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Attorney Review: From Terrorism to Rezoning Issues, Legal Counsel Can be a Real Estate Execs Greatest Ally

April 1, 2005

Commercial Property News

The list of legal issues for commercial real estate executives is long and far ranging. No matter which sector of the industry you are in, the need for experienced and creative- thinking attorneys has never been greater. As such, below we discuss three of the many legal issues that most concern commercial real estate executives: terrorism coverage, rezoning in urban environments and due diligence in a seller's market.


"In some seller's markets, funding due diligence is the price to pay to be in the running as a buyer," observed Mitchell Berkey, a partner with Wolff & Samson.

Covered for Terror?

The state of terrorism risk coverage remains top-of-mind for many people. The Terrorism Risk Insurance Act of 2002-which mandated that the federal government pay for 90 percent of terrorism losses in excess of the insurer's deductible-is set to expire at the end of the year. The Real Estate Roundtable, the Mortgage Bankers Association and other groups have been lobbying heavily for its renewal, and fortunately both the House and Senate have introduced bills to extend TRIA through 2007 and address long-term solutions to the terrorism-risk problem.

"If the bill is not extended, we expect to see bond downgrades, forced placement of terrorism coverage by commercial real estate loan servicers ... disruption in the marketplace, delays in funding new loans and litigation," said Gail Davis Cardwell, senior vice president of commercial and multi-family for the MBA.

"TRIA at least has been a stopgap for now," said Hal Lewis, a partner with Pathman Lewis in Miami. "If we lose the ability to have insurance companies offering terrorism insurance, it could stop large finance projects. It's the lenders who are pressing to have the terrorism component as part of the insurance package."

Risk Management Solutions, a catastrophe/terrorism risk-modeling firm, has been working with House and Senate committees to analyze TRIA's impact on the insurance market since its enactment in November 2002, as well as the proposed extension's cost to the government. The firm uses a probabilistic terrorism model to help commercial property owners assess the risk of attack to their portfolio.

"If you're an owner of five large buildings, do you need insurance on all of them or would a bomb impact only two or three of the buildings?" said Peter Ulrich, managing director of enterprise risk management at Risk Management Solutions. "What's the likelihood that terrorists would attack your building,. and what would the losses be? What type of attack would be likely: Anthrax? Bioterrorism? A chemical attack?"

Attorneys warn of fairly common gaps in the terrorism insurance available. For example, many policies will not cover bioterrorism, chemical terrorist acts or domestic terrorism, and most do not provide business interruption insurance when the real estate has not suffered physical damage. "

If your property is located in an area subject to a terrorist attack but your building isn't physically damaged, you'd be out the rent," explained Carl Schwartz, chair for the real estate department at Herrick Feinstein in New York.

Schwartz recommends "negotiating. hard" with insurers, being familiar with one's policy and with what coverage is reasonable, and ensuring you have savvy legal counsel that carefully reviews your insurance policy in order to help owners and lenders get the best policies for their risk.

Urban Rezoning

Another big issue-the need for rezoning urban areas-is on the rise, calling to the forefront attorneys who can help facilitate the rezoning process for eager developers.

"In Harlem, we helped a client who had the right to build about 50 units of residential housing increase his entitlement to 100 units," said Mitchell Berkey, a partner at Wolff & Samson. "As a result, a doorman-secured building is going to be built up there."

Meanwhile, Schwartz said his firm is currently working with a client who owns a 300,000-square-foot parcel in the Williamsburg section of Brooklyn, N.Y. The property currently is zoned for manufacturing, but the client is hoping to obtain a permit to build 1,400 or 1,500 residential units.

Rezoning for mixed-use development also is especially topical, with such projects all the rage but often fought by local residents and officials. "For one reason or another, neighborhoods are really afraid of downtown residential development," said Samuel Poole III, a shareholder with Berger Singerman in Miami. "Therefore, it's hard to get the residential component of mixed-use approved."

Smaller projects are less likely to run into rezoning opposition, said Poole, who added that large projects stand a better chance if the community is involved from the start and educated as to the impact of the project. Even so, the legality of the rezoning can be questioned if the protestors can show it is done solely to benefit one owner or one property rather than an entire neighborhood or district, cautioned Frank Stearns, a partner with Kirkpatrick & Lockhart Nicholson Graham LLP.

Also, residents can hold up a project even if zoning is not the issue.

"We were representing a developer for a mixed-use project that was already zoned for that use," said Poole. "The neighbors objected because it would be built next to a house designated historic. The neighbors got together with some wealthy downtown interests and were able to block the project for some time. It's just now coming out of litigation, and the neighbors conceded that they could not stop it."

One solution is to create a mixed-use development with built-in pedestrian areas, thus minimizing congestion, a quality-of-life issue attractive to many communities. Poole recommends using a form-based code that ensures that the buildings and neighboring streets fit together to attract pedestrians.

Due Diligence Rankles Buyers

Due diligence periods have grown shorter, and in some cases are virtually nonexistent. Thus, buyers have had to acquire legal counsel that can work at lightning speed to determine whether the comfort level is sufficient to sign a contract with no due diligence contingency.

"(A) buyer is (often) required to expend dollars to do due diligence when he or she does not even have a contract to buy a property," said Berkey. "In some seller's markets, funding due diligence is the price to pay to be in the running as a buyer."

For example, Berkey's firm recently helped a client who had one week to perform due diligence on a five-property portfolio. After four days and significant effort, it became clear that all questions could not be answered in that time, but the buyer decided to proceed with the purchase and hope for the best.

Adding to the difficulty is the fact that many institutional buyers are under great pressure to invest their money within certain periods.

"For the buyer, it's a difficult market," agreed Jonathan Mechanic, chairman of the real estate department at Fried Frank Harris Shriver & Jacobson. "Pricing is full, so they have to have a vision for the property that maybe others don't have. They need a strategy that allows them to pay top dollar because they have an edge or an angle that maybe somebody hasn't seen."

According to Wayne Pathman, a partner with Pathman Lewis, one solution that gives buyers an edge is conditioning the purchase contract so that they have the opportunity to upzone the property, increasing the height/area ratio and allowing them to build higher than the property is zoned for.

"A client had eight acres in Palm Beach and a small hotel in there," said Pathman. "(We. helped them upzone) to allow two towers of 15 stories each to be built. A property could be worth four or five times what someone paid for it because they up zoned it.

Copyright 2005 VNU Business Media, Inc. Reprinted with permission from Commercial Property News. For reorders call Valeo Intellectual Property, Inc. at 651.415.2300. 500888