VOLUME 33, NUMBER 9
©2017 Real Estate Publishing Corporation
September 2017
Aging Baby Boomers Driving Demand for Medical Office Space
While it’s still unclear what will happen with the Affordable Care Act, demand for medical office space is expected to remain strong as baby boomers continue aging and healthcare real estate increasingly expands into retail space and new markets to be closer to patients. One new report says boomers could drive demand through 2055.
By Liz Wolf
T
he giant, aging baby boom generation -- along with pressure for healthcare providers to cut costs and new technologies -- is boosting demand for medical office properties, according to a new CBRE report. Baby boomers’ growing need for care and access to a wide range of medical facilities is shaping the
way health care real estate is being used and developed. The U.S. Census Bureau estimates that the number of Americans 65 years and older will double to more than 92 million by 2055. Boomers will comprise nearly 23 percent of the country’s total population at that time. In fact, more than 10,000 baby boomers are turning 65 every single day. Here in Minnesota, the number of people turning Boomers to page 12
2017 Minnesota Real Estate Hall of Fame Inductees
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t the University of St. Thomas, the mission is to prepare students for holistic success. Through an education in business practices as well as education in the consideration and application of ethical values in decision making, the University of St. Thomas promotes a holistic perspective advancing “The Common Good.” The Shenehon Center for Real Estate was founded to enhance and promote the University of St. Thomas’ mission of education and leadership within the real estate industry. Towards this goal, the Shenehon Center for Real
Estate founded the Minnesota Real Estate Hall of Fame in 2010. The Hall of Fame serves recognition of individuals demonstrating high standards of leadership and business accomplishments while pursuing service to their communities. Since 2010, the Minnesota Real Estate Hall of Fame has recognized 29 individuals who guided companies influencing the landscape of Minnesota. These individuals can be characterized as the “shoulders on which we stand.” Being on their shoulders [due to their accomplishments], those in the industry are able to see
farther; we are able to build upon their successes to advance “The Common Good” through high standards of leadership, ethical decision making, and service to the community. By preserving the names of those who have made significant contributions to Minnesota real estate and have demonstrated care and concern for improving their communities, the Minnesota Real Estate Hall of Fame and the Shenehon Center for Real Estate proHall of Fame to page 15
September 2017
Contents
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Minnesota Real Estate Journal
SEPTEMBER 2017 • VOLUME 33, NUMBER 9
AGING BABY BOOMERS DRIVING DEMAND FOR MEDICAL OFFICE SPACE 2017 MINNESOTA REAL ESTATE HALL OF FAME INDUCTEES
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CBRE’S RECIPE FOR SHOPPING MALL SUCCESS: MORE RESTAURANTS, LESS CLOTHING STORES
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DON’T LET THAT LETTER OF INTENT LAND YOU IN LITIGATION
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Departments PEOPLE
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NEWS
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Minnesota Real Estate Journal
September 2017
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Real Estate Powerhouse Russ Nelson to Retire Long-time NTH president has helped shape the Twin Cities skylines for the past 35 years Award-winning real estate and project management firm NTH announced today the retirement of its president, Russ Nelson. The firm’s well-known and highly respected leader will be stepping down on December 31, following more than 35 years in real estate. Nelson founded NTH with Tina Hoye and John Tietz in 1993. The firm was one of the first in the Twin Cities to exclusively represent tenants, with clients ranging from small nonprofits to large corporations. From the start, Nelson loved serving his clients and the Twin Cities area – and set out to leave his community better than he found it. With energy, enthusiasm, and a coveted book of connections, Nelson has led projects that have shaped the skylines of Minneapolis and Saint Paul. One of Nelson’s most notable feats was the sale of 12.5 acres of land in downtown Minneapolis once owned by the Star Tribune, helping launch the redevelopment of Downtown East. Additionally, during his time at NTH, the firm has managed headquarters real estate transactions for U.S. Bank, Xcel Energy, HealthPartners, and Ecolab, in addition to renovation and construction projects like Orchestra Hall, the Ordway Center for the Performing Arts, CHS Field, and Palace Theatre, among many others. “Russ’s passion and energy is obvious to anyone who crosses his path. He is a person who leaves every situation better than he found it, including NTH. I know his team – led by longtime business partner Tina Hoye – is poised to carry on Russ’s legacy and service to the community,”said Richard Davis, executive chairman and former CEO of U.S. Bank. Nelson’s professional work is matched in magnitude by his contributions to the community. Among them, he supports programs for children and families through The Family Partnership and was involved in an $8 million fundraising campaign with his wife Nancy for Como Park Zoo and Conservatory’s polar bear exhibit and Japanese Garden. Passionate about the Min-
neapolis downtown core, he was active on the Minneapolis Downtown Council, through which he helped create the Downtown Improvement District and advocated for Target Field as chair of Homefield Advantage. He has served on numerous boards, including Regions Hospital, the Itasca Project, GREATER MSP, The Trust for Public Land, and The Minneapolis Foundation. “Russ and his team did a great job for us – they helped us acquire our new headquarters building and, just as importantly, found the right new owners for our old building,” said Ecolab CEO Doug Baker. “It is hard to imagine Russ ever slowing down, and I look forward to seeing him continue to serve the Twin Cities community in new ways.”
