Thursday, March 27, 2008

GE Real Estate Buys 206,000-SF Office Bldg. in Houston

GE Real Estate purchased Oak Park Office Center II, a 206,362-square-foot Class A office building in Houston, TX, from Realty Associates Oak Park II LP, a development venture between TA Associates Realty and Myers, Crow & Saviers Ltd. for an undisclosed amount. Harris County Appraisal District values the property at about $16 million, or about $77.50 per square foot. Completed in 2006, Oak Park Office Center II is fully leased to The Men’s Warehouse corporate headquarters. The office is on 18 acres at 6380 Rogerdale Road in the Oak Park Business Park, near the Westpark Tollway and Sam Houston Parkway. Oak Park Office Center II has been pre-certified by the U.S Green Building Council (USGBC) to meet the LEED Core and Shell requirements for the design and construction methods. HFF managing directors Robert Williamson and Jeff Hollinden, and Barbara Guffey, an associate director, led the investment sales team on behalf of the seller. fOR MORE INFORMATION SEE: www.houstonrealtyadvisors,com or

Wednesday, March 26, 2008

Expecting the unexpected: Being prepared with facilities data

"Over the past year, since the string of natural disasters that affected organizations across the globe, many have revisited what constitutes best practice in disaster planning and risk mitigation.
Recent events are a strong reminder that every organization - from government agencies to corporations - need to have disaster plans in place and be able to execute them well. And although effective plans involve a wide variety of functions within an organization, facilities managers and planners are often on the front lines of this issue.

Regardless of the nature of the crisis, whether it is a major hurricane, minor flood or a power outage, accurate, detailed information about an organization's facilities, their major systems, and functional uses is the foundation for making optimal decisions about how to redeploy resources and rapidly resume operations. This data forms the basis for establishing an effective in-case-of-emergency plan.

Organizations should at a minimum document the condition and replacement value of each building structure and its vital organs, such as the main fire, natural gas and domestic water valves, emergency generators, elevators, chillers, alternate portable water sources, and underground storage tanks. Other critical data includes access control information and equipment shutdown procedures. Organizations may also consider maintaining a detailed inventory of equipment and furnishings, which can not only enable them to better prepare a facility for operation after a disaster strikes, but also provide detailed documentation to support insurance claims.

Many organizations also are beginning to evaluate resistance factors for each facility. Depending on a facility's location, such factors may be calculated based on the ability of a facility to withstand excessive winds, the capacity of storm systems to accommodate heavy rains, or the ability of structural systems to support massive snow loads caused by blizzards. The standards for these factors will be developed over time, but eventually will create a metric from which facilities can be compared.

Based on assessment results, organizations can take short-term steps to mitigate potential business interruption by adding emergency generators, moving switchgear and other critical electrical and mechanical items to higher floors, and reinforcing building shells. In Miami, for example, a hospital added a fiberglass skin reinforced with concrete to its 1986 structure to help the building withstand the 178 mph winds of a category four hurricane.

Evaluating risk

Capital improvements targeted at enhancing disaster preparedness are often costly, and outside the scope of existing capital plans. For example, the American Hospital Association reports that the cost of an improvement specifically related to disaster preparedness is $2.93 million on average, but can run much higher. While these types of improvements may reduce damage in future hurricanes, they will not protect against other disasters. This illustrates a common misdirection in some organization's disaster plans. They anticipate and plan to meet a disaster very similar to the one they just endured. But all disasters, even those of the same type, do not follow the same script and do not require the same response action.

It is not possible, either financially or physically, to prepare for all possibilities. Therefore, risk analysis is an important component of disaster preparedness, balancing the probability of an event with its severity and impact. Organizations with a holistic picture of their facility portfolio are best positioned to project the impact of various disaster scenarios on future capital plans and to weigh various response alternatives. Again, comprehensive facilities data is the foundation for such a capability.

Data from anywhere, anytime

While disasters may strike without warning, there is often some forewarning, however brief, that can provide time to react to minimize resulting damage to life or property. While this was the case for last years' hurricanes in the Gulf region, different organizations'
reaction and response varied dramatically. Those with current and accurate information about their facilities were among the best prepared to take action to ensure business continuity.

