Representing the Real Estate DeveloperSERIES: REAL ESTATE LAW DUMBED DOWN

Premiere Date: April 20, 2017

This webinar is sponsored by: EisnerAmper

1

2

3

4

5

MODERATOR

Tal Izraeli Levenfeld Pearlstein, Chicago

PANELISTS

Michael Hobbs PahRoo Appraisal & Consultancy, Chicago

Max Kanter Bronson & Kahn, Chicago

Michael Weis Williams, Bax & Saltzman, Chicago

MEET THE FACULTY

6

7

ABOUT THIS WEBINAR

This webinar provides a broad overview of the legal and business basics of real estate development, both in the construction and development context. Among the issues covered are: mitigation of risks, different types of developments, due diligence, land acquisition, financing, due diligence and contract considerations.

8

ABOUT THIS SERIESWhether you are a direct owner or investor in real estate, or a business owner who requires a lease or ownership of a property to house your business, it is a good idea to have some basic knowledge of real estate law. Likewise, if you are general practitioner, you must be able to issue spot and respond to general questions your clients may have. Either way, this webinar series provides important basic knowledge and insight into the most fundamental and common of real estate transactions.

Each episode is delivered in Plain English understandable to business owners and executives without much background in these areas. Yet, each episode is proven to be valuable to seasoned professionals. As with all Financial Poise Webinars, each episode in the series brings you into engaging, sometimes humorous, conversations designed to entertain as it teaches. And, as with all Financial Poise Webinars, each episode in the series is designed to be viewed independently of the other episodes, so that participants will enhance their knowledge of this area whether they attend one, some, or all of the episodes.

9

EPISODES IN THIS SERIES

EPISODE #1 Representing the Commercial Landlord 2/2/2017

EPISODE #2 The Landlord/Leasing Relationship 2/13/2017

EPISODE #3 Representing the Commercial Tenant 3/9/2017

EPISODE #4 Representing the Real Estate Developer 4/20/2017

EPISODE #5 Representing Buyers and Sellers of 5/18/2017

Commercial Real Property

Dates shown are premiere dates; all webinars will be available on demand after premiere date

10

Different Types of Real Estate Development

• Build-to-Suit: is where a developer develops a property to suit a specific tenant. Typically, this is done with a lease in place that specifies the terms and conditions for the development. Tenants for build –to-suits are typically regarded as high credit tenants. The credit of the tenant is what typically makes these deals desirable for both developers and lenders.

• Speculative (or Spec): is a project where a developer has few if any lease commitments before commencing construction. A spec project is often done because a developer recognizes a specific real estate need (i.e., retail, office, industrial) that is not being served in an area. As the spec project proceeds, the expectation is that leasing commitments will be found.

11

Third Parties Involved In Typical Real Estate Development

• Architects and Engineers

• Lender (there is an acquisition loan, construction loan and take out/permanent loan, this may be the same lender or three separate lenders depending on the project)

• Title Company

• Surveyor

• General Contractor

• Zoning and Land Use Counsel and Consultants

• Environmental Consultant

• Tenant(s)

12

Stages of Real Estate Development

• The stages listed below are common in most development projects, it is also common that many stages must be addressed simultaneously and often out of sequence.

• Gaining control of the Property

• Government approvals, zoning, entitlements and incentives

• Capitalizing and forming the project (both equity and debt)

• Securing acquisition and construction financing (sometimes same lender)

13

Stages of Real Estate Development (Cont’d)

• Closing on land acquisition

• Construction agreements must be entered into with contractors

• Design and construct the project

• Negotiate lease(s) with tenant(s)

• Complete construction;

• Obtain conventional financing for stabilized project

14

Typical Contingencies in Real Estate Development

• The contingencies below are typical in most development deals and should be incorporated to the extent applicable and possible into the purchase and sale agreement.

• Zoning and municipal approvals

• Due Diligence (including environmental, engineering, title and survey, infrastructure and utilities)

• Financing (typically this is obtained during due diligence period)

• Leasing (typically commitments and leases are negotiated during due diligence period)

• Equity for Development (typically during due diligence period)

15

Financing/Lender Requirements

• Most development loans are for both the initial land acquisition and construction (sometimes these are separate loans). Lenders typically look at the following factors when underwriting a development loan:

• Credit of the guarantor(s)

• Track record of the sponsor/borrower

• Business plan for the development (in a spec deal)

• Credit of the tenant or tenants (i.e., in a build-to-suit) and leases to the extent they are available

• Timing to execute plan

16

Build –to-Suit Risks

• Credit of tenant (may change prior to completion of project)

• Lease – contingencies (i.e., zoning or approvals required from municipality) in lease may give the tenant an out prior to the completion of the project.

• Business environment may change during construction process.

17

Speculative Development Risks

• Securing tenants and negotiating and finalizing leases.

