Friday, April 27, 2007

Lease Audits: The Essential Guide is an excellent book

"Additional Rent
This term has at least two meanings. There is a broad meaning whereby the term refers to any consideration paid to a landlord under a lease other than the base rent. The second use is to refer to rent mechanisms which permit the landlord to recover from tenants all or some portion of costs expended by landlord in connection with the property, such as recovery of real estate taxes, utilities, CAM and the like.

This term is most familiar in reference to the verification performed by accountants in their review of their client's financial books and records. It is used in real estate to refer to many different type of analysis, most prevalently, environmental audits. We use it to refer to investigation of charge made under commercial leases.

Standard contractual language which one commonly encounters in certain contracts is often referred to as boilerplate. The word has a dismissive connotation. When asked to explain technical lease language, landlords' representatives often deflect the inquiry with the response, It's just boilerplate. Courts seldom refuse to enforce language simply because It's just boilerplate. More commonly, courts will enforce boilerplate, thereby suggesting that one should seldom be satisfied with the explanation that any language is just boilerplate.

This is slang for a limit placed upon liability. For instance a tenant might negotiate a cap on his annual responsibility for additional rent at some amount.

Contingent fee auditor
A person who agrees to perform an audit, without charge, other than possible recovery of expenses, except that the auditor does recover some (often 50%) percentage of the savings realized as a result of his audit."

Lease Audits: The Essential Guide is an excellent book. The author is Theodore Hellmuth, Esq., and it is published by Statelaw Guides, Inc.
"The book categorizes, de-mystifies and provides easy, helpful answers.
Tenants should read it before they draw their next rent check. Landlords should read it before they send their next additional rent bill. Both parties should read it before they work on any type of escalation clause.
Questions which this book answers include:
* What are the common types of error?
* What is the multiplier effect?"

for more information: see

Thursday, April 26, 2007

Insurer obligations

There are still hundreds of pending commercial property insurance claims from the 2004 and 2005 hurricanes, slowly winding their way toward resolution.

"Hurricane damage is sometimes a catalyst for an owner to sell real estate to a developer who wants to demolish the damaged structure and rebuild beachfront condominiums. During such fast-moving events, sellers and purchasers invariably have questions about the continuing rights to insurance recovery under the seller's insurance policy.

For example, can the insurance rights be assigned? If so, are they limited by the sale? Insurers look for an opportunity to slash their obligations to pay for repairs or lost business income. One must always carefully consider the language of the policy, but under the language of most property policies, there are three simple rules for resolving this

1. Following a sale, the policyholder/seller can still collect business interruption proceeds beyond the sale date and through what would have otherwise been the end of the "business interruption"
period caused by the hurricane. Most commercial policies insure lost business income during the period of business interruption caused by the hurricane or other covered peril.

This period of interruption is said to be theoretical — the amount of time it ought to take to complete all repairs with all due diligence and dispatch. The sale of a property in the middle of a business interruption period does not cut off and limit the business interruption insurance recovery. This rule is consistent with a very well settled line of legal cases holding that a policyholder is always entitled to collect business interruption based upon the full "theoretical"
interruption period.

1. The policyholder/seller can also collect repair or replacement costs estimated, but not actually spent, at the damaged property as of the sale date. Oftentimes when a sale is made in the middle of a claim, the actual repairs are partially completed. A seller can elect to retain the insurance rights, and for uncompleted repairs still collect the full repair or replacement cost value from the insurer even though those costs are not spent.

For example, if a hurricane damaged a façade and it must be replaced, the policyholder can still collect the repair costs without actually completing the repairs to the façade. Usually, this requires a choice by the seller to apply such proceeds to another insured location, or to "other capital expenditures" unplanned as of the date of the loss. In the absence of such a choice, the adjustment reverts to recovery on an actual cash-value basis.

1. All or part of a claim can be assigned to a purchaser. In Florida, Louisiana, Mississippi, and most other states, any and all parts of an insurance claim are assignable. The anti-assignment clause in a typical insurance policy means only that the policy itself cannot be assigned without consent, but if the hurricane or peril is past, a claim itself is assignable. Thus, if the deal so warrants, a seller can simply assign all or part of a pending claim for property repairs or business interruption loss. The scope and nature of an assignment is negotiable between the seller and purchaser.

Hold insurers accountable

In short, the sale of a damaged property in the middle of a claim does not create a windfall opening for the insurer to escape from some or all of its insurance obligations, no matter how rights to insurance proceeds are negotiated and allocated between the seller and purchaser in their agreement.

