Herbert Smith Freehills Kramer<\/a>, reminds us that every office arrangement starts with a signed lease, and that every signed lease is a legally binding contract.<\/p>\n\u201cUnless a landlord has the right to terminate that contract, the landlord can\u2019t just say, \u2018I\u2019m converting the building, get out of here,\u2019\u201d said Winefsky. \u201cThey have to be able to point to a specific provision that allows them, as the landlord, to terminate the lease.\u201d<\/p>\n
Winefsky said that for several years now, landlords with the appropriate foresight \u2014 in particular owners of Class B and C buildings in conversion-heavy areas like Lower Manhattan or Midtown South \u2014 have placed termination clauses in their leases, ensuring that if they decide to convert their buildings, tenants can\u2019t object or obstruct their plans.<\/p>\n
But landlords who take this step do so with the understanding that they are negatively affecting the building\u2019s marketability, while handing any prospective tenants significant leverage in lease negotiations.<\/p>\n
\u201cIf you sign a five-year lease without a termination, you know that for five years this is where your business is going to run,\u201d said Winefsky. \u201cIf you\u2019re signing a five-year lease, but the landlord can terminate at any point after year two, then you don\u2019t have that certainty, so there has to be some value proposition to you as a tenant. If not, then you can just go to some other generic space where you\u2019re not going to potentially be uprooted after month 26. There\u2019s got to be some value proposition \u2014 which usually comes down to money \u2014 as to why a tenant would sign a lease that has a termination.\u201d<\/p>\n
Gabe Marans, a vice chairman at Savills, said that when negotiating on a tenant\u2019s behalf, he does his best to ensure that such clauses are not included in leases. But when the landlord is adamant, Marans said that the negotiating leverage these clauses provide to tenants is considerable.<\/p>\n
\u201cIn the event that there is a demo clause within the lease, our objective is to make it as onerous as possible on the landlord by layering on extended notice periods and even some financial penalties should they choose to exercise that provision, in a way that both compensates the tenant for their sunk costs and gives them enough time to find a new home,\u201d he said.\u00a0<\/p>\n
While the particulars are determined by numerous factors, including the size of the tenant company, Marans said he uses 12 months as a minimum baseline for the notice required of the owner, and aims for 18 to 24 months for \u201ca tenant to review the market, negotiate a deal, and provide more than enough time for construction for them to move into a relocation option.\u201d<\/p>\n
On top of generous notice periods, Marans said he has obtained cost coverage for tenants in their new locations for everything from specialty HVAC systems to their entire furniture expense.<\/p>\n
The situations faced by tenants confronted with conversions are as varied as the tenants themselves, and can work to their detriment or favor in numerous ways.<\/p>\n
Marans said it\u2019s far more common for leases to not contain demo clauses. This is in part because such clauses really work to owners\u2019 advantage only if most or all of a building\u2019s tenants have them, a process that comes together only through years of tenant turnover.<\/p>\n
It\u2019s far more common, then, for owners and tenants to have to begin negotiations from scratch when a mid-lease conversion is announced.<\/p>\n
\u201cThe demo clause concept is more of a rarity than the rule in the New York marketplace,\u201d said Marans, who noted that there are several key factors determining how much a tenant can benefit from negotiations when a conversion is announced with no demo clause in the lease.<\/p>\n
\u201cMuch goes into this amorphous equation, including how much term is left on the lease,\u201d said Marans.\u00a0<\/p>\n
One tenant he advised whose owner wanted them out in six months got free rent for those months plus a furniture budget of $40 per square foot for their new space. Still, it depends.<\/p>\n
\u201cIf you have 10 years left on a lease, that tenant will have more leverage than if they only have 12 months,\u201d said Marans.<\/p>\n
Winefsky said that in most situations the tenant can at least expect to be made whole from what they\u2019ve spent on space renovations, depending on how far they are into the lease.<\/p>\n
