January 2024

Austin tower - smaller

Lost in Transition: Navigating the Changing Landscape of the Texas Office Market

Leave a Comment / Real Estate Development / By
  • The TC Energy Center – an office tower – in Houston is in default of its debt.
  • With vacancy rates and interest rates both up, the Texas office market is facing some very difficult times.
  • Owners and developers will have to get creative to seize upon the opportunity that this downturn may present.

I live in Austin. And whenever I drive downtown, I am always amazed by the number of cranes with new high rises going up. Or when I look at pictures of the Austin skyline from 2010 compared to today and see the remarkable growth. But those tall buildings can be misleading. Here in Austin, for example, we know we have some empty skyscrapers downtown. And the TC Energy Center in Houston is, sadly, a prime example of the falling occupancy rates plaguing the Texas office market. It’s a problem for a lot of property owners throughout our state. And country. So what can an owner do? Lets talk about it.

Current Office Market Overview

We have talked a few times in this blog about the state of the office market in Texas. But what does it actually look like out there? Well in the fourth quarter of 2023, DFW office vacancies hit approximately 21%. This is, obviously, significantly higher than the pre-COVID levels. In Houston, vacancy rates are somewhere between 23-25%. Austin, unfortunately, was in the same general area. And San Antonio was closer to Dallas – just under 21%. Again, all of these are significantly higher than they were prior to COVID.

So, what happened? Did everyone suddenly discover the joys (and difficulties) of working from home? Did Zoom meetings replace the watercooler gossip as the office’s new social lubricant? Well it’s a combination of things. The pandemic gave both employers and employees a taste of the remote life, and some folks don’t want to go back. And companies figured out they can get production and work completed without having to pay for as much office space. But we are seeing some push back. Many companies have shifted to requiring employees to come back to the office. That could potentially be good news for the office market.

 The Future of the Market

With the low vacancy and high interest rates, what options does a struggling office owner have? How can an owner avoid becoming the TC Energy Center?

One option is recapitalization – finding new investors to buy out current ones and/or partially refinance the debt. This is, of course, not very easy right now in a world where debt and equity is extremely difficult to find.

Its also possible to try to refinance the deal. But again, debt markets are incredibly tight. And whatever debt is out there for office buildings are going to have large interest rates. And that may not be financially feasible for the owner.

Perhaps an option is to repurpose these buildings. I have talked to a lot of developers who tell me that trying to repurpose office into housing is difficult and expensive and not realistic. But what about repurposing into medical or a lab or a data center? Could the building be used for that? Its certainly something worth thinking about.

The bottom line is this: the Texas office market isn’t dead, but its not exactly thriving either. It is going to take a lot of creative minds to save these buildings. And sadly, some current owners are likely to lose money. But when any downturn or difficult time comes around, opportunity follows. So let’s see what is out there and come up with some creative ideas.

Lost in Transition: Navigating the Changing Landscape of the Texas Office Market Read More »

Driskill

Preserving the Past, Paving the Future

Leave a Comment / Central Texas Political Issues / By

As a commercial real estate attorney and investor in the heart of Austin, I’ve witnessed firsthand the city’s explosive growth. Glass towers sprout like wildflowers, cranes paint the skyline in intricate ballets, and “Keep Austin Weird” bumper stickers cling stubbornly to Tesla doors. This dynamic progress, however, often clashes with the city’s equally strong desire to preserve its historic soul.

There’s no denying the charm of Austin’s historic districts. Walk along South Congress, for example, and you can shop in retail buildings older than I am. The Austin City Council recently approved a budget for a grant program aimed at preserving some of these buildings. But is that all good? Is there a downside? Lets talk about it.

Historic Preservation has Positives and Negatives

 

On January 18, the Austin City Council approved the budget for the Historic Preservation Fund grant program. The City will dedicate $31.7 million for the 2023-24 fiscal year to preserve and improve Austin’s historic properties. It is funded through a 15% allocation of the city’s hotel occupancy tax revenue. And as we discussed above, there are a number of historic buildings around Austin that likely need some preservation efforts.

But there is a flip side to that coin. Austin is undeniably facing a housing crisis. Rents skyrocket, affordability plummets, and young professionals, students, and even seasoned residents struggle to find a place to call home. In this context, every square foot of land becomes precious. And the preservation of historic buildings, some potentially vacant or underutilized, can contribute to the crisis. So what is a City to do? What are the pros and cons of historic preservation?

