s client, master developer Industrial Realty Group (IRG), had formed a joint venture with the Pro Football Hall of Fame, which is a non-profit organization governed by a Board of Trustees. The Stark County Port Authority was additionally brought into the ownership structure of the project to qualify the project for TIFF financing and a special sales exemption.
Valued at roughly $500 million, the sheer size of the project additionally made it one of the larger redevelopment projects in the region. Projected to be under construction for more than five years, the Hall of Fame Village redevelopment includes numerous phases, each representing its own set of challenges. The first phase, which is expected to be completed by August in time for the 2016 Enshrinement Ceremony and nationally televised NFL/Hall of Fame Game, focuses on improvements to the Benson Hall of Fame Stadium. Three of nine new youth fields are also part of Phase I and are expected to be completed within the next 12 months. Ground will likely be broken to begin Phase II construction after the August ceremonies and will include further stadium improvements, along with work on the new Main Street retail area which will feature a new hotel, restaurants and shops.
As part of the project’s overhaul are significant improvements to local infrastructure, including underground utilities, new parking areas, streetscape, sidewalks and electric line relocations. In order to proceed with future phases, it is expected that 100 parcels of land in Plain Township still need to be acquired and developed in time for a projected 2019 project completion date.
This is not the first time that the Walter | Haverfield real estate, public law and tax attorneys were challenged with such a complex task. In addition to the firm’s experience launching a number of large redevelopment projects in and around downtown Cleveland, Walter | Haverfield has been working with IRG to move forward on a number of phases for the Goodyear renovations in Akron. The Canton challenge has been more significant, however, inasmuch as it requires satisfying the financial and legal needs of a city, two school districts, the Port Authority, a non-profit organization and numerous private partners, as well as the legal procurement of nearly 100 parcels of land.
Fortunately, Walter | Haverfield had the necessary resources in-house to not only satisfy the various partners, but to also get the deal done before the end of 2015. The year-end completion translates into significant tax advantages as it allowed the tax exemption to begin already in 2015.
Contact:andnbsp;Nick R. Catanzarite
In an article published in the January 2016 issue of Properties magazine and titled, “Challenges and Opportunities to Watch for in 2016,” Geoffrey S. Goss predicted an exciting and prosperous year ahead for Northeast Ohio’s commercial real estate market.
In an article which appeared in the November 2015 issue of Properties magazine, titled, “Attorney-Client Relationships: Avoiding Surprises, Conflicts of Interest,” Geoffrey S. Goss addressed the increasingly important role of “conflict waivers” in commercial real estate transactions.
In a Crain’s “Real Estate Guest Blog,” published on October 26, 2015 and titled, “Avoiding federal tax liability when selling commercial real estate,” Tyler S. Bobes described “1031 like-kind exchanges” and outlined their benefits for commercial real estate investors.
October 2015 – “The timely filing of a Notice of Commencement protects both owners and contractors,” Crain’s Cleveland Business (Real Estate Blog)
$225 million Orange Village mixed-use project enters initial phase
Despite numerous challenges, Walter | Haverfield client Fairmount Properties is now entering the first phase of development for its $225 million Pinecrest mixed-use real estate project in Orange Village. The vision for Pinecrest dates back to 2013 when Fairmount first started putting plans in place for the 58-acre project that will include 400,000 square feet of retail and restaurant space, 90 new apartments and 150,000 square feet of office space linked to a 120-room hotel and parking garage. The first phase of construction involving the demolition of 31 homes in Orange Village began in August of this year.
Pinecrest is far from being an ordinary commercial real estate project. Fairmount (with the help of the Walter | Haverfield real estate legal team) had to negotiate with more than 30 individual property owners who, until recently, called the area of the Pinecrest project their home. These properties, each with its unique set of difficulties, needed to be demolished to make room for the new shopping/lifestyle project.
Complicating matters was the fact that Orange Village has placed a number of restrictions on the project, including a “no poaching” restriction that limits the developer’s right to lease to certain retailers already doing business in the region. In addition, a 30-foot mound must be built to protect area homeowners from the noise and viewing restrictions created by Pinecrest.
Project financing was additionally complicated by the use of tax increment financing (better known as a TIF). In order to receive approval for the TIF, Fairmount had to negotiate with Orange Village and the local school district to cover the necessary funding for the project’s infrastructure.
Walter | Haverfield has served as lead counsel on the project since 2013, overseeing all of the leasing and most of the financing and joint venture work, as well as closing on the option agreements with the numerous property owners. At one point during the process, as many as 19 properties were closing on the same date. Negotiations with prospective tenants are ongoing.
The grand opening for Pinecrest is projected for the spring of 2017.
Contact: Kevin Patrick Murphy
August 2015 – “Ohio statute
provides means to remove oil and gas leases,” Crain’s Cleveland Business (Real
Estate Guest Blog)
June 2015 –
“Supreme Court ruling underscores landlords’ fair
housing responsibilities,” Crain’s Cleveland Business (Real
Estate Guest Blog)
Geoffrey S. Gossandnbsp;served as a panelist at the Novogradac New Markets Tax Credit Conference on June 11, 2015, in Washington, D.C. Geoff’s panel addressed the topic, “The Tale of Two Credits: HTC and NMTC.”
In a Crain’s “Real Estate Guest Blog,” published on June 8, 2015 and titled, “Don’t take estoppel certificates lightly,” Sophia M. Deseran asserted that estoppel certificates merit attention in commercial lending or sale transactions; if misunderstood, they can be problematic for all parties involved in such matters.
Few people would have imagined that the space that once housed a major bank could become the home to Cleveland central business district’s largest full-service supermarket. But with the opening of Heinen’s this past February in the renovated Cleveland Trust Building on East 9th Street in downtown Cleveland, history was made.
The renovation has been praised for its thoughtful use of space without detracting from the beauty and rich history of the Rotunda. Behind all the hoopla and praise for the 27,000-square-foot project, however, is a tremendous real estate success story–one that was only made possible after overcoming numerous legal and architectural challenges.
At the heart of the challenge was the fact that the space had to be renovated according to historic rehabilitation standards. The fact that a supermarket occupies such a space, which was redeveloped in compliance with such standards, only adds to the allure of the overall project.