For example, prior to Hurricane Katrina's landfall, a manufacturer located in New Orleans was able to analyze its facilities data to pinpoint its most vulnerable facilities based on their specific location and construction type. A crosscheck of the functions performed in these facilities highlighted a risk to the central payroll operations. The company was able to quickly identify an appropriate, underutilized site within its portfolio to relocate its headquarters operations and was able to execute the transfer of operations of critical functions prior to onset of the hurricane. As a result, paychecks to its employees across the country were issued without interruption.

Of course, good facility information is only valuable if access to the data is not affected by the disaster. In the past, a comprehensive and well-organized plan room was considered a best-in-class approach to supporting the operations team in its disaster response. However, if such a plan room is in the path of the disaster and suffers damage, the organization's ability to respond effectively can be significantly impaired and the loss of data can be crippling. Today, best practices dictate that this information be stored electronically in multiple locations to minimize the impact of a single event.

Assessing the damage

In the wake of a major disaster, damage assessment can be a particular challenge for organizations with dozens or even hundreds of affected properties. Those with well-documented information about pre-disaster facility condition are much more readily able to pinpoint those facilities that are at greatest risk of damage and determine how to prioritize the assessment process.

In some cases, damage to structural integrity or specific building systems may not be obvious. Following up on the initial triage analysis with professional assessments of specific facilities or systems can enable organizations to respond quickly and cost effectively to initial assessment needs, while developing accurate estimates of repair costs.

An organization's pre-existing assessment data can be used to make initial assessments much more efficient. For example, resistance factors can be used to predict damage levels associated with a disaster before anyone returns to a facility. This data can be used as a metric to predict the location of areas of greatest damage, and which facilities should be rebuilt rather than repaired.

Managing the recovery effort

Once initial contingency plans have been executed, and a return to at least skeletal operations is complete, the longer task of reconstruction must begin. In the case of Hurricane Katrina, the most common types of damage sustained included power outages, water intrusion, power distribution equipment damage, structural damage, mold build-up, broken windows, and major roof damage and leaks. Based on the extent of damage, corporations can expect to spend between 50 and 100 percent of an asset's replacement value to cover major repairs to full replacements. Organizations often choose to upgrade these systems in the course of repair or replacement.

Businesses that have comprehensive facility data management systems have an advantage in reconstruction as well. They more readily can make well-informed remediation decisions quickly, which often come down to a decision to repair or to rebuild. A facility with a pre-existing condition index at the high end of the scale, for example, will be a likely candidate for rebuilding rather than repairing.

Quick remediation decisions can help companies stay ahead of the rush for building materials and labor resources, which can become scarce and expensive after a disaster. In the aftermath of the Hurricane Rita, for example, the cost of fuel and raw materials, and the difficulty in transporting goods around the region posed an ongoing challenge. The longer an organization takes to determine the scope of necessary projects and to schedule them, the more likely they will face higher costs for labor and materials, as well as a longer timeline for project completion. Arranging for contracts with service contractors prior to the emergency allows for the up-front negotiation of costs and service terms.

Building it better than before

As the rebuilding effort proceeds, the lessons learned over the past year are leading many organizations to implement upgrades to existing facilities to better protect them against severe storm damage, and to more carefully consider disaster preparedness when undertaking new construction. Realistically weighing the risks and benefits of such upgrades is important to making decisions about how to allocate limited resources most effectively. There are a wide variety of factors that organizations need to consider in such an analysis, including:

* The mission criticality of the facility
* How tailored the facility is to its specific function
* The current facility condition index (FCI)
* The current resistance factors of the facility
By creating a standard set of factors that are evaluated in making decisions about upgrades related to disaster preparedness—including some that may be very specific to the organization's particular mission and objectives—it can create quantifiable analysis criteria.
Such an approach enables objective decisions about what can be emotional and subjective issues, and helps organizations make investments that will serve them well the next time they face the unexpected.

