Articles Posted in Sales and Acquisitions

The use of the limited liability company (“LLC”) corporate structure has become very common in the real estate industry. It is the go to structure for the acquisition and development of properties by parties joining together behind a venture.  LLCs are governed by operating agreements among the members. These agreements are akin to the shareholder agreements among the shareholders of closely held corporations, and they govern many aspects of the operations of the venture.  One element in these operating agreements that bears close scrutiny by all of the members is the enforcement mechanisms that they put in place should any members fail to honor their obligations to fund future capital calls.

In truth, many LLC operating agreements contain inadequate payment enforcement provisions, making them potentially problematic and inequitable for the company itself and the members who honor their obligations and make future capital calls on a timely basis.  For example, if a member fails to meet their financial obligations, it is fairly common for these agreements to provide that the other members of the LLC may contribute the missing funds and treat them as a loan to the non-funding member.  Often times, the agreements provide that the loan will then be repaid to the funding members, with interest, once the LLC is in a position to make future distributions to its members, with no further enforcement methodology.

Such arrangements provide an unmerited level of flexibility to the non-funding member, as it enables them to weigh the pros and cons of making their required contributions or taking a loan from their partners to avoid any additional loss risk exposure in the endeavor.

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ORivera2014For the third time this week, an article by one of our firm’s attorneys was featured as the “Board of Contributors” guest commentary column in today’s edition of the Daily Business Review, South Florida’s exclusive business daily and official court newspaper.  Today’s article, which is authored by shareholder Oscar R. Rivera, is titled “Appellate Court Strictly Construes FAR-BAR ‘As Is’ Residential Sales Contract.”  It focuses on a recent appellate ruling that affirmed an $850,000 award for legal fees and costs in a dispute over a $2.85 million residential sale gone awry.  Oscar’s article reads:

The ruling by the Third District Court of Appeal in Diaz v. Kosch, is certainly drawing quite a bit of industry attention, and there are a number of important takeaways from it for buyers, sellers and the professionals who work on their behalf.

The case stems from the sale of a Coral Gables home in 2012 for $2.85 million. After the sales contract was executed and the initial $50,000 deposit had been made, the buyers, who are identified in the ruling as both being “attorneys with substantial experience with real estate transactions and title matters,” notified their broker on the penultimate day of the 10-day inspection period about potential permitting issues with the property. On the following day, the buyers sent an email to the sellers accusing them of “active misrepresentations” and threatening “legal fees and litigation.”

dbr-logo-1-300x57Nonetheless, on the same date, the buyers made the second deposit of $235,000, stating it was “with full rights reserved.” A week and a half later, they emailed a notice of termination to the sellers, who were amendable to it and responded by imposing no conditions on the return of the buyers’ full deposit. However, apparently due to demands for a release from legal liability by the buyers’ own broker (who also served as the escrow agent), the deposit was not returned by the escrow agent.

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Oscar R. Rivera

Oscar R. Rivera

The Daily Business Review, South Florida’s only business daily and official court newspaper, chronicles in its weekly “Dealmakers” column the work of South Florida professionals in putting together and finalizing many of the area’s largest real estate transactions.  The firm’s Oscar R. Rivera was the featured Dealmakers in this week’s column, which appeared in today’s edition of the newspaper.  The article, which is titled “Attorneys for Buyer Closed $74M Office Deal with Bonus Acre to Develop,” focused on his work in representing the buyer of the Doral Costa office park in a $73.75 million acquisition.  It reads:

The reasons an affiliate of Triarch Investment Group wanted to acquire the 17.8-acre Doral Costa Office Park are clear.

The three Class A office buildings are 96 percent leased in a strong submarket. Tenants include Allstate Corp., HSBC Bank and Samsung. The property has nearly an acre of developable land.

“The Doral area is a very attractive area. Developable land in the heart of an office complex was very attractive to this buyer group,” said Oscar Rivera, a shareholder with Siegfried, Rivera, Hyman, Lerner, De La Torre, Mars & Sobel, who represented buyer Doral Costa Capital LLC.

