Wednesday, May 30, 2007

Hoston Texas 3rd in Nation Population Growth

Atlanta and Dallas have led the nation in population growth since 2000, but these Sunbelt metros continue to show stubbornly high office vacancy rates. The two cities added more residents than any other metro area in the country between April 2000 and July 2006, according to recently released statistics from the U.S. Census Bureau. Yet both markets are plagued by high office vacancies due to a steady flow of projects coming on line.
Demographics do matter a lot. But there are plenty of other considerations that investors
need to think about like new supply,” says Bob Bach, national director of
market research at Chicago-based Grubb & Ellis. “If a metro doesn't have
population growth, it'd better have barriers to entry.”
Partof the problem is that cheap debt financing and rosy economic forecasts have
spurred new, chiefly speculative, office projects. Both Atlanta
and Dallas grew
office supply by 1.1% and 1.3% respectively as a percentage of total inventory
in 2006, compared with the national average of 1%.
One enabling factor is that abundant land and development sites envelop both
metros. In 2001, for example, the total square footage of new office projects
completed in Atlanta and Dallas represented approximately 10% of all
office completions across the nation that year.
Atlanta is a case study in how busy developers can dilute leasing demand. The influx of roughly 890,000 new residents pushed metro Atlanta's
population up to 5.1 million last July. It was a similar story on the jobs
front: Labor growth increased by an average of 4.7% annually between 2000 and
2006, outpacing the national average of just 3.3%.
So why did the Atlanta metro office market post a 19.3% vacancy rate for the first quarter of 2007?

Some 3.7 million sq. ft. of office space came on line in the first quarter, and
60% of those projects occurred on a speculative basis.
“Atlanta is still recovering from the last recession
because the negative economic growth was much deeper there than in most other
cities,” says economist Rajeev Dhawan, director of economic forecasting at Georgia State University's J. Mack Robinson College of Business.

Brisk hiring over the past few years simply hasn't kept pace with the new office
supply, he says, notably in the metro market, where the office inventory grew
by 1.49 million sq. ft. in 2006, and only 47% of that new supply was
Over in Big D, the nation's second fastest growing metro since 2000 with 842,449 new
residents, new supply is also muffling population and job growth trends. With
roughly 5 million sq. ft. of new office construction in the pipeline at the end
of March, few expect the sickly 19.8% vacancy rate to suddenly contract.
Dallas ranked as the seventh
strongest office market for total leasing absorption during the first quarter,
with roughly 440,000 sq. ft. in net absorption. Dallas has the largest concentration of
corporate headquarters in the nation.
A favorable year-round climate and a high quality of life have attracted many
businesses to the sprawling city. Recently Comerica Bank announced plans to
relocate its headquarters from Detroit to Dallas, where it will
house 200 senior-level employees.
Corporate expansions are critical to any office market, but demand can easily be
sidelined by new supply. And to many market watchers, therein lies the rub. As
Bach notes, “It's just too easy to build in these markets.”
The office
vacancy rate among the top five fastest-growing metro areas averaged 15.4% at
the end of March, well above the national average of 13.1%.



Office Vacancy
Rate 1st Quarter 2007













Riverside, Calif.



* population growth from April 1, 2000 through July 1, 2006

Sources: U.S. Census
Bureau, Reis Inc.

for more information see :

Tuesday, May 29, 2007

Landlord's Can Enforce Parking Restrictions

After a pharmacy tenant moved into a center, other tenants complained that the pharmacy's customers were taking up too many parking spaces in the center's premium parking area.

"In response, the owner issued parking restrictions that allocated a set number of parking spaces to each tenant based on the size of its store. The pharmacy was allotted 6 parking spaces. The pharmacy asked a court to block the owner from enforcing the parking regulations, claiming that they violated the lease and would hurt its business.

from Commercial Lease Law Insider, August 2006

Pharmacy 101 Ltd. V. AMB Property, LP: No. 05-1386 Section: "A"
(3), 2006 U.S. Dist. LEXIS 39337 (E.D. La. 6/14/06)

A federal court refused to block the owner from enforcing the regulations. The center's tenants had an expectation of sharing the premium parking area, but that expectation was dashed when the pharmacy's customers started using up their parking spaces, the court noted. Because the owner had a duty to ensure that its tenants' space were suitable for their needs, the owner had good cause for issuing and enforcing the parking restrictions, said the court. Also, the lease's clear terms let the owner impose such restrictions. Plus, nothing in the lease guarantees [the pharmacy] full and unfettered use of the premium parking area. And the restrictions were reasonable because they were based on objective criteria – that is, parking spaces were allocated based on the amount of square footage each tenant leased." for more information see:


