Real Estate, Refined

Your lawyers have done you wrong.

I’m not trying to throw my fellow members of the bar under the bus. The problem is not that they haven’t represented you well. It’s that they haven’t taught you well.

Real estate lawyers advise their clients to set up special purpose entities (LLCs, partnerships, and the like) for each property. This is good advice for legal liability and asset protection purposes. The unintended consequence, however, of drilling into investors’ heads that each property and project stands alone is that the investor—and often the lawyer himself—thinks of each project as a stand-alone. But that view denies reality.

Projects are highly interrelated. You know this from experience. When a storefront across the street from your center goes dark, your property is affected. Likewise, when the bank forecloses on a property, the value of all similar properties in the area suffer.

Investors, too, are interrelated. Jack, Jim, and Johnnie are buddies. They co-invest on multiple projects. If one property loses a tenant, they may even fund that property’s deficit with the cash flow from one of their other projects. It’s robbing Peter to pay Paul. (Be sure to consult with your legal and accounting advisors before attempting a transaction like this—documentation is key!)

When the bank comes calling on one or more notes, though, Jack, Jim, and Johnnie usually retreat to their respective corners. The deep pocket then tries to protect his reserves. This puts him in direct conflict with the other two who are simply trying to preserve the shirts on their backs.

Inevitably, everyone—investors, legal counsel, and the bank—are looking at the property as a stand-alone. That is exactly opposite of what they should be doing. A comprehensive approach that involves multiple projects and their investors, and sometimes multiple banks, is much better. Real estate is a dynamic industry that defies reductionist thinking. Therefore, by approaching the situation with a view that the parties still have more common interest than disparate and that there is strength in numbers, maximum value can be realized from the project.

If you’d like to learn more, give us a call.