Guest Blog: Investing In Commercial Real Estate — Why It’s All About The Interest Rate

Through our guest blogger program, Tayman Lane Chaverri LLP seeks to bring you fresh perspectives on issues of interest to businesspeople and entrepreneurs. 

We are pleased to welcome Javier Castro, President and Founder of Westline Commercial Real Estate as this month’s guest blogger.  Javier has over fifteen years of real estate development and business leadership experience.  In addition to his work at Westline, Javier led a real estate partnership that developed and managed properties throughout the Washington, D.C. metro area.  Javier also led the U.S. expansion of a Spanish-based multinational manufacturer and distributor of natural stone products, and later managed the sale of that business to a European private equity firm.  Javier began his real estate career as a Development Manager with The John Akridge Companies in Washington, D.C.

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Investing In Commercial Real Estate: Why It’s All About The Interest Rate

As an investor in commercial real estate, if you secure a loan for 80% of the purchase price, the return on investment hinges on the eventual sale of the property. Interest rates will make or break the deal.

Why is that? Well, for you CFOs out there, a commercial real estate purchase is really a leveraged buyout – once you’ve agreed to exit. This may have occurred to you already, but it wasn’t until I worked on a recent transaction that it really crystalized for me. Just like a leveraged buyout, the return on investment depends on the terminal value.

What You Can Control

As a buyer, you can negotiate a lower purchase price, using rising interest rates to justify your position. If you succeed, the lower purchase price results in less equity required and less debt. Good for you. That means you can make your loan payments, and bring home some cash. Of course, anything can happen along the way: you might lose one or more good tenants, or you might be able to increase your occupancy rates or upon renewal, increase rents. These all affect the performance of your investment.

What You Can’t Control

At the end of the day, though, if you bought a property at historically low interest rates and want or need to sell when interest rates are rising – well, good luck getting a good return on investment in the short term, no matter how well you ran the property. It doesn’t take much: 50 basis points in the wrong direction can torpedo your five-year hold performance, despite your hard work to increase rents and ratchet up occupancy rates.

To make a commercial real estate purchase pay out, you have to have a long-term view. Ensure you have the resources to buy and hold, so that you can exit when interest rates maximize your return on investment. In that recent transaction I mentioned, the property our client acquired was solid – but, they had family and financial matters that needed to be resolved, and they had to sell at a specific time. We got them a great deal, but not as much as we could have, had they been able to wait another year or two for interest rates to level off. Selling when interest rates are stable or declining has a positive impact on exit value and return on investment.

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Tayman Lane Chaverri LLP Achieves Substantial Settlement In Fewer Than 60 Days Of Litigation

Tayman Lane Chaverri LLP recently achieved a major victory in a civil action it commenced in state court in Montgomery County, Maryland.  As a result of the Firm’s efforts, TLC’s client, a stone and tile surfacing contractor focusing on large commercial and government construction projects, recovered a settlement worth substantially all of the claims asserted.  The client came to the Firm after months of carrying a receivable that the prime contractor was refusing to pay.  TLC gave the prime contractor and the owner one final chance to pay – which was rebuffed – before springing into action.  Coming up with a creative litigation strategy, TLC filed suit asserting claims that threatened to pierce through the prime contractor’s corporate structure and that would impose personal liability on that company’s directors and officers.  TLC simultaneously served discovery requests on the prime contractor and the owner that were designed to box the defendants into an untenable position that would set the case up for a quick decision by the judge.  But it was not to be.  Just days before it was required to answer, the prime contractor contacted TLC and offered to settle the matter for substantially all of the amount demanded.

Second Circuit Deals Another Blow to Madoff Victims: Investors in Feeder Funds Held Not to Be “Customers” for Purposes of SIPC Compensation

by Katie Lane Chaverri
Tayman Lane Chaverri LLP; Washington, DC

(reprinted with the permission of the American Bankruptcy Institute; original article may be accessed here:

On Feb. 22, 2013, a three-judge panel of the Second Circuit Court of Appeals affirmed the rulings of the U.S. Bankruptcy and District Courts for the Southern District of New York and concluded that downstream investors in so-called “feeder funds” were not “customers” entitled to recover directly from the Securities Investor Protection Corporation (SIPC) damages incurred as a result of the massive Ponzi scheme perpetrated by Bernard L. Madoff Investment Securities LLC (BLMIS).[1] The Second Circuit’s decision dealt a devastating blow to investors who were hoping to fall within the definition of “customer” in order to receive compensation of up to $500,000 each from the SIPC fund. The court’s ruling has the effect of allowing only the feeder funds themselves to collect up to $500,000 each, diluting the investors’ return to only a fraction of that recovery.

