McElhatton: Commercial real estate more complex than ever

Shaun McElhatton

Commercial real estate developers and brokers face increasingly complex legal problems today. Shaun McElhatton, a shareholder at Leonard, Street and Deinard in Minneapolis who focuses his practice in commercial real estate, understands.

He recently shared his thoughts on the legal challenges facing commercial real estate professionals today. Here’s some of what he had to say:

On the financing side, it is more common today to see multiple sources of financing for a single development, and that financing may include participations and/or securitizations. Financing also often includes some form of tax incentive, whether historic credits, new markets credits, environmental credits or low-income housing tax credits, all of which trigger complex tax and compliance issues.

On the dirt side, development today often consists of mixed-use projects, which require some form of vertical subdivision and/or operating easement agreement.

On the regulatory side, there are increasingly complex requirements related to impact fees, variances, SAC and WAC credits, traffic and public transportation, surface water management and flexible zoning tools, like PUDs.

Another legal challenge relates to substantial changes in the title insurance industry, where mechanics lien coverage is more difficult to obtain and more limited when it is available, and where most, if not all, title insurance companies have eliminated creditors’ rights coverage. In addition, underwriting in the title insurance industry, as in the lending industry, is tougher in general, so that some projects that were insurable in past years may not be insurable today.

As for finance trends, I expect to see the trend of increasing availability of financing continue and extending to more asset classes, such as hospitality. I also expect to see more competition for desirable deals — mostly trophy properties in first-tier markets and larger multi-family developments — resulting in slightly easier underwriting for those types of properties.

– Dan Rafter