Landmark Links June 27th – Out of Your Element


Lead Story…. It seems like everything in the real estate development industry is moving slowly of late.  Projects that would have taken a couple of months to close back in 2013-2014 now tend to linger for 4-6 months for one reason or another.  I’m of the opinion that there isn’t any one culprit but rather a collection of factors that add up to some big timing headaches.  City planning departments are understaffed, there is a massive labor shortage and it seemingly takes an act of Congress to get a bank to issue a term sheet on loans where they have indicated a strong interest.  Either way, extended delays seem to have become the norm and it’s making deals more difficult to get done.

Today I want to focus on an aspect of development that is causing timing headaches and is often a substantial impediment to a successful transaction: the different cultures of commercial real estate sellers and residential developers when it comes to due diligence.  It’s something that I had never really given much thought to until a client who is an infill developer brought it recently.  However, it’s something that we are seeing more of lately..

As most of you are aware, there is a lot of re-development going on in urban regions of the US where underutilized sites are re-developed from commercial to residential or mixed use.  As such, these transactions often involve a commercial owner/user or landlord selling to a residential developer who will take the site through the re-entitlement process.  Although no transaction is easy, commercial deals tend to have a fairly straight forward DD process: the buyer obtains copies of in-place leases, gets a property condition analysis, seismic report, Phase I Environmental and title report.  Attorney’s put together lease abstracts and estoppels.  The lender providing the acquisition loan has an appraisal done.  There’s a lot to get done but it’s fairly well defined process and most of the timing issues are within the control of the buyer.

Residential entitlement and re-development plays are pretty much the opposite in that they are anything but straight forward.  A residential developer needs to do all of the same DD that a commercial real estate investor does in addition to a whole lot more including: a market study, entitlement memo, planning department meetings, site plan draft, city council member meetings (if possible), engaging an entitlement consultant, etc.  The list goes on and on and many of these items are not completely within the developer’s control (city meetings, for example).  The environmental standards for residential are also higher (for obvious reasons) which means that additional testing is often required, especially if there has been any type of industrial use.

Everything is fluid in an entitlement deal.  The developer typically has a high-level concept of what the development will look like but specifics don’t get nailed down until later in the process.  Still, they have to court potential investors with a business plan that is still subject to change, based upon due diligence findings that ultimately won’t be fully known until the 11th hour.  It is often a sprint to the finish line in a somewhat chaotic fashion.  Entitlement projects are fun to work on but definitely not for the faint of heart.

The due diligence period for commercial deals is fairly straight forward and waiving DD is typically not to traumatic of an experience as unchecked items often get re-classified as conditions to close.  The culture around commercial transactions is usually for non-refundable dollars to be released fairly quickly since the buyer has a pretty good idea of what they are buying upfront.  Sellers and their brokers know this and it’s what they have come to expect.  On the other hand, feasibility dates for residential developers are something of a formality as they almost always get extended.  The inside joke among many residential developers is that a feasibility date is little more than the date when you ask for your first extension.  It’s almost expected that DD feasibility will get extended on an entitlement play.  No one particularly likes asking for or granting extensions but residential buyers, sellers and brokers recognize it as “business as usual.”

As you can imagine, this is creating a ton of friction as infill re-entitlement opportunities continue to become a larger part of the market.  Commercial buildings are typically sold by commercial brokers who have limited experience in residential entitlement and therefore expect a normal feasibility period where the buyer will go non-refundable at the conclusion rather than a request for an extension.  At the same time, residential developers have become accustomed to offering an aggressive feasibility period – they know that they won’t win the deal otherwise – and then asking for an extension as they would on a typical residential project.  The end result is a ton of frustration, conflict and dropped escrows.