The appellants were investors who owned interests in two limited partnerships, Spectrum Select LP and Spectrum Select II LP (collectively, the “Spectrum funds”). In turn, the Spectrum funds made investments in two hedge funds: Rye Select Broad Market Fund LP and Rye Select Broad Market Prime Fund LP (collectively, the “feeder funds”). The feeder funds pooled Spectrum funds’ capital with that of other investors and established securities accounts with BLMIS in the name of the feeder funds. The feeder funds were listed in BLMIS’ books and records, while the Spectrum funds were not, and BLMIS issued account statements and trade documentation directly to and in the name of the feeder funds. The offering memoranda and other agreements between the feeder funds and Spectrum funds provided that Spectrum funds yielded complete and exclusive control over investment decisions to the feeder funds.

Federal law provides that if an investor qualifies as a “customer”[2] of BLMIS, it may seek compensation for its unreimbursed investment losses — capped at $500,000 per customer[3] — from a special fund capitalized by the securities and brokerage community at large. Courts have narrowly construed the definition of “customer” to require that the investor entrusted the broker/dealer with cash or securities for the explicit purpose of trading those securities.[4] In reaching its conclusions, the Second Circuit reaffirmed and applied a five-part test developed by the court in SIPC v. Morgan, Kennedy & Co.[5] The court considered — and the record confirmed — that the appellants “(1) had no direct financial relationship with BLMIS, (2) had no property interest in the assets that the Feeder Funds invested with BLMIS, (3) had no securities accounts with BLMIS, (4) lacked control over the Feeder Funds’ investments with BLMIS, and (5) were not identified or otherwise reflected in BLMIS’s books and records.”[6]

Despite this standard, the appellant investors argued that they exercised a degree of control over the feeder funds’ investment decisions and intended that the money invested in the Spectrum funds would be used to purchase BLMIS securities. The investors further argued that the feeder funds were acting as agents of BLMIS. The Second Circuit disagreed and concluded that the Spectrum funds were merely limited partners in the feeder funds, which had no ownership interest in the feeder funds’ partnership property. Accordingly, the Spectrum funds lacked the authority to make investment decisions on the feeder funds’ behalf nor, according to the Second Circuit, did they “[entrust] their cash or securities to BLMIS.”[7] Similarly, the court rejected the appellants’ argument that the feeder funds were agents for BLMIS, noting that nothing in the record showed that the feeder funds were authorized to act on BLMIS’ behalf nor that BLMIS had exercised any control over the feeder funds.

This decision came only weeks before the Second Circuit issued another ruling that would prohibit Madoff victims from seeking recovery against the Securities and Exchange Commission, and has significant ramifications both within and outside of the Madoff case. Madoff’s fraud was broad and far-reaching and had a devastating effect on many private investors, as well as pension funds. Unfortunately, many charities, including the Simon Wiesenthal Center and other Jewish and Holocaust-related organizations, fell victim to Madoff’s fraud. This case essentially means that in order to be compensated under SIPC, hedge fund investors must satisfy the standard necessary to qualify as “customers.” In order to better protect themselves from future Madoff-like schemes, hedge funds and other investors should make their investments directly wherever possible or structure investments to conform to the Morgan, Kennedy & Co. standard to the greatest extent possible.


1. Kruse et al. v. SIPC et al. (In re: Bernard L. Madoff Inv. Sec. LLC), 708 F.3d 422 (2d Cir. 2013).

2. The Securities Investor Protection Act (SIPA) defines a “customer” of a debtor as:
[A]ny person (including any person with who the debtor deals as principal or agent) who has a claim on account of securities received, acquired, or held by the debtor in the ordinary course of its business as a broker or dealer from or for the securities accounts of such person for safekeeping, with a view to sale, to cover consummated sale, pursuant to purchases, as collateral, security or for purposes of effecting transfer.
15 U.S.C. § 78lll(2)(A).

3. See 15 U.S.C. §§ 78ddd and 78fff-3.

4. See In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 236 (2d Cir. 2011).

5. 533 F.2d 1314 (2d Cir. 1976).

