Lawyers. They’re famed for their arguing abilities and fountains of knowledge, so who’s better to bring in for some leasing advice than a leading commercial real estate lawyer? For this episode of “Conversations with Cohen,” I spoke with Larry Haber, Managing Partner of the commercial real estate department at Abrams Garfinkel Margolis Bergson. Larry and I chat about office leases post-Covid-19, lease restructurings, modifications and workouts, and what we’ve learned about protecting businesses moving forward.
As I mentioned earlier, Larry is the Managing Partner of the commercial real estate department at Abrams Garfinkel Margolis Bergson. He’s been in the real estate law space for over 30 years, where he’s specialized in lease negotiations on behalf of both tenants and landlords. He brings a fascinating perspective to the market, as he’s also an owner, manager, and developer of over six million square feet of office space in the tri-state area. In addition to all that, Larry is the founder of his own company called Leasing REality, which serves to educate folks about the office leasing process through blogs and podcasts. He can really touch upon so many different points of view on the commercial real estate market!
Today’s Office Landscape
Given Larry’s unique position as an advisor to both tenants and landlords, I thought he could offer a really holistic perspective on the current office leasing landscape. According to Larry, that landscape is not particularly pretty for either tenants or landlords, but between the two it is more of a tenant’s market. Essentially, there is very little demand for Manhattan office space, and that is a trend folks expect to continue. It hinges on both the shift for many companies to employees working remotely, as well as others having satellite offices out in the suburbs of Long Island or New Jersey where their employees can still come into work without having to commute into Manhattan.
Health and safety are a big concern for all of us. Many buildings, Class A in particular, will start doing temperature checks in their lobbies, reducing elevator capacity significantly, and other security measures. Those measures don’t stop in the lobby though – they’ll continue into the office. Something really fascinating that Larry mentioned is the possibility of companies creating a wellness room in their offices where they can have a registered nurse on site. It’ll look like something sort of similar to what you’d see with a nurse’s office in a school. Let’s just hope they can offer more than band-aids for your medical concerns.
Tenants and Existing Obligations
So, how do you as a tenant deal with existing obligations? I’m talking everything from your current options to how you conduct a conversation with your landlord. According to Larry, the most important piece of advice he can give is tenants and landlords working together. Both sides need to understand where the other is coming from. A tenant being clear with their landlord about what they’re looking for is always critical, but just as importantly, a tenant cannot lose sight of their landlord’s position. Most landlords have huge mortgages and a significant amount of rent payments (50%-60%) are going towards paying that off. Understanding that, along with how much the landlord will need as baseline in payment, what they’re angling for and the like, is pivotal to beginning a successful negotiation.
As for right now, some of the most important areas to take a look at within that lease agreement is your subletting and assignment clause. Do you have the right to sublet? What restrictions has the landlord imposed upon you? All that leads right into a discussion about subleasing – a really hot topic these days. Short-term subleases in particular are a hot commodity in the current climate where businesses do not know what the long-term outlook is both economically and health wise. As a result, those short-term subleases could actually trade at a bit of a premium to what they normally do, making it a really compelling option for businesses that find themselves strapped with excess space.
Larry pointed out that typically in an arrangement in office leasing, the landlord does more due diligence on the tenant than the tenant does on the landlord. In subleasing though, of which we expect to see a large uptick in midtown sublease space, it’s more of a two-way street. The sub-landlord (original tenant) does their due diligence on the sub-tenant for obvious reasons, but it needs to work the other way around too. Due to the nature of subleases, the sub-tenant doesn’t have privity with the landlord, and it all has to go through that sub-landlord. If you’re a sub-tenant paying 80 cents on the dollar, you need to do your due diligence on the sub-landlord to ensure they have the ability to pay that remaining 20 cents. Otherwise, if the landlord doesn’t get the full payment, they still have the right to kick you out of the space even if you’ve paid your agreement in full.
Some other key things to look out for if you’re planning on signing a sublease are getting a letter of credit for your security deposit rather than paying cash, having a landlord non-disturb agreement, and getting the right to pay the landlord directly without the sub-landlord in-between. All those provisions help protect you in case your sub-landlord goes bad on you.
Advice on Signing a New Lease
I wanted to hear some of Larry’s advice for tenants looking into signing new leases moving forward. Larry’s main point of advice was all about exit strategies. If your lease isn’t going well, your business is having financial troubles, or for whatever reason your requirements begin to change, you want the flexibility to get out of that lease. In order for you to do that down the line, you’ll need to arrange certain things in your initial lease agreement.
One of those factors of giving you a viable exit strategy is putting up extra security at the beginning of the deal. If you put up that extra security at the onset, you can negotiate a burn down later on. Landlords are more concerned with short-term risks when it comes to their tenants, so they’d also rather you put up a bigger amount at the beginning and so long as you live up to your end of the bargain, that initial security deposit will begin to burn down over the years. Ultimately, it’ll make it easier for you to get out of the lease earlier than your end date.
Another key factor is getting yourself a subleasing and assignment clause in your contract. Needs change over time and having the ability to sublease your space in the event that they do is really important. Between both of these particular factors – the extra security deposit and a subleasing clause – you’ll have a much more viable exit strategy in case you need it.
While your commercial real estate broker is there to help you out and navigate all these considerations, having a lawyer like Larry there to help you on the legal side is absolutely paramount. According to Larry, it’s critical that you bring in someone like him right at the LOI (Letter of Intent) stage. He claims that the LOI stage is when the tenant has the most leverage in the negotiation process and highlighting the terms of the agreement with your legal counsel at that stage can save you a lot of trouble down the line.
A Little Something Extra…
Normally I like to end off these conversations with some food talk, but this time Larry and I gave it a bit of a twist. Larry’s a big music fan (he makes tons of references on his platform Leasing REality) and in particular he loves the Grateful Dead. He’s been to concerts all over, from Toronto to California. Last year, Larry turned 60 and threw a tailgate party at Citi Field prior to a Grateful Dead concert with 60 friends. They had sushi from one of his favorite places called The Rada, Chicken Scarpiello from Chris & Tony’s, and some other goodies. Boy, don’t we all miss those days?
Check out my FULL video interview with Larry by clicking on this link. To learn more about Larry’s business, Leasing REality, check out his website or for Abrams, Garfinkel, Margolis, Bergson you can click this link.