• Financing the project (both debt and equity)

• Municipal approvals and zoning

• Execution of developer’s business plan.

18

Alternatives to Gaining Control of the Land

It is often the case that a developer would like to lock up the land while he or she assesses the viability of the project and takes (at least) the initial steps in executing its business plan. The key most often is to minimize the developer’s exposure for as long as possible while the various contingencies for the project are addressed. One way to do this is to build all of the contingencies into the purchase and sale agreement while minimizing the developer’s at risk capital (i.e., the developer would only be out the costs of its due diligence but all earnest money to lock up the property should be refundable). Another way to tie up the land for a developer is by using an option. An option can be a simple option to purchase land or in the form of a right of first refusal or right or first offer. If a form of option is used, it is important to have counsel structure the option in a way that conforms to state law and, in general, prepare a memorandum of the option to record against the property so that third parties have notice of the option.

19

Entity Considerations in Real Estate Development

The type of entity utilized by the developer is often dictated by the developer’s expectations for the project. Typically, this entails an entity that limits the developer’s personal liability, allows the developer to retain decision making control, allows for outside investors if that is what the developer seeks, and of course, is tax efficient. There are many decisions that need to be made during this stage that are project specific. It is however, imperative that the documents which create the entity must also conform to the requirements of the lender(s), investors and take into consideration the exit plan of the developer.

20

Vertical Subdivision

Typically, a developer subdivides a large parcel of land into smaller parcels (i.e., a horizontal subdivision). A vertical subdivision is the same concept applied to lots which are located on top of one another (i.e., a multi-story building). This structure is an alternative to a condominium structure. Depending on the project and the developer’s business plan, a vertical subdivision may be an alternative structure which allows portions of the same building to be owned (and possibly developed) by different parties without having to deal with governance issues common in condominium/association structures . The governing document is typically a subdivision declaration which creates the various easements, obligations and restrictions which apply to the building. When properly done, the vertical subdivision enables multiple parties to own separate portions of the same building and in doing so unlock additional value in each portion of the building.

21

Loan Considerations for Real Estate Developers

• Financing options will vary depending on the type of development (build-to-suit vs. speculative).

• Since the property will not produce any income for a period of time, the lender must be very confident in both the developer and the business plan for the development.

• For construction loan, in addition to securing the real estate and a full payment guaranty, lenders typically require a completion guaranty. The guaranties are typically highly negotiated however, it is more common than not that until a property is stabilized, the guarantor’s exposure is going to be higher in a construction loan. Accordingly, it is important to clearly identify the obligations of the guarantor(s).

• Acquisition and construction loans must also conform to the exit plan of the developer. In other words, once the project is stabilized and more financing options presumably exist, the construction loan documents must allow for repayment of the loan without significant fees and costs.

22

Recourse Guaranty

Since construction loans are riskier, it is common for guaranties to be full recourse during the construction phase. This means that the developer (individual or entity) is exposed to considerable risk since the collateral securing the loan is not viable. The guaranty (or guaranties) are typically the most negotiated loan document for good reason, it is imperative that all parties are clear on their obligations and that there are as few ‘trip wires’ as possible for the borrowers/guarantors.

23

Title Insurance

Upon the acquisition of the property an owner’s title policy should be obtained. The amount of insurance is typically the value of the land (assuming the parcel being developed is vacant). Simultaneously, assuming there is lender, a mortgagee’s title policy will be obtained. If the lender is making a construction loan, it is typical for the loan proceeds to be paid in disbursements which are made by the title company as the construction escrowee.

24

Mechanic’ Liens

• Mechanics lien laws vary by state but generally speaking it is the right of any party which improves the real estate (both material and construction) to file a lien against the property which secures payment.

• Mechanics liens are very significant in construction because lenders require that the lien of the mortgage (or deed of trust) to have first priority. In many states, mechanics’ liens can have priority over a lien of a mortgage even if they are not recorded prior to the mortgage.

• In order to protect the priority of the lender, typically, title companies provide coverage that is contingent on (i) updating title searches and (ii) collecting various waivers and affidavits from applicable contractors, subcontractors and materialman before making disbursements of the loan proceeds.

25

Certificate of Occupancy

• When a building is completed, in many jurisdictions (but not all) a certificate of occupancy must be issued by the local government building department which certifies that the building complies with all applicable codes and laws and is in suitable condition for occupancy.

• Obtaining a certificate of occupancy is a milestone in many loans and leases. Accordingly, the developer (or developer’s counsel) should be aware of the timing and requirements for obtaining a certificate of occupancy.

26

Permanent Financing

• A development project is complete when it is considered “stabilized”. This is when the project reaches certain levels of occupancy and income.

• Stabilization is often the requirement for permanent financing to be placed on the property.

• This is desirable because permanent financing is far less expensive than construction financing and is typically non-recourse.