Insurers may circle like sharks, sensing the opportunity to blunt their obligations. But there is nothing about the sale of a property that provides an insurer with the opportunity to sidestep its duty to pay.
Policyholders should insist that insurers adhere to their obligations.
Policyholders should carefully address assignment or other insurance-related language in purchase and sale agreements, loan documents, and other writings related to the transaction."

from National Real Estate Investor, July 2006
For more information see:

Wednesday, April 18, 2007

Damages to Building from Tenants

from The New York Law Journal, July 20, 2006


TAG 380 LLC v. JP Morgan Chase Bank, 300405 TSN 2005

On the First cause of action in an amount not less than $3,000,000., for
failure to restore the leased premises, 380 Madison Avenue, to their
original condition, with respect to alterations, upon the expiration of
the lease as set forth in §6.04 of the lease.

On the Second cause of action in an amount not less than $3,000,000.,
for failure to keep the leased premises in good working order and
condition as required by §7.01 of the lease.

On the Third cause of action in an amount to be proven at trial, for
failure to comply with §8.01 of the lease.

On the Fourth cause of action in an amount to be proven at trial, for
failure to comply with §§6.05 and 28.01 of the lease.

On the Fifth cause of action in an amount not less than $314,737.92 for
failure to pay additional rent as set forth in §3.02 of the lease.

On the Sixth cause of action in an amount not less than $64,764.65 for
failure to pay additional rent based on changes in taxes as set forth in
§3.03 of the lease.
This matter was referred to this court on April 24, 2006 for a trial.
During the trial the parties entered into a stipulation of settlement on
the record to resolve the Third, Fifth and Sixth causes of action, for a
total sum of $308,606.13 inclusive of interest through April 30, 2006.
The trial proceeded with respect to the First, Second and Fourth causes
of action.
Plaintiff alleges that at the time defendant vacated the premises it was
supposed to remove major tenant alterations such as:
A Glycol cooling system, double glazed windows on 13th floor,
supplemental air-conditioning units, a Halon fire suppression system,
Electrical and telecommunications wiring, a UPS system.
It is also alleged that defendant failed to make repairs to the building
plumbing system in the bathrooms, and that defendant failed to leave the
premises in good repair and broom clean condition, as evidenced by a
punch list of items in disrepair given to defendant on October 15, 2002.
Defendant counters that pursuant to §6.04 of the lease it was not
required to remove the major alterations, nor pursuant to §7.01 to
make repairs to the plumbing system in the bathroom. Finally defendant
asserts that it left the premises in good working order and in a broom
clean condition, ordinary wear and tear excepted, as contemplated in
§28 of the lease.
At trial plaintiff presented the testimony of four live witnesses,
Raymond Cuddy, the property manager at the subject premises; Ted
D'Alessandro, the building's chief engineer; Joseph Riccardi,
self-employed at Persistence Construction; Charles Guigno, managing
director of Stamack construction; and the video deposition testimony of
Steven Chapman taken on April 18, 2006. In 1993 Mr. Chapman was employed
by HRO International and was responsible for operations and construction
at the subject building.
Defendant presented the testimony of James Burgess who managed the space
at 380 Madison Avenue for defendant from 1998-2002; Jesus Soto a
maintenance handyman employed by Cushman & Wakefield at the premises;
and Joseph Gottdant, an electrician for 20 years, employed by Unity
Electric who performed disconnect work at the premises.
In 1981 Chemical Bank leased Six floors 9-14 at 380 Madison Avenue
(hereinafter the "premises") from Uris 380 Madison Corp. In 1989 the
15th floor was added and a portion of the 2nd Floor in 1997. In 1989 the
property was sold to 380 Madison Avenue Partnership, a wholly-owned
affiliate of HRO International, Ltd. Spartan Madison Corp., subsequently
became the landlord, retaining HRO as managing agent until February
2001. Plaintiff TAG 380 bought the lease to the building in February
2001 becoming the landlord one and a half years before the lease expired
in September 30, 2002. [see Defendant's Trial Memorandum]. Defendant
occupied the premises for a period of 20 years and made numerous
alterations to the premises, in accordance with the lease.
During the term of the lease defendant made numerous additions and
alterations to the premises. It installed a Glycol cooling system, which
is a massive installation of machines sitting atop the building's 13th
floor set back. It has heat exchangers, fans , pumps, switches, wires,
ducts and piping that run throughout the building from the 9th through
the 14th floor. It is also connected to supplemental air-conditioning
units throughout the building. This system along with the supplemental
air-conditioning system can only be removed at great expense and damage
to the premises. The systems are completely intertwined with the space.
To remove them the ceilings and floors have to be lifted. The
Supplemental air-conditioning systems, connected to the Glycol system
have duct work to vent throughout the rooms. There are pipes under the
floor tied into the base of the building to deliver water to the unit.
The components of the supplemental air-conditioning system are visible
throughout the seven floors [9th-15th]. The pipes, wires, ducts go
through walls, ceilings and floors.
Defendant also installed a Halon fire suppression system. It is tied to
the premises and can only be removed by taking out the ceilings, lifting
floors and going into walls, thereby causing extensive damage to the
premises. Additionally, defendant installed an Uninterrupted Power
Supply (UPS) system, weighing about 5,000 pounds, to insure power in the
event of a power failure. There are wires running through conduits,
cable trays and LAN rooms from one floor to another throughout the
premises. To remove the UPS system would cause damage to the premises
because would have to tear up floors and walls.
There are Electronic Data Processing cables that run throughout the
premises, through floors, walls and ceilings. To remove these wires
there would have to be major demolition of the premises. Ceilings,
floors and walls would have to be torn. These wires run to electric
closets that are kept locked by the landlord. In order for the tenant to
have access to these closets it must request it from the landlord.
When defendant vacated the premises it took photographs to show the
condition of the premises at the time. It also toured the premises with
a representative of plaintiff. During the tour defendant was not told
that it had to remove or replace anything. After defendant had left the
premises plaintiff served on defendant a punch list of items that needed
to be removed from the premises or repaired. The items that needed
repair were considered to be damaged beyond ordinary wear and tear.
Defendant concedes certain items on the punch list show damage beyond
wear and tear.
One of the items which plaintiff places on the list, which defendant
does not concede it is responsible for, is damage to the plumbing
fixtures in the toilets. Defendant asserts that landlord was responsible
for repairing these and that tenant was only responsible for the stalls.