munity overall.” Mr. Bastian specializes in commercial and multifamily financing and is a top-performing professional for CBRE in the Minneapolis market. He was recently named 2017 Rookie of the Year for the firm’s Minneapolis office. In addition, Mr. Bastian supports many local organizations including OneVillage Partners and Hearts and Hammers. He is a graduate of the University of St. Thomas in St. Paul and a member of the UST Real Estate Alumni Council. Established in 2006, the Developing Leaders Award has been given to rising professionals from across NAIOP’s chapter network in all sectors of commercial real estate. The award will be presented at NAIOP’s CRE.Converge 2017, October 10-12, in Chicago.
NAIOP SELECTS CBRE’S BEN BASTIAN FOR 2017 DEVELOPING LEADERS AWARD
Dominium Promotes Chris Barnes to Vice President, Senior Project Partner
Capital Markets’ Ben Bastian has been selected as recipient of NAIOP’s, the Commercial Real Estate Development Association, prestigious 2017 Developing Leaders Award. The award honors up-and-coming professionals under the age of 35 for their exceptional professional accomplishments, strong leadership and community involvement. Based in Minneapolis, Mr. Bastian is a vice president with CBRE Capital Markets’ Debt & Structured Finance team and a member of NAIOP Minnesota, where he has held multiple roles including chapter board member, PAC fundraising co-chair, and judge for the Awards of Excellence and University Challenge. Mr. Bastian was also an active participant in NAIOP programs throughout college, and became more involved with the local chapter through the Developing Leaders committee, which he chaired in 2013. “We are honored that one of our rising stars was recognized at the national level by the leading commercial real estate organization,” said Blake Hastings, managing director, CBRE. “Ben has had an incredible year balancing many complicated financing transactions for our clients with his commitment to serving the commercial real estate industry and the Twin Cities com-
Dominium, a nationwide leading apartment owner, developer, and manager, today announced that it has promoted Chris Barnes to vice president, senior project partner where he will supervise multiple business units within the development team. This is a newly created position for Dominium that was fueled by the company’s continued growth as it moves towards its goal to reach 40,000 units by the year 2025. “As we continue along the path of expanding our business, it is imperative that we look for new ways to build our bench strength and pose us for continued growth,” said Armand Brachman, managing partner of Dominium. “Creating this new position enables Chris to take on new responsibilities and gain more experience in managing multiple development teams.” In his new role, Barnes is responsible for supervising multiple team leaders within our development team while monitoring their development and acquisition pipelines. He is also continuing to oversee new project development, financing and acquisitions of his own portfolio.
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Minnesota Real Estate Journal
News Warehouse District Loft Apartments Sold to Local Investor for $3.25M CBRE arranged $2.2 million in acquisition financing for the property. SRRT Lee, LLC, an affiliate of SR Realty Trust, Inc. announced today it has purchased Lee Lofts Apartments, a 24-unit multifamily complex in Minneapolis’ Warehouse District for $3.25 million. CBRE Capital Markets’ Debt & Structured Finance arranged $2.2 million in long-term acquisition financing for the property. The buyer is an affiliate of SR Realty Trust, Inc., a private real estate investment trust managed and advised by Schafer Richardson, a fully integrated commercial real estate company that owns, operates and develops commercial properties in the Midwest. Lee Lofts was purchased from Harmony Lofts, LLC, a long-term owner through an UPREIT transaction. “The Lee Lofts acquisition is representative of SR Realty Trust’s mission
of helping individuals defer capital gains and depreciation recapture taxes,” said Jeff Merriam, a member of SR Realty Trust’s acquisition team. “In addition to fulfilling our mission, the acquisition fit our criteria of purchasing functional, well-located properties with the capacity to continuously increase net operating income.” Ben Bastian, Joel Torborg and Mark Roos of CBRE’s Minneapolis office represented the borrower, SRRT Lee, LLC. “CBRE’s Minneapolis financing team added a lot of value to the acquisition” stated Mr. Merriam. “The terms offered by Freddie Mac’s small balance loan program combined with the responsiveness and knowledge of CBRE’s financing team helped make for a successful addition to our portfolio.” The financing was obtained through Freddie Mac’s Small Balance Loan Program and offers several attractive features: 10-year fixed interest rate in the low 4.00s, 65 percent loan-to-value, five years of interest-only payments, a 30year amortization following the interestonly portion, non-recourse, low closing
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September 2017