27

Entitlements

• In real estate development, entitlements are the legal rights conveyed by approvals from governmental entities to develop a property for a certain use, intensity, building type or placement.

• Entitlements often determine the viability of a project.

• The process for obtaining entitlements is often lengthy and political, it is imperative that the right advisers are engaged as early as possible.

28

Subdivision

• Subdivision is the process of dividing land into parcels for sale or development typically by a plat.

• Depending on the type of development and the location, the subdivision process may also be one that is required for new developments.

29

Environmental Factors

Many environmental factors must be considered in the real estate development process. It is imperative that environmental issues be recognized early and that the right environmental consultants be engaged. Some common environmental issues or challenges are:

• Phase I and Phase II environmental testing;

• Brownfield redevelopment;

• Sustainable development; and

• Lender and tenant environmental (i.e., LEED) requirements.

30

Construction Contract

• When a contractor is engaged to construct the project, the form of contract that is typically utilized is “AIA”.

• The American Institute of Architects (AIA) forms are the most commonly used form of contracts in the construction industry.

• The AIA form contracts are negotiated by the parties and should be modified to accommodate the project. It goes without saying that it is imperative to engage an attorney with experience with AIA contracts.

31

ABOUT THE FACULTY:

32

TAL IZRAELItizraeli@lplegal.com

Tal Izraeli is a member of Levenfeld Pearlstein’s Real Estate Group. Tal represents investors, developers, borrowers, and lenders in connection with commercial real estate matters, including acquisitions, dispositions, leasing, real estate financing and mezzanine financing. Tal regularly represents clients in connection with drafting and negotiating purchase and sale agreements, loan documents, leases, investment entity structuring, and the sellers and buyers of distressed real estate loans.

Tal also has extensive leasing experience on a national level and has represented both landlords and tenants in lease negotiations for office, industrial and retail space, due diligence and lease amendment and termination. He has represented large national retailers in the negotiation of retail and warehouse leases around the country. In addition, Tal has represented corporate clients in connection with the negotiation and preparation of service agreements and related corporate matters.Tal is also fluent in Hebrew.

ABOUT THE FACULTY:

33

MICHAEL HOBBShobbs@pahroo.com

Michael Hobbs, MAI, SRA, LEED GA, is President of PahRoo Appraisal & Consultancy, a multi-disciplinary real estate appraisal and consulting firm. He has qualified as an expert before the Federal Bankruptcy Court, United States District Court for the Northern District of Illinois, and State of Illinois Property Tax Appeal Board.

Michael has advised clients on business and real estate matters in the areas of ownership, tax planning, IRS qualifying donations, bankruptcy, tax-deferred exchanges, mergers and acquisitions, liquidation, property tax assessment appeal, relocation, divorce and estate matters.

Michael has personally completed or reviewed more than 3,000 appraisals, consulting and litigation assignments involving apartments and condominium projects; residential properties; industrial facilities; high-performance, energy-efficient and sustainable properties; gas stations; convenience stores; retail centers; office properties; special use; land development and adaptive reuse projects.

Michael is national speaker, instructor, and author. He earned his Bachelor of Business Administration from the University of Notre Dame.

ABOUT THE FACULTY:

34

MAX KANTERmkanter@bronsonkahn.com

Max Kanter is an attorney at Bronson & Kahn LLC in Chicago.

Max’s practice is focused on commercial real estate transactions. These include real estate and lending transactions across the country, with a focus on shopping centers, office and industrial, apartment buildings and nursing homes. Mr. Kanter understands the complexities and potential pitfalls in commercial real estate transactions large and small. He ensures that his clients are legally protected, while never getting in the way of meeting the client’s end objective - getting a deal across the finish line.

ABOUT THE FACULTY:

35

MICHAEL WEISweis@wbs-law.com

Michael Weis is with an attorney with Williams, Bax & Saltzman, P.C. in Chicago. Mr. Weis chairs the Firm’s Business and Transactional practice, and focuses his practice on general corporate representation, commercial real estate and finance and taxation for mid-size privately and publicly held entities. He has represented clients in a myriad of industries including manufacturing, distribution, real estate, health care, food and beverage, technology and professional services. Mr. Weis has been involved in the negotiation, structure, documentation and closing of hundreds of complex corporate, commercial real estate and finance transactions in the United States and abroad. Mr. Weis was named a Leading Lawyer in the practice areas of Commercial Real Estate and Corporate Law.

Mr. Weis is a graduate of the University of Illinois Urbana-Champaign College of Commerce and Business Administration (B.S. in Accountancy with High Honors) and is a cum laude graduate of the University Of Illinois Urbana-Champaign College Of Law. He has been a Certified Public Accountant since 1985. He is a member of the Chicago Bar Association and Illinois CPA Society/

36

37

38