In preparation for this litigation plaintiff asked Joseph Riccardi to
prepare an estimate of the cost to remove the items it claims must be
removed, to repair the items it claims must be repaired and to replace
the items it claims must be replaced. Mr. Riccardi took the punch list,
walked through the premises and placed a value on the job to remove
repair or replace the items on the list. He admitted that his estimate
is not accurate because he needs to have plans before he can make an
accurate estimate. He based his conclusions on the fact that the
premises are situated in a class "A" building and the Union trades must
be called in to perform the job. Mr. Riccardi estimated that in this
building it cost $500 to remove a steel clip, $1500 to remove paper from
a vent, $14900 to remove double glaze windows, $250 to replace a light
switch, to replace ceiling tiles $6200. He admitted his estimate is
inflated by 3-5% to compensate for the lack of plans.

Defendant presented the testimony of Jesus Soto, handyman at the
premises, and of Mr. Gottdant, the licensed Union electrician who worked
on the move out. They went through the list of items conceded by
defendant it needed to repair, remove or replace and arrived at a figure
far less than that arrived at by Mr. Riccardi. The number arrived at,
taking into consideration the cost of materials and total man hours is
$37,848 to repair, remove or replace items damaged beyond ordinary wear
and tear. On cross-examination Mr. Ricciardi conceded that if there was
no need to remove the Glycol system, then the cost of removing the
double glazed windows would be $5,000 to $6,000 dollars because only the
inside glazing, soffit and convector covers would have to be removed.
Removal of the glass alone would cost approximately $2,000 but there
would be a need for other people to do other things involved such as
Finally, plaintiff did not request defendant remove the Glycol cooling
system, Supplemental air-conditioning system, Halon fire suppression
system, UPS system, or Electronic Data Processing wires at the time of
their installation or within 30 days thereafter.
Ordinarily it is the court's responsibility to interpret written
instruments. In the interpretation of the written instrument the court
has analyzed the applicable provisions of the lease in their entirety,
searching for the probable intent of the parties. In searching for the
probable intent of the parties the fair and reasonable meaning of the
words control. When the terms of the contract are clear and unambiguous
the intent of the parties must be found within the four corners of the

The court should construe the contract with due consideration to
execution, circumstances and purpose and give the agreement fair and
reasonable interpretation. Primary attention must be given to the
purpose of the parties in making the contract. Further, the document
should be read as a whole to ensure that excessive emphasis is not
placed upon particular words or phrases.

In cases of doubt or ambiguity, a contract must be construed most
strongly against the party who prepared it and favorably to a party who
had no voice in the selection of its language. The same rules of
construction applicable to contracts generally apply in the
interpretation of leases.

