Letters Of Intent Are Dangerous

Letters of intent, although common in real estate transactions, are dangerous. In Michigan, courts have ruled that a letter of intent (LOI) can be binding even though it says things like “non-binding”, “only preliminary to a definitive agreement”, and the like.

Courts reach such surprising results most often where 1) the LOI contains a detailed list of many of the deal terms, and 2) both parties have signed the LOI.

Why is the LOI sender asking the recipient to sign if the LOI is supposed to be nonbinding? If you receive an LOI asking for your signature, consider responding this way:

“Thanks for your letter dated _________. We did receive it, but we will not be signing it because we have no agreement with you at this time. We look forward to continuing negotiations with you.”

If you can’t resist sending some status report to the other side, put only a few of the significant deal terms onto a “term sheet”. And do not ask the other side to sign it.

Sure, sometimes you want an agreement with the other side, typically on such things as confidentiality and exclusivity of negotiations for a fixed time period. So put those two subjects into a separate letter that the receiving party signs. But say nothing about the deal terms.

In summary, the traditional approach to letters of intent creates a significant potential for surprise. Work with your legal counsel to abandon this dangerous, traditional approach in favor of one that is easier, more direct, and safer.

Retail Market Overview-November 2019

The retail market within West Michigan has been incredibly strong as begin the 2019 holiday season. Both national and local retailers continue to look for opportunities within the market but due to all 50-year low unemployment rates at 3.1%, high construction costs and limited inventory their searches are becoming more difficult. Even with several Big Box store closing throughout the nation, the retail sectors continue to flourish based highly off Restaurant and Fitness retailed concepts. Brick-and-Mortar stores still account for a large portion of overall spending. A recent report stated that 83% of consumers plan on shopping within a store during this upcoming holiday season.

A large amount of transactions and high level of interest continues to be around the 28th Street & East Beltline location. Labeled as the, “Main & Main” within West Michigan this corridor has seen REI, Von Maur, Black Rock Grill, MOD Pizza, Panda Express and others open in 2019. The rental rates within this area are some of the highest within the market. Another area that has seen a strong amount of activity has been East Beltline & Knapp. With the recent addition of TJ Maxx, Old Navy, Five Below, Orange Theory, Amazing Lash Studio, Woodhouse Day Spa and Clean Juice this corridor has drawn the attention of a handful of retailers and restaurants. Alpine Ave continues to push farther north with a new strip center built which includes an endcap drive thru Jimmy Johns. Even with TJ Maxx relocating from Alpine to the East Beltline this area continues to draw high level of interest. Rivertown saw the addition of two fitness users this past year Twisted Hot Yoga and Title Boxing. Both concepts are new to the Grandville market and have opened very strong!

Downtown Grand Rapids has seen immense growth and continues to see shape our West Michigan landscape. The addition of Studio Park has brought even more patrons into downtown. 20 Monroe Live, Van Andel Arena and DeVos Place continue to draw more and more crowds and attractions to each of their venues. The West Side of Grand Rapids has begun to become the “hot spot” in town with Bridge Street Market, WMCat, Consumer Energy starting construction in Spring of 2020. The restaurants of Butchers Union, Jolly Pumpkin, Sovengard, and New Holland Brewery have been strong additions to this stretch. The Wealthy and Cherry Street corridors continue to draw strong levels of interest as some of the highest rental rates within the downtown district are located here.

2020 should continue to be a strong year for West Michigan retailers. Much of the action will continue to be around 28th Street, East Beltline, Rivertown and Alpine Ave. These retailers will be faced with some of the same issues which plagued 2019, lack of employees, high construction costs and lack of inventory but West Michigan continues to be a strong economy for many of them. As more regional and national companies look at the market it will continue to bring bodies into the market who need to eat, shop and help many of the retailers!

Real Property Valuation Issues - Fee Simple versus Leased Fee

Valuation theory holds that interests or rights in real estate are to be valued rather than physical land and buildings themselves. Standards require that interests or rights be identified and reported. In ordering and completing appraisal reports then, the issue of which property rights should be valued often comes up. The primary property rights in appraisals are Fee Simple Estate or Leased Fee Estate. Fee simple includes the “full bundle” of rights while leases convey partial property rights to tenants for their use and occupancy. Following are definitions currently in use by the valuation profession (Dictionary of Real Estate Appraisal, 6th edition):
Fee Simple Estate – Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat.
Leased Fee Estate – The ownership interest that the landlord or lessor maintains in a property under a lease with the rights of use and occupancy being conveyed or granted to a tenant or lessee. The ownership interest in a leased property.
If not spelled out specifically, there may be some differences in interpretation among appraisers as to whether a leased fee or fee simple value should be presented. Many banks may take a generally prevailing view that if there is a lease, you must present the leased fee interest. However, as an appraiser it often generates questions such as, “shouldn’t we be determining how a typical buyer would view the lease and its impact on value? Should you really present the leased fee interest if there’s only a short term lease or leases remaining?