Walking through the store today, it is easy to overlook the noteworthiness of all that was accomplished since the Rotunda was vacated in the 1990s following the merger of Ameritrust and Key Bank. Remembering that teller spaces once stood where fresh food is now displayed only begins to tell the story of the challenges surmounted.
The legal challenges began with the lease agreement between The Geis Companies (the developer) and Heinen’s as it had to be negotiated such that all space was created within the confines of stringent historic rehab standards. It was the responsibility of our firm’s real estate and tax experts to ensure that the lease obligated Heinen’s, in building out the space, to observe these standards so that the project would not be at risk of losing the historic tax credits that were largely responsible for making the project a reality.
The store’s floorplan is unlike any other Heinen’s location in its configuration. Not only is it considerably smaller in size, but it is built around and amongst elaborately decorated arches and columns, as well as the iconic bronze seal that had to remain intact in the center of the Rotunda floor. In some areas, the lower ceilings presented design challenges, as did the historic cast iron railings that had to stay in place.
The transformation from a bank lobby to a supermarket at one of downtown Cleveland’s busiest intersections may be one of Cleveland’s greatest adaptive re-use success stories. Thanks to the efforts and expertise of many different service professionals, the project was completed on-time and serves as one more piece of the giant puzzle that favorably positions downtown Cleveland as a preferred place to live, work and play.
To reach Jack, call 216-928-2914 or e-mail jwaldeck@walterhav.com.
Even several months into the new year, many local commercial real estate professionals still relish how successful 2014 was from a development perspective. Led by our own real estate practice group, law firms across Northeast Ohio stayed busy keeping up with the vast number of transactions, as new deals closed and existing projects progressed into their next phases of development.
As strong as 2014 was, 2015 is shaping up as strong, if not stronger. Regionally, there are numerous projects progressing through development, with particularly robust activity in downtown and midtown Cleveland, as well as Ohio City. In Akron, the East End project saw the completion of the Hilton Garden Inn in late 2014, and construction of the project’s Phase II is in full swing, with completion of the Goodyear Hall redevelopment expected in mid-2015.
One factor helping to drive continuing growth this year is the broad availability of commercial lending funds. Traditional and non-traditional lenders are aggressively pursuing solid commercial real estate investment opportunities. The recent entry of several out-of-town banks into the region will serve to better ensure competitive rates for good projects and qualified borrowers.
New sources of funding are also becoming available locally as more non-traditional lenders are looking to increase their commercial real estate portfolios after having witnessed the tremendous success of several major local projects such as The 9 and Uptown. In addition, these recent successes may cause the Central Business District to catch the interests of developers who typically focus on the suburbs but who are now more willing to take risks within the city limits. Downtown growth may also expand westward with the conversion of the West Shoreway to a more accessible boulevard—a project may begin later this year.
Another factor in the regional real estate market is the preparation for next year’s Republican National Convention. Many businesses are being “encouraged” to do things outside of their traditional comfort zones in order to accommodate the needs of the Convention. Many local law firms are already experiencing an uptick in business in reviewing the multitude of contracts and agreements governing space and other logistics relative to the Convention. Of special note is the no-build zone surrounding the core convention site, which may likely accelerate building in 2015, since no exterior construction work can be done around the time of the Convention in and around the downtown area.
The anticipation of higher interest rates may also accelerate the timing of projects and deal closing. Rates have been precariously low for several years, prompting many to speculate that a rise may be likely in the near term.
Developers and investors eager to take advantage of current low rates may look to both accelerate current projects, if possible, and convert variable rate financing agreements into longer term fixed-rate structures.
As has been the case in recent years, tax credit financing remains an integral piece in moving qualified projects forward. The extension of the New Markets Tax Credit program thru 2014 should provide a ready source of funding for projects this year, as well.
As rosy as the overall forecast appears, history has taught us to not count the money until the deal is completed and delivered. Thus, areas of concern to be aware of include:
- Sustainability of high demand (and high occupancy rates) in downtown rental housing in order to fill units planned and under construction. While housing demand continues to be strong, the retail segment continues to lag. Without sufficient retail support, downtown housing may struggle over the long-term to retain the young professionals currently driving the residential building boom.
- The challenge to occupy the glut of new hotel rooms coming online in 2015. While the Republican National Convention will fill these rooms (and more), questions remain whether there is sufficient and consistent demand to support this growth long-term.
- The sense of optimism that has infiltrated much of the real estate industry has still not made its way to the full consumer population. Overall economic confidence needs to remain high to keep projects moving and adequately funded.
Despite these concerns, 2015 is already shaping up to be a positive and impactful year for developers, investors and law firms.
To reach Geoff, call 216-928-2973 or e-mail ggoss@walterhav.com.
In a Crain’s “Real Estate Guest Blog,” published on May 27, 2015 and titled, “More projects may be delayed thanks to new restrictions designed to save endangered bat species,” Joshua E. Hurtuk advised builders and property owners to be aware, when establishing construction timelines, that their plans may be impacted by the roosting seasons of endangered or threatened bat species in northeast Ohio.
In a Crain’s “Real Estate Guest Blog,” published on April 20, 2015 and titled, “RNC-related contracts pose special legal challenges,” John W. Waldeck, Jr. indicated that Northeast Ohio companies and individuals should consult with legal counsel in order to carefully consider which clauses in their construction contracts and leasing agreements may be impacted by the arrival of the Republican National Convention next summer.
January 2015 – “Looking Forward
in 2015,” Properties
magazine
Progress continues to be made on the East End redevelopment of the former Goodyear Tire and Rubber Co. campus off East Market Street in Akron. In November, Phase I of the redevelopment initiative was completed with the opening of the Hilton Garden Inn, Akron’s first full-service hotel to be built in more than 20 years.
Next on the agenda is the completion of the renovation of Goodyear Hall, which formerly served as the home of the World of Rubber, Goodyear Gift Shop and company exhibit hall. In their place will be more than 120 upscale apartments, along with office and retail space. The expansive theatre that seats more than 1,000 people, as well as the facility’s large gymnasium, will remain largely intact.
