Consumer Confidence Causing Collapse
“The overall economic conditions, including the massive failures
in residential real estate, are putting a lot of stress on commercial real estate, specifically as consumers have lowered their
spending due to the poverty effect—people feel poorer when
their house price is going down, so they tend to spend less,” says
Maura O'Connor, a real estate partner in Seyfarth Shaw LLP in
Los Angeles.
She adds, “So people are starting to pay off, or stave off, debt
“The whole capital market, all of this product
around the globe, is frozen in its ability to be able
to quickly deal with remedies.”
LEW FELDMAN
GOODWIN PROCTER LLP
instead of making discretionary expenditures. That change has
led to an overall decline in the economy.”
One pressure point is declining retail sales, she says, adding,
“a lot of retailers are not making the level of sales they were expecting, so you’re seeing a lot of distress in that industry.”
In multifamily, broken condo projects are fueling the flames,
causing a massive number of condos, particularly in urban areas,
to be put on the rental market, in turn flooding the multifamily
market and bringing down rents. Lenders or borrowers need
to do loan modifications to lengthen the terms or lower the
interest rates.
Of course, if there is a bankruptcy, a tenant has the right as
the bankrupt entity to either accept or reject its lease and to
stay put or sell the leasehold rights or work it out, leaving the
landlord to try to collect what’s owed.
“If the lease is rejected, the landlord gets paid in itsy bitsy
bankruptcy dollars,” O’Connor says.
Expect to see another round of lenders trying to figure out
what happens to the loans. “Some landlords will have trouble
“We believe that with the fall of the securities
market a lot of these scams will come to light.”
DENNIS ELLMAN
GREENBERG GLUSKER
paying their loans,” she says, adding, and if they’re mezzanine
loans, which are typically not directly secured by real estate, that
can create a swell of additional legal work.
“What you’re seeing right now is a lot of mezzanine loans that
are in trouble,” O’Connor says.
The Next Big Wave
California’s drought may yield an entirely new crop of water
rights and real estate litigation, notes Ed Casey, a partner with
Alston & Bird LLP in Los Angeles.
In the 1990s, the state passed a pair of bills—SB 610 and SB
221—that placed an added onus on developers and project
managers to ensure water supplies for the future. The bills require, among other things, projects over a certain size to obtain
water supply verification from the retail water agency on the
project.
Additionally, nearly two years ago, a federal judge decided
that the operator of a state water project, the California Aqueduct, would have to send out less water because of endangered
species issues in the bay delta, Casey notes. He says there have
been several recent instances where developers are starting to
get their will-serve letters pulled.
“All of this is kind of coming to a head,” he says, noting that
he expects water regulation to become more and more stringent in lockstep with population growth and global warming
concerns.
“Water is going to be an issue when the next real estate uptick
occurs,” he says.
One opportunity could spring from the water shortage: unde-veloped land may become more valuable where ground water
rights or water rights are attached.
“We haven’t quite gotten to the loan workouts. But
we’re going to have a blitzkrieg in 2009 and 2010
and 2011.”
ED CASEY
ALSTON & BIRD LLP
“Some people are actually looking at that as an opportunity,”
Casey says.
There is an increased focus on requiring developers to put in
treatment systems to treat project waste water. In the near future,
that requirement would essentially make every large project a water
treatment facility—water rights equal big money.
“That treated waste water in my opinion is going to become a
very, very valuable commodity as the years go on,” Casey says.
As technology improves, developers will be able to treat waste
water, let it percolate back down into the ground and then pull
it back out to use as drinking water, Casey notes. “As the bigger
projects start coming back into vogue again, people will start
looking at that,” he adds. “I think this is the next wave.”
To deal with the water shortages that will be impacting the
state over the next few years, “people will have to get used to
partnering with one another in ways they are not accustomed
to,” Casey says. “Right now most people in the real estate business are so focused on the sheer economics of keeping their
projects afloat, these subjects are taking a back burner.”
But once the market comes back, Casey believes water will be
on the tips of just about everyone’s tongues.
“And we haven’t even talked about the effect of climate
change on water,” he adds. “But those two things—the environment and water issues—will no doubt be the first issues that
project developers will have to tackle when things get back to
normal.” —SOCAL
