June 2022


Austin Soars to New Heights in Battle Over South Terminal

  • Eminent domain is the government’s power to seize private property for a public use.
  • The government must pay just compensation to the landowner when doing so.
  • The City of Austin is planning to use the eminent domain power to tear down the South Terminal of the Austin airport.

Well we are back to the airport this week. Our regular readers will know that I have previously written about some of the issues at the Austin airport:

Well this week we had a new development that will throw another wrench into the system. The Austin City Council has given the approval to file eminent domain proceedings and to buy out of the management agreement of the south terminal at the Austin airport (ABIA) as part of the facility’s expansion.

But what does that mean? What is eminent domain? What should you do should you get hit with an eminent domain? And what does it mean for the pending expansion?

Well, that is what we’ll be talking about this week.

What is eminent domain?


If you are following all of the development going on around the State of Texas, you are probably already familiar with eminent domain. You may have even gotten notice that the State or a municipality wants to take your land.

Eminent domain is the inherent power of the state and federal governments to seize private property for a specific public purpose. It was originally granted to the federal government through the Fifth Amendment to the Constitution. The Constitution and local state laws always require the government entity to pay the landowner “just compensation” for the land. Generally this means that the government has to pay the landowner market value for his or her property.

In Texas, the entire process begins with a letter from the condemning authority that it wants to take your land.

What to do when served with eminent domain notice?


So if you are a Texas landlowner, what should you do if you get a demand from a condemning authority? Same thing you should always do – hire a good lawyer. Texas landowners are protected under both the United States Constitution and the Texas Constitution.

There are important limitations and protections on the use of the government’s power. The most important, as discussed above, is the condemning authority has to pay “just compensation” for the property taken.

So, what do you do when you receive an “eminent domain” notice? You don’t panic, that’s what. You call a lawyer.

Your best option will be to enlist the guidance of eminent domain attorneys. They will ensure that the property condemned is being used for public use. And, secondly and most importantly fight to make sure the condemning authority is paying sufficient just compensation.

Is Austin Using Eminent Domain at the Airport?


So that brings us back to ABIA. How does eminent domain fit in there? If you recall, the last time we talked about the airport expansion, the City wanted to tear down the South Terminal. But LoneStar Airport Holdings has a longterm lease to manage the terminal. And was not going to let Austin out of that lease. Austin apparently made an offer to terminate the lease, but LoneStar did not think it was sufficient.

So last week, the City voted to use eminent domain powers to take control of the South Terminal away from LoneStar. The City already owns the land – so it is not seeking to condemn it. But eminent domain can be used to take any property right. So Austin is going to use it to get out of the contract with LoneStar.

I am not an eminent domain lawyer so I did not quite understand how this could work. But luckily, I know a fantastic one – Dan Tobin at McFarland PLLC. According to Dan, using eminent domain to terminate a service contract is unusual in eminent domain in general  – but much more common in the airport world. The tactic has been used previously with airports. And while it used to be pretty clear that a challenge to the City’s powers to avoid a contract with eminent domain would be successful, recently court decisions have started to shift back in favor of property owners. So Dan said he would not be surprised if LoneStar challenges the Austin’s ability to do this. *So I guess we will have to wait and see how this plays out and what the next steps are for the future of the South Terminal.




*And LoneStar – if you read this and need an eminent domain lawyer, I HIGHLY recommend Dan. He’s terrific.

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vendor litigation - Commercial Real Estate Attorney | Bukowski Law Firm | Austin, TX

Can a Buyer Waive a Fraud Claim?

  • A waiver-of-reliance clause is standard language in most commercial real estate purchase agreements.
  • The waiver clause solidifies that buyer is not relying on the representations of seller when purchasing the property but is doing its own due diligence.
  • If worded properly, a waiver of reliance clause may nullify any fraud or fraudulent inducement claims that the buyer could have.

Commercial real estate purchase agreements can be very long and detailed. They contain a lot of information and clauses. The ones we draft for our clients are often 30-40 pages long and have a lot of brilliant lawyer-speak in them. And while that can be irritating, the language is often essential for us to protect our client’s interest and help them navigate purchases and sales and minimize risk.