Consider a centralized system for facilities data

Having facilities data that is accurate and complete, and contained in a centralized system that provides the ability to both conduct what if scenario analysis and create project plans is critical to creating a timely recovery plan for several reasons:

The organization can more readily identify those facilities that are at greatest risk of damage prior to the disaster, and begin remediation actions.

Following the disaster, it can better prioritize the assessment effort.

Armed with the data and analysis it needs for quick remediation decisions, it can be first in line for hard-to-come-by construction staff for the rebuilding effort (as well as ahead of the curve as construction materials costs rise).

It will have hard data on which to base requests for funding for repair work from within the organization or from an insurance company, rather than relying on formulas or industry standards that may significantly underestimate actual costs."

Consider a centralized system for facilities data

Having facilities data that is accurate and complete, and contained in a centralized system that provides the ability to both conduct what if scenario analysis and create project plans is critical to creating a timely recovery plan for several reasons:
* The organization can more readily identify those facilities that are at greatest risk of damage prior to the disaster, and begin remediation actions.
* Following the disaster, it can better prioritize the assessment effort.
* Armed with the data and analysis it needs for quick remediation decisions, it can be first in line for hard-to-come-by construction staff for the rebuilding effort (as well as ahead of the curve as construction materials costs rise).
* It will have hard data on which to base requests for funding for repair work from within the organization or from an insurance company, rather than relying on formulas or industry standards that may significantly underestimate actual costs." For more information see: or

Thursday, March 20, 2008

Texas Real Estate Economic Data

The current conditions in the US real estate market precipitated by the failure of many subprime loans to home owners have created financial problems for developers and builders. It has slowed the velocity of land transactions and the construction of houses and developed lots. The number of buyers of real estate competing for quality real estate investments has become extremely limited.

In Texas, the developing shortage in inventory of houses and lots will set the stage for price increases as financing for home buyers become more available. Increasing construction to meet the new level of demand will be operating in a market with shortages in both new homes and lots. The price increase will occur in housing, lots and land for new subdivisions.

The Texas land market is stable and few tracts are discounted. However, some developers and investors with debt obligations that are difficult to meet are presenting opportunities. This is the time for those with capital to move into the market and purchase tracts at a discount. For those that have good positions in property, it is a time to be patient because significant price escalations appear likely as the market settles back to normal

The housing market in the United States in 2007 and 2008 has been subjected to the worst financial crisis in more than 30 years. The precipitating cause was irresponsible management of the mortgage business by the financial institutions.

The result of subprime loans made to home buyers who were not qualified was a large number or foreclosures which created excessive inventory of homes on the market. In overheated markets, speculators were forced to put homes, held for investment, on the market; thus further increasing the inventory.

The financial problems among lenders have made buying a house with mortgage financing difficult. This has created financial problems for developers and builders and decreased the construction of new homes and the value of those homes on the market. Builders are selling their housing inventory at losses. They are suffering with reduced cash flow and dealing with debt obligations that are difficult to meet.

The lenders and the purchasers of mortgages in the secondary market have taken huge losses. The money available for new loans has been greatly reduced.

The foreclosures and inventory buildup in the housing market is focused mostly on starter homes, which is the group heavily financed by subprime lending. It is also focused on particular geographical areas of the US. However, the problem in the financial sector has impacted all housing negatively.

The decrease in home building will help reduce the excess of housing in the marketplace. It appears that home construction nationally will bottom out in the fourth quarter of 2008 at less than 1 million units per year. The peak of home building occurred in 2005 at approximately 1.8 million units.

All but 10 states have maintained a positive appreciation in house value through 2007 and into 2008. States with the greatest foreclosures and inventory excesses were those that suffered depreciation in home values. The states with the greatest depreciation were Michigan, California, and Nevada. The financial crisis affects all states. Most of the severe problems are in the 10 states showing depreciated values. These states had an overheated market with an unusual and unrealistic appreciation in home values over the last 3 years

Texas had an appreciation of 6.3% in house values for 2007. Its value appreciation in houses has been steady and at a normal sustainable rate. Construction also has been at reasonable rate and the inventory of homes stayed at a comfortable balance with absorption.

