Real Estate final

The Story for the Final

Jonathon Li came to the United States from China in 1963 and settled in San Francisco. As time passed, he built a successful law practice and did a lot of pro bono work for his community – particularly for 1st generation Chinese who had brought their culture with them and spoke little, if any, English. These people stayed within their own community and, for the most part, only spoke among themselves. They had come from Communist China where speaking “out of line” had serious consequences.

In 1971, Mr. Li decided he wanted to change directions and ended his law practice. At that time, he saw that the banks in Chinatown didn’t really serve the community. In fact, he had applied for a business loan from his bank and was turned down (he was credit worthy and had a strong enough income to qualify for the loan). He believed that the bank’s denial was directly related to his ethnicity. Others in the community had similar experiences. The banks were happy to take deposits, but did nothing to support the community.

And so Mr. Li started the Dragon Community Bank in a small space between a noodle shop and fruit and vegetable seller. Over the next 5 years, the bank took root in the community and grew steadily. After graduating law school, his two daughters came to work at the bank as its chief loan officer and chief operating officer. By 2019, Dragon Community Bank had five branches in San Francisco and it still held fast to its mission to serve the Chinese community first and fully. In 2019, Mr Li added to the bank’s mission statement supporting the Chinese community with:

Dragon Community Bank is driven by a passion for justice, for people and for the environment, and by a belief that we at Dragon can accomplish more in genuine partnerships with others. In order to more fully accomplish our mission and live our values, Dragon strives to show our commitment to diversity and inclusion evident in our organizational structure, policies, board of directors, staff, donors, goals, and vision.

Our passion for justice calls on us to be inclusive, transparent, and fair in all that we do. Our commitment to working in partnerships compels us to build relationships where all partners are valued, heard, respected, and empowered. In short, we believe a deep commitment to enhance and steadily increase diversity and inclusion at Dragon flows directly from our core values and is essential to achieve our mission.

Early in 2020, Mr. Li decided to open a new branch in Los Angeles. After carefully researching possible locations, Dragon signed a 7 year lease for space in a well-located shopping center (near the community he wanted to serve) and immediately planned extensive and expensive tenant improvements for the space. Dragon is paying for all of this work.

Dragon’s lease includes an option to extend the term of the lease for another 15 years and the following simple provision: “Landlord will not lease any space in the Center to another bank, savings & loan, or credit union without first getting Tenant’s written consent.”

Mr. Li hired an advertising company to create a marketing campaign for the new branch in Los Angeles and the San Francisco branches. The new branch is scheduled to open by October 1, 2020. His long term plans for Dragon includes more branches in Los Angeles, and later, maybe some in New York.

A few weeks after signing the Dragon lease, the landlord leased a large part of the Center at the prime location near the entrance to Wells Fargo Bank. The reason Wells Fargo wanted to open a new “flagship” branch in the Center to show a new image to the public. After all of the recent seriously negative publicity, Wells Fargo saw the need and the opportunity to become a “different” type of bank, one that is committed to social responsibility, just causes, and consumer protections. To that end, Wells Fargo had formed partnerships and other cooperative arrangements with a number of prominent (along with many local and less prominent) non-profits and socials organizations, and has also committed a billion dollars to its new image. Wells Fargo started a new foundation that will fund its partner non-profits and other social causes.

Wells Fargo is taking almost 35% of the Center. The bank’s buildings will be designed by the same architectural firm that did Apple Park. The non-profit organizations will have their own building in Wells Fargo’s complex. Not surprisingly, everyone in the Center and the community will benefit from this project. Well Fargo also agreed to special loan conditions for tenants and for developers who are building affordable housing in the area. Wells Fargo has also agreed to refinance the Center. This new loan is at a lower interest rate and includes funding for major renovation work to the rest of the Center.

Before leasing to Well Fargo, the landlord didn’t bother to look at the Dragon lease, and had forgotten about the restrictive provision in it. When Mr. Li read about the Wells Fargo deal and the bank’s agenda, he called the landlord and reminded him of the non-compete provision in the Dragon lease.

A few days later the landlord called Mr. Li back and told him that Wells Fargo also didn’t want another bank in the Center, even though Dragon is small and non-threatening. According to the landlord, if he couldn’t work out a satisfactory solution to the restrictive clause in the Dragon lease, one that included preventing a branch in the Center, Wells Fargo would abandon its project altogether. It wouldn’t search for another location in Los Angeles. Instead, it would move the entire project to New York. Equally important, Wells Fargo didn’t want any publicity at all about the problem.

Mr. Li understood the risks (and opportunities) of exposing Wells Fargo’s heavy tactics, and he also understood his legal remedies. But he didn’t want to become lost in litigation and a public controversy. Legal and practical costs weighed heavily against going down that path. He knew that accepting Wells Fargo’s ultimatum would set back Dragon’s expansion plans at least a year. He had done a lot of research before choosing the Center. It was the only feasible location that could serve Dragon’s potential customers.

After all the publicity about Dragon’s growth and the new branch in Los Angeles, he’d have to come up with an explanation why Dragon decided not to open in the Center, one that preserved the confidentiality of a settlement. He stayed up late thinking about the scope of the loss to the community if Dragon stayed in the Center and if Wells Fargo followed through with its threat and moved its project to New York.