A desire for more consistency on these matters prompted the Appraisal Institute to hold discussions on and draft a Property Rights Symposium Discussion Paper (12/21/17). When a property is leased and the value of a lease interest is sought, the valuation process will reflect the lease and account for any loss or benefit due to the rent being above or below market or loss due to the time and cost to lease vacant space. But when the assignment is to value the fee simple estate in property that is typically leased and sold as leased, questions arise as to whether it should be valued as though occupied or as though vacant. This question is critical in eminent domain and property taxation where law or regulation generally requires the valuation of the fee simple estate, even if a lease exists. It is also an important question in mortgage lending when lease income is needed to repay the loan but there is risk of unexpected vacancy. The paper brings up the issue: does fee simple mean vacant and available for lease or occupancy? If so, should deductions be made for lease up time and cost? Does fee simple imply a “go dark” scenario? Also, how does the interest valued relate to your selection and adjustment of comps, and selection of an appropriate capitalization rate? The symposium concludes that the definition of fee simple may need changes. They suggest: “Fee simple estate. The highest estate allowed by law. An inheritable ownership interest of indefinite duration.” In addition, it was suggested that the valuation profession discontinue use of the terms leased fee and leased fee estate. Potential implications of these proposals are that valuers would need to determine, and valuation reports clearly state, the estate (fee simple, leasehold, or life estate) as well as the actual or assumed interests associated with the real estate that are reflected in the valuation. Depending on the question to be answered by the valuation for a property that is leased, or would likely be leased, the valuation could be subject to the existing lease, subject to leases at market rates and terms, or as though vacant and available to be leased at market rates and terms. The valuer generally must consult with the client to clarify which interests to value.

Application in sale and income approaches: the concept of “market value” is linked to specified property rights. It is the “transfer” (a hypothetical sale, the foundation of an opinion of value by an appraiser) where property rights intersect with the concept of market value, because every sale will have a transfer of some rights. So to appraise a subject property we hypothetically create the situation of a “transfer” or sale, and with that hypothetical sale we have to specify which set of property rights are transferred so that the type of value we are opining is clear. Accordingly, every sale comparable that has transferred did so with a specified set of property rights, and thus has to either match the property rights stated in the appraisal of the subject property or be adjusted appropriately. When the fee simple interest is valued, the presumption is that the property is available to be leased at market rates. A lease at market rent would not increase the market value of real property rights to the fee simple estate. Any potential value increment in excess of a fee simple estate is attributable to the particular lease contract”. (The Appraisal of Real Estate, 14th Ed., Chapter 21: The Income Capitalization Approach, p. 441). In the development and analysis for the Income Approach to Value, an appraiser may find that the lease terms are in line with current market conditions, and therefore, the value of the leased fee estate may be equivalent to the fee simple estate, but the property rights appraised and market value label should be leased fee estate for technical accuracy and consistency with appraisal industry standards and practice. Conversely, if the market rent is found to be greater or less than the contract rent, a leasehold estate exists in which the tenant holds positive or negative leasehold position.
I often order appraisal reports requesting that both a “leased fee” and a hypothetical “fee simple” value estimate are to be provided. This may help a bank to better analyze collateral from a lease contract/risk perspective, as well as a hypothetical “fee simple” with an assumption made that the property is available for lease at market rates and market risk. Usually, a “stabilized value” is sought in this fee simple hypothetical as though the property has achieved stabilized leaseup at market rents. An alternative value could also be sought in some cases for a “go dark” scenario with assumption that the property is vacated and available for sale.
Disclaimer: this blog is the opinion of the writer only and does not necessarily reflect the views of the writer’s employer.

Wither, Weed?

