Commercial Real Estate Deals Gone Bad and CRE Horror Stories

We recently asked our readers what they’d most like to read about on our Blog. Apparently you’re not getting your fix of nightmare material from the movies, because for many of you, your answer was, “CRE deals gone bad and horror stories!”

You asked to hear about commercial real estate deals that didn’t pan out as expected. Well, ask and ye shall receive…

Below are a few not-so-wonderful tales from CRE professionals. To steal a quote from Dragnet’s Sergeant Joe Friday, “Ladies and gentlemen: the stories you are about to hear are true. Only the names have been changed to protect the innocent.”

“Three Restrictive Covenants and You’re Out!”

Three adventures from one real estate attorney:

Covenant Story No. 1, “The Italian Villas”

A client was buying property around [a high-end retail corridor] to build some Italian looking villas. He engaged us to get the property’s land use approved.

He had a big model made up of the villas to show the city council. Must have weighed 60 lbs. We got the zoning approved, and I asked him “What are you going to do about the restrictive covenants?” He said, “What are those? How do I get rid of them?”

We weren’t hired to do any of his acquisition or title work, but figured out he had to get 51% of the property owners to waive the covenant. So he took this big model around to all of them, but couldn’t get more than 49%. Long story short, he had to sell. Didn’t lose his shirt, but had to sell.

Covenant Story No. 2, “Judas Saves the Day”

Another client hired us to handle their zoning approval, but no acquisition or title work. They were based out of town, so they hired a local broker to buy the properties they needed for the project.

He bought up all the properties, paid way more than what they were worth because he had to assemble them, and didn’t seem to do any due diligence. He’d sit in his office, people would come, he’d give them a check, and they’d give him title. They did no title searches at all.

Anyway, they were having a horrible fight with the neighborhood getting the property rezoned, but we got it approved. The neighborhood then said, nope, can’t build it because of these restrictive covenants. Of course, they didn’t know about the covenants because they hadn’t done any title work.

But their story ended better than the villas. They hired the neighbor who was the main objector to go around to the other neighbors and get their approval. She got them.

Covenant Story No. 3, “Twice Bitten, Thrice Shy”

This guy was assembling single-family residential parcels for a commercial project and came to us to rezone the properties. I told him we’d handle the zoning, but before we started he had to see if the properties he’d been buying had any restrictive covenants. So he looks, and they did.

He had to sell.

“Politics as Usual”

One memorable adventure from a CRE consultant:

I was working with a developer buying old commercial properties to assemble into one new project. It was going to be a pretty significant deal because he had people lined up for new office space, national retailers, apartments…

But the whole deal hinged on the city paying for some of the construction costs. For the most part the city council was supportive. They liked the idea of getting rid of the old buildings, getting new shops, jobs.

But one of them, don’t ask me why, was fighting us every step of the way. He demanded that local businesses get space in the project, which was fine, but then he kept asking for more space, and then reduced rent for them, and then this and then that.

There were other problems with the project, and it might not have worked out even if this councilman wasn’t around, but he sure seemed to be the straw the broke the camel’s back. One day we’re getting ready for another council meeting, then there’s another demand from him, and next thing I know the developer is taking his project to a different city.

I don’t know if that was really a horror story because the developer ended up okay, but I don’t think the city was really happy the project disappeared…

“Politics as Usual (Déjà Vu)”

One last adventure from a real estate lawyer:

We were hired to get a development and zoning plan approved for a large commercial project. We got the approvals, but before we could pull permits the next-door neighbors, a good-sized residential subdivision, starting calling their reps and complaining about the project they’d just approved. They were pretty well organized and very vocal.

I’m not going to make this too long, but essentially a majority of the council decided that they’d rather ignore state law and hold up our project than explain to their constituents that it had already been approved.

Two years and several lawsuits later we started construction.

You know why? It wasn’t the suits. The courts hadn’t acted yet. It was because the rest of the city was so angry at what the council was doing that they voted them out!

Gotta love politics.

Your Turn

Okay, now that we’ve shared a few, it would be great to hear from you. If you have a CRE horror story, or even just a thriller, give us the gory details in the comments section below!