Thursday, May 24, 2007

Hines Lands Downtown D.C. Office Bldg. for $152.5M

Hines, the Houston-based developer, has acquired the 2100 M St. NW office building in downtown Washington, D.C., for $152.5 million, or about $500 per square foot. Prudential Real Estate Investors, on behalf of German institutional investors in U.S. Property Fund III, sold the property with a 99% occupancy rate. The eight-story building was constructed in 1969 and totals 306,663 square feet. It sits at the intersection of M St. NW, New Hampshire Ave. and 21st St., and houses major tenants such as Urban Institute, George Washington University, and Perkins+Will Inc. Prudential acquired the property in 2004 for $95 million. Cassidy & Pinkard represented the seller, while Hines utilized in-house representation. Hampton Cross of Hines will manage the property, and Richard Nelson of Hines will handle the leasing. Hines may develop an additional 100,000 square feet at the property, according to John Harned, a vice president with Hines. The Texas developer acquired the property through its U.S. value added office investment program. Hines manages or owns seven D.C.-area properties totaling 3 million square feet. For more information see:

$130 Million Missing???? 1031 Exchange in Trouble

Where to start with this story? It has so many moving parts and players: more than $130 million in missing money for starters, and criminal investigations, civil lawsuits and hundreds of real estate deals hanging in the works. Then likely to follow from it all could come additional scrutiny on the burgeoning 1031 tax exchange industry. The troubles came to light last week when The 1031 Tax Group LLC, a Richmond, VA-based privately held consolidated group of qualified intermediaries for deferred like-kind property exchanges, filed for chapter 11 reorganization in U.S. Bankruptcy Court for the Southern District of New York. Edward H. Okun is owner and sole "member" of The 1031 Tax Group. Also filing for chapter 11 were 16 other firms rolled up as subsidiaries of The 1031 Tax Group, each designated as qualified intermediaries created to service real property exchanges. The intermediaries are spread out across the country including in San Jose, Boston, Denver, San Antonio, Tampa and New York. For the record, the others are: 1031 Advance 132 LLC; 1031 Advance Inc.; 1031 TG Oak Harbor LLC; Atlantic Exchange Company Inc.; Atlantic Exchange Company LLC; Exchange Management LLC; Investment Exchange Group LLC; National Exchange Accommodators LLC; National Exchange Services QI Ltd.; National Intermediary, Ltd.; NRC 1031 LLC; Real Estate Exchange Services Inc.; Rutherford Investment LLC; Security 1031 Services LLC; and Shamrock Holdings Group LLC. 1031 Tax Group cited "liquidity issues" in its decision to file for bankruptcy protection, including the actions taken by several financial institutions in blocking access to 1031 Tax Group's funds. The debtors estimate that on a balance sheet basis their assets exceed their obligations to customers and others. Calling them liquidity issues is putting it mildly. The 20 largest creditors listed with the initial bankruptcy filing were listed as being owed more than $65 million. In a typical 1031 exchange, an exchanger sells its business or investment real estate and then has 45 days from the date of sale of the property to identify a like kind replacement property and it has 180 days from the date of the sale to close on the purchase of that replacement property without suffering any tax consequence. In order to preserve the tax deferral, the exchanger cannot take title to the proceeds of the first sale, but must instead deposit the proceeds with a "qualified intermediary," until such time that the exchanger is ready to close on the replacement property. In The 1031 Tax Group's case there were more than 300 open exchange contracts representing an estimated liability of $151 million outstanding at the time of the bankruptcy filing. Deals ranged in size from tens of thousands of dollars to $10.5 million. That means there are more than 300 individuals or business entities now bumping up against a 180-day Internal Revenue Service-imposed window to conclude the second half of their real estate exchange, or face tax burdens and penalties. According to court papers, lawyers have begun petitioning the IRS seeking relief and to avoid paying taxes on money that has disappeared. And according to The 1031 Tax Group's filings, it does not have that money to meet those property closing obligations. Where the money is, remains a mystery. According to Okun, owner of The 1031 Tax Group, in statement made in bankruptcy court filings, at least some of the money is tied up in frozen bank accounts. The largest amount is between $10.5 million and $19.3 million in an account at the Colorado Capital Bank in Denver. The bank has frozen those assets. Okun maintains the funds were deposited without his knowledge and against the 1031 Tax Group's approved practices. The 16 members of the group were supposed to deposit exchange money into a single, central account. However, according to bankruptcy court filings, the central account had only $76,000 in it and outstanding checks of more than $30,000. According to bankruptcy court records, a preliminary investigation by the U.S. Attorney's Office in Richmond, VA, has begun concerning the activities of the group. The U.S. Postal Inspector issued a federal search warrant in April prior to the bankruptcy filing for documents in connection with the federal investigation. Okun's lawyers say he is cooperating fully with the federal investigation and is complying fully with all requests. The date of the federal search warrant is important because the 1031 Tax Group isn't Okun's only troubles. On May 9, Okun and his affiliated companies reached an agreement to settle three separate lawsuits arising out of the termination of a merger agreement in which Okun agreed to purchase First Montauk Financial Corp. in Red Bank, NJ. Under the settlement, Okun agreed to invest $2 million in First Montauk through the purchase of preferred stock or convertible debt directly from First Montauk within 90 days after approval of the settlement by the federal district court, where three lawsuits are pending. The parties originally executed a merger agreement on May 5, 2006, under which affiliates of Okun would purchase all of the outstanding shares of First Montauk for $1 per share in cash. However, in December First Montauk reported that the merger agreement had been terminated by the Okun affiliates and three separate lawsuits by the parties followed. In February 2007, Okun, through affiliates, purchased additional shares of common and preferred stock of First Montauk, which gave him voting control of the company. Now, First Montauk officials have moved in New Jersey State Court to vacate the settlement agreement. The Montauk board of directors authorized the action after learning of the federal criminal investigation through the 1031 Tax Group's bankruptcy filings. According to First Montauk, the filings reveal that Okun affiliates transferred more than $100 million of customer funds entrusted to The 1031 Tax Group to another Okun affiliate. That money was originally deposited by customers and was to be held on a short-term basis pending reinvestment of the funds. Okun and his affiliates 'borrowed" the funds, leaving The 1031 Tax Group without the capital necessary to satisfy customer withdrawal requests. (Editor's Note: The 1031 industry has seemingly done a commendable job in self-regulation, but given the enormous amounts of money entrusted to 1031 intermediaries, is the industry ripe for abuse and in need of more state or federal regulation?