The relevant clauses in the lease are clear and unambiguous.
§6.01prohibit tenant from making structural alterations to the
premises without landlord's prior written consent. It also confers on
Landlord the prerogative of approving contractors, setting the time and
manner work is to be performed, and compels tenant to obtain waiver of
mechanic's and other liens on the real property signed by architects
engineers, contractors, mechanics and designers involved in the work.
These unconditional waivers were to be delivered to landlord prior to
commencement of the work.
It therefore is a logical conclusion that prior to defendant's
installation of the Glycol System, supplemental air-conditioning system,
Halon fire suppression system , Electronic Data Processing installations
or UPS system the landlord had to be on notice that these systems were
going to be installed. Otherwise tenant would have been in violation of
this clause in the lease. There is nothing on the record of this trial
evincing tenant's non-compliance with §6.01 of the lease.
§6.04 makes all alterations of a permanent nature and which cannot be
removed without "damage" to the premises or building property of
landlord. Tenant shall not be required to restore the premises to the
condition it was prior to the alterations unless it has been so advised
by landlord within 30 days of approving the alteration or within 30 days
of submission of plans for the alteration if no approval is required.
Included in the list of alterations considered to be of a permanent
nature are stairways, slab openings, SPECIAL ELECTRONIC DATA PROCESSING
OR COMMUNICATION INSTALLATIONS, vaults, food preparation facilities,
private lavatories, projections rooms.
It is undisputed that following installation of these systems there was
no notice from landlord to tenant that the premises had to be restored
to their condition prior to the system's installations.

The only letter sent by landlord to tenant pertained to the double
glazed window s installed on the 13th floor set back. This letter made
reference to the Glycol cooling system, but it was sent years after the
system had been installed. §6.04 of the lease gives landlord only 30
days to request the restoration otherwise it is waived. With respect to
the Glycol system the landlord failed to act within the period allowed
by the lease, therefore it has waived the right to request the same be
§6.05 relates to MOVABLE PROPERTY and trade fixtures which remain the
property of the tenant and must be removed at the expiration of the
lease. If tenant intends to leave the property it must give landlord
notice no less than 3 months prior to the end of the lease. If tenant
fails to give such notice then landlord may remove the property at
tenant's expense.
There is no evidence that tenant sent landlord a writing to the effect
it was leaving property falling under this section in the premises.
Tenant failed to give landlord notice that it was leaving shelving,
blinds, projection screens, counters and signs. This movable property
belongs to tenant and it must be removed by tenant or by landlord at
tenant's expense. Defendant has conceded that it must remove this
property except for the projection screen. Defendant must remove the
projection screen from the premises or plaintiff may remove the same at
defendant's expense. Mr. Ricciardi makes an allowance of $6,000 to
remove the projection screen devises in the conference and training
rooms. Given that the witness numbers been have shown to be inflated,
this court will discount this figure by 50% and award plaintiff $3,000
for the removal of these devices.
Plaintiff argues that the Glycol system, air-conditioning system, Halon
fire suppression system, UPS system, Electronic Date processing
installations are all trade fixtures and fall under §6.05, because
they can all be removed.
The law of fixtures was evolved by the judiciary in order to ameliorate
the harsh result to those who substantially improved property but who
had less than a fee interest. The view in New York is broad. Here
machinery is deemed a fixture when it is installed in such a manner that
its removal will result in material injury to it or the realty, or where
the building in which it is placed was specially designed to house it,
or where there is other evidence that its installation was of a
permanent nature. Refrigerating machinery, boilers built into a
building, electric wiring, pipes to conduct electricity and gas from one
part of the building to another considered a part of the realty after
installation and not fixtures.

Under New York law, in order to promote efficient use of leased property
by a tenant, trade fixtures, which is a fixture or improvement that is
annexed to real property by tenant for purpose of carrying on its
business during a lease term, retains its classification as personal
property to the extent that it can be removed without substantial injury
to the freehold. The record is replete with evidence that removal of
the systems in question (Glycol, air- conditioning, electronic wires,
halon system, UPS) would cause material injury to the premises. Even if
we were to agree with plaintiff that these are trade fixtures under New
York law they lose their character because their removal would cause
injury to the premises.
The terms of the lease are clear and precise, these alterations are of a
permanent nature and property of the landlord. The terms of the lease
are controlling with respect to fixtures, their ownership and
entitlement to removal thereof.