None of this work would be possible without the support of a complex financing structure that relied heavily on historic and new market tax credits. Walter | Haverfield real estate attorneys were called upon to negotiate the financing so that favorable terms were reached for all of the investors, as well as the developer. Supplementing their expertise were the firm’s tax attorneys who provided the necessary counsel to ensure that the project qualified for tax credits and that the financing was in line with ever-changing tax guidelines.
Renovation work on the $37 million Goodyear Hall project, which has been described as a major catalyst for the redevelopment of downtown Akron, is expected to be completed in the second quarter. Plans for Phase III are already underway. Walter | Haverfield attorneys, who have been involved with the East End redevelopment since its inception, have already submitted the application for historic tax credits to help fund the massive renovation of the old million-square-foot Goodyear Headquarters.
In total, the revitalization project is valued at more than $200 million.
To reach Attorney Catanzarite, call 216-928-2981 or e-mailandnbsp;ncatanzarite@walterhav.com.
In a Crain’s “Real Estate Guest Blog,” published on January 26, 2015 and titled, “Air right parcels: An alternate way to structure mixed-use developments,” Jennifer A. Heimlich maintained that the use of an “air right parcel” model in the structuring of mixed-use developments can be beneficial to commercial property owners.
In an article which appeared in the November 2014 issue of Properties magazine, titled “Plan Ahead and Negotiate Wisely to Maximize Value of Shopping Center Outparcels,” Megan C. Zaidan advised builders of retail shopping centers to create outparcels early in the construction process and to make sure that documents pertaining to their establishment, such as “Reciprocal Easement Agreements,” contain provisions favorable to the builder.
In an article published in the November 2014 issue of the Novogradac Journal of Tax Credits and titled, “Revived Historic Structures Anchor Downtown Cleveland,” John W. Waldeck, Jr. was quoted on “The 9” project and the important role which tax credits played in making it a reality.
In an article published in Crain’s Cleveland Business on October 27, 2014 and titled, “Marijuana-based investing can have highs, lows,” Kevin Patrick Murphy provided some advice for real estate investors who may be interested in investing in the regulated cannabis industry.
In a Crain’s “Real Estate Guest Blog,” published on October 27, 2014 and titled, “Negotiating Favorable Co-Tenancy Provisions in Retail Leases,” Tyler S. Bobes discussed co-tenancy provisions in retail leases and their potential financial impact upon landlords and tenants.
October 2014 – “Construction
Defects: How Long Are You At Risk?” Properties
Magazine (Legal Perspectives).andnbsp;
The September/October 2014 issue of Cities and Villages magazine featured a presentation given by R. Todd Hunt on July 24, 2014, at the OMAA Law Institute. In this piece, titled “Land Use,” Todd covered a variety of topics of importance to municipalities across Ohio, including constitutional issues in land use law, zoning code pitfalls and weaknesses, rehearings by boards of zoning appeals, and Ohio Sunshine Laws applicability.
By John W. Waldeck, Jr. and Geoffrey S. Goss
People who frequently pass by the intersection of East 9th Street and Euclid Avenue have likely gotten used to seeing scaffolding on the Schofield Building. Despite tremendous commercial interest in the property, the most recent recession had stalled redevelopment of the historic structure.
Walter | Haverfield’s real estate team was called in on a referral to new client, CRM Companies, Inc., to help the project move forward. The client was specifically interested in leveraging the firm’s wealth of tax credit expertise, since the building had already qualified for federal Historic Tax Credits (HTCs) and was also awarded state HTCs.
Not only were our tax credit and real estate professionals able to render a tax opinion on the project and conduct a Safe Harbor analysis, but we also negotiated the necessary operating agreements and master lease, refining the master tenant structure. On behalf of our client, our team worked with the tax credit investor directly on these documents to bring about the desired investment result.
Construction and redevelopment of the Schofield Building continues to move forward to complement the other redevelopment initiatives occurring at or near that intersection. When completed, the long vacant building will be home to new retail space on the street level, a 122- room Kimpton Hotel and associated restaurant, and 54 market-rate apartments on the higher levels. The $45 million project is scheduled for completion by December 2015. Combined with the other work that the Walter | Haverfield real estate team has handled within that same block of East Ninth Street, over a two-year period the total investment within a one-block radius is estimated at more than $300 million.
Equally important as the dollar-value investment is the impact on the overall downtown revitalization effort. This marks the entrance of the Kimpton brand into the Cleveland market and the addition of more desperately needed hotel rooms to the central business district. The residential rental units will serve the still growing demand for downtown housing, as occupancy rates continue to run close to capacity. And finally, from the perspective of the many passersby, the Schofield Building’s beautiful facade which had been covered up for years, will be restored, creating an attractive landmark at one of downtown’s busiest intersections.
Read more about downtown Cleveland development.
To contact Attorney Waldeck, call 216-928-2914 or e-mail jwaldeck@walterhav.com; to contact Attorney Goss, call 216-928-2973 or e-mail ggoss@walterhav.com.
In an article published in the October 2014 issue of Properties magazine and titled, “Expansion of Ohio’s Historic Preservation Tax Credit Program Takes Effect,” Nathan A. Felker addressed the new Ohio law which expanded the state income tax credit available to those who wish to preserve historically significant structures across the state.
In its October 6, 2014 issue, Crain’s Cleveland Business named Kevin Patrick Murphy as a member of its 2014 “Forty Under 40” class. Along with the other young professionals in this class, Kevin was recognized for his achievements and leadership in the Northeast Ohio business community.
In a “Real Estate Guest Blog,” published by Crain’s Cleveland Business on August 25, 2014 and titled, “The Ohio Historic Preservation Tax Credit Program gets a boost,” Nathan A. Felker noted that a forthcoming expansion of the state income tax credit available to those undertaking the rehabilitation of historic buildings may encourage them to embark upon even more ambitious rehab projects in Cleveland over the next few years.
John W. Waldeck, Jr. was featured in an online article published on July 29, 2014 by the Lorain County newspaper, The Chronicle-Telegram. In this piece, written by reporter Lisa Roberson and titled, “Elyria mayor offers 2 plans to boost businesses,” Jack urged private builders to partner with the City of Elyria’s new Community Improvement Corporation in an effort to revitalize a number of areas in and around downtown Elyria.