Read excerpts from pertinent follow up comments at the end of the story as they are added.) Critics say the size and extent of the Okun case highlights the need for greater oversight to protect investors from what they see as a major flaw in the like-kind exchange system - a lack of federal oversight on this legal way to shield capital gains from the IRS, according to a report by the Florida Association of Realtors. Pat McCaffrey, a representative of another national 1031 exchange company, Investment Property Exchange Services Inc., told the Florida Association of Realtors that the bankruptcy is "a black eye for the industry." "It's a non-regulated industry," McCaffrey was quoted as saying. "Anybody can hang up a shingle in their garage, and people will give them millions of dollars." McCaffrey says he would "welcome regulation," but in the meantime recommends that investors don't just ask a company if it's bonded, but also "read the bond and see what the bond will pay for." Currently, only one state, Nevada, regulates 1031 exchange intermediaries - but only minimally. "(1031 exchanges) are a niche industry," Chris Lee, deputy secretary of state of Nevada told the Florida Realtors group. "They've flown under the radar for a very, very long time. For the amount of money they handle, it's amazing that no one is regulating them." (Is the 1031 industry ripe for abuse and in need of more state or federal regulation? Let us know what you think, e-mail me at or check my web site at or

Wednesday, May 23, 2007

Matress Firm Explodes in Growth Mode

UPDATE: Mattress Firm Wakes Up Competitors with 4th Industry Buyout
Deal to Acquire American Mattress Stores Will Grow Portfolio to 511 Stores in 40 Markets
Mattress Firm, the Houston-based specialty-bedding retailer, continues to roll up competitors in its bid to become the largest mattress retailer in the country. The company has been engaged in a buying free-for-all and its latest acquisition seems the most brazen. Mattress Firm will acquire all of the leases of American Mattress, a young retail mattress company started by one of Mattress Firm's own founders, Paul Stork. Last August, Stork bought the Houston stores of the American Mattress chain with a pledge to rival Mattress Firm and poured $500,000 into revamping the stores. At that time, Stork was quoted as saying, "I wish I hadn't done such a good job building up The Mattress Firm....They have momentum going for them and that's tough to compete against." Apparently, Stork was right. The deal is currently in due diligence and terms were not disclosed. In march, CoStar reported that Mattress Firm had struck a deal to acquire Mattress Discounters of Upper Marlboro, MD, which grew its portfolio by more than 140 stores and opened the door to six new markets in MD, VA, MA, RI, NH and DC. That announcement followed closely on the heels of two previous acquisitions by the company: Phoenix, AZ-based Metropolitan Mattress and Las Vegas, NV-based Bedtime Mattress Co. The addition of American Mattress stores will bring Mattress Firm's portfolio to at least 511 stores in 40 markets across the U.S., when the deal closes. Mattress Firm traded hands earlier this year when Boston-based private equity firm J.W. Childs Associates acquired the retailer from Sun Capital Partners. The following timeline illustrates Mattress Firm's growth over the past five years: October 2002 - Boca Raton, FL’s Sun Capital acquires Mattress Firm from Bain Capital. At the time, the retailer had 175 company-owned and 125 franchised stores in 39 markets across the U.S. June 2006 - Mattress Firm acquires Metropolitan Mattress. The transaction involved 26 locations in the Phoenix area. Combined with Mattress Firm's 14 existing Phoenix locations, it brings the retailer’s U.S. store count to 340 locations in 32 markets across 19 states. All Metropolitan Mattress stores are remodeled with Mattress Firm signage, store format, and products. January 2007 - Mattress Firm is acquired by J.W. Childs Associates and becomes Mattress Holding Corp. The company has grown to 350 stores in 32 markets in 19 states. Mattress Firm’s CEO, Gary Fazio said of J.W.’s acquisition in a press release, "Their track record with other leading retail and consumer brands, coupled with our deep bench of talent throughout our organization, are the ingredients we need to accelerate our efforts to open new stores and new markets. This ownership structure gives us capital for growth and the ability to continue the momentum