New Financial Reforms to Change Real Estate Market?

Posted on July 30, 2010 by John G. Kelly

It has been widely reported that Northrop Grumman has chosen a building located in the Fairview Park area of Fairfax County to relocate approximately 300 employees from Los Angeles. Certainly this decision bodes well for the Northern Virginia region as a whole, as proximity to Washington, D.C., the Pentagon and the Northern Virginia technology centers offers many advantages. In recent years, other corporate giants such as Hilton, CSC, and Volkswagen of America have all relocated to Northern Virginia. After deciding on Virginia instead of Maryland, Northrop Grumman focused on sites in Arlington and Fairfax Counties before ultimately selecting the Fairview Park property. State and local government incentive programs were considerable.

One very interesting aspect of this transaction is that Northrop Grumman elected to purchase the building instead of entering into a lease as was widely expected. There are two main business issues at play. First, clearly they are taking advantage of current conditions in the commercial real estate sector to buy the property at a significantly lower price than what the property sold for less then three years ago. Published reports in The Wall Street Journal and elsewhere indicate that Northrop will purchase the building from ING Office Fund for approximately $78,000,000.  Note that the building was purchased in 2007 from Verizon Communications Inc. for $105,000,000. Second, under proposed financial reforms and accounting changes scheduled to take effect in 2013, companies are to report leases as a long-term liability instead of an annual operating expense. It has been widely reported that the accounting change was a factor in Northrop’s decision. 

The effect to the commercial real estate market if more companies elect to purchase instead of lease could be seismic. Lease terms could become shorter than what is now typical, and more purchase and sale transactions could be the norm. Expect this issue to be the focus of many in the months to come.

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The Virginia Defective Drywall Correction and Restoration Assistance Fund

Posted on April 14, 2010 by Tad Lunger

We've got two new provisions to the Code of Virginia as of this last legislative session which create a perpetual, non-reverting fund to facilitate the remediation of property impacted by the use of "Defective Drywall" in residential construction.  This fund will be administered by the Virginia Resources Authority and the Department of Housing and Community Development ("DHCD"). 

According to the bill's summary, the DHCD will "...develop guidelines for the distribution of loans or grants from the Fund to particular recipients. The grants and loans may be used to pay the reasonable and necessary costs associated with: (i) the remediation of a contaminated property to remove hazardous substances, hazardous wastes, or solid wastes, ( ii) the stabilization or restoration of such structures, or (iii) the demolition and removal of the existing structures or other work necessary to remediate or reuse the real property" due to the effects of "Defective Drywall." Kind of makes you nostalgic for underground storage tanks, doesn't it?

So what is considered "Defective Drywall?"  Well, it's defined at length in the bill's definitions section, so I won't bore you with all the details, but basically it must have been installed during new construction or renovation between 2001 and 2008 and meet the technical requirements of the definition (i.e. sufficient strontium, sulfur or hydrogen sulfide levels, etc.). 

Who can receive loans and/or grants from the fund?  Eligible entities for grants appear to only include local governments (who appear to be able to then use these grants to create incentives for remediation), while loans may also be made to local governments, public authorities, corporations, partnerships, or individuals for the remediation purposes.  The Virginia Resources Authority will get to determine the rates.

So the legislation is in place creating the fund.  What I've learned about government funds though, is that the most important question about any fund is: Is it funded?  Well, I don't know yet.  But I did shoot the bill's patron,  Delegate Oder, an email to see if he could shed any light on how the fund will actually operate for us - we'll let you know when we hear back.

Want to know more about Chinese and other defective drywall from a product liability standpoint?  Check out Tim Hughes' string of posts here.

 

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