In a “Real Estate Guest Blog,” published by Crain’s Cleveland Business on June 23, 2014 and titled, “As landlords seek loans, lenders increasingly seek documentation from tenants,” Sophia M. Deseran indicated that well-crafted Subordination, Non-Disturbance and Attornment Agreements (SNDAs) can benefit lenders, borrowers and tenants in commercial financing transactions.
On June 18, 2014,andnbsp;Geoffrey S. Gossandnbsp;participated as a panelist at the Cleveland Metropolitan Bar Association’s Real Estate Section Spring Seminar. The topic of discussion for this panel was titled, “Essentials of a Commercial Transaction.”
Byandnbsp;Gary A. Zwickandnbsp;and Lacie L. O’Daire.
On December 30, 2013, the Internal Revenue Service issued its long-anticipated “Safe Harbor” guidance for transactions in which federal Historic Tax Credits are employed to raise capital for real estate redevelopment projects. The guidance was issued in the form of Revenue Procedure 2014-12. To access the full text of Revenue Procedure 2014-12, please follow the link at the bottom of this Client Alert.andnbsp;
The guidance was issued in response to requests for clarification of the IRS position taken in the case ofandnbsp;Historic Boardwalk Hall, LLC v. Commissioner, decided in 2012 by a federal court of appeals. Theandnbsp;Historic Boardwalkandnbsp;case had a chilling effect on pending and new projects which would utilize federal historic tax credits to aid in capital formation for redevelopment of historic structures. It has been anticipated that the guidance would bring stability and certainty to this segment of the real estate industry, which was thrown something of a curve ball in the 2012 decision.andnbsp;
Generally speaking, the IRS re-emphasized a key outgrowth ofandnbsp;Boardwalk Hallandnbsp;- HTC deal structures must ensure that “investors” (owners who are not developers or do not manage the project) share in both the upside and downside risk associated with the project. In IRS-speak, investors should have “a reasonably anticipated value commensurate with the Investor’s overall percentage interest.”andnbsp;
The guidance provides a road-map for HTC-structured transactions to utilize in the future. Among other things, the Safe Harbor guidelines: (i) provide clear minimum equity interest requirements for the developer/sponsor and the investor; (ii) define minimum investor contribution percentages and related timeframes as to when such contributions should be advanced; (iii) create categories of permissible and impermissible guarantees; and (iv) set forth a strict prohibition against developer/sponsor calls (as to the purchase of the investor’s interest).andnbsp;
The Safe Harbor applies to allocations of HTCs on or after December 30, 2013. If transactions which closed prior to this date meet the Safe Harbor guidelines, then the IRS will not challenge the later allocations of HTCs to the extent of the subject matter contained in the guidelines.andnbsp;
This Client Alert is intended to give only a brief overview of the Safe Harbor guidelines. There are other requirements not summarized above that will require detailed analysis for each transaction. It is too early to predict how investors, in particular, will seek to change the structure, pricing and other terms of Historic Tax Credit-related transactions given the guidance provided by the IRS, but deal changes seem likely. Please consult us to provide further advice.andnbsp;
In an article published in the January 2014 issue of Properties magazine and titled, “Progress in 2013 promises bright 2014 for commercial real estate in Cleveland,” John W. Waldeck, Jr. provided a summary of commercial real estate activity in Cleveland in 2013 and offered a glimpse at some of the projects which are scheduled for the new year.
On January 13, 2014, Geoffrey S. Goss maintained that recent historic tax credit guidance issued by the IRS should result in an increase in successful tax credit-backed projects in the future in his article, “Long-awaited IRS guidance provides clarity for historic tax credit development partnerships,” in Crain’s Cleveland Business’s “Real Estate Guest Blog.”
In aandnbsp;Crain’sandnbsp;”Real Estate Guest Blog,” published on December 16, 2013 and titled, “Making the most of exclusive-use provisions in leases for landlords and tenants,”Megan C. Zaidanandnbsp;explained the purpose of “exclusive-use” provisions in commercial leases and described how, when drafted properly, they can benefit both landlords and tenants.
In an article published in the November 2013 issue ofandnbsp;Propertiesandnbsp;magazine, titled “The Life Cycle of a Property,”andnbsp;Geoffrey S. Gossandnbsp;advised owners of commercial real estate properties to rely on third-party professional help throughout the “life cycles” of their properties.
On October 24, 2014,andnbsp;R. Todd Huntandnbsp;spoke on the topic, “Those Legal Cases That Affect the Way You do the Public’s Business,” at the 2014 Cleveland Planning and Zoning Workshop, sponsored by APA Cleveland, in Westlake, Ohio.
July 2013 – “Foreign Aid,” Commercial Investment Real Estate (July/August 2013)
March 11, 2013 –
“EB-5 funding:
Still another option for expanding project financing, Crain’s
Cleveland Business (Real Estate Blog)
October 2012 – “Historic Tax Credits Face External Challenges Despite Proven Economic
Impact,” Properties
September 2012 –
“Recent court decision challenges future of vital historic tax credit
program,” Crain’s Cleveland Business (Legal Guest Blog)
August 20, 2012 – “Amid financing challenges, developers consider options,” Crain’s
Cleveland Business
“Serving as legal counsel for the Pinecrest development was extremely rewarding,” said Kevin Murphy, a partner at Walter | Haverfield. Murphy’s comments about the Cleveland area’s newest mixed-use district appeared in Properties magazine.
Every commercial landlord should be familiar with the phrase “retail apocalypse.” It’s a phrase that refers to the recent epidemic of retail store closings, many of which were the result of those companies filing for bankruptcy. Unfortunately for landlords, store closures and other vacancies are trends that do not appear to be slowing. And it’s important that landlords are aware of their rights in bankruptcy and the potential traps involved. Here’s what commercial landlords need to remember as they navigate this dynamic landscape:
The Automatic Stay
Once a tenant files for bankruptcy, an automatic stay or injunction is invoked to protect that tenant from new or continued collection activities. It also prevents landlords from initiating an eviction, changing the locks or even demanding payment of past-due rent. A landlord’s violation of an automatic stay may allow the tenant to recover actual damages, including attorneys’ fees and, in some cases, punitive damages.