costs, and is fully assumable. “SR Realty Trust, Inc. had three main loan requirements for this acquisition: offer a long-term fixed interest rate, be a non-recourse loan and have 5-years of interest only payments; the Freddie Mac Small Balance Loan Program was able to achieve all these items,” said Mr. Bastian, vice president. Located in the warehouse district of downtown Minneapolis at 280 N. Second Avenue, Lee Lofts is in close proximity to the central business district, North Loop dining and entertainment, Target Field, the Mississippi River and a light rail station. The property features oversized loft-style units with 14-foot ceilings catering to the young professionals and empty nesters flocking to downtown. Lee Lofts was originally built in 1906 and converted to loft-style apartments in the 1960's. The seller of the property also completed a full renovation of the property in 2015, which includes new stainless-steel appliances, quartz island countertops, new lighting fixtures and new windows. The property has historically operated at or near full occupancy,
and was 96% percent occupied at the time of closing. Freddie Mac’s Small Balance Loan (SBL) program was established to specifically cater to loan sizes of $1 million to $7.5 million for properties with at least five apartment units. The Freddie Mac SBL Program offers a more borrower-friendly “bank-like” approach to underwriting and quoting deals. The process is considerably shorter than borrowers’ experience with the traditional Freddie Mac program. CBRE is one of eleven nationally-approved Freddie Mac seller/servicer lenders and the largest company with a local Minneapolis office. The firm is also the largest Freddie Mac seller/servicer since 2009 with total volume of more than $10 billion in 2016.
Dougherty Mortgage LLC closes $31.5 million HUD 221(d)(4) loan for Union Flats Dougherty Mortgage LLC, a full service national mortgage banking firm, recently closed a $31.5 million HUD
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221(d)(4) loan for the new construction financing of Union Flats, a 217-unit multifamily affordable housing property located in St. Paul, Minnesota, in the western portion of the city at the intersection of Territorial Road and Hampden Avenue, just north of University Avenue. All 217 units will be rent and income restricted to residents earning 60% or less of the Area Median Income. The Project will be constructed on a site currently occupied by the Hunt Electric Corporation building, which will be demolished as part of this transaction. Project amenities will include a secured entrance, community room with kitchen, outdoor patio, fitness room, rooftop deck, Dog Park, storage lockers, elevator, and an on-site leasing office. Unit amenities will include a refrigerator, range/oven, dishwasher, in-unit washer and dryer, window coverings, and a patio or balcony. In addition to the HUD-insured first mortgage, the project will receive equity from the sale of Low Income Housing Tax Credits, and funds from the Metropolitan Council, Department of Employment and Economic Development, and Ramsey County to be
Minnesota Real Estate Journal
used for environmental clean-up costs.
Timberland Partners Announces Purchase of Green Mount Lakes, O’Fallon, Illinois, 240 units and Brookes Edge, Cleveland, Tennessee, 324 units Minneapolis based Timberland Partners is pleased to announce the acquisition of Green Mount Lakes Apartments located in O’Fallon, Illinois and Brookes Edge, located in Cleveland, Tennessee. Founded in 1992, the company now owns and manages 64 apartment communities totaling over 12,500 apartment units in its portfolio spanning 13 states. The acquisitions were funded from the newly formed Timberland Partners Investment Fund VI, LLC, and represent the first two acquisitions from fund six. Timberland Partners anticipates offering additional investment opportunities as it continues to pursue a strategy of aggressive growth in the multi-family real estate market.
Timberland Partners Vice President of Investments, Matt Fransen, said “We are excited about the acquisition of Brookes Edge and Green Mount Lakes. Both assets are well-constructed, high quality communities in strong locations. They’re both positioned well to achieve strong returns for our partners over a long term investment horizon following the implementation of our value-added plans. They are great additions to kickoff our sixth apartment investment fund.” A number of exciting improvements are planned for Green Mount Lakes, which was built in 2003-2004. Most notably, a new fitness center, clubhouse remodel and new resort-style pool along with a dog park. The property consists of spacious one, two and three bedroom floorplans with high-end finishes including nine-foot ceilings, crown moulding and full-sized washers and dryers in every unit. Brookes Edge was built in two phases in 2013 and 2016, with a hilltop location providing stunning views of the Smoky Mountains. The property consists of one and two bedroom floorplans with high-
September 2017
end finishes including nine-foot ceilings, soaking tubs and full-sized washers and dryers in every unit. The seller for Brookes Edge was represented by Dennis Harris of The Kirkland Company based in Nashville. The seller for Green Mount Lakes was represented by Matt Bukhshtaber with the CBRE office based in St. Louis.