Pros of historic preservation:

  • Cultural Legacy: Historic buildings are living repositories of our past. Some are more than just structures; they are stories etched in wood and brick, testaments to the city’s evolution and a source of identity for Austinites.
  • Community Character: Historic districts may add charm and character to a city.
  • Economic Benefits: Some studies have shown that revitalized historic districts can actually attract businesses and tourism, boosting the local economy and creating jobs. Tourism thrives on cultural experiences, and historic sites are often key anchors.

 Pros for New Development:

  • Housing Affordability: Every historic building preserved is a potential new apartment complex, condominium, or affordable housing unit lost. In a city desperately scrambling for solutions, sacrificing development potential can seem like a luxury we can’t afford.
  • Economic Stagnation: While historic districts attract certain businesses, they can also deter others. Strict regulations and limitations on development can stifle innovation and restrict a city’s economic diversification.
  • Equity Concerns: Historic preservation initiatives, when not carefully crafted, can disproportionately impact low-income communities and communities of color. Gentrification often follows in the footsteps of revitalized districts, displacing residents who can’t afford the rising costs.

In addition, at least in Austin, we too often see buildings being preserved that have little to no historic significance. So what is the solution? How do we bring people together to balance these competing interests for the best of our City?

Here are a couple of ideas:

  • Targeted Preservation: Prioritize preserving only truly significant buildings while allowing for adaptive reuse or redevelopment of others of little significance. Identify underutilized structures and encourage projects that retain the historic character while addressing the housing crunch.
  • Incentives and Flexibility: Offer developers incentives, tax breaks, or streamlined permitting processes for projects that incorporate historic elements or contribute to affordable housing needs. This creates a win-win scenario where economic growth complements preservation efforts.

The City of Austin faces a complex challenge. But by acknowledging the merits of both sides, fostering creative solutions, and prioritizing both heritage and growth, we can ensure that Austin remains a vibrant, diverse, and livable city, where the echoes of the past harmoniously blend with the melody of the future. As lawyers, as builders, as Austinites, let’s strive to write a chapter in our city’s story that balances respect for our history with the promise of a thriving tomorrow.

Preserving the Past, Paving the Future Read More »

Display of a model of a building that was chained by a man.

Ticking Time Bomb: Navigating the Legal Minefield of $2 Trillion in CRE Refinancing

Leave a Comment / Legal Awareness / By
  • There is approximately $2 trillion in commercial real estate loans that are coming due by the end of 2025.
  • That could lead to a number of different types of litigation facing commercial real estate owners.
  • But being prepared in advance, owners can potentially avoid that litigation or at least be successful during it.

Anyone that has been involved in commercial real estate for a while knows this can be a volatile business. We’ve seen booms and busts, bubbles and bursts. But the coming refinancing storm on the horizon could be jarring – even for experienced commercial real estate professionals. With $2 trillion in CRE loans set to mature by the end of 2025, a tsunami of legal issues is poised to crash ashore. Buckle your boots, folks, because the waters are going to get choppy. So lets talk about it.

 Potential Litigation: A Legal Landscape in the Making

 

The refinancing crunch, fueled by rising interest rates and a changing market, threatens not just financial stability, but also throws open the door to a plethora of potential lawsuits. We have talked previously about the oncoming mess of refinance and what you can do, as a commercial real estate owner, to protect yourself. But today I want to talk about some potential legal issues and litigation that may come as a result of the refinance boom. That potentially includes:

  1. Lender vs. Borrower: Breach of Contract, Fraudulent Inducement, and All That Jazz

Imagine this: your loan expires next year and the market’s gone south. Suddenly, the terms lenders promised seem impossible to meet. Borrowers, facing the prospect of default or predatory terms, will likely look for legal alternatives to being foreclosed upon. That usually starts with trying to do a workout with the lender. But it can also include potential litigation. Lawyers will be parsing loan documents, searching for inconsistencies, and claiming fraudulent inducement to renegotiate terms or even seek damages. Lenders, on the other hand, will defend their legal right to adjust rates and terms based on market realities. Prepare for heated discovery battles, expert testimony on valuation models, and judges juggling competing interpretations of “best efforts” clauses.

  1. Partner vs. Partner: Dissolution Dances and Disputes in Joint Ventures

When the music stops in a refinancing waltz, who gets the real estate rose? Joint ventures, common in Texas CRE, are breeding grounds for conflict. One partner might want to walk away, another might fight to hold on. Expect disputes over loan guarantees, valuation of assets, and allocation of losses. Lawyers will be drafting dissolution agreements, arguing breach of fiduciary duty, and dissecting operating agreements with surgical precision. It’ll be a tango of Texas-sized egos and lawyers wielding legal briefs like dueling sabers.