6. Kruse at 427-28.

7. Id.


TLC Partner Katie Lane Chaverri Recognized by The Washington Post Magazine as a 2013 Super Lawyer Rising Star

TLC Law Firm is excited to announce that Super Lawyers and the Washington Post Magazine recognized and listed Katie Lane Chaverri in its 2013 publication as a top attorney in the Washington, DC metro area.  Super Lawyers rates outstanding lawyers who have attained a high-degree of peer recognition and professional achievement. The selection process is multi-phased and includes independent research, peer nominations and peer evaluations. Katie is among only 2.5% of her peers, who share this distinction.

SuperLawyers Cover

New Guidance on the Enforceability of Arbitration Agreements

Clients often like arbitration provisions because of a belief, sometimes true and sometimes not, that binding arbitration provides a quicker, more efficient, and less expensive alternative to formal litigation.  Whether this is true or not is dependent on, among other things, an understanding and analysis of the facts and circumstances underlying the particular transaction in which the parties are seeking to place an arbitration requirement, the relationship between the parties, and the rights, duties, and obligations implicated by the proposed arbitration.

The recent opinion of Judge Catherine C. Blake of the U.S. District Court for the District of Maryland in Raglani v. Ripken Professional Baseball, — F.Supp.2d —- (D. Md. 2013), provides us with a good reminder about two elements which must be present for a binding arbitration provision to be enforceable.  First, the arbitration agreement itself must provide that both parties mutually promise to submit their disputes to arbitration.  Second, the arbitration agreement must provide a neutral forum to resolve disputes.

In Raglani the defendant sought to dismiss or stay an employment discrimination case because the plaintiff had not submitted her claims to binding arbitration as provided in the defendant’s employment policies which the plaintiff, upon being hired, had acknowledged contained valid and legal obligations.  Based on federal and Maryland law, Judge Blake refused to enforce the arbitration agreement and allowed the plaintiff’s case to continue.

It is the law of most jurisdictions that if a party to a binding arbitration agreement ignores that agreement and initiates a lawsuit or other court proceeding, the defendant may obtain dismissal or a stay of the lawsuit upon a showing of (1) the existence of a dispute between the parties, (2) a written arbitration agreement or provision covering the dispute, and (3) the failure, neglect, or refusal of the non-movant to arbitrate the dispute.  Movants, such as the defendant in Raglani, who are seeking relief under the Federal Arbitration Act must also demonstrate a nexus between the transaction/dispute at issue and interstate or foreign commerce.

However, the Raglani opinion reminds us that in order to get to the point of considering these factors, the arbitration agreement at issue must be enforceable, which means the arbitration agreement, like any other contract, must be supported by valid consideration.  Under Maryland law, the validity of the consideration supporting an arbitration agreement is determined by looking to the arbitration agreement itself without reference to the validity of the larger contract (if any).  Thus, under Maryland law, an arbitration agreement, or an arbitration provision within a larger contract, must be supported by consideration independent of the larger contract.  In the context of arbitration agreements, the requirement of valid consideration means that the arbitration agreement must contain an explicit mutual exchange of promises to arbitrate.  Accordingly, an arbitration agreement that only requires one side to submit its problems to arbitration has no mutuality of obligation and thus is not a valid, enforceable arbitration agreement.  The arbitration clause at issue was unilateral in that it did not require the defendant employer to submit its problems to arbitration and thus Judge Blake found that the arbitration clause was unenforceable as lacking sufficient consideration.

Additionally, under Fourth Circuit caselaw, even if the arbitration provision applies to both parties equally, it must provide a neutral forum to resolve disputes.  The arbitration clause at issue in Raglani provided that the defendant employer had sole and exclusive control over the list of potential arbitrators.  Although Judge Blake wrote that this was sufficient grounds to rule that the arbitration clause at issue did not provide a neutral forum, the arbitration clause at issue in this case also did not provide sufficient rules by which an arbitration would be conducted.

Raglani provides a clear reminder to business lawyers and clients in Maryland and the Fourth Circuit (Maryland, Virginia, West Virginia, North Carolina, and South Carolina) to keep two key factors in mind when drafting arbitration agreements that are intended to be binding:  First, the arbitration agreement itself must provide that both parties mutually promise to submit their disputes to arbitration.  Second, the arbitration agreement must provide a neutral forum to resolve disputes.  For the forum to qualify as “neutral” it must, at a minimum, adopt sufficient rules to govern a proceeding.  Business lawyers and clients may also wish to consider including a process whereby both parties to the dispute have input into the choice of arbitrator.