A landlord can file a motion with the bankruptcy court to seek relief from the automatic stay if certain conditions are met. Landlords should be aware that automatic stay is applicable even if the terms of the lease state that the lease is terminated upon the filing of a bankruptcy case.
Lease Assumption and Rejection
Under Section 365 of the Bankruptcy Code, a tenant has the option to assume or reject the remainder of the lease. If the tenant does not assume the lease prior to 120 days after the petition date or the date confirming a plan of reorganization, then the lease is considered rejected. The tenant then must immediately surrender the property to the landlord. That period may be extended by 90 days upon motion.
Often, the tenant will reject the lease for economic reasons. In such cases, the landlord becomes an unsecured creditor with a claim for damages for unpaid rent based upon the statutory formula in § 365. However, as a result of being a general unsecured creditor, a landlord will likely receive less than the actual amount of the rejection damages claim.
Also, the rejection of a lease does not remove a tenant from the leased premises. The landlord may need to incur additional expenses in removing the tenant through an eviction action in state court.
Fortunately, even if the tenant rejects a lease, it is liable to the landlord for rental payments that became due after the petition was filed and before the tenant rejected the lease. These and other monetary lease obligations are paid as administrative expenses, which allows the landlord to recover those amounts on a priority basis.
From the landlord’s perspective, it is clearly preferable that the tenant assumes the lease. Not only do the premises remain occupied, but the tenant must also provide assurance that they will be able to address any defaults and meet the terms of the lease. The tenant may also assign the lease, or sublet, to another tenant. This occurs when the lease has value, but the tenant does not want to continue to operate in that location. Because the Bankruptcy Code provides that anti-assignment clauses in leases are generally not enforceable in cases of bankruptcy, the tenant has a lot of leeway in determining whether to assign a lease to another party. If they choose to assign the lease, the tenant must reconcile any past debts and ensure the new tenant will be able to meet the terms of the lease.
If the lease involves premises within a shopping center, the landlord generally has more protections against assignment. In order to assign a lease in a shopping center, the tenant must demonstrate that the new tenant can fulfill the obligations of the lease, any percentage of rent due will not decline substantially, the original terms of the lease still apply, and the assumption or assignment of the lease will not disrupt any tenant mix in the shopping center.
Proof of Claim
If a landlord is owed damages by a tenant, it must file a proof of claim by a claims bar date. The landlord may not know the amount of damages to claim by this date if the tenant has not yet decided to assume or reject the lease. As a result, landlords are provided a certain amount of time to assert damages if the tenant rejects the lease. It is important that a landlord be aware of these dates and file a proof of claim in a timely fashion.
As rumors that large retailers and smaller companies are on the brink of bankruptcy continue to swirl, it is clear that the “retail apocalypse” is not ending soon. Commercial landlords would therefore be well served to gain a thorough understanding of their rights and restrictions when dealing with a tenant in bankruptcy. Doing so will allow them to recover the money they are rightfully owed and avoid having legal action taken against them.
Patrick Hruby is an attorney in Walter | Haverfield’s Corporate Transactions group. His practice also extends into the Litigation Services group. He can be reached at phruby@walterhav.com or at 216-619-7878.
Retail landlords should be aware of their rights and restrictions when dealing with a tenant in bankruptcy, according to Walter | Haverfield’s Patrick Hruby, writing for the Cleveland Metropolitan Bar Journal.
Considering Landlord Rights in Commercial Tenant Bankruptcies
Commercial landlords have become familiar with the phrase “retail apocalypse,” a sobering term that refers to the recent epidemic of retail store closings. It is a trend that has resulted from companies filing for bankruptcy, and one that does not appear to be slowing. The Bankruptcy Code contains three key provisions landlords must understand as they navigate this dynamic landscape.
Immediately after a tenant files for bankruptcy, an automatic stay is invoked to protect the tenant from collection activities. This action prevents landlords from initiating an eviction, changing the locks or demanding payment of past-due rent. While it is possible to file a motion to seek relief from an automatic stay, landlords must be aware that the injunction still applies, even if the terms of the lease state the contract is terminated upon the filing of a bankruptcy case.
Under Section 365 of the Bankruptcy Code, a tenant who files for bankruptcy may reject or assume the remainder of the lease. Often, the tenant will reject the lease for economic reasons. The landlord then becomes an unsecured creditor with a claim for damages. As such, however, they will likely receive less than the actual amount of the damages claimed. Fortunately, the tenant is still liable to the landlord for rental payments that became due after the petition was filed and before the lease was rejected. It is clearly preferable to the landlord that the tenant assumes the lease, the premises remain occupied, and the tenant agrees to be bound by the terms of the lease going forward.
Finally, a proof of claim can be filed by a landlord if they are owed damages by a tenant. The landlord may not know the amount of damages to claim if the client has not yet decided to reject or assume the lease, so they are provided time to assert damages if the tenant rejects the lease. Landlords should be aware of these dates to ensure they file a proof of claim in a timely fashion.
Restaurant Leases
While restaurants have shown resilience to certain aspects of retail ills, they can present problems for landlords who desire to keep traditional retail tenants happy. Odors, parking, noise and beer and wine service at restaurants present unique problems.
To address the issue of odors and smoke coming out of hood exhaust pipes, scrubbers are and should be required, especially if there are residential components to the center. There is the potential for a very negative impact on leasing to residential tenants who experience smoke and odors penetrating their apartments adjoining restaurants. The cost of such installations may be a challenge to both landlords and tenants.
Grease traps are a must in restaurant operations, and have been for a long time. There may be a desire by landlords for a multi-tenant grease trap installation. That’s so the landlord can be assured of the regularity of cleaning and maintenance that are required to ensure efficient operation of the grease traps. On the other hand, dividing up the costs of maintenance and replacement of the multi-tenant traps can be a headache since each tenant’s use and demand on the system can vary widely.
Outdoor patio and seating areas are extremely common today. However, they bring with them issues of liability, adequate insurance, controlled entrances, noise and rent charges, if any. All must be taken into account in lease negotiations.
Finally, issues relating to the serving of beer, wine and spirits seem to never end. There are licensing matters, whether landlord or tenant control will ultimately control the liquor permit, and unique insurance products that must be accounted for.
