presents presents Commercial Lease Assignments and Subleases: Negotiation Strategies in a Troubled Market Negotiation Strategies in a Troubled Market Best Practices for Landlords, Tenants, Subtenants and Assignees to Avoid Legal Pitfalls A Live 90-Minute Teleconference/Webinar with Interactive Q&A A Li 90 Mi t T l f /W bi ith I t ti Q&A Today's panel features: Dorothea W. Dickerman, Partner, McGuireWoods , McLean, Va. Ruth A. Schoenmeyer, Of Counsel, Jenner & Block , Chicago y , , , g Elizabeth K. Cooper, Esq., Managing Director – Brokerage, Jones Lang LaSalle , Washington, D.C. Thursday, March 25, 2010 The conference begins at: The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 10 am Pacific P ifi You can access the audio portion of the conference on the telephone or by using your computer's speakers. Please refer to the dial in/ log in instructions emailed to registrations.
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Commercial Lease Assignments and Subleases: Negotiation Strategies in a Troubled Market – Best Practices for Landlords, Tenants, Subtenants and Assignees to Avoid Legal Pitfalls Subtenants and Assignees to Avoid Legal Pitfalls Presented by: Elizabeth K. Cooper, International Director Jones Lang LaSalle, Inc. Dorothea Dickerman, Partner McGuireWoods LLP Ruth Schoenmeyer, Of Counsel Jenner & Block LLP M March 25, 2010 h 2 2010 1
2 I. Current Market Trends Jones Lang LaSalle, Inc. Elizabeth Cooper
3 A. Supply vs. Demand
Q4 2009 office clock – several markets beginning to stabilize to stabilize Atlanta, Detroit, Miami, Phoenix, West Palm Beach Charlotte, Orlando, Tampa Chicago, Cleveland, Fairfield County, Hartford / New Haven, Los Angeles, New Jersey, Orange County, Philadelphia, Sacramento, Westchester County, Seattle Boston, Indianapolis, Jacksonville, New York, Oakland / East Bay, Richmond San Francisco Peninsula Silicon Valley St Louis Richmond, San Francisco Peninsula, Silicon Valley, St. Louis Austin, Dallas, Denver, Fort Lauderdale, Houston, Memphis, San Diego, San Francisco Peaking market Falling market Baltimore, Raleigh / Durham Minneapolis San Antonio Minneapolis, San Antonio The Jones Lang LaSalle office clock Pittsburgh Rising market Stabilizing market shows where each market sits within its real estate cycle. Markets generally move clockwise around the clock with move clockwise around the clock, with W Washington, DC hi t DC markets on the left side of the clock generally landlord favorable and markets on the right side of the clock generally tenant favorable. 4
U.S. vacancy levels will continue to rise into 2010, but at slower levels at slower levels 18.3% 20% 20% 16% 12% 8% 8% 4% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 Q1 Q2 Q3 Q4 2009 2009 2009 2009 5
Tenants more certain of future, pushing leasing activity higher for the second consecutive quarter higher for the second consecutive quarter Quarterly percent change 10% 10% 0% 0% -10% -20% 9.8 percent annual decline decline -30% Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 6
Sublease space levels drop for the first time in two years as leasing activity grew on the discounted space years as leasing activity grew on the discounted space SF 140,000,000 Levels decreased by more than a half million 120,000,000 square feet in Q4 100,000,000 80,000,000 60,000,000 60 000 000 40,000,000 20,000,000 , , 0 Peak during Q2 2007 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 last downturn '01 - '03 7
Marketed rents down more than 15.0 percent from peaks established in 2008 peaks established in 2008 Quarterly percent change 6% 4% 2% 0% -2% -4% 4% -6% Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 8
Net effective rents in primary markets starting to stabilize after such steep declines stabilize after such steep declines 0.0% -10.0% -20.0% -30.0% -40.0% -50.0% Overall net effective rent decline Largest percent decline in specific building -60.0% -70.0% NYC Boston Chicago San Francisco Los Angeles Washington, DC Dallas 9
Tenant-favorable conditions to persist in 2010 12-month outlook % change from peak of market (2007) to bottom (mid-2010) Employment -7.4 to 7.7 million jobs Leasing activity -63.0% Sublease space + 37.0 MSF Marketed rents -20.0% Effective rents -33.0% Rent abatement +150.0% Tenant Improvement allowances +30.0% New construction activity -100.0% 10