The Devil is in the Details, and the Profit is in the Claims Process

With contractor bids for the Silver Line Phase II project required to be submitted by the end of the day on Friday, April 19, citizens groups, unions, and other interested parties are beginning to ramp up their criticism of the Metropolitan Washington Airports Authority’s intention to award the contract to the lowest bidder among five pre-qualified contractors.  The Silver Line Phase II project is a massive, $5.5 billion rail extension to Dulles Airport and Loudon County, Virginia.  Construction on Phase II is expected to begin in 2013 with a targeted completion date in 2018.

While no one can dispute the goal of completing a construction (or really any) project for the lowest possible cost, the practice of awarding contracts solely or primarily on a lowest cost basis creates incentives that may put the contractor and the owner at odds.  While this practice will cause potential bidders to compete to be cheapest, which seems good on its face, it may break down during the change order and claims process which inevitably occurs at the end of a large project.  The contractual difficulty of replacing a contractor at the tail end of a project may create an incentive for the contractor to lowball the bid with the anticipation of getting payment, and profit, out of the job in the form of back end change orders and punch list items.

There are several things an owner or prime contractor can do to try to minimize the incentive for this kind of activity.  The owner or prime contractor can require bidders to be pre-qualified pursuant to some set of criteria other than low cost.  Examples range from requiring contractors to have successfully completed a certain number of similar projects in the past, to imposing minimum financial stability requirements on the contractor, to requiring a bond or even a bond for a contractor to be allowed to bid.  The owner or prime should take care to be as specific as possible in fashioning the scope of work for the project; the more detailed the conditions in the contract are about the work product expected of the contractor, the less room there is for reasonable (or unreasonable) minds to disagree on what constitutes full or partial performance.  The owner or prime should also allow for an adequate study period so all qualified bidders have a full and complete opportunity to evaluate the scope of work and the work that will be required to perform given that scope and the physical conditions and other constraints under which the project will be completed.

However, we cannot forget that construction projects, particularly large municipal construction projects, are very complex, logistically and environmentally challenging operations and that even with the best laid plans and the best intentions things can and do go awry.  Unanticipated site conditions, so-called acts of God, the cumulative effect of ordinary course delays and errors, and just plain snafus are a regular part of the construction process and often lead owners and primes to ask contractors to do more than might have originally been contemplated to make sure the project is completed as originally envisioned.  Depending upon how the contract is drafted, and upon the equities of the situation, a contractor who follows the owner’s or the prime’s directions in this regard deserves to be compensated for the additional work and should not be seen as some sort of bad actor.

Effective legal representation is important in these situations.  Both contractors and owners should look for a lawyer who can not only understand and interpret the contract in light of the law and the parties’ course of dealing to date, but who is also familiar with the dynamics of the construction process.  While contractors and owners should engage an attorney ready and able to litigate the matter, contractors and owners should also look for an attorney who understands when litigation is appropriate and when it isn’t. An attorney with this balanced approach will have the ability to coach his client in dealing with the other side so that no rights are waived and the chances for achieving the client’s goals outside of litigation – and therefore more economically – are maximized.  Finally, this attorney has to have the judgment to know when he or she needs to step in and take over the dialog on behalf of his client; and he needs to have the advocacy skills to persuasively make his client’s case, first with the other side and then before a judge, mediator, arbitrator, or other adjudicator if things get to that point.

The Metropolitan Washington Airports Authority appears to have taken significant steps to prequalify bidders to maximize the chances that the Silver Line Phase II project will be a success, both from a project and a budget perspective.  However, with a project of this scale, complexity, and timeframe, it is all but certain that there will significant bumps along the way and that the owner, contractors, and subcontractors will have to be at the top of their game to respond to these complications, both in order to get the project done, and in order to make sure that the economics of the project work out as they should.  As they say, claims will be made.

Second Circuit Rules Madoff Victims Barred from Bringing Claims Against Securities and Exchange Commission

On Wednesday, a three-judge panel of the Second Circuit Court of Appeals in New York upheld the dismissal of lawsuits brought by Madoff investors against the Securities and Exchange Commission, the U.S. securities regulator. While the court found that the SEC’s actions and inactions were “regrettable”, the court ultimately held that the SEC was protected by a law that shields federal agencies from liability. The case is Molchatsky v. United States, Case No. 11-2510 (2d. Cir. Ct. of Appeals).