Conservation Easements
Recent case law continues to show IRS pressure on the use of conservation easements as qualified charitable contributions. In one example, a conservation easement was donated which reserved to the landowner, if an eminent domain taking occurred, the value of any post-easement improvements built by the landowner. The IRS attacked this provision successfully (appeal expected), convincing the appeals court that this was an impermissible retention by the landowner of a right to “extinguishment proceeds” by the landowner. The deduction was completely disallowed.
In another example, the court held that a golf course easement, which was syndicated, did not protect any of the required conservation purposes. The charitable deduction was completely disallowed.
In the third example, also a syndicated easement transaction, the charitable deduction was completely disallowed because the Form 8283 required to be filed by the IRS in such transactions was not completed properly in that a blank space was intentionally left open (apparently on the advice of counsel).
Conclusion
Put your experienced, professional team in place in advance of dealing with the issues discussed above. You will avoid surprises after the documents have been signed!
John (Jack) Waldeck, Jr. is head of the Real Estate team at Walter | Haverfield. Jack can be reached at jwaldeck@walterhav.com or at 216-928-2914.
Walter | Haverfield partner Jack Waldeck addressed three key legal issues facing the commercial real estate industry in an article in Properties magazine.
Commercial real estate and construction professionals take note: The adoption of blockchain technology in the design and construction industry presents a great opportunity.
Projects come in all sizes and complexities, and involve multiple levels of participants, in multiple phases. Delays and disputes often occur when communications break down among the project parties. Issues can include change orders being performed without full agreement of the parties; the application of different definitions to contract terms; and delays incurred, but not communicated until the project is behind schedule.
The list is endless, but in almost every instance the left hand is unaware of what the right hand is doing. No other industry is in such dire need of a process upgrade. From acquisition to financing to design to construction, a successful project requires open communication and collaboration at all levels.
Blockchain technology can provide this new level of project transparency.
In layperson’s terms, blockchain is a secure database that is date-stamped and shared among a network of participants. The parties in the network initially agree to the rules of the blockchain, and the blockchain acts as an electronic record of the project. The operative documents, agreements and records are stored in a series of blocks that can be updated by any party within the network. The blockchain records the time and sequence of each amendment or update and instantly notifies all participants.
Each amended block becomes a new block that is linked to the preceding block. This forms a successive chain, which becomes the permanent record of the project. The agreements in the blockchain, or smart contracts as they are called, are designed to be self-enforcing, with the terms and conditions of the agreements connected to the flow of funds and sequencing of events during construction.
So, how can blockchain enhance communications and streamline the process? Imagine a commercial development where the progress of construction and flow of payments are completely automated and transparent. Project milestones can be verified by all parties in real time, and payments are automatically released upon completion of such milestones. Owners can track the flow of payments downstream to ensure subcontractors and suppliers are being paid. General contractors can track the approval process for payment applications, as well as funding from lenders upstream.
This transparency would reduce the likelihood of payment disputes and enable parties to identify potential issues in advance of work stoppage, allowing projects to proceed on time.
The applications for blockchain technology in the design and construction industry are endless. Project information would be universally available to every level of the project team, leaving no more excuses for breakdowns in communication. Lenders, owners, design consultants, engineers, architects, general contractors, subcontractors and suppliers would all have the ability to update the project database in real time.
The lines of communication would be wide open. Shipments could be tracked, inspections shared, workflow schedules updated, change orders processed and submittals reviewed, all in real time, and all with a complete historical record of the contractual obligations and timelines surrounding such items.
Blockchain technology is here. The industry must now educate itself and push for mainstream adoption.
Rick Amburgey is an associate with Walter | Haverfield who focuses his practice on construction law, financial services and commercial real estate. He can be reached at 216-619-7843 or at ramburgey@walterhav.com.
*This article also appeared in Crain’s Cleveland Business.
Alex, Ed and Josh Hurtuk with Alex’s French bulldog, Cooper, in the Hurtuk’s South Russell family home.
Admiration for their father and curiosity about his career fueled Josh and Alex Hurtuk’s interest in real estate law from a young age.
“Alex would draw up contracts around the house and hide parts of it so I couldn’t tell what I was signing,” recalls Ed Hurtuk, father of Josh, 33, and Alex, 27. “He wanted a horse so he drafted a contract that I signed that said he could get a horse by the time he was 12 years old.”
Contracts turned into negotiations in the Hurtuk household as the kids mimicked their father, Ed, a real estate lawyer who opened the law firm of Hurtuk & Daroff in Mayfield Heights in 1997.
“Alex’s interest in a horse faded so he used the contract as leverage and negotiated for something else – a painting of LeBron James in his bedroom,” added Ed as he laughed. “The contract was a long-term play,” said Alex.
The Hurtuk kids soaked in their dad’s work – as foreign as it seemed – while Ed shared small details of his job along the way.
“I remember driving around with the family, and my dad would say, ‘I did the lease for that building,’ or ‘my clients own that building,’ or ‘I did the loan for that building,’” said Josh, a Solon resident.
“When I was growing up, I didn’t understand that clients could leave and go to another firm,” said Alex Hurtuk, a downtown Cleveland resident and former college tennis player. “I thought my dad’s clients were part of our extended family, and I think that speaks to my dad’s positive and long-term relationships with his clients.”
Josh grew up excelling in science, while Alex enjoyed math and art, and Ed did not expect their interest in real estate to exceed their passion for such subjects.
“I thought Josh and Alex might think it’s boring to sit and read a lease,” said Ed, who once served as law commissioner for the Ohio Supreme Court. “I thought there are sexier things out there than real estate law.”
But when the brothers wanted to work at Hurtuk & Daroff in high school and college to earn some extra money, he sensed he could be wrong.
“I knew through college that I wanted to go to law school and work in real estate,” said Josh, who has been selected to the Ohio Super Lawyers Rising Stars list for the past four years. “In law school, I geared all of my classes toward real estate and transactional law.”
“I enjoy the contractual side of real estate and the fact that there is a tangible product when a project is complete,” added Alex.
Once Josh and Alex started their educational paths toward real estate law, Ed hoped that the three of them could work together at Hurtuk & Daroff someday and carry on the family business. But, in a twist of events, the trio ended up working together in a much different scenario.