11 B. Lease Terms and Renewals
Today’s environment – reasons to sublease • Reduction or mitigation of real estate costs • Mergers and acquisitions • Early relocation desired • Excess space is not only costly but can lead to low morale in an office 12
Subleasing is difficult even in a healthy market • Understand your sublease clause • Set financial recovery expectations properly (use an expected and realistic range) • Set timing expectations of when the task can be accomplished • Understand your landlord’s motivations, and their other building/portfolio dynamics Trust and take the advice of your real estate broker (or don’t hire them) • Go ugly early – don’t just meet the market – beat it • Go ugly early – don t just meet the market – beat it • The best subtenant prospect for a decent financial recovery is always from within the building, then from within the complex….and so on • It’s far better to be “in-the-way” of a larger tenant needing additional space – rather than being “good” at what you do Structure your lease acquisition with all of this in mind. 13
II. Distinctions Between Assignment and Sublease Ruth Schoenmeyer Jenner & Block LLP 14
15 A. Legal Differences
Reversionary Interest • Number one difference: reversionary interest - Assignment: Transferor does not retain a reversionary interest in lease - Sublease: Transferor retains a reversionary interest in lease - Sublease term ends at least one day prior to the end of the term Sublease term ends at least one day prior to the end of the term - Or, transferor retains options to terminate, expand or renew 16
Reversionary Interest • How do courts determine whether an assignment or sublease has occurred? - Reversionary interest, not intent • Danger: Unintentional assignment pro tanto - Issues for transferor - Loses right to evict subtenant - Loses control of renewal rights and other lease options g p - Liability remains - Issues for transferee - Uncertainty as to rent Uncertainty as to rent - Uncertainty as to rights upon transferor default 17
Relationship with Prime Landlord • Transferee has direct relationship with prime landlord if assignment • Transferee has indirect relationship with prime landlord if sublease - Consent to transfers, alterations, etc. - After hours services 18
Liability • Not a distinction between an assignment and sublease • Liability of the transferor continues under the original lease unless: - Novation (i.e., full substitution of assignee for assignor) - Prime landlord agrees transferor is off the hook in original lease or consent 19
20 B. Drafting Differences
Drafting Assignments and Subleases • Step one: Review prime lease to determine whether any particular language must be included in assignment or sublease - Prime lease often requires assignee to expressly assume all obligations under the prime lease p - Prime lease sometimes includes other magic language for any assignment or sublease, e.g., if a pension trust owns the property, a transferee might be required to make certain representations regarding its relationship (or lack thereof) with to make certain representations regarding its relationship (or lack thereof) with prime landlord 21
Drafting Subleases • Different approaches: stand-alone document or document that incorporates all or some of the prime lease provisions by reference • Regardless of which approach you use, transferor cannot give more than he received under the prime lease received under the prime lease • For example, if all alterations, without exception, require prime landlord’s consent under the prime lease, transferor cannot agree that certain p , g cosmetic alterations will not require anyone’s consent 22
Stand-alone Sublease • Start with normal lease document • Certain provisions are simply between transferor and transferee: term, rent, security deposit, condition of premises, etc. • Other provisions will need to be adjusted to account for prime landlord responsibilities or consent rights: maintenance and services, alterations, restoration obligations upon casualty or condemnation, etc. g p y , • Finally, add provision regarding prime lease: neither party will cause a default thereunder, transferor will not amend the prime lease without t transferee’s consent, etc. f ’ t t 23
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