What a Fisker Bankruptcy May Look Like

On Friday, April 5, 2013, electric car maker Fisker Automotive laid off 160 workers, or about 75% of the company’s total workforce, without severance and without providing the statutory notices required for layoffs of that size.  This latest move comes after a series of corporate body blows, any one of which would be a good indicator that something is rotten at Fisker – at the end of last month the company forced all U.S. workers to take a one week, unpaid furlough in order to conserve cash while at the same time engaging bankruptcy and restructuring lawyers at Kirkland & Ellis to represent the company; several weeks before that Henrik Fisker, the company’s founder and namesake, resigned as executive chairman, citing “major disagreements” with company management over business strategy.

At this point, you would be hard pressed to find someone able to credibly disagree with the attorney for the newly-fired Fisker workers who has said that Fisker is likely to file a bankruptcy case “sooner rather than later.”  Unless the U.S. Department of Energy agrees to an extension, or the company opts to pursue a non-bankruptcy strategy, a Fisker bankruptcy filling could come on or just before April 22, the day on which Fisker’s next multi-million dollar loan payment is due to the DOE, which has provided Fisker with $192 million in financing secured on all of the company’s assets.  From the perspective of troubled company experts, the likelihood and likely timing of any Fisker bankruptcy filing is clear.  The issue that remains is what a Fisker bankruptcy case may look like and what creditors, investors, and other interested parties can expect to see.

In short, any Fisker bankruptcy course is likely to be what we in the troubled and distressed company industry call a “smoking hole.”  First and foremost, the Fisker bankruptcy case is likely to be a liquidation.  Companies don’t fire 75% of their workforce if they expect to emerge from the bankruptcy process intact or even similar to their pre-bankruptcy status.  While the U.S. Bankruptcy Code provides Chapter 7, a form of bankruptcy case in which the debtor is liquidated, Fisker would be more likely to file for protection under Chapter 11 which, absent extreme action on the creditors’ part, would allow Fisker’s incumbent management to control the bankruptcy case and the company liquidation.  Chapter 11 would also give incumbent management greater likelihood of controlling the preference, fraudulent conveyance, and other avoidance claims which may be asserted in any bankruptcy case.  Incumbent management will want to control these claims because they themselves may be targets of these claims and because a large number of avoidance actions being pursued by an aggressive trustee (as would likely occur in a Chapter 7 bankruptcy) makes a lot of enemies in the business community and may inhibit incumbent management’s ability to obtain jobs in the future.

Fisker may also opt to file what is known as a pre-pack bankruptcy case – that is, a bankruptcy case in which the plan of restructuring (which in the case of a liquidation means the plan of liquidation) is agreed to prior to the bankruptcy and filed on or very shortly after the start of the case.  This plan will probably call for some orderly process for the sale or liquidation of the company’s assets followed by a distribution of the proceeds to the company’s creditors.  The days leading up to the filing date likely will be spent lining up potential asset purchasers.  The most preferred of these asset purchasers may be able to obtain a number of protections ranging from minimum bid amounts or increments up to break up or overbid fees – actual cash payments which would be received by the preferred bidder in the event that another bidder wins the auction.  In the parlance of the profession the preferred bidder is known as the “stalking horse” and these bid protections are known as “stalking horse protections.”  Debtors like stalking horse protections, and bankruptcy courts tend to allow them, because they encourage a pre-approved buyer to step forward and make a credible play for the assets, which tends to help ensure a more spirited auction and a better return on the sale.

In addition to structuring the case and basic bankruptcy issues, a number of thorny issues would have to be overcome in any Fisker bankruptcy case – First, the senior lender appears to be secured by all of the company’s assets and thus, unless the sale pays more than the amount of the outstanding loan balance for those assets (not likely), that lender may have to agree to receiving a discount if any other creditor or class of creditors is to receive anything.  Second, the senior lender in this instance is a government agency and the handling of this case and the resulting treatment of the government’s claims within the bankruptcy may be highly politicized, with the normal rules of corporate finance potentially taking a backseat to partisan gamesmanship.  Third, there appear to be real questions about the value of Fisker’s assets to begin with.  The company has produced only one model of automobile, which is expensive and has not met with much success in the marketplace.  Moreover, problems with that automobile’s electrical system have been alleged to cause spontaneous fires in several separate incidents.

Even though the metes and bounds of a Fisker bankruptcy case can be described with relative clarity, successfully executing on this strategy will be a real challenge for the company and its advisors.

Note:  Neither David Lee Tayman, the author of this post, nor any other attorney at Tayman Lane Chaverri LLP has had any involvement with Fisker Automotive, the company’s creditors, or any other parties-in-interest to any potential Fisker bankruptcy case.  This article consists of the author’s opinion based upon publicly available news and information resources.