“It never occurred to me to merge with Walter | Haverfield,” said Ed, who taught real estate and finance as an adjunct faculty member at Case Western Reserve University School of Law and the Cleveland Marshall College of Law.
Both Josh and Alex practiced real estate law at Walter | Haverfield, and an acquisition of Hurtuk & Daroff by Walter | Haverfield soon seemed like the right move for both firms, the real estate groups and the family.
“It was a good way of getting Josh and Alex involved in my practice, and it’s been great for us to have the back-up of lawyers at Walter | Haverfield,” said Ed.
“For me, it was a dramatic change in thinking,” said Josh.
Since the acquisition in 2019, the firms have benefited from the strength, expertise and experience of each other, and Josh and Alex are appreciative of the opportunity to learn from their dad.
“People have always told me that my dad is a great attorney, but he is so humble about it,” said Alex. “He teaches me that if you’re humble, work hard, do a good job and are nice to people, it works out.”
“My dad says the best way to get work is to do good work,” says Josh. “My dad is dedicated to getting people to work together and be on the same page.”
All of the Hurtuks, including Bethany, Ed’s wife, and their third son Ben, who works for a private equity firm, are fierce Ohio State football fans. “We are a pretty quiet family,” according to Ed, “but people are shocked by the rowdiness when they watch an OSU game with us.”
The Hurtuks say work doesn’t spill over into family time, but Sundays can be a bit tricky.
“I work on Sundays, and they don’t,” Ed laughs.
Josh and Alex are quick to respond to say they work Sunday nights after dad goes to bed.
March
23, 2020
COVID-19 (coronavirus) has brought with it a virtual tidal wave of legal questions. An important one: may a tenant invoke a force majeure (French for “superior force”) clause to avoid paying rent to a landlord in the event of a government lockdown or quarantine? Unfortunately, the answer is, “it depends.” Interpretation and application of any contractual force majeure provision is highly dependent on the particular terms of the clause in question and the circumstances causing a disruption of normal business activities. Other contractual performance doctrines may come into play, such as impossibility of performance and frustration of purpose. Both doctrines refer to occurrences or causes beyond one’s control, and therefore without fault.
A threshold question is whether force majeure applies as a result of COVID-19/novel coronavirus. One recent article observes that “a force majeure clause could cover the COVID-19 pandemic if it includes specific public health-related language, such as ‘flu, epidemic, serious illness or plagues, disease, emergency or outbreak.’” “Acts of government” may also trigger force majeure, but absent other reference to such health-related events, the catch-all phrase “Acts of God” often included in a force majeure clause may not apply. As another article aptly puts it: “An ‘Act of God’ alone may be too broad to excuse a party from performance.” Most courts narrowly interpret force majeure clauses, and that level of strict scrutiny may pose a real challenge where the clause does not specifically mention something relating to public health events.
On the other hand, Ohio, like many other states, has public health laws that may be useful in establishing force majeure/impossibility/frustration. Ohio law provides that “The director of health shall investigate or make inquiry as to the cause of disease or illness, including contagious, infectious, epidemic, pandemic, or endemic conditions, and take prompt action to control and suppress it.” Another Ohio law prohibits any person from violating “any rule the director of health or department of health adopts or any order the director or department of health issues under this chapter to prevent a threat to the public caused by a pandemic, epidemic, or bioterrorism event.” Violation of an order of the Director of Health is punishable as a second-degree misdemeanor.
There are only a handful of reported cases that construe Ohio’s laws regarding orders by the Director of Health, and none deal with large-scale pandemic/epidemic events such as the COVID-19 virus. However, both the Ohio Governor and the Ohio Director of Health have issued an official “Stay At Home” Order, mandating that all non-essential business and operations must cease, except for specifically-permitted Essential Businesses and Operations. Therefore, tenants who are not engaged in Essential Businesses and Operations seemingly may have a good argument that rent should be abated during the time period that this Order is in effect. There will undoubtedly be litigation over these issues in the months and years ahead because this Order has required the closure of numerous retail and service businesses, cutting off cash flow to these tenants and in turn compromising their ability to pay rent to their landlords.
At the same time, there is case law holding that these type of closure orders do not constitute force majeure so as to excuse a tenant’s performance under a lease. For example, in Aukema v. Chesapeake Appalachia, LLC, landowners brought an action seeking to declare that certain oil and gas leases had expired and were not extended by force majeure. Defendants argued that a state directive that placed a moratorium on hydraulic fracturing constituted force majeure that excused lack of actual performance, and thereby permitted automatic lease renewal (which was tied to actual drilling operations). The court rejected this argument, noting the state directive permitted alternative drilling operations that could have been performed by defendants so as to trigger automatic lease renewal. The court also rejected claims that the state directive frustrated the lease’s purposes, reasoning that the frustration doctrine requires an event that is unforeseeable, and the directive in question was foreseeable when the leases were “signed, renewed, and assigned.”
Another relevant case, though not involving a commercial lease, is Phelps v. School Dist. No. 109, Wayne County. There, the question was whether a school district had to make payments to a teacher who was under contract with the school board when her school was closed for two months “by order of the state board of health on account of the influenza epidemic . . . .” The trial court sided with her and awarded her $100, representing two months of pay. In upholding this judgment, the Supreme Court of Illinois observed that the move to close the building did not alter the rights of the parties to the contract. Therefore, it is prudent to require a provision in the contract that specifically exempts one from liability in the event of an epidemic or pandemic.
A more limited application of contractual frustration is seen in Colonial Operating Corp. v. Hannan Sales & Service. There, the parties entered into a lease under which the tenant was permitted to use the premises only for an automobile showroom. Five years after entering into the lease, the Office of Production Management of the United States issued a directive prohibiting the sale of model year 1942 automobiles or any automobiles that had been driven less than 1,000 miles. When the landlord sued to collect unpaid rent, the tenant claimed that the OPM order had frustrated the purpose of the lease, thereby discharging the tenant’s obligation to pay rent. The New York Supreme Court, Appellate Division, held that the trial court erred in finding that the lease’s essential purpose had been frustrated, relying on the fact that the OPM order did not completely “prohibit, ban or frustrate the sale of all automobiles in the demised premises.” Rather, the appellate court noted, the OPM directive still permitted sales of other automobiles, including sales to government entities and other various “eligible” parties. Further, the OPM directive did not prohibit the sale of “second-hand automobiles and automobile accessories . . . .” This case reinforces that there must be a fact-specific inquiry into how a government order specifically impacts the tenant’s operations of its leased premises.