“These buildings are anchored by a significant and well-established group of tenants,” Rivera added. “It was a very solid investment for the buyer group.”

But completing the $73.75 million transaction with the seller, an affiliate of Boston-based TA Associates Realty, required fast work.

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OscarRivera2014.jpgThe firm’s Oscar R. Rivera wrote an article that appeared today in the Daily Business Review, South Florida’s exclusive business daily and official court newspaper. The article, which was titled “Best Practices for Buyouts of Unit Owners at Older Condos,” discusses recent changes in the Florida condominium termination law and important considerations for developers in these property acquisitions. Oscar’s article reads:

In the last several weeks we learned of a building in Surfside where the developer successfully bought out all of the units from their owners and another in the Brickell area where the developer purchased 60 of the 61 residences from their owners and is now using the statutory condo termination process to acquire the remaining unit and commence its development plans.

During last year’s legislative session, Florida lawmakers made changes to the condominium termination statute that made the process considerably fairer for unit owners. Now owners who are current on their mortgages and association fees must get fair market value, and their entire first-mortgage debt must be satisfied even if it exceeds the current fair market value.

In addition, for the original owners who maintain it as their homestead property, they must be offered their original purchase price regardless of whether it exceeds the current fair market value. The changes also enable some owners to rent their units for a year before moving out and receive a 1 percent relocation fee.

In light of these changes and in an effort to avoid any delays and additional costs due to holdout owners and related litigation, it greatly behooves developers in these buyouts to carefully assess and determine the valuation of the property in order to make very fair and enticing offers to the unit owners.

Keep in mind that the price that is offered to every owner will be based on the same exact price per square foot for every residence in the building, so the square-foot price must be high enough to entice even the owners of the most lavish units with the best views.

His article concludes:

The most effective approach is for the developer to work very closely with the association’s board of directors in order to get all of the pertinent information into the hands of every owner at the property. Meetings with the owners to answer all of their questions and allay any of their concerns are also a priority.

The contracts that are presented to all of the owners will be identical, except of course for their corresponding unit number, owner’s name and purchase price based on the square footage. There are no financing contingencies or property inspections required, but they do include contingency clauses indicating the required critical mass of units that must accept in order for the offers to be valid. They also include extension clauses to enable the developer to extend the deadline in case of litigation or other delays due to some of the logistics of the condo termination process.

In many cases, the only negotiations that take place with some of the individual owners involve their requests to remain in their residences and pay rent to the developer for a number of months after the closing. Developers should remain flexible in accommodating these requests, as typically they will not be able to begin the teardown of the property for months after the closings while other aspects of the condo termination and development processes are underway.

Our firm congratulates Oscar for sharing his insights into this important and timely topic for real estate developers with the readers of the Daily Business Review. Click here to read the complete article in the newspaper’s website (registration required).

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OscarRivera2014.jpgThe firm’s Oscar R. Rivera contributed a guest column that appeared in today’s edition of the Daily Business Review, South Florida’s only business daily and official court newspaper, about the recent decision by the First District Court of Appeal in the case of Thomas I. Bowman v. Jon Michael Barker et al. His article reads:

. . . Bowman purchased a home from Barker that was later discovered to have numerous defects. He filed a lawsuit alleging that Barker failed to disclose known defects in the house contrary to his duty under the law and fraudulently misrepresented the condition of the house. The suit also included other defendants and claimed that they contributed to the problems and caused damages related to their roles in repairing, remodeling, inspecting and selling the house.

The defendants denied being aware of any defects in the property at the time of the sale and moved for summary judgment, which was granted by the circuit court.

In reversing the lower court’s decision to issue a summary judgment for the defendants, the First District Court of Appeal found that the home buyer had demonstrated the existence of facts and inferences that should have allowed the case to go to trial.

These included evidence that the home sellers were experienced real estate investors in other house-flipping projects, and they had knowledge of the extremely poor initial condition of the house. In fact, they admitted that it was in such bad condition that they were able to buy it for little more than the value of the land.

