My Recent Trip to Cuba

I recently had the good fortune to spend two weeks in Cuba, having participated in a humanitarian visit to the country. I’ll leave the politics aside (although, if you have any interest in an insider’s perspective, I recommend Yoani Sanchez’ blog) and limit this blog to describing some of the things I saw.

Approximately 80% to 85% of the buildings in Havana are pre-revolution, have not been maintained and are in deplorable condition, both cosmetically and structurally. The infra-structure throughout the country is in dire straits. There is no water pressure in much of the country (which makes bathroom use an interesting experience), in many places, electrical power is turned off during the night, the top speed limit on the major highways is 50 mph and 35 mph on all other roads, all of which are full of potholes, so that, frequently going from point-to-point on a road is really a matter of zigging and zagging your way; many of the bridges shake when vehicles cross over them, which does not give one a sense of confidence in the transportation system. And, there is no money to address any of these issues.

After the collapse of the Soviet Union, Cuba no longer had a source of foreign aid (as opposed to foreign investment, of which there seems to be a significant amount, most notably from Venezuela and China).

There is a housing crisis in Cuba which the Cubans openly acknowledge, and while a 100 by 300 meter tract of land in the countryside can be purchased for under $100, it takes, on average, five years to build a house because of the limited availability of building supplies. While I was there, on November 10, it became legal for the first time for individuals to buy and sell private homes – although house-swapping has been legal for some time and it has always been legal for private homes owned at the time of the revolution to be passed down from generation to generation.

If you have an opportunity to visit Cuba – especially while Fidel is still alive – take it! It is an unforgettable experience and the Cuban people could not be warmer and friendlier.

The country may be downtrodden but the people most certainly are not. They understand that the rift between Cuba and the US is a political one carried on at the highest governmental levels and I discerned no animosity of any sort on a people-to-people level. They venerate Ernest Hemingway and, like so much of the rest of the world, Cuban people enjoy much of our American “culture” from rock and roll, TV shows and movies, to baseball (the Cuban National Pastime) and, of course, Coca Cola, the ubiquity of which is rivaled only by mojitos.

I’ve Foreclosed on a Property, Some Tenants Live There Already, But I Think I Can Do Better…

Let’s say you’ve purchased a Maryland residential property (defined as having four or fewer dwelling units) at foreclosure, and you want to either move in or rent it as investment property. However, tenants living in it at the time of foreclosure still reside there, under a lease having an unexpired term at what you consider a below-market rent. What, if anything, can you do?

Recent legislation in Maryland, passed in response to the turmoil of the real estate economy, has given tenants living in residential property that has been foreclosed upon enhanced protections. This legislation limits opportunities to terminate existing leases.

Assuming the property you purchased is residential and you intend to lease it, you will take title subject to the rights of existing tenants – which means that they have the right to continue renting the property until the end of the lease term. However, this right applies only to tenants that are “bona fide,” meaning that they are not the mortgagors who have defaulted (or the child, spouse, or parent of the mortgagors), the lease was the result of an arms-length transaction, and the rent is not substantially less than fair market value. (The measure of fair market value, while objectively quantifiable through, for example, an MAI appraisal may be costly, if the tenants dispute your valuation.)

Different rules are applicable if the lease is an “at will” lease (meaning that either side can terminate at any time) or is for a month-to-month tenancy. In those instances, you must give 90 days notice before terminating the tenancy.

Similarly, if you purchased the property with the intent of occupying it yourself as your residence, then, no matter how much time remains on a lease term, you can terminate it, provided the 90 day notice is given.

A word to the wise, however; Maryland’s notice requirements are specific, and must be strictly followed. More information about the notice requirements and the foreclosure process can be found at here.

Real Estate Redux

The cover story in the current issue of Fortune is The Return of Real Estate. While the title is slightly misleading in that it focuses solely on residential real estate, it makes for interesting reading nonetheless (and to be fair, the subtitle of the article suggests the scope of its content).

According to the article, the key factors driving this resurgence are the cost of owning vs. renting and the level (or lack thereof) of new construction. Apparently the pendulum is finally beginning its swing back from glut to dearth.

In support of that proposition, the article says that in mid-2006, there were 53,000 new homes for sale or under construction in Phoenix; currently, that number is only 8,100. In discussing this statistic with one of my colleagues she asked why she should care about what’s going on in Arizona when we’re here in DC. In responding, I was reminded of John Donne, English poet and lawyer (real estate maybe?) who famously declaimed, “Ask not for whom the bell tolls. It tolls for thee.”