Stephanie Taylor represents the landlord as his sole leasing agent for the Center, and in that role handles all of the lease negotiations, including those with Wells Fargo. (Well Fargo represented itself.) The landlord took no part in that process for any of the Center’s leases. Stephanie wrote all of the leases using a form document originally written by her real estate broker (the company she worked at).

Stephanie is a friend of Mr. Li’s oldest daughter (now Dragon’s CFO) from college, and because of that relationship, Stephanie represented both Dragon and the landlord in the Dragon negotiations. She didn’t explain either the Dragon lease’s use restriction or its option to extend with Well Fargo before Well Fargo signed its lease. She said nothing about Wells Fargo to Mr. Li at any time before he read about it in the newspaper. Stephanie’s commission for the Wells Fargo lease is an amount that would resolve most of her financial problems.

Mr. Li met with his daughters to discuss the financial impact of accepting Wells Fargo’s proposal. They concluded that delaying the new branch in LA for over a year and moving to a location that won’t serve the bank’s customer base nearly as well as the Center and would have a significant impact on the bank’s growth plans. They worried that Dragon might not be successful in Los Angeles.

Wells Fargo offered to add funding for some of the local charitable organizations and causes Mr. Li and Dragon support – but only if he accepts the proposal. Wells Fargo reminded Mr. Li that there wouldn’t be any litigation. If he didn’t accept the proposal and agree to how it was presented to the public, Wells Fargo would have a press release saying that it supported small community banks and was abandoning the Center to respect Dragon’s rights and opportunities. The release would go on to explain why the project will be moved to Manhattan.

Wells Fargo’s Vice President of Operations called Mr. Li and told him the he had to accept or reject the proposal in the next 24 hours because Wells Fargo unexpectedly had to make a time-sensitive decisions immediately. He went to his favorite restaurant to have a few drinks and a quiet meal by himself. He had a difficult business and personal decision to make.

Two weeks later the governor issued an Executive Order mandating that all businesses close for an indefinite period. Existing construction projects could continue, but only if everyone on those projects adhered to special safety procedures. The company doing the work for Wells Fargo agreed to start its work and expects to be finished on schedule so that Wells Fargo will be able to open in the Center by September 1st.

Added for the Final

After difficult negotiations, Mr. Li settled the dispute with the landlord, Wells Fargo, Stephanie, and her broker. As a result, Dragon will be staying in the Center and Wells Fargo will continue with its lease and its large presence there. Work to improve the Center restarted immediately.

The landlord and Wells Fargo paid a substantial amount of cash to Dragon, and the landlord reduced Dragon’s rent by 30%. Well Fargo also agreed to contribute $250,000 to Mr. Li’s charity of choice. Stephanie and her broker returned all of the commissions paid to them, including what she earned from the Dragon lease. Well Fargo and Dragon also developed a joint lending program that will offer very competitive loan rates to minority-owned businesses.

Now that the problems with the Center have been resolved satisfactorily, the landlord wants to purchase a 40 acre parcel next to the Center and develop it into a 100 unit low to moderate income co-housing community. He will be buying and developing the property with three investors. Each of them will be making an equal investment in the project.

There’s a small pond on the property that has a stream running into it and supporting an acre of wetlands surrounding it. The property is currently zoned by the county as General Agricultural**. Well Fargo has agreed to finance all of the construction work.

The landlord negotiated the terms of a purchase agreement with the parcel’s owner. The land has been in the owner’s family for over 100 years and has been used for farming, light industrial uses, some known and some unknown, and for the last 25 years, open space, during that time. There are a couple of old, unused buildings on the side of the property farthest from the Center.

The purchase price will be $25,000,000. The landlord will have to give the owner a $1,000,000 deposit immediately. It will be refundable only if the landlord terminates the purchase agreement for “cause,” i.e., for one of the reasons included in the contract.

There’s walking path leading from road at the front of the parcel that goes to the pond. It is well worn and used for years by the public to go there. It winds through the area where the landlord plans to build the community building for the co-housing owners. The property’s owner who sold the property to the landlord never gave permission for anyone to go to the pond.

**AG (General Agricultural). The AG District provides areas for farming, ranching, agricultural support facilities and services, low intensity uses, and open space. It is consistent with all agricultural-oriented General Plan land use designations, as well as those designations that allow for more intensive uses. Agricultural uses are of primary importance and all other uses are secondary.

The Questions

Who should be the new owner of property, and how can the owner(s) hold title to it? What do you recommend, and why?
What would you include the purchase agreement (i.e., contingencies) between the landlord and the property’s owner to make sure that the landlord and his investors will get their deposit back if they legally terminate the agreement? List them and explain why for each.
Identify each of the legal issues you expect the landlord will have to resolve successfully for his the co-housing project? Include the federal, state and local laws that you think he will have to comply with. Add a brief explanation of why for each of them.
Who do you think will oppose this co-housing community? What will their objections to it be based on? Again, explain.
As you know, COVID-19 has “changed everything.” List the ways the pandemic could affect this project. Just a list.