The Texas housing market is one of the strongest and most stable markets in the USA at this time. The evaluation of the Texas real estate and housing markets is done in the context of the USA as a whole. Employment and population are the driving forces creating the demand for real estate and homes. The supply of houses and other real estate elements compared to their demand effects construction rate and value changes.

In 2007, Texas job growth was 2.1% and lead the nation in both percentage growth and absolute number of jobs created. Job growth in the US was 0.9% in 2007. The job growth in Texas of 218 thousand exceeds Florida and California which had 86 thousand and 79 thousand respectively. Texas represented over 16% of total USA job growth in 2007.

Texas population grew over 3 million from 2000 through 2007 and again led the nation. Texas and California will lead the nation in population growth through 2030 according to the US Census Bureau. The growth for Texas is projected to jump from 20 million in 2000 to 33 million by 2030.

Houston had job gains in excess of 96 thousand in 2006 and in excess of 95 thousand in 2007. Houston led the state in 2007 in job growth and was followed by Dallas/Ft. Worth with 83.5 thousand, Austin with 30.5 thousand and San Antonio with 24.2 thousand. Both Houston and Austin had job growth rates of approximately 4.0% in 2007. Clearly, Texas and its major cities are having exceptional growth.

The median price home in Houston is $152 thousand while the median price in Los Angles is $ 589 thousand, Miami is $365 thousand and New York is 540 thousand. This difference in home costs is even more dramatic if the household income for each city is considered. The 2006 median household income for Houston was $57 thousand, for Los Angeles $62 thousand, for Miami $45 thousand and for New York $60 thousand. There is little difference in income with a large difference in home costs.

The affordability of housing and the low cost of living in Texas create an atmosphere to attract jobs and retain population. Thus the demand for real estate continues to grow.

Texas has a balanced housing and developed lot inventory. In Houston the inventory is 3 months for new homes and 6 months for resale homes. The average day on the market for resale homes is a reasonable 85 days. The vacant housing inventory in California is as high as 44 months. In Reno, Nevada the inventory is 13 months and is 12 months in Las Vegas.

Prior to the subprime lending crisis, Houston and the major cities of Texas had a comfortable to tight balance between construction, inventory and sales of homes. The lending crisis impacted sales and put additional homes in inventory. This caused the builders to reduce production.

Home construction in the US has fallen between 35% and 40% to date and will fall to approximately 50% in 2008. Construction should begin to recover in the US by the last quarter of 2008. California, Nevada, and some locations in Florida will recover later.

Home construction in Houston was down 25% in 2007 and is possibly going to continue to fall until mid 2008. Annual sales in Houston are significantly down in housing below $200 thousand but sales are ahead in housing above $200 thousand. Houston responded early to the housing slowdown. New housing starts have been less than sales in the Houston market since the end of 2005.

The impact on Texas of the housing slowdown as a result of the national financial crisis in the US will begin to correct by mid 2008. Extremely strong job growth and population growth over the last few years has continued to create demand for housing and other real estate and muted the impact of the inventory and financial issues.

The subprime crisis created several problems which affected the Texas housing market. It retarded mortgage lending in general for all price housing and had a strong negative impact on housing under $200 thousand. Loans to purchase homes are more difficult to obtain and required stronger credit and more equity by the home buyer. Many potential buyers, including those that were recently foreclosed, will reside in apartments until they have the credit or until loans become more available. This group will represent pent up demand that will ultimately add to the continuing demand from the strong job and population growth in Texas.

During this troubled time in the housing industry many National builders who were building in Texas came under huge financial pressure because of the problems in places like California and Nevada. They had to use their capital to support their business in the weaker markets and had to abandon or greatly reduce their programs in Texas. Their reduced interest in Texas construction and development meant that development of houses and lots would slow.

The slowdown of their Texas programs would further reduce available inventory. This is not a problem on the short run because demand in Texas has been reduced. The number of homes and developed lots will ultimately be reduced to a point where normal demand increase from future home buyers benefiting from better credit availability and greater market confidence will drive prices of homes, subdivision land and developed lots upward.

Additionally, the national builders will return to Texas with their old enthusiasm and buy land to develop lots or buy lots to build homes as their financial problems elsewhere are resolved.

