| |
As seen in
New York Business
October
16 - 22, 2000
SPECIAL REPORT COMMERCIAL REAL ESTATE:
Committing to a high price in future growth
'Puts' offering added space at pre-agreed
price make comeback
by PETER MALBIN
Hogan
& Hartson is committed to growth - quite literally.
Last June, the expanding Washington, D.C.-based law firm signed
a lease for 100,000 square feet of space at 875 Third Ave.
That lease includes an unusual feature that legally binds
the firm to take on an additional 30,000 square feet between
the second and fifth year of the lease.
For a host of growing blue-chip businesses, law and accounting
firms, and technology companies that are prospering, merging
and hiring new staff, such "puts" or "must-takes"
are becoming an increasingly attractive means to lock in additional
space down the road at a pre-agreed price.
For better or worse "If
they don't need the extra space (when the put falls due) they
can sublease it," reasons Kenneth D. Rapp, senior vice
president of CB Richard Ellis Inc., who completed the transaction
for Hogan & Hartson.
On the downside, such security can come at a high price. If
the tenant finds out, say in five years' time, that it doesn't
need the extra space: tough. "The tenant is obligated
to take the space and is committed," notes Jonathan Mechanic,
chairman of the real estate department at Fried Frank Harris
Shriver & Jacobson.
No wonder that some brokers say that they have not seen puts
used in the market since the peak of the last real estate
boom back in the late 1980s.
The specific rental rates of a put can vary widely. "It
can be agreed at the time of moving in, in a fair market situation;
or it can be rent-agreed-upon today," notes Ken Siegel,
a managing director at Jones Lang LaSalle Inc.
Put upon
By
locking in today's record rents, however, tenants are running
risks. After all, they could be left, in a worst-case, recessionary
scenario, not only taking space that they no longer need,
but doing so at rents far above prevailing levels.
No wonder puts, even in today's frothy market, appeal only
to a relatively small group of companies. George Donohue,
President of William B. May International, notes that puts
are particularly attractive to larger, successful companies
with deep pockets, which are confident of their growth pattern
for the next several years.
Once, life was far easier for tenants. In the good old days,
when tenants had the upper hand-from 1988 to 1996-it was not
uncommon for them to negotiate a lease that gave them options
to expand at predetermined rental rates, shed space, and renew
or cancel leases.
"Now, if you tried to negotiate a lease like that, they'd
laugh you out of the room," says Michael T. Cohen, President
of Manhattan-based brokers GVA Williams. "If you're looking
for rights to grow within new space, landlords usually give
you one of two choices: you can commit and lock in the 'escalated'
rent or be prepared to pay whatever the market will bear."
One fast-growing group that did commit is Seattle-based Getty
Images Inc. The photo and film archive recently inked a long-term
lease for 250,000 square feet of space at One Hudson Square
in lower Manhattan. The deal includes two puts, each for more
than 10,000 square feet of space in the same building.
"We were able to negotiate a deal with Trinity Church,
the owners, based on today's rents," says James Meiskin,
President of Plymouth Partners Ltd., a New York tenant advisory
firm. "If the owner is not willing to grant options at
a prenegotiated rent, the next best thing is puts."
|
|
|