210-Unit Whole FoodsAnchored Luxury Apartment Community in St. Paul Sells to New York Investor for $87 Million CBRE Multifamily represented Ryan Companies and The Excelsior Group in the sale of the Vintage on Selby, a new construction multifamily project with 210 apartments and a 39,506-squarefoot Whole Foods grocery store, for $87 million to an affiliate of Zurich North America (advised by Zurich Alternative Asset Management, “ZAAM”). ZAAM was represented by Chris Edgar, Director of Multifamily Acquisitions and Sean Bannon, Managing Director, Head of US Real Estate.
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Abe Appert, Keith Collins, Ted Abramson and Laura Hanneman in CBRE’s Minneapolis office arranged the sale on behalf of the owner, The Vintage on Selby, LLC, an entity-related to Ryan Companies and The Excelsior Group, which developed the property in 2015. The sale is the first multifamily acquisition in the Minneapolis metro area for Zurich. “This sale once again demonstrates new investor interest in our market and the continued popularity of urban infill multifamily properties,” said Mr. Appert, executive vice president. “The lifestyle offered at the Vintage on Selby with the connectivity to Whole Foods, a bustling urban neighborhood and best-in-class amenities is attracting top-tier renters with high incomes.” Completed in 2015, the Vintage on Selby offers a modern luxury living experience in an urban neighborhood setting with vintage charm. With a prime location at the intersection of Snelling Avenue and Selby Avenue in St. Paul, the Vintage offers great prox-
Minnesota Real Estate Journal
imity to both the Minneapolis and St. Paul CBDs and the future Major League Soccer stadium on University Avenue. The building features a mix of units ranging from studios to three bedrooms. The units are 9 percent larger on average than other new construction properties in the Twin Cities metro area. The Vintage on Selby features luxury amenities unmatched in the neighborhood including a rooftop terrace with outdoor lap swimming pool, a fitness center and yoga room, a 6,000-square-foot natural turf backyard, club room with gourmet kitchen, electric car charging stations and bike storage. The property includes 495 parking stalls below ground and in attached covered ramp for resident and retail use. The Vintage on Selby is also served by bus rapid transit on Snelling Avenue and is within walking distance of the Green Line light rail. The CBRE team previously represented Ryan Companies in the sale of
222 Hennepin, another new construction multifamily project with a Whole Foods grocery store in downtown Minneapolis.
Dougherty Mortgage LLC closes $1.2 million Fannie Mae loan for Wakefield Apartments
September 2017
Fannie Mae loan for the refinance of Wakefield Apartments, a 48-unit market rate multifamily apartment property located in Mobile, Alabama. The Fannie Mae 10-year loan has a 30-year amortization schedule and was arranged through Dougherty’s Minneapolis office for borrower Sipco Florabama, LLC.
Dougherty Mortgage LLC, a full service national mortgage banking firm, recently closed a $1.2 million
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Minnesota Real Estate Journal
September 2017
Boomers From page 1
65 this decade – which is about 285,000 – will be greater than the past four decades combined, reports the Minnesota State Demographic Center. The 65-plus population is expected to double between 2010 and 2030. By then, more than one in five Minnesotans will be age 65-plus. “The steep increase in the 65-plus population and anticipated greater need for in-office physician services by the group signals a continued increase in demand for healthcare services and medical office space in the years ahead,” says Andrea Cross, Americas head of office research at CBRE, in a prepared statement. Boomers mean more investor interest in medical office buildings (MOBs) The medical office market is experiencing an increase in investor interest, due in part to the large number of boomers needing more medical services. MOBs are attractive since medical practices tend to sign long-term leases and are strong credit tenants. “We get called by the larger investment firms quarterly if not monthly, letting them know what’s available in the market,” says Chris Jacobson,
healthcare real estate advisor at CBRE Healthcare Services Group in Minneapolis. “Investors tend to gravitate toward buildings that have 100 percent medical tenants and are almost 100 percent leased,” adds Susan Wilson, healthcare real estate advisor at CBRE Healthcare Services Group. “A lot of the Class A investors all over the country are targeting this market because healthcare is so strong here.” “Investment in healthcare has been very, very strong,” agrees Louis Suarez, vice president of Healthcare
Services at Colliers International | Minneapolis-St. Paul. “There’s a lot of money chasing it, both from the big, national REITs’ standpoint and private equity.” However, he says there are not that many properties on the market. “What that does is drive down cap rates or gets people to buy more challenging assets just to get into a market or get into healthcare, so they might be willing to take a little more risk on shorter term,” Suarez says. “If it’s a trophy asset, or a high-value asset, then those cap rates go down and prices go up.”