The supply of available housing and lots for construction is becoming short in Texas. The demand will accelerate as the population increases and home loan availability again returns to a normal level. This will bring strong pressure in the marketplace for subdivision land, lots and new homes and should drive prices to higher levels. For more information see; or

Tuesday, March 11, 2008

Small, Steady Texas MUDs Keep on Bonding

This is why Houston, Texas is stil HOT for commercial developement:

New housing starts are down and home foreclosures are up across the country, but some Texas communities continue to expand using relatively small bond issues sold by municipal utility districts to provide the infrastructure for new development.
Those associated with issuing MUD bonds say demand for the low-rated or even unrated debt remains strong despite the credit crunch. They say there are fewer bidders of late, but the bids received reflect steady interest from buyers looking for uncomplicated tax-exempt securities.
"From what I'm seeing, the market for water debt is just fine," said Cheryl Allen, senior vice president with Southwest Securities Inc. "We may be pricing slightly higher than other bonds, but typically rated utility bonds are pricing similar to the rest of the market."
Allen is the financial adviser for more than 70 utility districts across Texas.
The majority of debt sales by municipal utility districts are bank-qualified and this helps keep demand high, she said.
"Wall Street firms have pulled out of bank-qualified water debt of late ... they're in, they're out," Allen said. "We get a steady group of purchasers for water debt and we do rely upon them. But if we get four bids or six it doesn't really matter, although the more the merrier,"
There are 740 active MUDs in the Lone Star state and another 327 utility districts that are classified inactive by the Texas Commission on Environmental Quality. Inactive MUDs are either built out or have been approved and just haven't started construction yet.
Many of the utility districts in the state are near Houstonin Harris Countyand Fort Bend County, and are at least partially responsible for the rapid growth of the area. Houston's population of about 2.13 million is up more than 9% from the 2000 Census.
Harris County has added nearly half a million new residents since the start of the decade. Only Maricopa County, Ariz., which includes Phoenix, has experienced a larger gain, with almost 700,000 new residents. With 3.9 million, Harris County is more populous than 25 states and the third-largest county in the country.
The Addicks Utility District is offering $7.9 million of waterworks and sewer system unlimited-tax and revenue bonds in the competitive market today, and the district's financial adviser expects at least two or three bids for the debt.
"A few MUDs were in the market last week and priced very well, and we expect to see rates that are competitive with that," said Anthea Moran, vice president with First Southwest Co.
"What we're experiencing with MUDs right now is that we're probably not going to see as many bids as we might have six months ago, but we still expect at least two or three bids," she said. "The bonds being bank-qualified may also lead to more interest from investors given the current market conditions."
Schwartz, Page & HardingLLPis bond counsel to the westHarris County district.
Moran said the debt may be insured but officials had not "heard anything definitive back from the insurers yet."
The bonds come to market following an upgrade of the Addicks district's underlying credit by Standard & Poor's to BBB from BBB-minus due to the district's assessed-value growth and declining debt burden. The upgrade also applies to nearly $13 million of outstanding debt.
"The district is in very good financial shape right now with healthy debt ratios," Moran said. "It's a more mature utility district with costs much lower than that of a start-up MUD."
Development within the district began in 1977 and there are currently 1,266 residential lots in a handful of different subdivisions. The home values within the district range from $95,000 to $205,000, and as of Jan. 18, there are 1,151 homes completed, 42 under construction, and 73 developed lots available. The district also includes a recently completed, 312-unit apartment building that is about 50% occupied.
The current estimated taxable assessed value of the district of nearly $200 million is more than double four years ago.
"We believe Addicks Utility District officials will incrementally issue additional debt because the property tax base's continued development is capable of supporting it," said Standard & Poor's credit analyst Jennifer Garza. "We also believe management will sustain its adequate financial position with reasonable reserves while the property tax base continues to mature."
Most utility districts that are rated carry underlying ratings somewhere near the triple-B threshold.
"The small number of MUDs in our A category speaks to the inherent strength of the specific credit," said Dwight Burnssenior analyst with Moody's Investors Service.
He said Moody's currently rates 22 Texas MUDs at A3 or higher.
Two weeks ago, the Faulkey Gully Municipal Utility District, about 23 miles northwest of downtown Houston, competitively sold nearly $4 million of waterworks and sewer system combination unlimited-tax and revenue bonds won by Sterne Agee & LeachInc.
The sale provided the issuer with a net interest cost of 4.5394%, and the underwriter secured the triple-A wrap provided by Assured GuarantyCorp. for the debt. Yields ranged from 3.4% with a 5% coupon in 2013 to 4.125% with a 3.75% coupon in 2018. Six series of bonds maturing between 2021 and 2037 weren't reoffered.
The debt came to market on the heels of an upgrade to A3 from Baa1.
Jimmy Fellus, senior managing director at Sterne Agee, said the underlying rating has become a key component for these types of bonds. for more information see : or

