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Real Estate Roundup 7.24.20

Real Estate Roundup:

Lawsuits

  • Largo Development alleges that through the use of JDS’s construction arm, the Michael Stern ramped up the project management costs associated with the 43-unit condo project at 613 Baltic Street to $5 million, or 290 percent above the initial budget. According to the lawsuit, “Stern’s revenue diversion scheme not only purloined Largo’s share of the profits but also substantially bilked and artificially depleted Largo’s initial capital investments in the Project.” Largo is seeking nearly $40 million. (TRD)
  • Serdar Bilgili, chairman of Turkey-based BLG Capital, filed a lawsuit against Michael Shvo and his investors for allegedly cutting it out of the $600 million Transamerica Pyramid purchase in San Francisco, and the $370 million acquisition of the “Big Red” office tower in Chicago. BLG alleges that Shvo “acted in bad faith” and “usurped business opportunities” with deals for those properties. (SanFranciscoBusinessTimes+TRD)

Politics 

  • Commercial landlords may soon need to follow some of the same rules that govern residential property owners when a tenant breaks the lease. On Wednesday, the state Assembly passed a bill that would require commercial landlords to minimize damages against a tenant who vacates their property before the lease expires. When a tenant breaks a lease, the bill would require landlords to “take reasonable and customary actions to rent the premises at fair market value or at the rate agreed to during the term of the tenancy, whichever is lower.” (TRD)
  • The “acceleration rent clause” is a provision that lawyers say is common in commercial leases, but is often difficult for them to enforce and collect on. Under the clause, a tenant who defaults owes their landlord the full amount of rent due over the course of the lease in one lump sum. However, many states, including New York, only allow landlords to enforce rent acceleration as a means of recouping damages. As a result, landlords must attempt to mitigate damages by finding a replacement tenant. Worth noting that obtaining a judgment is one thing –– collecting is different… Lawyers expect many of the legal battles to end in negotiations, with the acceleration clause acting as leverage for landlords. (TRD)

Office leasing

  • A Reuters analysis of quarterly earnings calls over the past week revealed more than 25 large companies plan to reduce their office space in the year ahead, a move designed to reduce the second-largest expense after payrolls at corporations. Morgan Stanley in June forecast that work-from-home policies will increase vacancy rates in office buildings. Vacancy rates in New York will reach 10%-12% in the next two to five years from 8.7% now… Green Street Advisors expects that office demand will be reduced by up to 15% as a result of work from home policies once the pandemic is contained. (Reuters)

Other news 

  • Barry Sternlicht’s Starwood Property Trust is exploring selling an almost $2 billion portfolio of energy infrastructure loans and commitments mainly acquired from General Electric Co. less than two years ago. When the real estate investment trust announced the portfolio’s acquisition in the latter half of 2018, Chairman and Chief Executive Officer Sternlicht said he was searching for ways to diversify beyond Starwood’s focus on commercial real estate. (Bloomberg)
  • Cohen Brothers Realty owes approximately $1 billion in commercial mortgage-backed security debt. Payments on about half of those loans have missed monthly deadlines since April… Bankers have been amenable to temporary loan relief, but CMBS contracts that prioritize protecting bondholders are less flexible. CMBS loans are attractive to landlords because they’re non-recourse, so the lender can’t go after other assets. The tradeoff is that troubled loans go to workout firms known as special servicers, who charge hefty fees and offer little sympathy. Charles Cohen says those were “timing issues,” such as slow-paying tenants whose rent goes directly to the lenders under lockbox provisions in the CMBS contracts. (Bloomberg)
  • Coronavirus restrictions brought the U.S. housing market to a near standstill. Now it’s beginning to recover, if unevenly, as states enact their reopening plans. In total, 18 of the 50 largest U.S. markets have reached or even surpassed January levels of market activity. A seller’s market, brought about by a shortage of listings, record-low interest rates and a release of pent-up demand after the shutdowns. (NYTimes)
  • Sales of existing homes jumped nearly 21% in June compared with May, according to the National Association of Realtors. This is the largest monthly gain since the Realtors began tracking the data in 1968. It came after sharp declines over the previous three months due to the coronavirus pandemic. Sales were still 11.3% lower annually. (CNBC)
  • Home prices in the Hamptons have rebounded after nearly two years of weakness in 2018 and 2019. While the Hamptons has long been the summer playground of the Manhattan elite, brokers say the current wave of buyers are making the Hamptons their main home, returning only occasionally to the city for meetings or events. (CNBC)
  • Las Vegas Sands, the world’s largest casino company, is painting a bleak picture of the U.S. gambling capital for investors, saying Covid-19 has devastated the city’s bread-and-butter convention business, with no significant recovery in sight. Unlike the global gaming capital of Macau, Vegas is dependent on business and convention groups for much of its revenue. The coronavirus pandemic has put a halt to those, along with leisure travel. Operators in Las Vegas can’t make money with negligible midweek hotel occupancy and half-filled properties on the weekends. Air traffic to the city is less than half of what it was, and the city is looking more like a drive-to, regional market. (Bloomberg)

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