Many contracts and leases leave the parties to determine a future purchase price or rent between themselves as set by the then “Fair Market Value” (FMV). The crafty draftsperson will often try to sneak in language “as determined by seller (or landlord)”. But smart buyers and tenants won’t stand for that unilateral determination. A more concrete method of determining the FMV needs to be added to the document to set the future purchase price, option price or renewal rent. FMV is then usually determined by an appraisal. Sometimes the seller or landlord will obtain the initial appraisal, with the buyer/tenant having the right to challenge the initial appraisal by obtaining its own appraisal. If the 2 appraisals don’t agree, the appraisers choose a 3rd appraiser whose appraisal would then be binding. This process can be time consuming and costly. Other times, the buyer and seller or landlord and tenant agree in advance as to who the appraiser will be and jointly pay for the appraisal prior to the time the purchase price, option price or rent is to be set. The appraiser’s determination of FMV would be binding and the purchase price or rent is set based on such determination.

It is important to understand what you are getting when you add this appraisal language to a contract or lease. Otherwise, when the time comes, the appraisal you obtain might not fit your needs and the FMV could cause you to overpay, as tenant or buyer, or receive, as seller or landlord, less than FMV.

The Uniform Standards of Professional Appraisal Practice, as developed by the
Appraisal Standards Board of the Appraisal Foundation, has 3 approaches in determining a property’s value:

  1. Cost Approach: Under this approach, a property’s value is determined by adding the estimated value of the land to the current cost of construction of the replacement for the improvements on the land and subtracting depreciation (land value + construction cost – depreciation). The appraiser must obtain cost estimates from builders and contractors. Appraisers must do research as to depreciation. Land value is established separately.
  2. Sales Comparison Approach: this approach is useful when several similar properties have sold or are for sale in the subject market. The value of the subject property is determined by comparing comparable sale and a price range is given.
  3. Income Capitalization Approach: Value under this approach is reached as the present value of future benefits of property ownership. There are 2 methods, direct capitalization and yield capitalization. Direct capitalization is the relationship between 1 year’s income and the value of the property that equals a cap rate or income multiplier. Yield capitalization is the relationship between several years of stabilized income and a reversionary value at the end of a defined term.

 

Most appraisals determine value using at least 2 of the methods. Income producing property will almost always use an Income Capitalization Approach. Where 2 of the approaches conclude virtually the same value, it is safe to assume that the appraisal is fairly accurate. However, it is important to review the appraiser’s assumption. How old are the comps used? What is the supply of like properties currently for sale? What is the absorption rate? What are area cap rates? What is the condition of the subject property and what was the condition of the comps? What is the vacancy rate and what vacancy rates were used? There are many other assumptions to consider that could affect the appraiser’s conclusions as to FMV.

At contract/lease drafting time, sellers and landlords want as much flexibility as possible to raise the purchase price or rent in the future. At this point, FMV is a very loose term. Buyers and tenants want caps. Efforts to cap an increase are sometimes futile, especially following a lengthy initial lease term with small rent increases. That is why it is essential that the parties work to ensure that FMV actually be fair at the adjustment time.

Usually, it is a good thing when an anchor tenant decides that it is time for a massive renovation that requires Landlord to totally renovate and redesign the shopping center. It should mean a good face lift and upgrades for the local tenants. However, there will be some challenges and pain suffered along the way, particularly if the tenant does not have protections built into its lease up front, but also if the tenant doesn’t seek and obtain protections prior to the commencement of construction.

This scenario is playing out for a local restaurant client of mine. The restaurant, a popular deli located in a Publix anchored shopping center is suffering through Landlord’s renovations of the Publix and the shopping center. To call the work “renovations” is an understatement as Publix, like it so often does with its older, smaller stores, is in the process of a total rebuild. Only the exterior walls remain. The interior has been totally gutted and the roof above the store is gone. Like so many old Publix centers, Publix sits in the middle of the shopping center, with small, local retail, including my restaurant, on either side. From the street, it looks as if Publix is not just closed, but demolished. Therefore, it looks as if the entire shopping center will also be demolished.

During the demolition work, the contractors have cut water, gas and electric lines multiple times causing my client to close down for several days. The client has suffered lost revenue and expenses including paid wages for closed days to employees, not to mention spoiled food and other lost expenses. Vibrations from construction activities, unclean work site (such as nails in the parking lot), unsafe sidewalks and no signage, have also adversely affected business. The client has contacted the Landlord through the property manager and so far, the property manager has deferred to the general contractor, arguing that all cuts in utility services are general contractor’s liability.

Client contacted me for help. The first thing to look to is the lease. The lease should have protections for disruption of utilities and services caused by Landlord, in this case through its contractors. It should have provisions regarding construction and renovation of the shopping center, maintenance of the common areas, access to the shopping center and Tenant’s premises, quiet enjoyment. signage and multiple other like provisions. Needless to say, I have seen better leases than this one.