Tight vacancies The overall vacancy rate for U.S. medical office buildings is 8 percent. It’s been falling in recent quarters due to stronger user demand, likely driven by the aging population and an increase in the ranks of the insured. The Twin Cities vacancy rate is even tighter at 6.7 percent, according to CBRE, which locally tracks 6.55 million square feet of medical office space. “More than half of the hospital camBoomers to next page
September 2017
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puses are 100 percent full,” Jacobson says. He believes the MOB market is even tighter than 6.7 percent. “There are a couple of obsolete buildings on the edge of not being medical office buildings anymore that are skewing the numbers artificially up,” he says. Older MOBs becoming obsolete; technology is big factor “The evolution of medical technologies is boosting demand for newer product with the infrastructure capable of handling cutting-edge devices and systems,” said Jim Hayden, executive managing director, Healthcare, Global Workplace Solutions, CBRE, in a prepared statement. “Medical office space that helps providers minimize costs and maximize outcomes, including buildings that support collaboration and can accommodate new technologies that help them achieve these goals, will likely remain in favor.” “Technology is changing so quickly,” Jacobson adds. For example, ceiling heights are changing. “Five years ago you could get away with a 9-foot ceiling in a medical building. But today, those buildings are having vacancy problems because some of the new equipment is taller than that… Patient experience has also become so important and lower ceiling heights don’t make a patient feel comfortable.”
New development is robust Cushman & Wakefield MinneapolisSt. Paul reports 874,650 square feet of medical office space is under construction in the Twin Cities and another 226,150 square feet is planned. “Obviously, construction is still going at a good clip,” says Tom Stella, senior director of brokerage services at Cushman & Wakefield’s local office. He says much of the new space is large system-driven, single-tenant buildings rather than traditional multi-tenant office buildings. Also, much of the new
construction is “multi-specialty centers that are getting closer to the communities where people live – trying to get that convenience for patients,” he says. These specialty centers have a multiservice aspect, which is a huge benefit for boomers, according to a report by Deutsche Asset Management. They report that there’s an “ease of accessibility to a variety of medical treatments” all under one roof. This ease of care component speaks directly to an aging population, which often needs treatment for more than one condition at a time.
“As people age, the complexity of their care changes, so it’s not just going to see a primary care physician,” Suarez says. “It’s dealing with multiple medications, multiple issues so you’re seeing a move to multi-disciplinary specialty centers where you can go to the same place and get your general physical but also help with your diabetes or obesity or aging issues where you might need geriatrics services such as Alzheimer’s testing and memory loss testing as well as education.” Boomers to page 16
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Minnesota Real Estate Journal
September 2017
CBRE’s recipe for shopping mall success: More restaurants, less clothing stores O n paper, it sounds simple: Owners can boost the fortunes of struggling indoor malls by reworking the mix of merchandise they offer, moving away from traditional apparel stores and adding more restaurants, entertainment and healthcare options under their roofs. The problem, as CBRE writes in a new national report, is that this bold fix for malls is one that’s easier to write and talk about than it is to put into place. But taking on that challenge and changing that merchandise mix? That might be the only way to save some of the country’s indoor malls. The CBRE report said that there are still two main categories of retailers that occupy most of the space in the country’s indoor malls, department stores, which occupy 48.7 percent of mall space, and apparel, accessories and shoes, which takes up 29.4 percent. The problem? Both of those retail categories saw slow retail-sales growth form 2011 to 2016. Those retail categories that are seeing stronger growth, though, still account for a relatively small percentage of indoor mall space. CBRE said that restaurants only occupy 4.6 per-
cent of the space at malls. Sporting goods retailers occupy just 3.1 percent, home furnishings 1.6 percent and health and personal care stores 1.2 percent. This mix is no longer working for many of the country’s large indoor shopping malls. “The American mall itself isn’t anywhere close to dead; It’s the old mall model that is dying,” said Melina Cordero, CBRE Americas Head of Retail Research, in a written statement. “Converting malls’ tenant bases to include more of the categories that inperson shoppers now favor won’t be an easy or quick fix. But it is a necessary evolution for the mall industry to maintain its place as a cornerstone of American retail.” One of the challenges to changing the retail mix? Most retailers lease space in malls for 10 or more years at a time. It’s not easy to change those leases or end them early without retailers’ consent. Department-store chains often hold veto power, too, over any significant changes proposed for their space. In some cases, these chains can event veto changes proposed for the malls in which they operate.