\u201cIf you put $150,000 into a space to build it out, perhaps you\u2019re gonna get all of it back,\u201d said Winefsky. \u201cOr if you put in $150,000 and you\u2019re halfway through the deal, maybe you\u2019ll get back $75,000 to amortize it. To me, that\u2019s a \u2018making whole\u2019 component of it. At a minimum, a tenant should expect to be made whole. But that\u2019s not an incentive.\u201d\u00a0<\/p>\n
From there, the tenant broker can then negotiate the inducement.<\/p>\n
Another key factor is the timing of a tenant\u2019s negotiations compared to those of the building\u2019s other tenants.<\/p>\n
\u201cAre you the first one to negotiate the buyout, or are you the last one, and therefore the one holding up the process?\u201d said Marans. \u201cEven within one building, two tenants will be viewing entirely different packages that could be negotiated with ownership.\u201d<\/p>\n
When faced with an upcoming conversion, tenants should immediately start to determine the exact nature of their leverage.<\/p>\n
\u201cIf the space is not special to you, then there\u2019s a dollar amount the landlord could pay that would make you say, \u2018I\u2019d rather have this money in my pocket and have to move to another space,\u2019\u201d said Winefsky. \u201cThe landlord has to come up with a deal that is enough of an inducement for the tenant to say, \u2018Why am I not just taking this money?\u2019\u201d<\/p>\n
Mitchell Arkin, an executive managing director at Cushman & Wakefield, had an office tenant who was already seeking to downsize on their space and their rent with a sizable amount of square footage on the sublet market when rumors began to spread that their building was facing conversion.<\/p>\n
Before it was even confirmed, Arkin and Kelli Berke, a director at Cushman & Wakefield and Arkin\u2019s lease team partner, spoke to the tenant about their options. With the tenant having around eight years remaining on their lease, the brokers made sure they understood their leverage, and that they could potentially negotiate a healthy sum to agree to leave the space.<\/p>\n
News of the upcoming conversion went public a week later.<\/p>\n
Since the tenant was in need of a smaller space, Berke showed them several options, and they happened to locate an ideal space in a building owned by their existing landlord, making a new lease deal and a hassle-free exit easy to negotiate.<\/p>\n
Ultimately, the client decided against seeking a significant sum in exchange for vacating the space.<\/p>\n
\u201cThey said, \u2018If we can just get out of this $8 million\/$9 million [rent obligation] and move to a new space that\u2019s more appropriate for our needs, that\u2019s a win-win for us,\u2019\u201d said Arkin. \u201cEverything was their decision. We laid out the facts for them, we educated them, and they understood the market. We explained how we could create leverage, and they made the decision to just get out.\u201d<\/p>\n
While this tenant made the prudent choice for their company, many tenants take a different path.<\/p>\n
\u201cThere is no limit to the concessions or incentives that could be negotiated to enable a tenant to vacate early,\u201d said Marans. \u201cThis could be everything from a lump sum payment to a free rent period to reimbursement of costs. There is no limiting factor beyond just the leverage that the tenant has over the landlord\u2019s ambitions for a residential conversion.\u201d<\/p>\n
As it happens, though, one limiting factor is that landlords don\u2019t need all of a building\u2019s tenants to vacate before initiating the conversion process.<\/p>\n
Nathan Berman, managing principal and founder of MetroLoft, estimates that he has overseen around 25 conversions \u2014 or over 8 million square feet, according to MetroLoft\u2019s website. That has included 20 involving occupied buildings. He is working on three, \u201cpotentially four,\u201d at present.\u00a0\u00a0<\/p>\n
Berman shared how he approaches tenants in buildings he plans to convert.<\/p>\n
\u201cWe tell all the tenants that we will honor everything in their lease, but once the lease is done, we\u2019re obviously not renewing them,\u201d said Berman. \u201cWe tell them, \u2018If you do not want to stay in a building that will be under continuous construction for the next two, three, four years, we will let you go. If you\u2019re paying below market rent, maybe we\u2019ll pay you something to encourage you to go. Maybe we\u2019ll pay your moving expenses. And, if you are so in love with the building and you don\u2019t want to go, God bless. I don\u2019t mind collecting rent in a building that\u2019s under construction.\u2019\u201d<\/p>\n