This probably goes without saying but it really doesn’t have to be this way.  First off, if commercial sellers want to realize the additional value driven by selling their property to a developer who will entitle it for a higher and better use then they need to accept the down side as well – more moving pieces requiring more feasibility time.  Second, the expectations have to be set better upfront – feasibility for entitlement plays takes longer.  Period.  However, sellers want to have their cake and eat it too and buyers understand that they have to play the game with regards to over promising on timing and then hope that they are able to eek out a feasibility extension without having the deal fall out of escrow.  As much as I wish that it weren’t the case, I don’t see it changing soon.  Just chalk it up as another impediment to getting deals done in a challenging environment.


Taking Over: The latest report from the Census Bureau shows that Millennials have taken over in the US when it comes to demographics.

Delusional: Investors still think that they can make average annual returns of 8.6% per year investing in bonds and dividend-yielding stocks despite mountains of evidence to the contrary.

Too Far? Economic studies on Seattle’s 2016 minimum wage hike are starting to pop up.  The jury is still out but the results don’t look particularly good thus far for low wage workers.

Who’s In? An interactive history of US labor force participation.

Size Matters: Low gas prices and cheap financing have Americas back in love with  SUVs and pickups that many wrote off a few short years ago.


Transformation: How Tampa, Florida turned a dead zone into a vibrant downtown.  See Also: Reno is starting to look more like Silicon Valley.

Under the Radar: Elimination of interest deductability could wreak havoc on the real estate industry.


Priced Out: There is an increasing list of cities in the US where land prices and regulation have made it too expensive to build apartments.  See Also: Why can’t they build more homes where the jobs are?

The Verdict is In: California’s zoning and entitlement rules are a disaster for affordability.

San Francisco’s metropolitan area added 373,000 net new jobs in the last five years—but issued permits for only 58,000 units of new housing. The lack of new construction has exacerbated housing costs in the Bay Area, making the San Francisco metro among the cruelest markets in the U.S. Over the same period, Houston added 346,000 jobs and permitted 260,000 new dwellings, five times as many units per new job as San Francisco.


Caveat Emptor: Initial coin offerings are a thing and I don’t see how they could possibly be a good thing:

Since the beginning of the year, 65 projects have raised $522 million in these offerings, according to Smith & Crown, a research firm focused on the new industry.

It is a frothy, sprawling and completely unregulated way of funding start-ups, leaving even veteran technology watchers scratching their heads.

“It’s kind of like when you are a little kid and you know you are getting away with something,” said Chris Burniske, an industry analyst at ARK Invest. “It’s not going to last forever, but it’s fun in the interim. The space is giddy right now.”

Last month, a small team of computer engineers in Lithuania raised $14 million in 45 minutes by selling a coin, known as Mysterium, that is intended to give access to an encrypted online data service that is still being built.

The next day, a group of coders in the Bay Area pulled in $35 million in under 30 seconds of online fund-raising. The coders were offering Basic Attention Tokens, which will one day work on a new kind of ad-free web browser.

Then this week, a team in Switzerland raised around $100 million for a coin that will be used on an online chat program that has not yet been released, known as Status.

This will end in tears.

Wrecking Ball: News of Amazon moving into a market segment has resulted in $69 billion of lost market cap for competitors.

Culture Shock: Walmart acquired in an effort to compete with Amazon.  Then it banned office drinking.  This went over poorly.   If there is a better illustration of the difference between cultures in the old and new economy, I have yet to find it.

Unintended Consequences: Canada’s legalization of pot has resulted in a marijuana shortage.

Chart of the Day

Amazon now has a nearly 1% market share of ALL warehouse space in the US.  


Hot For Teacher: A teacher at a Christian pre-school in California was fired once it was discovered that she was working as a porn star at the same time.  All that I can say is that those parent teacher meetings must have been awkward when dads recognized her.

Seems Reasonable: Teen accused of pulling gun on Jack in the Box employees over missing chicken nugget.

FAIL: A fake cop pulled over a real cop and ended up behind bars because, Florida.

Please. Make. It. Stop.: Millennial men are bolstering the plastic surgery industry.

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