we've established over the past several years." February 2007 - Mattress Firm announces agreement to acquire Bedtime Mattress, Inc., which owns and operates 15 stores in the Las Vegas area under Bedtime Mattress and Mattress Direct brand names. The deal will bring Mattress Firm’s store count to nearly 370 stores in 33 markets across 20 states. March 2007 - Mattress Firm announces an agreement to acquire Mattress Discounters, which has more than 140 stores across the Northeast. May 2007 - Mattress Firm announces agreement to acquire leases of 13 American Mattress stores in the Houston area. Mattress Firm, ranked 25th in Furniture Today's Top 100 retailers, has not announced plans to close any acquired stores. Expect to see 30 to 40 new stores added each year; typical store sizes range 3,000 to 4,000 square feet, and match well with discount retail tenants. for more information see:

www. call Ed Ayres now 713 782-0260


Monday, May 21, 2007

Matrix of successful restaurant leasing

"All too often developers look to the perceived success of existing centers and believe in the me too simplicity of merchandising in lieu of a sound judgment decision based on analysis. Therefore, they leap over the data analysis that could have helped ensure merchandising and economic success or at the very least hedged their chances of failure.

Basic Building Blocks

Merchandise the restaurant tenant mix to the prospective demographics.
The lead indicator in demographics is, as always, population density both day and night, income and age. But the vast majority of restaurant sales is driven by two meals per day; therefore, the proximity, identity and specifics of the adjacencies make the daytime population a critical factor to a restaurant tenant's decision. The demographics used for retail tenants are not necessarily the same for the restaurant tenant, which requires a denser population within a smaller radius usually 1, 3 and 5 miles. As such, the development's marketing package should contain a separate restaurant data supplement that speaks to this specific required criteria, as well as the particulars of the daytime demographics, as well as that of the adjacencies to the development.
Take advantage of psychographics, which study how the demographic spends its money in correlation to its income.
Another consideration is the restaurant competition to the proposed tenant's cuisine within the radius to determine if a certain cuisine is over-restauranted in the developer's trade market.

Retail and entertainment tenants want to know that the restaurant mix will complement their customers, as they consider restaurants being their marketing partner to the public. Research the restaurant tenants within centers where they are currently most successful and compare the demographics to the specific development's demographics. Conversely, the vast majority of restaurant tenants want compatible retail tenants and, more importantly, a theater for the large number of bodies it brings to the center. A matrix of various cuisines and brands should be complementary — not competitive — thereby contributing significantly to sales, bringing potential customers to the front door.
This expands mealtime hours, and therefore the tenant can increase his pro forma sales, which will make tenants more apt to pay greater rent and take less tenant allowance.

Focus on the anchor restaurant tenant first. As in retail, restaurant tenants follow the most successful companies. Do not shotgun the restaurant tenant market, or there is a risk of having the tenant initially turn down the site, only to make it a more difficult task to sell that same tenant after the lease is signed with the anchor restaurant, as they would believe they would be at a disadvantage in negotiations. As there are relatively few national anchor restaurant tenants, developers look to multi-unit regional and local restaurants.
Be careful to investigate the tenant's ability to expand operationally.
Although the development and economics offered by the developer could be quite appealing to a restaurant tenant, if it is not organizationally staffed for expansion, it probably will not be capable of maintaining its quality in food and service, especially if the site is located outside the tenant's sphere of control geographically. Chances are, the tenant will fail. At which point there is a vacancy in the center that will cost additional tenant allowance dollars in addition to those already expensed to the initial tenant.