One of the areas we often use to minimize risk is a waiver of reliance (“WOR”) section. This section came up recently for us when one party sued another for fraud after the purchase. The arguments from the buyer were much less effective because of the WOR clause.

But how do you determine whether a WOR clause is effective? This is what we will be discussing this week and how it can be beneficial to you.

What is a Waiver of Reliance Clause and What does It Cover?

When a buyer is purchasing commercial real estate, it generally relies on its own due diligence to determine whether the acquisition is a good one for it. The buyer needs to request the documents and information it wants from the seller and then do its own analysis to determine whether it wants to acquire the property. It should not rely on what the seller is telling it about the property.

A WOR clause basically codifies this position in writing in the purchase agreement. It generally states that the buyer is not relying on any representations the seller has made and it is doing its own due diligence and analysis of the project. Because it is doing its own due diligence, the buyer cannot blame the seller if something goes wrong after purchase.

But a WOR clause may have even more power than that. If drafted properly, it may nullify the possibility of a suit for fraud. But to do this, it must be written in accordance with the Texas Supreme Court guidelines.

Determining Whether a WOR Clause is Effective Against Fraud Claims

It is black-letter Texas law that proof of reliance is an essential element of fraud and fraudulent inducement claims. That’s why a WOR clause may be so important in nullifying a fraud or fraudulent inducement claim. If the parties’ intent is clear and specific, a WOR clause may disclaim reliance on certain representations, thereby negating reliance-based claims like fraud and fraudulent inducement.

To determine whether a WOR clause is sufficient to nullify a fraud or fraudulent inducement claim, the Texas Supreme Court has instituted a two-step analysis. First, the Court determines whether the parties to the contract used clear and unequivocal language. Second, the Court evaluates the circumstances surrounding the contract’s formation to determine whether the disclaimer is binding. A court will then also use a five factor analysis to evaluate the circumstances around a contract’s formation. This includes determining whether:

  • The terms of the contract were negotiated or boilerplate;
  • the parties specifically discussed the topic of the later dispute during negotiations;
  • the complaining party was represented by counsel;
  • the transaction was arm’s length; and
  • the parties were knowledgeable in business matters.

Assuming that the language of the WOR clause and the circumstances surrounding the contract show that two sophisticated parties freely entered into the agreement, then the buyer may very well have waived any fraud or fraudulent inducement claims it could have against the seller.

Its extremely important, therefore, to understand what waiver language is included in your purchase agreement and the full extent to what you may be waiving.

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creative apt

Baby Steps to Solve the Central Texas Housing Crisis

  • Austin has some of the most restrictive compatibility requirements in the country for a city of its size.
  • The City Council voted last week to ease some of those restrictions.
  • While this is a good start to solving our affordable housing issues, it is just a baby step to fixing the entire problem.

We talk a lot in this blog about housing. I guess we talk a lot about housing in this town in general. There’s a reason for that, of course. There is no bigger issue in Central Texas than affordable housing. And how we deal with it is going to dictate how this area thrives and survives in the future. Not to mention this is nominally a real estate blog.

To that end, I have been an unabashed supporter of increased density. I think it is the key to making sure we have enough housing to meet the incredible growth we are seeing – and will continue to see.

Well this past week the Austin City Council took some small steps to help alleviate the roadblocks to affordable housing. So that’s what we are going to talk about this week.

What Affordable Housing Measure did the Austin City Council Vote On?


On June 9, the Austin City Council had a marathon session that mainly revolved around trying to solve Austin’s affordable housing issues. Specifically, the Council addressed compatibility issues. This was the first vote of the Council. If fully approved, the new ordinance will likely go into effect this fall.

If you are not familiar, currently a building on a road that is within 420 feet of a single family home can only be 60 feet tall. This, obviously, hurts housing density as it limits the number of units that a developer can build – especially along transportation corridors.

So at the hearings the City Council voted to increase the heights a little. I got the two charts below from Jack Craver’s daily email – which, I HIGHLY recommend subscribing to. Its incredibly informative on Central Texas political issues.