Lease exclusivity provisions to avoid conflicts

Exclusivity provisions in commercial real estate leases are quite common, especially for retail properties. They give particular tenants exclusive rights to operate certain businesses in shopping centers.

from CIRE Magazine, published by CCIM

"However, in order to avoid legal action, provisions should be drafted carefully so all excluded uses are clearly spelled out. In addition, landlords should not create problems between tenants by including conflicting provisions in individual leases. Two cases illustrate some of the problems that can arise from poorly written exclusivity provisions and act as reminders to be as specific and careful as possible when including them in leases.

The Need for Clarity

Rite Aid sued both its landlord and another tenant at Providence Square Shopping Center in Virginia Beach, Va., in Providence Square Associates v. G.D.F., Inc., claiming that both had violated an exclusivity agreement in its lease. Rite Aid's lease with Providence Square Associates, originally signed in 1977, stated that space in the shopping center would not be leased to any other drugstore, variety store, or photofinishing business.

In 1996, Hannaford Bros. Co. began negotiating a lease with Providence Square for space in the shopping center for a supermarket. The lease contained a prohibition against the operation of a pharmacy only to the extent that the Rite Aid lease prohibited as much. After executing the lease, Hannaford began constructing a supermarket that included a pharmacy. When Rite Aid's lawyer informed Providence Square that a pharmacy was being built in the supermarket, Providence Square attempted to negotiate an indemnification agreement with Hannaford, realizing it would be liable for a breach of Rite Aid's lease. The agreement, which Hannaford refused to sign, would have indemnified Providence Square for any costs arising from the breach of Rite Aid's exclusivity provisions.

The supermarket opened in June 1998 and housed both a full-service pharmacy and a drop box for photo processing. Its signs and advertisements proclaimed it a "food and drug superstore." The store's opening had an immediate and adverse effect on Rite Aid's business.
Hannaford averaged about $30,000 per month in prescription drug sales, which is the sort of competition Rite Aid sought to avoid through the exclusivity provision in its lease. In protest, Rite Aid stopped paying its rent.

Providence Square sued both Hannaford and Rite Aid, alleging that its leases with them were being breached because Hannaford was operating a pharmacy and Rite Aid was withholding rent. Rite Aid countersued, alleging that Providence Square allowed Hannaford to operate the pharmacy and photo drop box in violation of Rite Aid's lease.

Rite Aid also sued Hannaford, claiming Hannaford breached its own lease with Providence Square, violated the restrictive covenant in Rite Aid's lease, and wrongfully induced Providence Square to breach its lease with Rite Aid. Hannaford's defense was that it was not a drugstore but a supermarket, which was not excluded under Rite Aid's provisions.

The 4th U.S. Circuit Court of Appeals held that Rite Aid's prohibition of another drugstore sought to avoid the competitive sale of prescription medicine in the shopping center. It said that a drugstore is no less a drugstore merely because it is incorporated into a supermarket. By looking at the substance of the activity restricted under the exclusivity provision and not the label given to the activity, the court found that Hannaford indeed violated the exclusivity provision in Rite Aid's lease. The case was remanded to a lower court for trial.

Avoid Conflicting Language

An earlier case also shows the importance of considering existing exclusivity provisions when negotiating with new tenants. In Michaels Stores, Inc. v. Castle Ridge Plaza Associates, the U.S. District Court for the District of New Jersey allowed an existing shopping center tenant whose lease was being violated due to conflicting exclusivity provisions to intervene in a new tenant's lawsuit against the landlord.