The next question is whether Landlord approached Tenant prior to construction started. Landlord should have discussed its plans with all of the tenants and the accommodations Landlord would make to minimize disruption to each of the tenants’ businesses. Tenants could then outline their concerns so that Landlord could adjust. Expectations could be set and met. In this case, despite the fact that everyone knew Publix’ plans, work just started without any converations.

Now, here we are with loss of business damages to the client. This is a good reminder as to why it is important to consult with an attorney prior to signing any document. A properly drafted lease probably would not have stopped this Landlord from doing thing that disrupted Tenant’s business. But it sure would have given Tenant leverage and remedies when things got bad.

In 1983, the New Jersey Supreme Court, in the landmark case, Burlington NAACP v. Mt. Laurel Township, limited the use of exclusionary zoning as a means of preventing the construction of affordable housing in wealthy communities. The Mt. Laurel case shaped zoning law across the country in the ensuing decades and the Mt. Laurel Doctrine is established precedent. Over the last 3 plus decades, we have seen the growth of low and moderate income housing in the suburbs, giving lower income families access to ownership of homes, in many cases for the first time. As such, these families have had access to crime free neighborhoods and better schools and to better long term success that come with these opportunities.

Mt. Laurel, in many respects, was the next logical step following the passage of the Fair Housing act in 1968 which outlawed racial discrimination in the sale and rental of housing. While that Act certainly helped many people of color move to more affluent suburban communities, it didn’t do enough for lower income families. It was, and is only a single law dealing with discrimination. Mt. Laurel exposed a problem. Local governments manipulated zoning laws to segregate communities by income and consequently, by race.

Despite the Mt. Laurel Doctrine, local governments have done nothing to encourage economic desegregation. Recognizing this problem, Senator Cory Booker (D-NJ) recently introduced the Housing, Opportunity, Mobility and Equity Act (HOME Act) (not yet assigned a bill number). The bill would close the loop on Mt. Laurel and take the Fair Housing Act to its natural next step. It would promote more inclusive zoning policies in order to economically and thus racially desegregate housing and make it more affordable.

The Act provides that states, cities and counties receiving funding under the Community Development Block Grant Program for infrastructure and housing would be required to develop new strategies to reduce barriers to housing development and creating the housing supply. Governments would be required to support new, inclusive zoning policies which create a “more affordable, elastic and diverse housing supply.” Best practices should include: authorizing higher density, eliminating off street parking requirements, establishing density bonuses, removing height limitations, prohibiting income discrimination, relaxing size restrictions and allowing accessory dwelling units. This list is not complete and are examples of things you don’t see in the suburbs and in planned communities.

The Act would also create a new refundable tax credit for renters who pay more than 30% of their income on rent and utilities.

The legislation would also provide local governments with incentives to allow “by right development” so that projects meeting zoning requirements could be administratively approved. If developers can save on the costs of lengthy hearings, the costs could be passed on to the end users, further reducing housing costs. Local elected officials (and staff, for that matter) are painfully blind to their role in the end cost of rents and sale price.

The topic of economic segregation in housing is not often talked about. The fact that it leads to racial segregation means that it should be discussed and addressed. That is not yet addressed by the Fair Housing Act makes it an important topic. President Obama sounded the warnings and Senator Booker’s proposed legislation goes a long way to addressing this important issue. However, ultimately, it will be up to the states to mandate that local governments eliminate economic segregation and take steps similar to Senator Booker’s proposals.

Over the last 30 years, I have handled more residential closings than I can remember. I have grown pretty numb to the process that my buyers and sellers go through. While I like to think that I patiently answer all their questions, I know that deep down, it should be routine and obvious. How come, I subconsciously wonder, they don’t know how to transfer utility accounts, change addresses, deal with condo and home owner associations or obtain insurance? Why can’t they provide lenders and landlords with proper financial information?

During these 30 years, my family has moved only 2 times. The first time, it was just my wife and me, just before the birth of our first child, from a 2 bedroom apartment into our first house. This was not a big move as we didn’t have much. It was difficult only that my wife was 7 months pregnant. But, packing and unpacking was a breeze, and we had lots of help. The second time we moved was 5 years later, after we outgrew that house. Our 2nd child was 2. This move also was not so hard. We were still accumulating stuff and were more than doubling the living space. The grandparents watched the kids while we packed and unpacked and waited for new furniture. Actually, furniture arrived for many years after we made that move. I navigated the details of those 2 moves fairly effortlessly. Simple to do lists got me through it and our real estate agents and my secretary kept me on task.