  1. Environmental Liabilities: Unmasking the Ghosts in the Walls

As environmental regulations evolve, lenders are hyper-aware of potential hidden liabilities. Borrowers, hoping to secure new loans, might not disclose environmental issues, fearing rejection. This opens a can of worms. Lenders who discover contamination later could sue for fraud, seeking to either rescind the loan or recover cleanup costs. Environmental lawyers will be busy investigating soil samples, analyzing regulatory compliance, and drafting complex remediation plans. It’s a game of environmental hide-and-seek with potentially sky-high stakes.

  1. Title Defects: Skeletons in the Property Closet

Imagine renegotiating your mortgage when a long-lost relative surfaces, claiming ownership of your prized office building. Title defects, lurking like dusty skeletons in the Texas land records, can derail any refinancing deal. Borrowers could find themselves facing lawsuits from undisclosed heirs, creditors, or even government entities with competing claims. Title lawyers will be poring over dusty deeds, deciphering ancient surveys, and unraveling chains of ownership.

 Beyond the Battlefield: Strategies for Avoiding the Legal Crossfire

 While litigation looms, proactive measures can mitigate the risk of getting drawn into costly courtroom battles. Here’s some essential legal ammo for Texas CRE owners navigating the refinancing storm:

  • Proactive Communication: Open and honest communication with lenders is crucial. Don’t wait for the eleventh hour to address concerns.
  • Meticulous Documentation: Maintain meticulous records of loan documents, environmental reports, and title searches.
  • Seek Early Legal Counsel: Consulting a savvy CRE lawyer early on can help identify potential pitfalls and craft strategies to avoid litigation.
  • Explore Alternative Solutions: Consider loan extensions, modifications, or joint ventures with financially stronger partners.

Remember, Texas is a land of opportunity, but also a land of fierce legal battles. As the refinancing storm approaches, arm yourselves with knowledge, legal counsel, and a healthy dose of pragmatism. The path to securing your CRE future might not be paved with gold, but with careful navigation and legal foresight, you can weather the storm and emerge stronger than ever.

So, buckle up, Texas CRE owners. The next few years promise to be a wild ride, but with the right legal compass, you can steer your property safe and sound through the treacherous waters of refinancing. Just remember, in the legal jungle, knowledge is your machete, and a good lawyer is your trusty guide.

Ticking Time Bomb: Navigating the Legal Minefield of $2 Trillion in CRE Refinancing Read More »

business dispites

Force Majeure Clauses in the Age of Pandemics: What Commercial Leases Need Now

Leave a Comment / Legal Awareness / By
  • Force majeure clauses are designed to leave parties with an out when an unforeseen issue arises.
  • Its important to draft them with specificity and reasonableness to be effective.
  • By doing so, you can ensure that both parties to the commercial real estate lease are reasonably protected against unknown impediments.

Remember the good old days of commercial real estate? When the biggest worry in a commercial lease negotiation was finding parking for your food truck after closing a sweet deal? Well, move over, parking woes – force majeure clauses are taking the stage, center spotlight, and belting out a chorus of legal uncertainty in the wake of pandemics and other unforeseen events.

Crafting and interpreting force majeure clauses in today’s changing world can be very difficult. There is a lot of confusion about them and that can lead to a mess when the unthinkable actually happens. So lets talk about them.

 

What is a Force Majeure Clause?

A force majeure clause is basically a clause in a contract that often relieves the parties of their obligations under the agreement if something unforeseen happens that frustrates the purpose of the agreement. Sounds easy, right? Its not. There are a lot of moving parts that have to be interpreted and can lead to large disagreements.

A perfect example of this is the COVID pandemic. It sent the commercial real estate world into a tailspin, with businesses and landlords caught in a tug-of-war over rent payments, lease obligations, and the meaning of “unforeseeable event.” This is where those force majeure clauses came under intense scrutiny. Did they cover pandemics? Were they specific enough? Did they offer a fair escape hatch for both parties? It was a mess that is still being worked out today.

 

Crafting Clauses for the Future

So, how do we avoid similar legal limbo in the future? Here are some best practices for crafting and interpreting force majeure clauses in your Austin commercial lease:

  • Specificity is Key: Don’t be vague. Spell out specific events that qualify as force majeure, including pandemics, natural disasters, government shutdowns, and technological blackouts. Think of it like packing a disaster preparedness kit for your lease – the more you have in there, the better equipped you’ll be.
  • Reasonableness Reigns Supreme: Even with a list of specific events, include language requiring the event to be “unforeseeable” and “beyond the reasonable control” of either party. This adds a layer of fairness and prevents someone from claiming a surprise birthday party as a force majeure event (yes, that actually happened).
  • The Devil’s in the Details: Don’t just list events – outline the consequences. Specify whether obligations are suspended, excused, or modified when a force majeure event occurs. Will rent be prorated? Lease terms extended? Be clear and specific to avoid future misunderstandings.
  • Communication is King: When the unexpected strikes, don’t hide under your Stetson hat. Open communication is crucial. Notify the other party promptly about the event and its impact on your lease obligations. Remember, collaboration is key, not a legal showdown at high noon.