To understand the extreme levels this can proceed to, Berman said that when he converted 116 John Street in 2013 \u2014 a property he sold to Silverstein Properties in 2021 for $247.5 million as that company\u2019s first residential acquisition in New York City \u2014 one office tenant remained in the building for seven years after the conversion was complete and residential tenants began moving in.<\/p>\n
\u201cIt was a language school on the second floor, and they just did not want to move, for whatever reason,\u201d said Berman. \u201cOur residential tenants don\u2019t mind a commercial tenant in the building. It\u2019s usually the other way around.\u201d\u00a0<\/p>\n
Given the possibility of renovation\/habitation overlap and all its ramifications, this is a situation Herbert Smiths\u2019 Winefsky said should be recognized by the tenant\u2019s lawyer when the initial boilerplate lease is being negotiated.<\/p>\n
\u201cThere is a provision in every lease that gives the landlord the right to perform certain work for the benefit of the building, meaning the landlord can access your space to perform certain work,\u201d said Winefsky. \u201cThen there\u2019s often a negotiation about what are the parameters around that. Can the landlord come in during business hours? Can they leave their construction materials in the tenant\u2019s space overnight? These are all things that, if negotiated properly, will make it difficult for the landlord to be able to point to a section of the lease and say, \u2018I can come in and do this stuff.\u2019\u201d<\/p>\n
Berman said that for tenants who choose to remain during the construction process, he does what he can to minimize inconvenience, even to the point of taking extra steps to curb the noise if the tenant has an important meeting or other event in their space.\u00a0<\/p>\n
But he also said that some tenants, after the initial notification of conversion, seem to think he\u2019s bluffing, leading them to express surprise when their space is suddenly surrounded by scaffolding and loud banging noises.\u00a0<\/p>\n
One tenant \u2014 led, Berman said, by a \u201cvery heavy-handed lawyer\u201d \u2014 took Berman to court, in what he categorizes as an attempt to \u201cextort\u201d him for more money. This effort, he said, did not pay off.\u00a0<\/p>\n
\u201cThe lawyer was under the impression, I guess, that we could not work in the building if this particular tenant took us to court,\u201d said Berman. \u201cIn the end, we paid the tenant what we were going to pay him, and the tenant withdrew the lawsuit and left.\u201d<\/p>\n
While tenants with years left on their leases who desire to remain in a building under construction are certainly free to do so, tenants facing conversion with time left on a lease and no demo clause will usually have significant leverage in terms of time, and should plan ahead to use this to their maximum advantage.\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0<\/p>\n
\u201cBe proactive. Time is leverage,\u201d said Berke. \u201cBe patient, because maybe if you do stay and wait it out, the landlord will come to you with a check.\u201d<\/p>\n
Larry Getlen can be reached at lgetlen@commercialobserver.com<\/a>.\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"Moving is one of life\u2019s more stressful events, and this is certainly true for companies moving entire offices.…\n","protected":false},"author":3,"featured_media":233718,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5122],"tags":[125736,5229,125737,125738,70469,405,403,5226,5225,5228,5227,67,586,132,5230,68,2969],"class_list":{"0":"post-233717","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-new-york","8":"tag-116-john-street","9":"tag-america","10":"tag-gabe-marans","11":"tag-josh-winefsky","12":"tag-nathan-berman","13":"tag-new-york","14":"tag-new-york-city","15":"tag-newyork","16":"tag-newyorkcity","17":"tag-ny","18":"tag-nyc","19":"tag-united-states","20":"tag-united-states-of-america","21":"tag-unitedstates","22":"tag-unitedstatesofamerica","23":"tag-us","24":"tag-usa"},"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@us\/115219448802071431","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts\/233717","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/comments?post=233717"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts\/233717\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/media\/233718"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/media?parent=233717"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/categories?post=233717"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/tags?post=233717"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}