Review tenants' sales trends for at least the last 3 years. If a restaurant is open less than 2 to 3 years, the sustainability of the sales and concept is hard to determine, but nonetheless, it is a solid indicator of whether the tenant's restaurant is answering to the center's demographic.

Merchandise 3 tenants for each site and cuisine, as it is more prevalent in the restaurant business than in the retail business for a number of the tenants not to go forward due to insufficient capital and/or lack of adequate management.

An evolving trend has been high-end restaurants that have created polished casual caf├ęs as well as multi-concept growth restaurant companies that are non-chains. These are eclectic restaurants that extend beyond the brand of well-known successful operations. They are able to grow without leaving the current or adjacent trade markets while still taking advantage of the brand and its proximity to existing operational management.

Lease Economics

There seems to be a disconnect between a developer's expectation of restaurant lease economics and the reality of the restaurant's financial ability and experience. All too often the developer will prepare a pro forma and budget prior to merchandising the restaurants and/or assume that the economics of the deal, especially the rent, would be consistent with that of retail tenants or prior experience with other restaurant tenants. Due to the cost differences between restaurant and retail development expenses, the disparaging difference in usage of the gross leasable area and the percentage of sales threshold for rent, the economics of a restaurant lease must be determined based on its own industry and individual data. With proper analysis, the developer will be less likely to have protracted negotiations, will properly gage the tenant allowance and rental income and therefore will make the best possible deal with the most desirable tenant in the shortest amount of time.

The pro forma economics of rent, tenant allowance, landlord shell work and bankability of each restaurant tenant will vary by the brand, the size of the company, the type of cuisine, the historical cost to build, sales per unit, sales per square foot and net revenues as a percentage of sales, as well as food and labor costs. This due diligence and analysis will help the landlord to estimate the tenant's threshold for rent and thereby assist in qualifying a restaurant as a potential tenant.
Does the tenant have the equity to develop the restaurant above the landlord's tenant allowance? If not, a lease is being signed with an out provision for the tenant if he cannot raise the required dollars. Does the tenant have the financial capacity (bankability) to guarantee the lease? Small restaurant companies most often do not have the financial statements that would be considered bankable. Don't expect personal guarantees or cross-collateralization because small operators are understandably risk-adverse. The landlord should be prepared to take the financial risk if she wants the advantageous emerging restaurant concept that would set her center apart from others and bring the most traffic.

Before the lease economics are negotiated, establish the previous comparable center experience of the tenant. If the restaurant has not been in a center previously, and is not represented by highly experienced and trusted consultants, attorneys or brokers, the issues of gross rent vs. triple-net leases, percentage rent, and lease assignment and subletting — amongst many others — will become difficult barriers to completing a deal.

Today, restaurants have become an anchor. They help to
define and differentiate one development from another."



Message for office tenants:

This article related to Northern California, but may be relevant to your market also.
from Real Estate Forum :

"Do a deal as soon as possible, or you may lose the space you want.
And be prepared to pay higher rents. Tenants are about to experience `sticker shock' in the coming months. Construction costs are at all-time highs and to replicate the assets that we have is very expensive. Rental rates are not going to stay static; they are on the move and they are going to move dramatically. Tenants must move quickly or they are going to lose the opportunity."
from July 31, 2006
"…remember this was spoken by a landlord, but many of us representing Northern California office tenants fear this same trend is coming our way. However, we have seen some landlords much too aggressive in their pricing, raising asking rents too high too soon, while at the same time, there are tenants out there overly ambitious in their lease concession requests. It is often up to the astute brokers on each side to bring market reality into the picture."

Wednesday, May 16, 2007


This is a commercial holdover proceeding commenced by landlord by
service of a Three Day Notice of Cancellation of the Lease on Tenant

from New York Law Journal, July 26, 2006

"The parties entered into a commercial space lease for respondent to
conduct a restaurant business for a term of 5 years, with a 5 year
option to renew.