Plaintiff requests repair to the bathrooms, however §7.01(b) confers
that responsibility to the landlord.
Landlord did not give tenant notice in accordance with §31.01of the
lease that tenant remove the Glycol system, Halon System, UPS system,
Electronic data processing wiring, supplemental air-conditioning system
at the time of their installation. These systems are not trade fixtures,
their removal would cause material injury to the premises and possibly
the building. Under New York law they are permanent installations that
fall under §6.04 of the lease. Pursuant to this section they are
property of the landlord and remain with the premises. However, tenant
was provided notice of the double glazed windows and must remove the
Tenant had to remove movable property unless it gave landlord notice at
least 3 months prior to lease termination that it intended to leave
them. There is no evidence that such notice was given. Under §6.05
tenant must remove this property or landlord may remove it at tenant's
expense. Tenant has conceded the removal of some of these items.
However, tenant must also remove the projection screen.
Under §7.01(b) landlord is responsible for repairs to electrical,
plumbing, heating, ventilation and air-conditioning systems of the
building as well as plumbing fixtures and plumbing hardware in the core
toilets. Therefore, tenant shall not be responsible for repairs to
toilets, plumbing fixtures or to convector covers in the bathrooms.
Accordingly, for the foregoing stated reasons it is the decision and
judgment of this court that the First cause of action is dismissed, the
Second cause of action is dismissed, on the Fourth cause of action
Judgment is awarded in favor of plaintiff and against the defendant in
the amount of $45,848.00 [$37,848 to replace ,remove and repair items of
ordinary wear and tear,$5000 to remove double glazed windows, $3000 to
remove projection screens]. The clerk of the court shall enter judgment
in favor of plaintiff and against the defendant in the amount of
$45,848.00 with interest from September 30, 2002, plus costs and
for more information see


Tuesday, April 17, 2007

Industrial floor measurement method

This standard was adopted by BOMA (Building Owners and Managers
Association) to address those situations not covered by BOMA's Office Floor Measurement Method.

from a presentation at the BOMA National Conference, June 2006

"BOMA recommends using the ANSI/BOMA Z65.1 (Office Standard) when occupancy of a building has 51% or more area devoted to offices. When building occupancy is 51% or more dominated by non-office users (including ground floor retail), the Industrial Standards should be used.

There are two different methodologies for measurement of Industrial

- Exterior Wall Method

- Drip Line Method

For the completed standard,

Exterior Wall Method:

- Originates from the need to measure fully enclosed industrial
buildings that are typically heated or air conditioned.

- The Measure Line follows the exterior surface of each
Exterior Wall of the building and forms a perimeter for the building.

- Definition: Refers to the outermost structural wall or
architectural treatment which forms the external perimeter of the building.

Drip Line Method

- Originates from the need in warm climates to measure
industrial buildings that are essentially wall-less structures.

- The Measure Line follows the most exterior drip line around
the roof system of the building and forms a perimeter for the building.

- Definition: Refers to that point beyond the Exterior Wall
lying within the same vertical plane as the outside edge of an overhang or portion of the building roof system.

The industrial floor measurement standard includes definitions that are not similar or not included in the Office Standard:

Demising Wall
Any interior wall dividing one tenancy from another, Office Area from other areas, and/or Finished Mezzanine from Storage Mezzanine.

Floor structures within the Exterior walls capable of supporting offices, warehousing or manufacturing activities (function of load bearing capacity and compliance with applicable building codes).

Rentable Mezzanine
Any Finished Mezzanine and/or Storage Mezzanine expressly agreed by the parties to be in the Gross Building Area.

Stand Alone Mezzanine
Any Finished Mezzanine and/or Storage Mezzanine that does not rest on any exterior wall.

Storage Mezzanine
Any Mezzanine constructed in accordance with applicable building codes other than a Finished Mezzanine.

Measure Line
Lines that form the exterior perimeter for the building, used in determining Gross Building Area.

Exterior Wall
Outermost structural wall or architectural treatment which forms the external perimeter of the building.

Office Area
An area within the building developed with a minimum of the following
Frame and drywall partition
Ducted HVAC
Fully finished floor covering
Lighting thru-out of not less than 50 foot candles at desk height
Electrical required by code

Rentable Area
Comprises the Tenant's Area with its associated share of Common Areas."