Restaurants, such as the popular Shake Shack in Bloomington, Minnesota’s Mall of America, can change the fortunes of indoor malls. stronger growth in net operating CBRE does have some good news income than have their smaller, regionfor mall owners and operators, though: al peers, CBRE said. The company said that struggling “Going forward, we’ll see mall ownretailers are becoming more amenable ers invest capital into placemaking and to efforts to reposition the malls that creating experiences for shoppers, they call home. which can include introducing more CBRE points to the recent successes trendy, startup retailers in their malls,” of what are known as super-regional said Todd Caruso, Senior Managing malls as proof that indoor malls can Director leading CBRE’s Retail thrive by changing their tenant mix. Investor business, in a statement. Super-regional malls, the largest of the “Studying the data underpinning a indoor mall types, specialize in offermall’s trade area, including consumer ing diverse retail options, relying heavpreferences, will help owners deterily on restaurants and entertainment mine whether their strategies should options such as movie theaters, bowlinclude re-tenanting, redevelopment or ing alleys and adult-focused arcades. demolition.” These larger malls have generated
September 2017
Hall of Fame From page 1
mote goodwill, accomplishment, and public interest in real estate. There have been numerous outstanding inductees into the Hall of Fame since 2010, and this year is no different. The Minnesota Hall of Fame is proud to recognize: Ralph Burnet Ralph began his real estate career at Bermel Smaby Realtors. After leaving Bermel Smaby Realtors, he started his own realty company, Burnet Gagner Realty and built it to the largest in the Twin Cities. In 1983, Burnet merged his company with Merrill Lynch and for the next 7 years Burnet served as its Eastern Regional President. But when Merrill Lynch Real Estate was sold to Prudential in 1990, Burnet and his partner Dar Reedy bought back the Minnesota-based company. In 1996, Burnet expanded into the Chicago market, merging with Prudential Preferred Properties of Chicago. By 1998, Burnet Realty had grown to the 4th largest residential brokerage in the United States, and expanded though merging with the Coldwell Banker name. Today, Coldwell Banker Burnet is one of the largest residential real estate companies in the United States today.
Minnesota Real Estate Journal
Beyond the Burnet Realty company, Ralph for years has been active in supporting the arts and professional athletics in Minnesota. He currently sits on the chair of the Hennepin Theatre Trust and is a limited partner of the Minnesota Timberwolves. His philanthropy for the arts community started with his hotel developments Le Meridian and The W, where Burnet displayed art and also created a gallery at Le Meridan to showcase local artists. Jack Rice Son of 2011 inductee Bernard Rice, Bernard (Jack) Rice Jr. began his career in his father’s footsteps after graduating in 1983 from the University of Minnesota. Jack held early roles at Towle, Eberhardt and Dayton - Hudson Corporation. At Dayton – Hudson Jack played a major role in the development of some of the very first Target stores. He was also very involved in the development of company owned property around Southdale Center in Edina. In 1975 he started his own consulting and brokerage called The Rice Company. Jack has shown a passion for education, being a frequent speaker at the Realtors Institute, the University of Minnesota and trade associations such as NAIOP (National Association of Industrial and Office Parks) and NACORE (National Association of
Corporate Real Estate Executives). In 1986, Jack was asked to serve as the Executive Director of the Downtown Development Task Force, a group of Minneapolis-area businesses concerned about the future of the city’s downtown. He is also a former board member of the Minnesota affiliates of the Mortgage Bankers Association, Minnesota Land Use Committee and the Urban Council on Mobility. Jack is presently a member of the Real Estate Advisory Boards of The University of Saint Thomas and The University of Minnesota Foundation. Much of Jack’s philanthropy has been in the Edina community. Most recently, he has enabled the school district acquire land for its transportation facility. Howard Shenehon A 1936 graduate of the University of Minnesota, Howard began his career at the Shenehon Company, which was founded in 1929 by his father. By 1941, Howard had transitioned to a non-real estate role for Honeywell in which he assessed productivity. He returned to real estate in 1950 after his father’s retirement, transitioning the Shenehon Company to an appraisal entity. Through this work, Howard was an early advocate for equal housing and real estate education, and a frequent guest lecturer at the University of Min-
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nesota and Macalester College for real estate education. His philanthropic efforts focused on developing affordable housing and educating communities that minority homeowners do not lower real estate values. Every year, the Minnesota Real Estate Hall of Fame honors those who a board of peers believe have exemplified the standards for acceptance through an induction ceremony typically held in November. If interested in attending or reading further about past inductees, please visit the Shenehon Center for Real Estate (www.stthomas.edu/centers/shenehon) or search “Minnesota Real Estate Hall of Fame” in your browser.