In the lease it was stipulated that the premises were to be used and
occupied as a restaurant and for no other purpose. Respondent was the
successor tenant to a prior tenant who also used the space as a
restaurant. The kitchen area is less than 25% of the total lease space.
On or about December 27, 2005, a fire occurred in the kitchen area in
the subject premises. According to an expert in the field of structural
engineering, the fire was started inside the exhaust duct in the kitchen
due to the over accumulation of grease and oil in the duct. The grease
and oil caught fire, and the heat from the burning grease and oil in the
duct caused the wood beams in the roof and ceiling to catch fire. The
wooden ceiling and roof beams were burned beyond repair. The walls
enclosing the kitchen were superficially charred, but they remained in
good condition with respect to structural strength. The kitchen floor
was superficially damaged from the water used to extinguish the fire.
The portion of the roof immediately surrounding the duct in the kitchen
was burned, but the balance of the roof remained intact. There was no
visible fire damage to the subject premises in the interior dining,
storage, bar and bathrooms areas. There was no visible fire damage to
the exterior of the subject premises or the adjoining storefront
commercial premises. Landlord presented no expert testimony or other
evidence concerning the estimated cost to repair or rebuild, or the fair
market value of the building or subject premises.
Landlord notified tenant in writing that pursuant to the fire clause of
the lease, landlord demanded that tenant vacate the premises and
surrender the lease within three days of receipt of the notice. Tenant
contends that landlord is in violation of the lease because the fire
clause under the lease obligated the landlord:

to repair the fire damage at [its] cost regardless of the fault.
Paragraph "Fourth" is the key provision in the lease concerning the
instant dispute. This paragraph provides:
If the demised premises shall be partially damaged by fire or other
cause without the fault or neglect of Tenant, Tenant's servants,
employees, agents, visitors or licensees, the damages shall be repaired
by and at the expense of Landlord and the rent until such repairs shall
be made shall be apportioned according to the part of the demised
premises which is usable by Tenant. But if such partial damage is due to
the fault or neglect of Tenant, Tenant's servants, employees, agents,
visitors or licensees, without prejudice to any other rights and
remedies of Landlord and without prejudice to the rights of subrogation
of Landlord's insurer, the damages shall be repaired by Landlord but
there shall be no apportionment or abatement of rent. No penalty shall
accrue for reasonable delay which may arise by reason of adjustment of
insurance on the part of Landlord and/or Tenant, and for reasonable
delay on account of labor troubles, or any other cause beyond Landlord's
control. If the demised premises are totally damaged or are rendered
wholly untenantable by fire or other cause, and if Landlord shall decide
not to restore or not to rebuild the same, or if the building shall be
so damaged that Landlord shall decide to demolish it or to rebuild it,
then or in any such events Landlord may, within ninety (90) days after
such fire or other cause, give Tenant a notice in writing of such
decision, which notice shall be given as in Paragraph Twelve hereof
provided, and thereupon the term of this lese shall expire by lapse of
time upon the third day after such notice is given, and Tenant shall
vacate the demised premises and surrender the same to Landlord. If
Tenant shall not be in default under this lease then, upon the
termination of this lease under the conditions provided for in the
sentence immediately preceding, Tenant's liability for rent shall cease
as of the day following the casualty. Tenant hereby expressly waives the
provisions of Section 227 of the Real Property Law and agrees that the
foregoing provisions of this Article shall govern and control in lieu
thereof. If the damage or destruction be due to the fault or neglect of
Tenant the debris shall be removed by, and at the expense of, Tenant.
At the outset it is clear that the fire clause constitutes an express
agreement which excludes the operation of section 227 of the Real
Property Law. The fire clause in the lease also provides that:

(1) if the subject premises should be partially damaged by fire by no
fault of the tenant (they should be repaired by the landlord, and until
such repairs are made the rent shall be abated or shall be apportioned
according to the part of the subject premises which is usable by tenant;

(2) however, if the subject premises should be partially damaged by fire
by the fault or neglect of the tenant they should be repaired by the
landlord, and the tenant shall pay rent without apportionment or
abatement; and

(3) if, however, in the event subject premises should be totally damaged
or rendered wholly untenantable by fire and the landlord decide[s] not
to restore or not to rebuild the [demised premises], or if the building
is so damaged the Landlord decide[s] to demolish it or to rebuild it,
then the landlord may elect to terminate the lease by written notice
sent to the tenant by regular and certified mail.
The fire clause of the lease is divided into two categories of damage to
the demised premises and/or the building: the first category is partial
damage, and the second is total destruction or substantial destruction.
Only the category of total or substantial destruction gives rise to the
landlord's right to terminate the lease.
The specific language in the fire clause in the lease that covers total
and substantial destruction provides:
If the demised premises are totally damaged or are rendered wholly
untenantable by fire or other cause, and if Landlord shall decide not to
restore or not to rebuild the same, or if the building shall be so
damaged that Landlord shall decide to demolish it or to rebuild it, then
or in any such events Landlord may, within ninety (90) days after such
fire or other cause, give Tenant a notice in writing of such decision,
which notice shall be given as in Paragraph Twelve hereof provided, and
thereupon the term of this lese shall expire by lapse of time upon the
third day after such notice is given, and Tenant shall vacate the
demised premises and surrender the same to Landlord.