The defendants also admitted to knowing about the need for substantial repairs that included structural damage and a failing foundation, which was later estimated at more than $50,000 to repair, and about the existence of prior additions and unpermitted work.

The appellate panel found that this evidence raised questions of fact about the home sellers’ knowledge and also undermined their credibility and the plausibility of their denying knowledge of the defects and the necessary repairs.

Oscar’s article concludes:

The home sellers testified that the repairs had been completed prior to closing, but the appellate court found that there was evidence indicating that the main defendant had admitted to making several false representations on the property disclosure form, which he said was due to pressure from his Realtor and his dislike for completing those forms. The opinion also found that there were conflicting accounts of what representations he made about whether the repairs had been completed.

The evidence also revealed that the remodeling contractor has a different view of the instructions given and the scope of work. The company’s representative claimed that he and his business partner were never made aware of any structural issues, nor were they asked to repair them.

The court also ruled that the fact that the house was sold as is did not make summary judgment appropriate as the duty to disclose known defects continues to exist for a home sold as is. The opinion found:

Despite selling this house as is, the sellers had a duty to disclose what they knew about its condition, and they undertook to make disclosures to appellant about the condition of the house. The record demonstrates triable issues of fact about what that condition was, what the sellers knew about it, what disclosures were made and whether those disclosures were accurate.

Our firm congratulates Oscar for sharing his thoughts on this ruling and its positive implications for home buyers in Florida with the readers of the Daily Business Review. Click here to read the complete article in the newspaper’s website (registration required).

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OscarRivera2014.jpgFirm partner Oscar R. Rivera wrote an article that appeared in today’s edition of the Daily Business Review, South Florida’s only business daily and official court newspaper, about the recent decision by the Third District Court of Appeal in the case of Blue Lagoon Development v. Maury and Leon Medical Centers. His article reads:

A recent appellate ruling found that the trial court erred in validating a buyer’s termination of its contract for the $23.6 million purchase of a commercial parcel due to the seller’s alleged failure to obtain a zoning change by the date specified in the agreement.

. . . Blue Lagoon executed a purchase and sale agreement in late 2007 for the sale of a large commercial real estate tract in Miami to Leon Medical Centers for approximately $23.6 million. One of the conditions in the agreement was that Blue Lagoon would obtain a change in zoning from RU-2 to BU-2 by July 31, 2008, but the agreement did not contain a “time is of the essence” provision.

A zoning hearing based on Blue Lagoon’s application was conducted on July 16, 2008, the Citizens Zoning and Appeals Board approved the application, and a resolution approving the zoning change was certified by a deputy clerk of the Miami-Dade County Department of Building and Zoning on July 23, 2008. The resolution was not appealed during the subsequent 14-day appeal period that expired on Aug. 4.

Leon Medical Centers, which had closed on another commercial parcel for the same intended use on July 11, 2008, for approximately $11 million less than it had agreed to pay for the Blue Lagoon site, sent a termination letter to Blue Lagoon on July 31 exercising its right to terminate the contract because it maintained that Blue Lagoon did not obtain the requisite zoning by July 31, given the possibility of an appeal after that date. The company moved forward with the construction of the medical facility that it originally planned for the Blue Lagoon site on the new parcel.

Oscar’s article concludes:

Based on the date in which Blue Lagoon secured the zoning change, which was prior to the July 31 deadline, the absence of express contract language requiring that any appeal period must expire before the “outside date” of July 31, and the absence of a “time is of the essence” clause in the agreement, the Third District Court of Appeal concluded that the property was rezoned from RU-2 to BU-2 as stipulated under the agreement and reversed the lower court ruling.

The appellate panel based its ruling in part on the opinion by the Fourth DCA in a 2012 decision finding that “the mere designation of a particular date for performance of such a condition does not make that date the essence of the contract; time is not of the essence, even in an agreement setting forth a specific date for performance, absent a showing that reasonable delay would have constituted a material breach or that the party entitled to performance suffered a significant injury due to the delay in performance.”