In 1998, the arts and crafts store Michaels leased space in a shopping center in East Hanover, N.J., from Castle Ridge. Castle Ridge did business at the site under the name Linens 'n Things. The lease contained provisions prohibiting uses that conflicted with exclusive uses granted to other shopping center tenants, which included appliance, fabric, drug, greeting card, and convenience stores.

No mention was made of an arts and crafts store in Castle Ridge's lease, even though such a store was a tenant in the center. The store, Rag Shop, had a provision in its 1989 lease that no other arts and crafts store would be leased space in the center.

In accordance with lease requirements, Michaels notified the landlord of its intended use of the space as an arts and crafts store. The shopping center notified Michaels that because of the exclusivity provision in Rag Shop's lease, Michaels could not operate an arts and crafts store in the leased space and that any attempt to do so would violate its own lease.

Michaels went to court seeking a declaration that its intended use of the leased premises as an arts and crafts store was permitted under its lease. Michaels also sought an injunction prohibiting the landlord from interfering with its possession of the leased premises since its use was not prohibited in the lease.

Rag Shop asked the court's permission to intervene in the case to protect its position, claiming it had a direct interest in the outcome of the lawsuit. Allowing Michaels to operate an arts and crafts store would violate the exclusivity provision in Rag Shop's lease, thereby harming the store.
The court agreed with Rag Shop and allowed it to become a party in the case. It found that Rag Shop's interests were different from the landlord's - since a loss by the landlord would mean it had to allow Michaels to proceed with its plans, while Rag Shop would face undesired competition. The court found this sufficient reason to allow Rag Shop into the case, for which there is no record of a final decision.

These cases raise valid issues for landlords to consider when including exclusivity provisions in leases. The more specific an exclusion can be written, the less the court can read into it. A properly drafted provision leaves little doubt about what use is excluded, lessening the uncertainty for both landlord and tenant.

It also is in a landlord's best interest to ensure that the exclusivity provisions in various tenants' leases complement - not contradict - one another. Conflicting exclusivity provisions may leave the landlord caught in the middle of two unhappy tenants, which could bring lawsuits from both parties."

For More information see ; or

Monday, March 10, 2008

Which Leases Are Good Candidates for Audit?

How to Identify the Key Indicators

There are many factors that can increase the risk of overcharges to a tenant. Most of these relate more to the nature of the transactions than to specific behavior of a landlord, but nevertheless, if a location is in a higher risk category, a tenant would be well-served by investigating the charges with a higher level of scrutiny.
Complex leases. These locations are more prone to error because of the number of moving parts within the documents themselves. Locations can be complex by virtue of a number of factors, including having multiple spaces under different amendments or leases in the building, the presence of multiple expense pools (common for mixed use properties), and having highly negotiated inclusion and exclusion definitions in the operating expense language (such as gross-up language, capital expenditure language, etc.).

A location that tests positive for ANY of these risk factors should be evaluated further to determine if the charges were calculated correctly.
Larger / more expensive leases: Although all leases should be subject to routine reviews, as a rule of thumb, all leases over 30,000 square feet should be examined automatically because even small errors can be significant when translated to cumulative liability. Individual expense line items that are more than 15% higher than similar buildings in the same market should also be investigated to determine the reasons for the variance. Leases with significant sundry charges such as overtime HVAC, cleaning or freight elevator use should also be examined closely for those issues.
Leases with significant or unexpectedly high costs: Specific expenses should always be examined when they fluctuate unexpectedly or when they have risen faster than inflation or when they deviate from plan. These abnormalities can be indications that the landlord is not being consistent in its treatment of expenses or is misinterpreting the lease. In addition, leases in which total expenses have risen by more than $0.45 per foot in any one year should be automatically examined.
Leases in buildings where ownership has changed: Changes in ownership often bring changes in methods of accounting and management philosophies. Depending on the type of lease (gross, modified gross, net), these changes can have unintended adverse effects on a tenant’s charges. For more information see: or