Larger Corridors

The first chart shows how high developers will be able to build in larger corridors. As I wrote above, currently the rule is 60 feet. But under the new proposed rules, developers could go to 65 feet up to 200 feet from a shingle family home and 90 feet if the home is more than 200 feet away.

Medium corridors

The second chart is for medium corridors. As you can see, the restrictions are similar but more restrictive.

In addition to this, the City Council also added a new zoning class category – VMU2. As a result (as is also pictured by the yellow in the two charts), developers will be able to build to 90 feet in a compatibility area if they agree to provide some affordable housing in the development. That will likely mean 12% of the units have to be reserved for folks who make 60% of the metro median family income in the area.

What Does this Mean for Affordable Housing?


It’s a start. That’s really all it is. Austin’s compatibility rules were adopted in the 1980s. At the time – as many of you know – Austin was a MUCH different city. In 1980, the Austin metro area had just under 400,000 residents. Today we have over 2.1 million. And there is no end in sight for that growth.

Yet despite that growth, Austin has some of the most restrictive compatibility requirements in the country for a city of its size. And these restrictions are severely harming the amount of housing available in the city. Because, obviously, the higher that developers can build, the more housing they can provide. And, of course, with more units the projects become more profitable for developers and, as a result, more projects will get built.

So we should all be thankful that the City Council is looking to reduce compatibility restrictions on new developments. It’s a good start. But we just cannot stop there. Because its just a baby step on the path to fixing our affordable housing issues.

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How to Diffuse a Prepayment Penalty

  • With the federal reserve raising interest rates, property owners may look to alternative methods of financing.
  • If these methods have early prepayment penalties, one way to avoid those is to defease the loan when selling the underlying property.
  • By tying an investment payout to the loan payments, a property owner can sell a property and avoid a prepayment penalty.

When real estate folks get together in a group, there are a limited number of topics we all talk about. Especially if there are things going on in the country that greatly impact the real estate world.

That’s a long way of saying that lately all anyone wants to talk about is rising interest rates. And I reckon I will specifically write about that soon. But the fed has raised rates this year and will continue to do so.

As interest rates increase, investors and developers are looking to alternate types of financing. Indeed, I was just having a conversation with my good friend Matt Counts about the life insurance lenders that he works with and all the options he provides his clients. And these and other lending vehicles can be great. But the loans often come with prepayment penalties.

So what does an owner do if it wants to sell its property that has a loan with a large prepayment penalty on it? We are going to talk about one of the options this week.

Options for Dealing with a Prepayment Penalty


Maybe the most common, easiest way to deal with a loan with a large prepayment penalty is to just have the new buyer assume the loan. And with a rising interest rate market like we are in, this may not be a bad option. The loan may well have better terms than the buyer could get in the market.

But there is also another option. The seller can defease the current loan.

What is Defeasance?


Defeasance is the process of repaying a commercial real estate loan by switching the payment to something more stable and government-backed, typically a US Treasury Bond. This is usually done to assist in refinancing the real estate or selling it. This switch does not change how much is owed, and the principal and interest must be paid in full to the lender.

Essentially with the proceeds from the real estate sale, the Seller buys a security that will pay out the exact same amount, at the same time, as the current note on the property. Thus each month, the security issues a coupon that makes the payment on the outstanding loan.

How does Defeasance Work?


As described above, defeasance is a prepayment plan for an outstanding loan. The Seller invests in a security through a special defeasance company. And then the defeasance company makes sure the security pays out directly to the loanholder.

As we talked about above, one of the main benefits for borrowers is to circumvent the prepayment penalties of the underlying loan. Defeasance does this through “the purchase of Treasury bonds with maturities equal to the remaining term of the loan, with coupon rates that provide the necessary income to offset the contracted periodic interest and principal payments”. The potential downside is this could leave the owner vulnerable to interest rate rise. The owner may have to pay more for the defeasement security if rates are higher than they were when the original loan was purchased.

Obviously a Seller has to pay for the defeasance security. That reduces the amount of the sale proceeds going to it. But that defeasement fee for the security can be much lower than a prepayment penalty. Thus defeassnce can be a great way to avoid large prepayment penalties. And, as a result, make unique loan structures more attractive when initially purchasing a property.

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