Michigan, get ready! The commercialization of adult use marijuana nears. Last November, when the voters approved the marijuana adult use ballot initiative known as Michigan Regulatory and Taxation Marijuana Act (MRTMA), commercialization seemed a long ways away. Not true anymore. Less than 100 days.
The Marijuana Regulatory Agency (MRA) of the Department of Licensing and Regulation (LARA) recently issued Emergency Rules for regulating and controlling aspects of the adult use business. They then indicated that, if all went well, MRA would begin accepting applications for MRTMA licenses on November 1, 2019. Not long now. Current MMFLA licensees are chomping at the bit to get applications submitted and licenses issued within a short period of time after the application window opens at MRA. Adult use products could be available for the holidays this year.
Why is all this important for members of CAR? There is tremendous demand for locations for operations to serve the adult use business. Prospective licensees need to find industrial and agricultural properties for growers and processors under both MMFLA and MRTMA. Both laws mandate that they locate facilities in zones allowing industrial and agricultural uses. Then there’s the retail outlets: the “Provisioning Center” under MMFLA and the “Marijuana Retailer” under MRTMA. Commercial districts are targets. As we’ve seen in Grand Rapids, the main business thoroughfares have had multiple properties placed under contract as possible sites for the medical marijuana operations at this time. Keep in mind, MRTMA future uses. Eight locations in Traverse City alone in a two block area on Front Street.
The prices potential licensees are paying for these locations is enormous compared to current assessed values. Just saw that a fully licensed, non-operating Provisioning Center of 4,000 square feet in the River Rouge area has an asking price of 18 million dollars.
There are currently 251 MMFLA licensees (99 Growers and 125 Provisioning Centers). Keep in mind that in the former category, several of the licensees are extremely large entities and hold numerous Class C licenses (up to 1,500 plants per license). Those licenses right now are $66,000 per year. If you stack 10 of those licenses in one location for up to 15,000 plants, that’s a big operation. This is what you may come to see in the future as this marijuana business develops in Michigan.
The trick for prospective licensees and realtors is to find a municipality which allows some form of marijuana business enterprise to be located within its boundaries. Under the MMFLA, the key is “opt-in”. That means that we started with the 1,773 municipalities in the State not allowing any operations. That law gives to each municipality the right to carve out its own law if it wanted to allow operations for medical marijuana businesses within the municipal boundaries. Until recently, less than 120 municipalities had opted in. That’s expanding as community leaders realize the benefits.
Under MRTMA, it’s the opposite. Every municipality is in, unless it chooses to “opt-out”. For the most part, every municipality which has been faced with the decision has opted out or will do so by November 1. If they miss the deadline and MRA starts receiving applications, they’re in and they did not get to carve out their own ordinance provisions. Many of the municipalities have stated they want to carve their own ordinance and so opt out first, giving time to see what the Emergency Rules provide as well as what they want in their community. As your clients look for places in every municipality in the State, remember that every ordinance is different. Every municipality carves its own provisions as to types of licensed establishments it will allow and numbers. In the case of the City of Grand Rapids, it developed a system for scoring and a draw for locations. There’s the 2,000 foot radius buffer zone and another 1,000 foot radius buffer from “sensitive areas”. You have to know what every municipality wants. Nowadays, most are holding drawings so applications for municipal preliminary licenses have due dates.
Then with MRTMA there are new types of additional licenses which business people will be looking at using. There’s the licensed designated consumption establishment (ie: smoking lounges). Will a convenience store want to add it? What about a bar owner with an additional location for the smoking lounge? Then there’s the temporary marijuana event license. Instead of Celebration on the Grand, how about a Cannabis Celebration on Calder Plaza or in the parking lot of a mall, or in an open field? Then there’s the new Microbusiness for up to 150 plants for state residents who are not now MMFLA licensed.
Lots of opportunities ahead for CAR realtors in all areas of Michigan in this burgeoning field. Stay up to date on municipal requirements and find those primo locations for your clients.

Changes To The Marketable Record Title Act Could Impact Closings

Every real estate contract must, unless agreed to otherwise, convey what is known as “marketable title”. The courts have defined marketable title as title that is free from encumbrances and assures the purchaser of quiet and peaceful enjoyment of the property. The Marketable Record Title Act (“MTA”) generally provides that a purchaser has marketable title if they have an unbroken chain of record title to any interest in Michigan real estate for 40 years (20 years for mineral interests), where there are no documents in the chain of title purporting to divest that person of title.

On December 28, 2018 the Michigan legislature passed Senate Bill 671 which amends the MTA. The bill took effect on March 29, 2019. Prior to the amendments, the MTA limited a title examination to the most recent 40 years (20 years for mineral interests) with any defects occurring prior to that time disregarded. While the amendments to the MTA attempt to clean up and simplify title in in certain situations, they may have unintended consequences for homeowners associations and condominium associations as affirmative actions will now be required to preserve certain use restrictions.

For example, if a homeowners association has a 40 year old subdivision deed restriction against building unattached garages or decks, a sale of a lot within the subdivision without a specific reference to that 40 year old restriction could wipe out that restriction with respect to that lot. In this situation it is not clear who should file notice under the amendments to preserve the restriction, the seller or the homeowners association. The homeowners association may ultimately be forced to review all deeds in the subdivision to make sure any old restrictions are properly referenced so they will continue to be enforceable against new purchasers.

Prior to the amendments, concerns were raised as to what exactly the MTA required to preserve an interest or use restriction. It is common for deeds to have generic statements such as “subject to anything of record”, “subject to existing use restrictions, if any” or “subject to easements and restrictions of record” and some title companies were reluctant to issue title insurance in these instances. The amendments to the MTA seek to clean up title in situations where deeds contain these generic statements or where title is subject to restrictions that are over 40 years old (20 years old for mineral interests). Simply using this generic language will no longer restart the 40 or 20 year time period and the amendments generally will invalidate a reserved interest or use restriction that is not specifically identified in the chain of title within the last 40 years.

The amendments to the MTA do provide for a 2 year window (from March 29, 2019) for recording a notice to preserve such interests or use restrictions that are more than 40 year old (20 years for mineral interests). The amendments require the notice to contain very specific information. After March 29, 2021 when the window closes, notice of interests or restrictions must be recorded within the 40 year time period (20 years for mineral interests) and must contain the required identifying information or the claimed interest or restriction will no longer be preserved and will be void as a matter of law.

Many questions are still left unresolved, including who is a claimant entitled to file notice under the amendments to MTA. Deed and use restriction may or may not go away and closings may be delayed as title companies, sellers and buyers seek to sort through the confusion and figure out what deed and use restrictions are still valid under the amended MTA.