Property Three is designed to introduce and explore some of the basic elements of Commercial
Real Estate Transactions. This statement of course objective must be tempered by the myriad of
forms that commercial real estate transactions can assume and the equally prolific number of goals
and objectives that participants in the real estate transaction might have.
While it is impractical to identify all the different varieties of commercial real estate investment,
the course materials have been organized to introduce four major areas which overlap and expand
upon each other. These four sections raise questions which are applicable to most of the sundry
forms of real estate transactions and treat in detail several specific recurring forms of investment.
These four sections are:
A. Choice of business form, investment and tax consequences
B. Shopping centers, site selection, financing the shopping center, and shopping center leases
C. Condominiums, Co-ops, and Conversions
D. Urban renewal and development in the contemporary urban area.
Part One: Business Organization, Capital Acquisition and Investment Alternatives.
A. Choice of business form, investment and tax consequences
This section of the course materials introduces the participants, business organization alternatives,
investment organization alternatives and some of the ever changing tax consequences of the real
estate transaction. Who are the potential participants in the commercial real estate transaction?
What are the possible goals or objectives for engaging in the purchase and holding of real estate for
"profit" or "investment? How are sites and projects selected for development or purchase? How are
decisions concerning the "viability" of a real estate investment made? How are financing decisions
made by both the investors and the lending institutions?
How does the potential investor evaluate the purchase of local real estate, how does an investment
decision evolve, how is the property is appraised and how is the investment and it's uncertainties
evaluated?
B. Shopping Centers:
In the first section above, the concern was whether one retail, office, or service location would
serve the needs of the business. These readings contains cases, text, articles, leases and other
materials directed at the mid- century phenomenon of the shopping center. Thus, in this section, the
question broadens to defining the need of a larger segment of the population, competing for their
attention in a sea of other neighborhood, sub-regional or regional shopping centers and the waning
pull of the downtown shopping milieu. This section, therefore, begins by defining the different types
of shopping centers and how decisions are made concerning their location. Then, the question of
"key" tenants and "ordinary" tenants, concessions, including rental, contribution to common
expenses, and construction and depreciation of structures are considered in the initial packaging of
the shopping center for presentation to investors and lenders. The shopping center lease concerns
not only the economic relationship of the lessee and lessor, but also the management and governance
of the shopping center. Hours of operation, restrictions, responsibilities, non-competition provisions,
radius restrictions, percentages of gross and net profits, responsibilities for maintenance and
construction and shared expenses are all matters of concern in the shopping center lease agreement.
Since many shopping centers were formed in the early and mid-fifties, they are in the twilight of
their economic years as originally conceived. Shopping centers are being sold, redesigned and
expanded with an infusion of new capital and the promise of a new "tax life."
C. Condominiums and Cooperatives:
The third section of the materials represents a shift in focus. In the first part of this section, the
Condominium and Co-operative are studied from the vantage of both the common law and the New
York enabling legislation. The problems recognized prior to the drafting of the legislation and the
early concerns expressed by scholars are considered in the context of 20 years of hindsight. The
economic consequences of choosing the condominium form for multi-unit (dwelling or commercial
units) construction is explored, including the regulation of condominium offerings by the SEC and
the Secretary of State in NY. Why would a developer choose the condominium form and what is
the difference in profit margin and timing of return on investment?
Existing structures which have been used for rental purposes can converted to condominiums.
The rental entity can be sold to a condominium association and the individual units conveyed into
separate ownership. The fact that a substantial amount of commercial real estate activity can take
place without generating new housing units presents problems for those classes of society which rely
on rental units for economic, age, social, ethnic or racial reasons. Condominium conversions,
gentrification, present those interesting and trying problems of public policy interfacing with private
property rights.
D. Downtown - Urban Renewal and Private Investment:
The fourth and final section of the materials is in an evolving format. The lessons of the first
three sections of these materials blend the profit and investment motives of the private sector with
the public policy controls of the state (federal, state and local governments). The urban areas of this
nation are a balance between public and private policy, capital, incentives, and foresight. The first
part of the fourth section deals with the historical role of the Federal, State and Local governments
in housing, urban planning and urban renewal. This introductory overview of governmental
involvement in downtown renewal highlights the evolutionary role played by government in the
demise of some urban areas, the reason for significant amounts of government land ownership in
some urban areas, and the need for innovative patterns of public-private co-operative ventures for
future renovation of downtown areas.
Buffalo was one of those early cities to experience the benefits of enlightened city planning. The
radial roads emanating from the base of city hall, along with the beauty of Delaware Park attest to
the classic plan of Frederick Olmstead. The planning of the 50s and 60s removed much of the viable
properties of the downtown area and substituted empty lots, the highest and best use of which was
to provide plentiful parking for the remaining parts of downtown Buffalo. The theaters, the
shopping areas, the offices, the hotels, the attractions of the city were historical recollections. The
few attempts to provide some catalyst for future growth in the city were not taken seriously by the
general population or bungled by the responsible public officials. The new State University campus
located in the near suburb of Amherst, the football stadium located in Orchard Park, the Marine
Midland Center (as one author notes in the Buffalo News, Sunday January 6, 1985) was arrogantly
placed over Main street, far from any location which would benefit any of the other buildings in the
downtown area.
The City of Buffalo presented a challenge worthy of any urban planner. In this context the city
decided to participate in the future growth and direction of the city's redevelopment - a new agency
was formed to focus on the waterfront - called the Waterfront Development Agency. This agency
hired American Cities, a national planning group to present a plan for developing a plan for the
waterfront. After the plan was presented, a request for proposal to develop the actual plan was
publicized and American Cities was again retained to develop the actual plan. This history, the
initial plan, the nature of the deed restrictions and the relationship between the public and private
sectors in planning, development and financing is the thrust of this section of the materials.
Section One:
Parties, Objectives, Organizational Forms, and Taxation
As previously indicated, this section is an introduction to considerations inherent in the
commercial real estate transaction. These factors are sufficiently numerous and can be found in any
number of combinations. The question then becomes how to present the materials to facilitate
piecing the puzzle together.
This chapter focuses on a specific piece of real estate and three different potential purchasers.
The objectives of each of the purchasers is different, as is the financial situation, expectation as to
gain, tax bracket, organizational form.
To fully appreciate the choices open to each of the purchasers in the problem, there are
background readings included within this chapter. The readings for this section include:
First, a general look at some of the threshold factors in investment, land acquisition and
management.
Second, driving home the distinction between the acquisition of property for the purpose of producing income, using the property in the ordinary course of a trade or business, or buying and selling property as the stock of a business which deals in real estate for the purpose of making a profit from such dealings. Certainly, one of the major questions concerns the validity of the classification scheme used by the Internal Revenue Service and whether that comports with the practice of real estate investors. See generally, Malat v. Riddell, 383 U.S. 569, 86 S.Ct. 1031, 16 L.Ed 2d 102 (1966); U.S. v. Winthrop, 417 F.2d 905 (5th Cir. 1969);
Biedenharn Realty Co. Inc. v. U.S., 526 F.2d 409 (5th Cir) Cert. denied, 429 U.S. 819 (1976).
Third, a general look at some of the financial and tax consequences attendant to decisions
affecting real estate purchase, holding and resale.