Washington DC, Northern Virginia and lower Montgomery County, along with places like Indianapolis, Minneapolis, San Diego, the San Francisco suburbs and Texas, are what the article calls “nondistressed markets.” In these locales, housing prices, while impacted, were not battered. These markets will show a healthy resurgence as the economy and, in particular, job growth, improve. The housing market in Phoenix, along with other Sunbelt cities like Las Vegas and Southern Florida, suffered devastating collapses that crushed their local economies.

With job markets showing nascent signs of life, low inventories of new homes mean there is an opportunity for construction to slowly begin anew – notwithstanding the continuing spate of foreclosures nationally, provided that local markets are able to absorb these properties. Why? Because foreclosed properties drive down the price of housing generally, this makes them extremely attractive to investors, who purchase them for use as rentals. As the Fortune article points out, “Remember, the millions who lost their homes to foreclosure still need somewhere to live.” Real estate construction, whether it be housing or commercial, has a pervasive impact on local economies; first, construction of a typical new home can, during the course of construction, employ anywhere from 80 to 100 tradesmen such as electricians, plumbers, carpenters, painters, roofers and the like, not to mention the increased business for local mortgage brokers, appraisers and insurance agents, as well as local dealers and suppliers. More than that, however, the revival of the home building industry unquestionably impacts the national economy as well, because new construction means new business for the manufacturers of appliances, plumbing fixtures, floor coverings, paints and wallpaper, furniture, roofing and siding materials, etc., not to mention lenders and insurers.

One can even argue that in today’s multinational economy, the effect is global, since it is hard to imagine any new home without several flat screen TVs, WiFi, sound systems and the other amenities of modern life, many of which are made abroad.

If you are actively involved in real estate (or even just interested), I think the Fortune article is a good, informative read and if you’re not a subscriber, it’s definitely worth the newsstand price.

Chinks in a Subtenant’s Armor

Recently, I received a call from a prospective client (the “PC”) regarding a sublease the PC had entered into as a subtenant less than a month earlier. It turned out that the tenant (the sublandlord in this case) failed to comply with provisions of its lease (i.e., the “main lease”) and its landlord put the sublandlord on notice that this failure constituted an “Event of Default.” The notice stated that, unless the sublease was terminated immediately, the landlord would start proceedings to terminate the main lease. Imagine the PC’s shock upon learning that it was about to be dispossessed from its premises shortly after having taken possession.

Simply stated, a subtenant’s leasehold rights derive entirely from those of its sublandlord. That means that if the sublandlord’s lease with its landlord is terminated, the subtenant’s rights will simultaneously be terminated. Not a predicament a subtenant wants to find itself in. (In this case, the landlord was unwilling to compromise, so the PC’s proverbial goose was cooked.)

Were there steps that the PC could have taken to avoid this situation? Yes. First, the PC could have asked to review the non-monetary terms of the main lease. By this simple process, the PC would have discovered that the landlord required that certain conditions precedent to any subletting had to be met by the tenant. Second, the PC could have requested the landlord’s written consent to the sublease, thereby removing all doubt as to the landlord’s consent.

Of course, even if a landlord consents to a sublease, a subtenant’s situation is still at risk to an early termination of the main lease. To minimize that risk, a subtenant can ask the landlord for a non-disturbance agreement (an “NDA”), which will require the landlord to recognize the sublease even if the main lease is terminated before the expiration of its term. However, this is a case where size counts. If the subleased space constitutes only a small portion of the tenant’s space, the landlord will, in all likelihood, be unwilling to execute an NDA; if, on the other hand, the subleased space is of significant size, the chances of obtaining an NDA increase, although it would not be unreasonable for the landlord to impose conditions precedent to its effectiveness (such as requiring that the subtenant first cure any existing main lease default by the sublandlord, or requiring the PC assume all of the sublandlord’s main lease obligations, including those pertaining to rent and the length of the remainder of the lease term). If a landlord is unwilling to give a subtenant an NDA, the subtenant can ask the landlord to send it copies of default notices and request that it be given an opportunity to cure its sublandlord’s defaults.

Admittedly, in the subject case, the PC has remedies available to it against its sublandlord (e.g., breach of the covenant of quiet enjoyment (if there is one in the sublease) and/or breach of contract), but these remedies are inadequate to compensate it for the loss of its possession of the subleased space and the PC is most likely going to have to find and relocate to space elsewhere.