For more information contact Ed A. Ayres

Friday, April 13, 2007

Consent to a sublease

A subsubtenant sued its sublandlord, seeking damages and the return of
her property after the sublandlord allegedly forcibly removed [the
subsubtenant] from, and took possession of, her massage therapy
business. The sublandlord sought to have the suit dismissed.
Originally, a businesswoman had bought the sublandlord's massage
business and then subleased the premises. Those premises had been
leased by the sublandlord from a real-estate company. The record did
not show whether the sublandlord needed the owner's permission
before making the sublease agreement. The businesswoman then resold the
massage business to the subtenant who thereafter took possession of the
premises, [and] began renovations and conducted business therein.
The sublandlord claimed that the subtenant took possession of the
premises without her knowledge, and the businesswoman's husband
admitted that he sold the business to the subtenant without the
sublandlord's consent or knowledge. Thereafter, the subtenant
claimed that she paid rent directly to the lessor. Later, the subtenant
and the businesswoman each received a letter from the sublandlord
purporting to terminate the original sublease agreement between the
sublandlord and the businesswoman. The subtenant claimed that about
three months after receiving that letter, the sublandlord "and
others arrived at the premises and forcibly removed" the subtenant
from the store and discarded certain of her property.
Park v. Timber Creek Plaza, LLC 02-4929 (U.S. Dist. Ct. D. N.J. 2005)
(Unpublished) February 22, 2005 The subtenant alleged that the
sublandlord deprived her of her property without due process of law in
violation of the 14th Amendment of the Constitution. The District Court
dismissed that claim since "deprivation of property without due
process of law requires a showing of state action and the subtenant
failed to show that the sublandlord had exercised power "possessed
by virtue of state law and made possible only because the wrongdoer
[was] clothed with authority of state law."
The Court held that, in New Jersey, in order to recover under a claim of
forcible entry and detainment of property, the claimant must make a
showing of legal actual possession at the time of entry... as well as a
showing of legal entitlement to actual possession - although title to
the property is not required. The sublandlord argued that the subtenant
was not legally entitled to possession of the premises since she was not
a named party to any contractual agreement found in [the] record and
since she subleased the premises without the sublandlord's knowledge
or consent, thereby violating the terms of the original sublease between
the sublandlord and the businesswoman, thereby voiding the
businesswoman's sublease agreement with the subtenant. The Court
rejected this argument, finding that the businesswoman's
"failure to secure the permission of [the sublandlord] prior to
subleasing the premises would not by itself void that agreement"
since it is generally accepted that lessees may transfer their leases
despite restrictions in the lease against doing so.
Thus, the Court held that any sublease agreement entered into by [the
businesswoman] was not void ... for failure to obtain the
sublessor's consent. Additionally, the Court found that a dismissal
of the subtenant's claim would be improper since a reasonable jury
could conclude, based on the facts ... that [the subtenant] was in
actual legal possession of the premises on the date of the alleged
This conclusion was supported by the fact that the sublandlord entered
into a second sublease with the businesswoman in what appeared to be an
effort to circumvent the subtenant's entitlement to the premises
after the sublandlord and the businesswoman entered into their sublease
agreement. The Court likewise rejected the sublandlord's contention
that an unwritten commercial sublease is void since the rule had since
been changed. Finally, the Court held that since each party gave
dissimilar accounts of what had occurred, it was more proper for a jury
to resolve those factual disputes.
The subtenant sought damages for wrongful distraint, which the Court
referred to as the `seizure of another's property to secure the
performance of a duty, such as payment of overdue rent.'
The sublandlord argued that the Court had no evidence that the subtenant
owned any of the property distrained and, thus, [was] not entitled to
any damages. The Court agreed and dismissed the subtenant's
conversion, trover, and wrongful distraint claims since her evidence on
the issue of ownership was a mere scintilla and [was] not significantly
probative."from <
For more information see


Thursday, April 12, 2007

HINES puts BofA Tower on the Block 400M

Hines Interests LP is shopping one of the more recognizable towers in the city's skyline: the 1.3 million-square-foot Bank of America Center. The downtown landmark is not only expected to trade for top dollar, but could also attract some new investors to the city. Hines tapped Holliday Fenoglio Fowler LP to market the property for sale. A team of Jeff Hollinden, Glenn Whitmore, Scott Galloway and Mark Gibson has the listing. The 56-story tower at 700 Louisiana St. could pull in around $325 per square foot, which is on the upper end for trades in the city, according to a source familiar with the offering. That puts a price tag of about $422.5 million on the property. This offering represents a core asset with a value-add component in its rent roll, said the source. With an occupancy rate of 94%, there's still some upside to the building. Rents go for about $19 per square foot, according to CoStar Group information. The property is expected to attract a lot of interest. "This is the kind of asset that doesn't trade very often in Houston. It's the kind of asset that makes someone come to town for the first time," such as an offshore investor or large pension fund, said the source. Hines developed the property in 1983 and held it in its value-add fund. The local company is looking to take advantage of the fact that it's a good time to be a seller in this market. "We believe the present capital environment makes it the right time to bring this superior asset to market," said John Mooz, vice president at Hines, in a statement. "Taking this into consideration, we are hopeful this prime asset will create a new benchmark for Houston’s real estate market." For more information see:


A lease's late fee that compounds monthly may or may not be
reasonable; if a court finds it to be unreasonable, it should reform the
late fee provision to reasonably compensate the landlord for late rental
"A commercial landlord sought to evict its tenant for non-payment of
rent. The amount of rent allegedly due and owing was derived from past
due rent, penalties for late payment of rent, and fees associated with
utility services, which the lease agreement characterized as additional
rent. At the eviction hearing, the tenant stipulated that these types
of charges were in fact considered additional rent under the lease.
Nonetheless, the lower court concluded that these charges were not
`additional rent' and dismissed the complaint for lack of
subject matter jurisdiction. The Appellate Division disagreed with the
lower court. It found that the lease agreement specifically defined the
charges at issue as additional rent, specifically citing the following
text from the lease:
All rental payments and other charges provided for herein [including
utilities and late payment of rent penalties] shall be paid without set
off, recoupment, counterclaim or abatement of any nature whatsoever.
Rental and other payments shall be made without previous notice or
demand therefor[e] and shall for purposes of Landlord's rights,
including the nonpayment thereof, and for all other purposes for which
the same shall be relevant be deemed additional rent subject to the same
duties and obligations of Tenant with respect thereto and the same
remedies of Landlord for the nonpayment of basic rent.
As best as the Appellate Division could discern, the lower court also
held that even if late payment of rent penalties were deemed
`additional rent,' [the landlord] had (1) waived his right to
collect them; and (2) the late fee provisions in this commercial lease
agreement were unconscionable and unenforceable."
Shaffer v. Tiny Blessings II 2005 WL 3309792 (N.J. Super. App. Div.
2005) (Unpublished) December 8, 2005
A late fee of ten percent was to be assessed on the fifth day of the
following month. Essentially, the ten percent was to be compounded. In
its analysis, the lower court characterized this provision as onerous,
and noted, without specific reference to any authority, that:
`it is the policy of this State ... that [these] sort of
administrative fees need to be in some manner rationally related to the
[landlord's] administrative costs.
The Appellate Division disagreed that this late fee provision was
facially invalid. It pointed out that unlike residential tenancies, the
terms of commercial leases are almost exclusively derived by market
forces. Generally, a commercial landlord is free to negotiate with the
tenant the terms of a lease, including additional rent fees for late
payment of rent.
To the Court, this didn't mean that there need not be a nexus
between the amount of the fee charged, and any additional reasonable
administrative cost incurred by the landlord. A late fee provision in a
commercial lease is, at its essence, a stipulated damages clause. For
that reason, the Court, remanded the matter to the lower court to
develop a record to determine the reasonableness of the late fee
schedule. It ordered that if the lower court found the provision
compounding the late fees to be unreasonable, it should endeavor, to the
extent possible, to reform the contract to fulfill the parties'
original intent that the rent be paid on time and that the landlord be
reasonably compensation for late fees. For more information see:

Wednesday, April 4, 2007

Fitch projects 15% default increase in 2007 CMBS loans

Aggressive underwriting on securitized commercial real estate loans originated in 2007 will lead to increased defaults over the next decade, warns Fitch Ratings. The chief cause for concern is a reliance on continued property price appreciation to achieve positive cash flow. “Experience has taught us that continuously upward-trending rents and real estate values are not guaranteed,” says Zanda Lynn, managing director at Fitch Ratings, which tracks commercial mortgage-backed securities (CMBS). “In the overly optimistic view of the current market, future corrections or economic fluctuations are not contemplated.” Over the past decade, defaults among CMBS loans have averaged about 3.7% annually, according to Fitch, which considers a loan to be in default when a payment is 60 days or more past due. The rating agency expects to see approximately 15% more defaults over the 10-year term of loans originated in 2007, due to the combined effect of loans based on projected — rather than current — values, and aggressive underwriting that is enabling borrowers to take on total debt exceeding 100% of asset values. In some cases, debt service at the outset exceeds existing cash flow. Fitch researchers say the recent downturn in subprime residential mortgages should serve as a warning to investors about the dangers of mixing aggressive underwriting with reliance on continued price appreciation. Yet Fitch has reviewed underwriting on numerous office properties where existing cash flow was adjusted to reflect continued market and rental growth. In some cases, office leases that expire after the loan refinancing date are included in calculations as if they will generate rents at or above the market rate; in others, vacant space is considered leased at market rates. In retail, Fitch has reviewed underwriting that projects sales growth will continue uninterrupted and which assumes that tenants will renew at rental rates equivalent to a greater percentage of sales. In practice, however, retailers may deem a store uneconomic for continued operations when sales decline in relation to rent. On the hospitality front, Fitch has reviewed cash flows that anticipate increased revenue based on market growth alone, without the continual capital investment that is a necessity for hotels to maintain their market position. In some cases, revenue resulting from planned improvements is recognized in advance, despite the lack of money set aside to complete the planned upgrades. “Real estate professionals are structuring loans today with the expectation that cash flow will continue to rise in a commercial real estate market that has already experienced dramatic upward trends,” says Eric Rothfeld, senior director at Fitch. “Fitch is seeing the market financing the higher value prematurely based on the expectation that it will occur but well before it does, or does not, come to exist.” Market evidence argues both for and against Fitch’s default projections, according to Mike Straneva, Americas director of transaction real estate at Ernst & Young. Because cap rates are already at historic lows, significant price growth through cap-rate compression is unlikely, says Straneva. That could make refinancing difficult for highly leveraged assets and increase defaults, particularly if cap rates increase, Straneva says. “If your cap rate on an apartment portfolio was 6% when you bought it and now the cap rate is 7.5%, you just had a whole lot of value go out of your property,” he says. Yet, commercial real estate fundamentals remain healthy nationwide and could support double-digit rent growth in some tight markets, such as Los Angeles’ office market. That will create positive cash flow to help borrowers stay in the black. “People aren’t going to be bailed out by cap rates,” Straneva emphasizes. “On the flip side, there’s going to be real rental growths in many property types, and that in turn will cause cash flow to improve and will lower loan-to-value ratios.” Because approximately 70% of new CMBS loans are interest only (IO), or include an interest-only period, the bulk of defaults resulting from CMBS loans originated in 2007 may not occur until the loans require refinancing in 2017, says Lisa Pendergast, managing director of CMBS research and strategy at RBS Greenwich Capital. Regular payments on IO loans are smaller and easier to manage because the borrower isn’t paying on the principal. “The irony is that while IO loans will keep term defaults lower, they will work in unison with the very real potential that rates will be higher and property valuations lower (in 2017) to create a higher balloon default rate,” Pendergast says. By contrast, a borrower with a typical amortizing loan will have reduced the amount of principal owed on the property by 12% to 14% over the course of a 10-year term, reducing refinancing requirements. Pendergast applauds Fitch for spotlighting the aggressive underwriting in the CMBS market. However, she challenges rating agencies to keep credit-enhancement requirements in step with any increasing default risk. “If that’s truly how they [the rating agencies] feel, it would be good to see credit enhancement levels starting to increase,” she says. “If you think defaults are going to rise, then credit enhancements should not be falling.” For more information see;

Tuesday, April 3, 2007

Retail Investment Market COOL DOWN

Retail Investment Market Calms Down April 03, 2007 By Dees Stribling, Net Lease Correspondent
When it comes to investing in retail properties--which form the basis of roughly half of all net lease deals--an emphasis on quality is back, according to a recent report by Marcus & Millichap Real Estate Investment Brokerage Co. The rush to retail, while not over, has slowed down. "Borrowers will want to be aware of some trends that may develop in the months ahead," the report notes. "For one, distinctions based on asset quality will become increasingly apparent as the year progresses. Spreads on lower-tier assets, for example, are forecast to widen in response to slower economic growth, but on average, pricing is expected to stay attractive."
Unlike recently, investors won't find lenders quite so willing to lend to facilitate the acquisition of just about any sort of retail property, and buyers aren't quite as eager to buy, either. "Buyers are more careful in terms of underwriting and willing to pay less than a year ago," Bernard J. Haddigan, senior vice president and managing director of the national retail group of Marcus & Millichap, told CPNetLease. "There's still an abundance of capital in the market, but it's a little more selective." Also, according to the report, lenders may feel greater pressure from regulators this year as concerns about risk exposure intensify. In 2006, the Federal Reserve and FDIC warned that the concentration of commercial real estate loans had reached record highs and proposed guidelines to small lenders about overexposure to commercial properties. But such pressure might not even be necessary, especially if the U.S. economy cools a bit later this year. "Rapid price appreciation over the past few years alleviated some of the risks borne by lenders," the report notes. "With price growth cooling, lenders will apply more stringent underwriting standards for lesser-quality assets, particularly those with noncredit or low-credit tenants." In short, "quality matters--location, asset quality, tenant credit quality," said Haddigan. "Investors aren't dying to buy any retail property regardless of how marginal or bruised or how short the leases. It's two o'clock and the bar's closing. A bit of sobriety came back to the market." For more info: SEE