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Los Angeles Business & Commercial Law Blog

Uncertainty may be cooling the CRE market

Economic and political uncertainties are continuing to suppress commercial real estate values in California and around the country according to a growing number of industry experts. Commercial property prices dropped by 0.3 percent in June, and falls were observed in all five core property segments. The decline marks the second consecutive month that values on the online real estate company Ten-X's pricing index have fallen. However, commercial property prices remain near record highs and have more than doubled since 2010 according to Real Capital Analytics.

Industry analysts say that investors seeking solid and secure returns are turning to alternative assets like medical facilities and student housing, and projects in smaller markets such as Nashville and Atlanta are also gaining in popularity. Secondary and tertiary cities have been overlooked in recent years as developers focused their energies on major gateway markets, and this has sometimes led to severe supply shortages and fierce demand for space. However, many investors are still reluctant to act because of continuing doubts about the economy and the political climate in the nation's capital.

Performing due diligence before buying commercial property

Prospective purchasers of California commercial real estate most likely do not look forward to performing due diligence, but they make the effort because they know that taking shortcuts in this area can cast a long shadow. Poring over documents may not provide much in the way of excitement, but the information this kind of research can yield about the legal, financial and physical condition of a property could be crucial.

The information uncovered during due diligence can protect commercial property sellers as well as buyers. While the process provides buyers with what they need to make more prudent decisions, sellers are less likely to be sued over undisclosed defects or misrepresentation. The due diligence process generally begins in earnest when an initial offer is made, and buyers often have 30 days or less to gather the required financial and legal documents and have the property physically inspected.

CRE refinancing growing more complex

California commercial real estate developers may already have felt the impact of credit constraints and Dodd-Frank regulations on their ability to refinance their projects. Hesitant lenders, a scarcity of loan funds and growing piles of required paperwork have made it a difficult, time-consuming process to refinance commercial real estate.

The Dodd-Frank Wall Street Reform and Consumer Protection Act made banks subject to more restrictive lending rules, including a requirement that lenders retain more capital in loan loss reserves. The managing director of JLL Finance Group said the amount lenders are able to lend has decreased by around 10 percentage points on a loan-to-value basis. Where banks might previously have lent a commercial property owner 75 to 80 percent of the property value, they are now lending 65 to 70 percent.

Commercial property loans up, despite higher interest rates

Those who are thinking about purchasing commercial real estate in California may be encouraged to learn that commercial real estate lending activity is strong amidst growing interest rates. In fact, commercial lending is growing faster than other types of loans, such as retail and unsecured loans.

According to reports, the rate of loan growth in U.S. banks during the first months of 2017 was down, mainly because of higher interest rates. Less enterprises and individuals want to take on new debt at these higher rates. However, as of May 2017, about 22 percent of lending was for commercial real estate, while credit card loans accounted for only about 8 percent. Retail loans at 7 percent include student loans, vehicle loans and various other types of secured consumer loans, and credit card loans consist of unsecured consumer loans.

Sales figures suggest that CRE markets are cooling

The commercial real estate markets in major California cities like Los Angeles, San Diego and San Francisco have been extremely active in recent years, but property sales data for the first quarter of 2017 suggests that investor enthusiasm is waning. First-quarter property sales in New York City were down by 58 percent compared with the same period a year ago, according to data released by the brokerage firm Cushman & Wakefield. Analysts say that overbuilding and political uncertainty may be to blame.

The business community generally reacted positively when Donald Trump was elected president, but many top executives are now expressing doubts. Some business leaders feel that Trump will be unable to pass the tax cuts he has promised, and others worry that the reduced taxes and increased spending the president is championing could lead to higher inflation, soaring interest rates and slower growth. These fears are particularly pronounced in sectors like real estate that are heavily reliant on financing and debt.

Breach of fiduciary duty 401(k) lawsuit moves forward

A lawsuit against Starwood Hotels is moving forward in a California federal court. In a ruling on May 1, a judge moved forward the claim that Starwood's record-keeping and administrative fees were so excessive as to breach the company's fiduciary duty to 401(k) plan participants.

The judge noted in his opinion that the plaintiffs in the case have not yet specifically alleged exactly how Starwood's fiduciary duty was breached. However, the facts that they have so far brought forward were sufficient in order for the case to continue.

What Happens in California Stays in California - Employees Working and Residing in California Now Have a Right to Litigate in California and Under California Law.

A new California statute - California Labor Code § 925 - that became effective January 1, 2017, prohibits employers from requiring employees who live and work in California from litigating their employment claims elsewhere. Section 925 also prohibits attempts to limit the application of California law to employee claims.

Growing businesses don't always have to relocate

As many California entrepreneurs can probably attest, it can be challenging to sell commercial real estate. So business owners who have discovered that their enterprises are outgrowing their current facilities might want to consider a few other alternative plans before making the huge commitment to move.

While moving to a different location can be expensive and time-consuming, business owners could lose profits if their current facilities cannot meet their companies' needs. While many people automatically think the best way to accommodate their growing enterprises is to move to larger buildings, it could be more beneficial for them to remodel their present locations. Not only will doing so create more space, it will also increase the market value of the facility. However, the costs of adding office space should be carefully compared to those involved with purchasing a larger facility. Those who choose this option should keep in mind that most industrial buildings require four parking spaces for every 1,000 square feet of office space.

Enforceability of a Former Employee's Promise Not to Seek Re-Employment

Settlement agreements with departing employees - whether done in the context of a pending lawsuit or a severance package - quite often include the departing employee's promise never to seek to be re-hired. Given that neither side is - at the time - all that happy with the other, this would seem a pretty unremarkable arrangement. A California federal court decision, however, raises questions as to the ultimate enforceability of the promise.

Navigating California's State & Local Minimum Wage Requirements

The California state minimum wage increased as of January 1, 2017, with additional annual increases scheduled through January 1, 2023, when the minimum wage for all employees will reach $15.00/hour.  California Labor Code § 1182.12; Minimum Wage Order 2017.  Until then, employers with 25 or fewer employees are subject to a lower minimum wage requirement than those with more than 25 employees.  For example, as of January 1, 2017, the minimum wage for employers with 25 or fewer employees is $10.00/hour, but is $10.50/hour for employers with more than 25 employees.

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