 

Interpreting Current Clauses

But what do we do about current leases with old force majeure clauses? Here are some tips for interpreting it in the age of pandemics:

  • Look at the Language: Start by examining the specific language used in the clause. Are the listed events broad or specific? How is “unforeseeable” defined? Are there any ambiguities that need clarification?
  • Consider Context: Don’t read the clause in a vacuum. Think about the circumstances surrounding the negotiation of the lease, the type of property involved, and the current market conditions. This context can help you interpret the clause in a way that’s fair and equitable.
  • Seek Guidance: If you’re unsure about the clause’s meaning, don’t hesitate to seek legal advice. A qualified commercial real estate attorney can help you navigate the nuances of the language and determine your rights and obligations under the clause.

Force majeure clauses ideally are not weapons to be wielded in anger, but tools to be used constructively in times of crisis. By crafting them carefully and interpreting them with reasonableness, you can ensure that your Texas commercial lease weathers any storm, pandemic or otherwise.

Force Majeure Clauses in the Age of Pandemics: What Commercial Leases Need Now Read More »

report

Demystifying the Corporate Transparency Act Filings

Leave a Comment / Legal Awareness / By
  • With the new year, the federal government has enacted new reporting requirements for most entities.
  • A Beneficial Ownership Report has to be filed that lists all owners over 25%.
  • For commercial real estate professionals – with lots of single purpose entities – this could potentially be a large undertaking.

New calendar years often bring new regulation. That’s the joy of our system of government and, as business owners and executives, I reckon we are all familiar with that.

Well welcome to 2024 and a new landscape reshaped by the Corporate Transparency Act (CTA). As the calendar flips, a new compliance burden has shifted into focus. And it is one that could require a significant time and expense commitment for you. So lets talk about the reporting requirements of the Corporate Transparency Act.

 What’s at stake?

In theory, Congress enacted the CTA aims to shine a light on the often-murky corners of corporate ownership. By requiring disclosure of “beneficial owners” – those with 25% or more ownership or control – the government hopes to combat financial crime, money laundering, and terrorist financing. So, who needs to comply? A lot of entities.

  • Domestic reporting companies: This broad category encompasses corporations, LLCs, and other registered entities formed or registered in the U.S. (excluding certain public companies and exempt entities).
  • Foreign reporting companies: Companies formed outside the U.S. but registered to do business here also fall under the CTA’s gaze.

 What needs to be filed?

 So now that we know who needs to report, what do they need to report?

  1. Beneficial Ownership Information (BOI) Report: This document requires the entity to disclose the identities of its beneficial owners, including:
  • Name, date of birth, and address
  • Social Security number or another unique identifier (passport, driver’s license, etc.)
  • Percentage of ownership or control
  1. Company Applicants: In addition to reporting the beneficial owners, entities must also disclose who the company applicants are. You’ll need to disclose:
  • Name, date of birth, and address of each entity applicant who is causing the BOI to be filed.
  • The date the application was filed.
  1. Amendments: Life changes, and so do business structures. Any alterations to the BOI or Company Applicants information necessitate an amendment filing within 30 days. Think name changes, ownership shifts, or new applicants joining the fold.

 When does the clock start ticking?

 For existing entities (formed before January 1, 2024), the filing window opens on January 1, 2024, and closes on January 1, 2025. New entities formed after January 1, 2024, have tighter deadlines: file within 90 days of receiving notice of formation (until December 31, 2024), and within 30 days thereafter.

 Where do these filings land?

 All reports find their home in the Financial Crimes Enforcement Network’s (FinCEN) secure, non-public database. Access is reserved for authorized government agencies for national security, intelligence, and law enforcement purposes.

 Exemptions for Some Entities?

 

Not everyone gets swept up in the CTA’s current. Some entities, like publicly traded companies or those already subject to extensive financial reporting, receive an exemption pass. But remember, exemptions can change, so keep your radar tuned for updates.

So that’s the issue. The federal government has new reporting requirements for all entities. And for those of us in the commercial real estate industry – with lots of single purpose entities – this is going to be a bit of a pain. But such is life.

If we can be of help you with any of your filing requirements, please do not hesitate to reach out. Thanks.

Demystifying the Corporate Transparency Act Filings Read More »