Page 16 Boomers from page 13
What’s underway? A highlight of some construction projects In on-campus development, a $224.6 million, 367,000-square-foot specialty center is under construction adjacent to Hennepin County Medical Center’s campus. It will meet the healthcare needs of the growing residential population in downtown Minneapolis and patients using HCMC for specialty surgery services. Also, the 148,000-square-foot Hazelwood Medical Center, being developed by Minneapolis-based Davis Group and part of St. John’s Hospital campus, is under construction. It will be anchored by HealthEast. It’s the first time that HealthEast is creating its own specialty center, and the move goes against the trend of more systems developing off-campus buildings, Cushman & Wakefield Minneapolis-St. Paul reports. Off-campus development; more outpatient facilities being built Systems are “meeting patients where they are with convenient, flexible facilities,” JLL reports. Hospitals and health systems are shrinking the number of inpatient beds and thinking more like retailers. They’re building outpatient services closer to where patients live, in places like grocery stores, drugstores
Minnesota Real Estate Journal
and a growing number of off-campus MOBs. “We’re seeing systems have to become more flexible, more adaptive, more efficient and they have to be able to provide multiple specialty services,” Suarez says. “They’re doing more in a more efficient way in smaller spaces, and more and more of those services are coming out of the hospital and in locations that are closer to the end-user. They’re catering to the baby boomers’ needs, not the system’s needs. That’s why you see more near retail; it’s a drive for more convenient healthcare and more convenient services.” One big trend is the development boom by orthopedic groups Aging boomers and the increased demand for sports medicine and preventative health services are driving a slew of new off-campus orthopedics facilities. Summit Orthopedics recently opened a clinic in Eagan. TRIA Orthopaedic Center opened a clinic in Woodbury this summer (at CityPlace, which is the redevelopment of the former State Farm site). Twin Cities Orthopedics opened a facility in Woodbury in September and has facilities underway in Edina, Vadnais Heights, Blaine and is building a medical office building and Sports Medicine/Perfor-
mance Center at the Minnesota Vikings’ new headquarters/practice facility in Eagan. The Twin Cities Orthopedics Performance Center and TCO Stadium will anchor the redevelopment of the former 200-acre Northwest Airlines site. “It’s very exciting. I walked the site about a week ago,” says Troy Simonson, CEO of Twin Cities Orthopedics. “It has a whole campus feel to it.” Simonson says demand for orthopedics is the result of several factors and the “aging population is definitely a piece of it. The active lifestyle that this market seems to have is another piece of it,” he says. “If you’re active, you’re going to have injuries. And we’re seeing a lot of growth in the sports performance piece.” Eye groups are also active as optometrists cater to the boomers. “Baby boomers are putting a lot of pressure on orthopedics and eye, and there’s lot of activity on both of those fronts in this marketplace,” says Michael Sharpe, principal of the Davis Group, adding that several eye groups are looking for space. Currently, a 40,000-sf build-to-suit facility for Minnesota Eye Consultants is underway in Woodbury. In other office-campus development, the Davis Group and Elion Partners are
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developing the 50,000-square-foot CityPlace medical office building in Woodbury, which recently signed a lease with Minnesota Gastroenterology. (TRIA also opened at CityPlace, which is a 100-acre, mixed-use development boasting mix of retailers and restaurants). Sharpe says such a location is key today. “When I started in this business 15 years ago, location was not as critical,” he says. “Now healthcare is competing with retail for high-visibility, highaccess sites. Two factors are coming into play – the aging population, which is putting pressure on healthcare systems -- and from a provider standpoint, whether it’s HealthPartners or Medica, they’re pushing their providers to be where their patients are.”
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Don’t let that letter of intent land you in litigation By Mark L. Boos*
W
hen an interviewer asked what problem caused him to rewrite the last page of A Farewell to Arms an astonishing thirty-nine times, Hemingway was characteristically direct. “Getting the words right,” he replied. Unfortunately, it seems few of us are following Papa’s example when it comes to letters of intent (“LOI’s”). Because we just can’t seem to get the words right, our LOI’s often end up generating confusion, hard feelings, and litigation. Lots of litigation. Why is it so easy to get the words wrong? For starters, LOI’s are victims of their own popularity. Whether you’re buying, selling, leasing, or developing, chances are the deal will start with an LOI. Many owners, buyers, sellers, tenants, bankers, and brokers wouldn’t dream of kicking off a transaction without one. In short, there are a whole lot of LOI’s being prepared, so there are a whole lot of chances to get it wrong. In addition, LOI’s are typically prepared by non-lawyers. Consequently,
the legal import of the LOI and the significance of certain language are seldom fully appreciated. It is not uncommon, for example, for a regional or national developer or investor to use the same form of LOI regardless of which state it is working in. Because the law governing LOI’s varies from state to state, the same document can have dramatically different legal effects depending on which state’s law applies. This can come as an unwelcome surprise to the parties involved. The good news is that getting the words right in your LOI really requires just two things: a rudimentary understanding of a couple legal concepts, and asking the right questions. What you need to know Legal Concept 1: If it walks like a duck . . . In Indiana (and most other states), it doesn’t matter what you call the document. If your LOI includes all the material terms of a deal and evinces what a judge believes is objective evidence of the parties’ intent to be bound, you’ve got yourself an enforceable contract. Even if buyer and seller both subjectively believed they were enter-
ing into a non-binding LOI at the outset, as circumstances evolve memories can, let’s just say, become less than reliable–usually in a way that benefits the “mis-remembering” party. Since what matters is not what the parties’ intent actually was in the beginning, but rather what the document suggests that intent was, imprecise wording can turn a document the parties originally intended to be a non-binding LOI into an enforceable contract.
ously, the drafter was unaware that Indiana case law includes decisions holding that an LOI obligating the parties to execute a final legal agreement can itself be an enforceable contract. Had he or she been aware of that precedent, the sloppy language presumably would not have made it into the executed LOI. As it was, unfortunately, there was simply no way to predict what a court might do with our client’s document.