Our firm congratulates Oscar for sharing his insight on this new appellate decision with the readers of the Daily Business Review. Click here to read the complete article in the newspaper’s website (registration required).

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Oscar Rivera photo FINAL.jpgThe firm’s Oscar Rivera recently represented the owner and developer of the 220 Alhambra Circle office tower in the sale of the property for $75 million to Mercantil Commercebank, the building’s largest tenant. His critical role in this transaction, which was in the works for nearly three years, was the subject of the lead “Dealmakers” feature in today’s Daily Business Review.

The article reads:

Attorney Oscar Rivera, head of the real estate practice at Siegfried, Rivera, Hyman, Lerner, De La Torre, Mars & Sobel, represented the seller.

“It was a challenging transaction simply because the building was not for sale,” he said. “[Building owner] Joe [Kracauer] has a great attachment to that building. It is in a trophy corner on the main drag in Coral Gables, and he was quite proud of what he had accomplished. His son Benjamin was one of the architects in that project, so there was an emotional factor. He really didn’t want to sell. And it took a lot of convincing over the years.”

Once that hurdle was surmounted, the two sides had to negotiate the value of the building, which was something of a complicated proposition. The seller argued for a high price given the leases the building commanded. The buyer countered that, were the bank to relocate, the nearly empty building would immediately face depressed leasing rates.

“We went back and forth a number of times and a number of occasions, and all sorts of strategies and ideas were tossed about: buying part of the building, buying part of the building now and part later, selling the entity instead. I don’t think any idea in terms of how to structure it wasn’t discussed,” Rivera said.

Quote: “We looked at all different parts of permutation and in the end a straight sale was the best option. It went full circle,” Rivera said.

Our firm congratulates Oscar on his efforts in bringing this transaction to fruition and having it catch the attention of the Daily Business Review. Click here to read the complete article in the newspaper’s website (registration required).

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For years, the prevailing view has been that brokers were permitted to lien the proceeds from the sale of a property to secure their commission, but not the property itself. However, a decision by the Third District Court of Appeal in July has effectively expanded the rights of real estate brokers to protect their commissions in commercial real estate transactions. In the case of J. Milton Dadeland, LLC v. Abala, Inc., the appellate panel found that a broker is permitted to lien the property in a commercial real estate transaction while the transaction remains pending in order to protect its commission.

The change is significant, as liens on a property require that the parties to the transaction ensure that the broker is paid and the lien is released prior to the closing. Liens on the proceeds of sales allow for the transaction to be finalized, and the broker is then left to pursue the seller to recover their commission from the proceeds.

In its ruling, the Third DCA found that the Florida Commercial Real Estate Sales Commission Lien Act does not establish that brokers’ ability to lien the proceeds of sales is their only remedy.

The case involved a $1.47 million award to Abala, which brokered a $25 million short-sale of an apartment complex to J. Milton Dadeland LLC in 2010. Prior to the closing, Abala placed a lien on the property in order to secure its commission, and J. Milton sued after the closing in an effort to vacate the lien.

3rd district court of appeal.jpgThe court disagreed with J. Milton’s arguments that the state’s Commercial Real Estate Sales Commission Lien Act provided an exclusive remedy to the broker in the form of a lien on the net proceeds but not on the real estate itself. It concluded that it would be absurd to limit a broker’s rights to claims on net proceeds in a short sale, as there are no net proceeds in such sales. The court found that the Lien Act allows a broker to place a lien on real property where expressly permitted by contract. It ruled that the broker’s lien in this case was permitted by its contractual agreement, and it affirmed the circuit court’s judgment enforcing the broker’s right to the lien.

This decision sends a clear message to brokers to ensure that their client agreements specifically provide that the lien for their commission can be placed on the real estate itself; and for owner/sellers to assure themselves that their commission agreement waives this right and limit’s the brokers lien rights to the proceeds as specified in the statute. The ruling establishes that the contractual terms found in a broker’s agreement are not limited to the scope of the Florida Real Estate Commission Lien Act. Broker contracts that contain the right to file such a lien enable brokers to do so at any time prior to the closing, without having to file a lawsuit.