Now, 23 years later, the kids are grown and left us with an empty nest. We have sold the house and have downsized. We decided to rent a much smaller townhouse to give us time to decide what is next. But this has been overwhelming. We have accumulated so much “stuff”. We are the definition of what downsizing is supposed to be. How to sort through and dispose was a tremendous challenge. We had only 6 weeks from signing the contract to closing in which to clean out closets and cabinets and donate furniture. Multiple pickups had to be arranged and coordinated. But the decisions….

To do lists were endless. Last time we moved, there was water, electricity, phone and cable. Now there is satellite, internet, alarms, gas and more to add to the list. Turn it on and turn it off. Insurance. Changing addresses on all kinds of accounts. Where did we get so many credit cards? And banks and other financial accounts? How many visits does it take to get the internet to work?

The packers and movers did a great job – right up until they got to the end of the truck. The new townhouse is an urban three story walk up. We never measured our furniture. The living room furniture is too big to make it up the narrow stairways (with a turn) as is the queen box spring for the second bedroom. Two hours of twisting, manipulating and cursing and the guys gave up and put it in the garage. So no furniture in the living room and no bed in the second bedroom.

The easiest parts of this process are the closing, which my assistant is handling expertly, and the lease, because we have been fortunate to have a very nice and helpful landlady. And, in both cases, our real estate agent has been a trouble shooter. But as a seller and a renter, I now truly understand and empathize with my clients. I see why they get stressed and sometimes ask obvious questions or forget to do simple things. After all, I am that guy right now. Someone has to keep me on the right track.

The Miami-Dade County Commission has given zoning approval to Triple Five Worldwide Group’s plan to build American Dream Miami which will be the largest mall in North America. To call American Dream Miami a mall is not a fair description. It will be a 6 million square foot theme park, office, retail, shopping and entertainment complex. Plans call for 2000 hotel rooms, an ice climbing wall, an indoor ski slope, a water park with submarine rides, shopping, dining, a performing arts center and offices. The project will be built on 175 acres at the intersection of I-75, the Florida Turnpike and Miami Gardens Drive, just south of the Miami-Dade – Broward County line.

In addition, Graham Companies, which is selling a portion of the property to Triple Five, received approval to develop 300 acres to the south of a larger commercial and residential project, containing 3 million square feet of office, 1 million square feet of retail and 2,000 rental units to be developed over the next 20 years.   The American Dream project is expected to add nearly 100,000 trips per day to area roads. The Graham project would add over 50,000 trips per day.

While local leaders are very excited about the potential economic impact of these 2 projects and tout tax revenues and job creation, the traffic congestion is one area where major disagreement exists. While Miami-Dade County will address traffic issues in the approval process, Broward County and cities near the county line have expressed concern. In Miami-Dade County, the developers will have to improve or pay for improvements to state roads affected which the state does not address or pay for. However, Triple Five claims that there will be no impact, or minimal impact at most, to Broward County roads. The developer’s claims are ridiculous. Studies show major traffic diversions to Broward County roads including the Turnpike extension and Miramar Parkway. The complex is 1 mile from the county line and common sense dictates that a high percentage of visitors will be coming from the north. Any market study would compare visitors to Hard Rock Stadium, also on the county line, for Dolphins games, soccer games and concerts, and see how many people come from Broward and north. Countless comparisons in Broward and Miami-Dade could be made. The American Dream Mall would not survive without visitors outside Miami-Dade County.

Prior to Miami-Dade’s approval, Broward threatened to file a lawsuit unless the developer agreed to make improvements to Broward roads impacted by American Dream Miami. Negotiations ensued and Triple Five agreed to spend $650,000 on modernization of traffic lights on Miramar Parkway.   This conciliation is not enough and Broward continues to push for more but won’t find support from its counterparts in Miami-Dade. In a letter to Broward Mayor Beam Furr, Miami-Dade Mayor Carlos Gimenez wrote that Miami-Dade County had found no evidence that the American Dream Miami and Graham projects combined would contribute more than 5% of the daily traffic on any Broward roads which would be the trigger to demand fees from the developers. Mayor Gimenez’ conclusion comes despite several reports showing a high impact in Broward County.

American Dream Mall and the Graham Project demonstrate a total lack of regional cooperation in planning. While Triple Five can save a few dollars by not paying fees to Broward to mitigate potential traffic impact, their reluctance to pay is not only cheap, it is shortsighted. The expected price tag of the Triple Five project is $4 Billion.   There is no estimate yet for the Graham Company project. However, adding a few million dollars for traffic mitigation in Broward County is meaningless for either party. The shortsightedness is hard to understand. Clearly, the developers know that the visitors will be coming to this theme park from Broward and the north, whether they are residents or tourists. These visitors will make up a huge percentage of the annual visitors to American Dream Miami. They will be sitting in traffic unnecessarily and starting their experience poorly. This could be avoided, or made better. Triple Five, Graham Companies, Miami-Dade County…. Think bigger.

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