The takeaway? If you don’t want your LOI to magically turn into a binding contract, better make sure it doesn’t include any language suggesting otherwise. Easy enough, right? Maybe so, but just a month or two ago a client of my firm was wrestling with a “non-binding” LOI that concluded with this little gem: “This letter is intended to outline general business points, and is not a binding contract. Buyer and Seller shall enter into a definitive purchase agreement upon full execution of this letter.” The use of the word “shall” makes those two sentences wholly inconsistent in the legal world (and, I would argue, in the real world as well). Obvi-
Legal Concept 2: Forgetting about good faith can be bad news Many states impose a duty to negotiate in good faith once an LOI is signed. In other words, even where the parties agree that the LOI is non-binding, it really isn’t. The parties still must negotiate toward a final agreement in good faith. If one or both of them don’t, litigation can result. Indiana is not one of those states. Under an LOI governed by Indiana law, a party may nearly always simply elect to discontinue negotiations when it so chooses. So, a non-binding LOI in Indiana really can be non-binding . . . provided the parties get the words right. Litigation to page 18
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Litigation from page 17
Not long ago, another client of my firm walked away from a “non-binding” LOI he had signed. He felt justified based on the following language: “. . . this Letter of Intent is not intended to form a binding agreement for the purchase and sale of any real property, and neither party will have any obligation to the other until a formal Purchase and Sale Agreement has been executed by the parties.” So far, so good. Unfortunately, the very next sentence was a perfect example of how to turn a non-binding LOI into a partially binding LOI: “The Purchaser and Seller agree to negotiate diligently in good faith and exclusively with each other for a period of up to 45 days . . . .” That good faith language arguably trumped our client’s right to change his mind and walk away. Had the other party been interested in either preserving the deal or extracting a little money for a “breakup” fee, our client could have been in a world of hurt. The lesson here is that, unless you are comfortable being compelled to negotiate in good faith toward a final agreement, your LOI better expressly close that door. To summarize, you really need to understand just two legal concepts to get the words right in an LOI. First,
sloppy language can turn what the parties intended as a non-binding LOI into an enforceable contract. Second, “good faith” is a legal term of art with particular legal effect. Tossing it around haphazardly in an LOI can have consequences neither party expects. What you need to ask In addition to being familiar with a couple of basic legal concepts, getting the words right in an LOI is also a matter of asking a few basic questions before you draft. Question 1: Why isn’t my attorney drafting—or at least reviewing—this? After all, it’s a legal document with potentially significant legal consequences–dangerous terrain for nonlegal folks who likely don’t know what they don’t know. Question 2: To what extent, if at all, do the parties want this LOI to be binding? In my experience, parties to an LOI typically say they want a non-binding document when what they really want is something slightly different. In many, if not most, cases the parties want certain LOI terms and agreements—confidentiality and “no shop” provisions, for example—to be binding. In other words, notwithstanding
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what they may call it, parties to an LOI most often want a partially binding document. Making sure the provisions that need to be enforceable are enforceable while the balance of the LOI isn’t requires deft drafting and a fair bit of detail. Whatever the parties’ shared intention really is—non-binding, partially binding, or fully binding—the language of the LOI needs to make that intention perfectly clear. Again, getting the words just right really matters. Question 3:Do the parties want to be bound by a covenant to negotiate in good faith, or do they prefer to be free to walk away at any time? LOI’s, like zombies, seem to be nearly impossible to kill off. They get revised, recycled, and resuscitated for use in one transaction after another, warts and all. For that reason, I recommend including a clear statement as to whether or not the parties intend to be bound to negotiate toward a definitive agreement in good faith. As touched upon earlier, this is not strictly necessary in states such as Indiana where no duty of good faith is implied. However, because LOI forms—either intact or in bits and pieces—tend to travel across state lines where they are reused without review by local legal counsel, it is prudent to address the good faith question explicitly.
Conclusion Your next LOI probably won’t have much in common with A Farewell to Arms. But, like Hemingway, you will produce a better written product if you focus intently on getting the words right. Fortunately for all of us, getting the words right in an LOI is a simple matter of knowing some basic legal principles and asking the right questions. If we do that and mind the details, the parties’ actual intention will be accurately captured and, most importantly, our LOI’s will lead to closings instead of to court rooms. *Mark L. Boos is a partner in Wooden McLaughlin’s Indianapolis office. Licensed in both Indiana and Illinois, Mark has been practicing commercial real estate law for more than twenty years. NOTICE: This article is for informational purposes only and does not constitute legal advice. You should consult an attorney for advice addressing any particular set of facts or circumstances.
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