The ruling makes it imperative for real estate attorneys as well as title and closing agents to conduct due diligence on everything from the listing agreement to the title.

In addition, it would not be a surprise to see more appellate challenges on this issue, which could result in conflicting rulings that would eventually lead to the Florida Supreme Court taking up the issue. Opponents of the ruling may also pursue changes to the law during the next legislative session in order to attempt to reestablish the previously accepted status quo.

In a deal that was more than two years in the making, I recently represented the owner and developer of 220 Alhambra Circle in the sale of the office tower to Mercantil Commercebank for $75 million. Mercantil has been the largest tenant in the building for more than 15 years.

The bank has acquired one of the premier class A office towers in the Coral Gables market (pictured below), which has been one of the largest bright spots in the South Florida office market. Recent reports in Globe Street (www.globest.com) and The Real Deal (www.therealdeal.com) chronicle how the Coral Gables office market continued its momentum during the fourth quarter of 2014. The reports note that two new tenants recently inked leases at The Alhambra, which is the 14-story office tower that is interconnected with the Hyatt Hotel.

220Alhambra.jpgFiduciary Trust International of the South, a division of Franklin Templeton Investments, signed a lease for 12,500 square feet at the property, where it is relocating from its current space in downtown Miami. Pipeline Workspaces, a shared office space provider, signed a lease for 14,000 square feet at 95 Merrick Way, which is also part of the same complex.

According to statistics gathered by CBRE, the Coral Gables office submarket continues to lead the way in terms of office market absorption. Tenants leased about 195,000 square feet of office space in Coral Gables during the first three quarters of 2014, which is substantially more than any other submarket in Miami-Dade County.

Sometimes we are approached by clients who inquire about purchasing the entity that owns the property instead of buying the property itself. This is not very common but there are a series of reasons why this might make sense that I discuss below. Nevertheless, the purchase of an entity brings about a whole different set of requirements along with significant differences in the contract drafting and the due diligence that needs to take place.

One of the reasons often brought up to do an entity purchase is the transfer tax savings that might be accomplished. Depending on the jurisdiction where the property is located, these amounts could be significant. Another could be the status of the project. For example, if there is significant construction going on at the property, it might be easier to sell the entity than to sell the property. This avoids issues with notices of commencement, assignment of construction contracts and the like.

Once the determination is made to purchase the entity, the lawyers then need to change gears and think like a corporate lawyer as well as a real estate lawyer. In addition to all the usual real estate issues that have to be considered regarding due diligence and warranties and representations related to the real estate, the same issues need to be addressed with regard to the entity being purchased.

Many times the purchase of only the real estate includes a provision that the seller makes no representations and the buyer is purchasing the property as-is, based on their own due diligence. That does not work in the context of purchasing the entity. Since an entity is a breathing, living legal person, there are liabilities associated with its prior existence. These liabilities can range from tax liability and filings, sales tax collection and payment issues, employment issues, existing contract obligations, and a range of other items. Therefore, it is very dangerous for the buyer of an entity to take the deal as-is.

Generally there is a lengthy list of warranties and representations made by the seller as to the entity and its prior existence. Often times, these representations are backed up by an indemnity from the seller (or from a parent, affiliate or even its shareholders if it is a special purpose entity that will have no assets after the sale) protecting the buyer from any liability for anything that occurred prior to the purchase.

Also, the due diligence requirements are generally double those of the regular real estate purchase. In addition to the usual real estate due diligence, the buyer must conduct due diligence on the entity itself and its accounting and potential liabilities. Relying on the seller’s representations and indemnification is not enough. Therefore the amount of work that goes into investigating the purchase of the entity is significantly more.

Our other real estate attorneys and I have a great deal of experience with these types of transactions, and we write about this and other important real estate business and legal issues in this blog on a regular basis. We encourage industry followers to submit their email address in the subscription box at the top right of the blog in order to automatically receive all of our future articles.