This language is the choice of the parties and must be construed
This is not a case of total destruction, or substantial destruction, as
has been considered in other cases.
The Landlord concedes that the subject premises was not totally damaged
and that the building was not so damaged that Landlord… decided to
demolish it or to rebuild it. Instead, landlord contends that the fire
rendered the subject premises wholly untenantable.
What did the parties intend to mean when they chose the words wholly
untenantable. A review of Friedman on Leases some guidance in defining
the meaning of untenantable. It provides as follows:
"Premises are not untenantable merely because damage has made them
unsatisfactory for the normal conduct of a tenant's business.
Untenantability is like destruction in that it means substantial damage
to a structure. Untenantability…has been defined as damage of such
nature that the premises cannot be used for the purpose for which they
were rented and cannot be restored to a fit condition by ordinary
repairs made without unreasonable interruption of the tenant's use…
Thus, the term wholly untenantable contemplates circumstances where the
fire damage was so extensive that it consumed and totally destroys a
substantial part of the building itself, or the subject premises, and
the premises no longer existed as a restaurant for the purpose for which
it was intended by the parties. The word untenantable is preceded by the
qualifying word wholly. By the use of this qualifying adjective, the
parties intended to reinforce the notion that the parties intended that
the damage be substantial and total in nature, and not partial. The
phrase wholly untenantable, is placed in the agreement in that part that
contemplates total or substantial destruction of the premises. By
placing the phrase where it has been placed in the fire clause, for the
purpose of characterizing the extent of damage which was to give rise to
the right to terminate the lease, the parties must have intended it to
mean more than partial damage, and more than the destruction of only a
part of the subject premises, as shown by the evidence here.
Friedman on Leases states:

structural damage is essential to untenantability. Damage that makes use
of leased property unpleasant and inconvenient for the conduct of a
tenant's business is not untenantability. Neither is damage that makes
the premises completely, but briefly, unusable . . . In all the
situations where structural damage is slight and restoration is possible
within perhaps a couple of weeks, . . . claims of untenantability are

In this case, the structural damage was slight and limited to the
ceiling and roof, and restoration was possible. Although, the fire
damage and smoke may render the use of the subject premises unpleasant
and inconvenient for the conduct of respondent's restaurant business
temporarily until properly repaired, such damage does not render the
premises untenantable. The subject premises was not untenantable merely
because the fire damage made the premises completely, but briefly,
Here, the right of the landlord to terminate the lease arises only if
the subject premises is either totally or substantially destroyed such
that in a practical sense it loses its character as a restaurant. The
evidence here does not establish such total or substantial destruction
such that the premises lost its character or identity as a restaurant,
to the degree that it could not readily be restored within a reasonable
time by repair.
Finally, the Court notes that this matter does not turn solely upon the
wishes of the landlord or its apparent financial interest. The interests
of both parties must be considered by the Court. In the five month
period that respondent was in possession of the subject premises, prior
to being forced to close its business due to the fire, there was some
evidence that respondent invested substantial funds into the business,
including expenses such as renovations, and leasehold improvements
(i.e., installation of a HVAC system). The forfeiture of respondent's
long-term leasehold may provide a windfall to the landlord, while at the
same time, cause the respondent to suffer substantial economic loss.
As there is here little or no structural damage, and there is no
evidence of a health or public safety reason for terminating the lease,
the Court finds that the demised premises was only partially damaged by
the fire and that the fire damage was not so severe as to render the
premises wholly untenantable, entitling the landlord to terminate the
lease. Except for the incidental inconvenience and temporary
interruption of the conduct of respondent's business that may be caused
to perform repairs, landlord presented insufficient evidence to show by
a fair preponderance of the evidence that respondent could not continue
in occupancy and use substantially in the manner and extent as it had
occupied and used the subject premises prior to the fire. Therefore,
landlord has failed to establish the factual prerequisites that would
entitle it to terminate the lease pursuant to the lease agreement.

Conclusion: Accordingly, judgment in favor of the respondent and the
petition is dismissed."