Make no mistake: In Ohio alone, there will be hundreds of millions of dollars at stake on the issue of rent suspension due to the effects of COVID-19. Ohio tenants will have the “benefit” of the “Stay At Home” Order and other orders issued by the Governor and the Ohio Director of Health to bolster their arguments of force majeure, impossibility of performance, and frustration of purpose.
Based on the examples above, success may not be assured for tenants invoking these principles in defense of eviction and back-rent claims by landlords. Meanwhile, landlords must still make mortgage payments, pay insurance premiums, and incur operating expenses. One can envision a scenario in which both landlords and tenants become insolvent and are unable to pay debts in the ordinary course. Payments in response to claims under business or rent interruption insurance policies may have the potential to cover some of these cash flow gaps, but it is becoming fairly clear that insurers are taking the position that such policies do not cover claims arising from COVID-19 losses. (A bill was introduced and quickly withdrawn recently in New Jersey which would have compelled insurers to honor business and rent interruption claims due to COVID-19. Read about that here.) It would appear that only the federal government has the resources to craft a rescue of those impacted by the loss of rental income in this crisis.
Darrell A. Clay is a partner at Walter | Haverfield who focuses his practice on labor and employment and litigation . He can be reached at dclay@walterhav.com or at 216.928.2896.
Jack Waldeck is a partner at Walter | Haverfield and the chair of the real estate team. He can be reached at jwaldeck@walterhav.com or at 216.928.2914.
March 23, 2020
Ohio Governor Mike DeWine’s “Stay At Home” Order, which lasts until Monday, April 6, 2020, has shut down all Ohio non-essential businesses in a further attempt to control the spread of COVID-19 (coronavirus). What does this mean for Ohio’s owners, design professionals, contractors, subcontractors, and suppliers? First, most construction in Ohio is not shutting down, but businesses that choose to remain open must implement the necessary steps to ensure the safety of employees, contractors, and other invitees to the project site.
Section 9 of the Order identifies “Essential Infrastructure” as an exemption to shutting down non-essential businesses. Specifically, “individuals may leave their residence to provide any services or perform any work necessary to offer, provision, operate, maintain and repair Essential Infrastructure.” This includes, among other things, general construction, construction required in response to this public health emergency, hospital construction, construction of long-term care facilities, public works construction, school construction, essential business construction, and housing construction. The Order also states that the Essential Infrastructure exemption “shall be construed broadly to avoid any impacts to essential infrastructure” as the same may be “broadly defined.” Further, the Order includes critical trades as Essential Businesses and Operations, which include, among others, building and construction tradesmen and tradeswomen, plumbers, electricians, operating engineers, HVAC contractors, and painters.
Owners, design professionals, contractors, subcontractors, and suppliers who choose to continue construction operations during the shutdown must proceed with caution. Safety measures must be both documented and implemented in order to protect against the spread of COVID-19. Where possible, remote and virtual work as well as meeting capabilities must be utilized, and all parties must continue to follow the recommendations of the Centers for Disease Control and Prevention (CDC), Occupational Safety and Health Administration (OSHA), and the Ohio Department of Health, which include, among other recommendations:
- Social distancing of at least six feet between individuals performing work at the project site
- Frequent disinfecting and cleaning of all surfaces and equipment
- Keeping only the required staff necessary to perform the work in accordance with the project schedule
- Discontinuing use of community drinks or food
- Discouraging hand-shaking and other contact greetings
- Instructing workers to clean their hands often with an alcohol-based hand sanitizer that contains at least 60-95% alcohol, or wash their hands with soap and water for at least 20 seconds. Soap and water should be used preferentially if hands are visibly dirty
- Providing soap and water and/or alcohol-based hand sanitizers to workers
- Discouraging congregation at lunch or breaks
- Discouraging the sharing of tools
- Prohibiting the sharing of personal protection equipment (PPE)
- Utilizing disposable gloves where appropriate
- Conducting routine environmental cleaning
- Encouraging workers to take temperatures at each project site
- Requiring any workers exhibiting any symptoms to leave the project site and/or to stay home if sick
- Requiring respiratory etiquette, including covering coughs and sneezes
- Maintaining records, updates, and communications in connection with the processes and procedures implemented to comply with the foregoing regulations
Each party should read and understand their construction agreement, especially those provisions relating to notification and documentation requirements and entitlements to additional time or monies. The success of every project depends upon the prompt and transparent communication and cooperation among owners, contractors, subcontractors, design professionals, and suppliers. Every party must work together to ensure the safety of the project and to address the potential time delays and costs associated with the ongoing fight against the spread of COVID-19.
Rick Amburgey is an associate at Walter | Haverfield who focuses his practice on construction law, financial services and commercial real estate. He can be reached at ramburgey@walterhav.com or at 216-619-7843.
March 30, 2020
If you need documents notarized, Walter | Haverfield is here to help. We are certified through the Ohio Secretary of State to notarize documents online for individuals in and outside the State of Ohio. No in-person meeting is necessary. Details on what is needed in order to participate in an online notary service are below. The process is also described below.
Participant Requirements:
- Access to the following: a computer, internet and webcam
- Driver’s license or passport
- Digital version of documents that need to be notarized
E-Notary Process (takes about five minutes):
- A link to join the e-notary process is sent to the participant
- Once a participant clicks on the link, the e-notary software is launched online and a credential analysis begins
- During the credential analysis process, the participant uploads his/her driver’s license or passport
- The software analyzes the license/passport and asks a series of questions to verify one’s identity
- An e-signature is adopted, and the Walter | Haverfield notary digitally applies the seal and signature to the document(s)
- An email is then sent to the participant with a copy of the notarized documents
Ohio is one of 36 states that allows documents to be e-notarized. In Cuyahoga County, there are about two dozen e-notaries.
Please note that online notary services are not available for depositions.
We look forward to maintaining our strong working relationship with you during this time and keeping in close contact via phone, email or video conference. Should you need our online notary service or have questions, please email us here.