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Thursday, May 10, 2007


Hines Tees Up Another Houston Offering

The Houston office investment sales market is getting impossibly crowded. Local player Hines is shopping another Houston office property, the 542,458-square-foot office tower at 919 Milam St. downtown that it owns through a venture with California Public Employees' Retirement System (CalPERS). The venture, known as National Office Partners LP, tapped Holliday Fenoglio Fowler LP to market the property for sale. HFF is also shopping the 1.2 million-square-foot Bank of America Center at 700 Louisiana St. for Hines. The Hines/CalPERS venture paid $42.6 million, or around $78.49 per square foot, to acquire the property at 919 Milam in 2005. This time, it should fetch more than double that amount. The property reportedly could trade for about $200 per square foot, which would put a sale price in the neighborhood of roughly $108 million. HFF did not immediately return calls for comment. The property is currently 77.9% leased with rents averaging $17 per square foot, according to CoStar Group information. The building, which occupies a full city block bounded by Travis, Walker, Milam and McKinney streets, was developed in 1956 and renovated in 2006. It has a new four-level parking garage for 300 cars at the base. The offering will face a lot of competition. In addition to the Bank of America Center -- which is expected to fetch more than $400 million -- there are at least a dozen office properties on the market in Houston right now. Local players chalk the supercharged sales activity up to several factors, from the city's strong ties with the oil industry, a recent investor attraction, to the unprecedented amount of capital looking for real estate investments in secondary markets. For more information see : or

Thursday, May 3, 2007

Wilson Industries signs 450,000 sq ft lease

Wilson Industries Inc., a leading manufacturer of drilling and pipeline supplies, signed a lease for 450,000 square feet at Underwood I distribution facility at 359 Old Underwood Road in LaPorte. It intends to move into the facility in August. The 900,000-square-foot distribution facility was completed last year. It features 32-foot clear height and a Union Pacific Rail Line. Gary Mabray of Colliers International represented Wilson Industries Inc. Robert and Albert Clay of Clay Development represented the landlord in-house. for more information see ; or

Class A buildings

ffice tenants seek Class A office space for many reasons, including upgrading or maintaining their firm's image, providing clients and employees with a better amenities, or to justify rents at an existing location.

from The Business Journal of Phoenix, July 28, 2006

"Many business owners would like to believe their office buildings are Class A, but determining whether a building is Class A is almost as logical as choosing Taylor over Kathryn on American Idol.

Commercial real estate firms continually research building classifications to understand what determines top of the market and rate office buildings using several criteria. As new properties are developed and the market changes, classifications can be a moving target.

Most experts agree Class A space typically makes up the top 10 percent of the market. What experts cannot agree on is what factors are used to determine that top 10 percent.

The benchmark rental rates for any office market are found in the top-performing Class A projects, and those rents set the tone for rates in new Class A projects under development.

To see how your building and others measure up, consider the following

There typically are one or two key intersections or thoroughfares in every metropolitan area that everyone agrees are Class A locations that consist of "main street and main" -type concentrations of developments.
All real estate decisions typically revolve around location. Is the property highly visible? Is there easy access? Is the neighborhood conducive to a professional office environment? And, the most important locational consideration is whether this is the place where your enterprise will achieve the greatest success.

The industry generally agrees that today's Class "A" office building has large, column-free floor plans that provide 25,000 to 50,000 contiguous square feet per floor. A central lobby readily guides visitors to their destination; and the building complies with governmental regulations, current zoning and the Americans with Disabilities Act.

While various architectural styles and construction methods may be employed, the building design and materials must have an element of timelessness to be considered among the best in the market. It cannot look "old" in five or 10 years. At the same time, a building does not qualify as Class A simply because it is new construction.

Some of the most important physical features of a Class A building include telecommunications and information technology infrastructure necessary to adapt with modern technology, as well as up-to-date electrical, mechanical and plumbing systems.

Building operations and management
Building operations and management may be the most obvious factor in determining if a building fits into the upper echelon of the market. Is there an on-site management and engineering presence? Are common areas and exteriors well-maintained? Most people can sense this by just walking through the building lobby, speaking with tenants or using the washroom.

Class A office buildings should feature an on-site, readily identifiable management staff with daily, ongoing maintenance and cleaning services.
Systems should be in place to quickly and professionally address tenant needs. If the building owner is the person who changes light bulbs and unclogs toilets, the building is probably not Class A.

A long list of popular building amenities exist in Class A buildings, and firms have their preferences. Most agree that on-site or proximate food and sundry services are important, but some also want a health club, valet parking, concierge service, child care, shoe shine, upscale retail, auto detailing and repair services.

What is realistic?
Is your ideal environment a trophy office project, a shopping center, or a mixed-use project?

Look closely at your company
Class A amenities have a positive impact on employee productivity and enhance the experience your clients have when visiting your office.
Amenities also should simplify and improve life for you and your company.

There is only one judge -- the tenant.

Create your own definition of Class A and find a building that facilitates the success of your business. Speak with your real estate agent and determine the amenities and features that are essential to attract employees, serve your customers and build your business. The companies who pay rent have the power to define a building's class through their checkbooks and tenancy. You are the judge." for more iinformation see: