Those Dream Leases Can Be Rude Awakenings

Call them cheap leases from hell.

The huge glut of space produced by the 1980s' commercial-construction orgy has pulled rents way down. Moreover, as extra enticements to fill their vacant buildings, hungry real estate owners often throw in a year's free rent and free interior work, such as erecting partitions. All of this has made the 1990s a paradise for office tenants. But for a growing number of renters, the paradise is dotted with land mines, especially when the landlord happens to run into trouble. Notes Philip R. Sprayregen, a managing director at the CB Commercial Real Estate Inc. brokerage: "Sometimes, what look like really good deals are fraught with risk for tenants."

Ask Proskauer, Rose, Goetz & Mendelsohn. A tantalizingly low rent at a new glass-sheathed office tower near Times Square in Manhattan seemed too good to pass up--fully $10 per square foot less than the law firm had been paying under its old lease. So, it happily moved into nine floors of the 42-story skyscraper in late 1990.

BUMPS AND GRIME. Unfortunately, the landlord, Solomon Equities Inc., couldn't find other tenants to make the building financially viable. The result: Maintenance suffered. Bad elevators were the first problem. They took forever to arrive, control buttons didn't work, ground-floor landings were bumpy. Unwashed windows collected a thick layer of grime. At one point in early spring, 1991, the heat went out for weeks. Work halted on completing the building's facade. Then, Solomon put the partnership that owns the place into Chapter 11. According to Herbert T. Weinstein, a Proskauer partner, the two sides are finally close to resolving the problems. "It'll be great to have the windows cleaned after almost two years," says Weinstein. Solomon executives declined to comment.

Eviction is another hazard for tenants. When lenders take over a building, which happens a lot today, they have the legal power to tear up leases--and occupants can end up getting booted. That's what happened to 15 tenants last year when NCNB Corp. foreclosed on the four-story Lakecrest Building in Nashville and sold it to tiremaker Bridgestone/Firestone Inc. to use as its U.S. headquarters. Despite the availability of offices nowadays, finding the right space and arranging a long-term lease can still be an egregious hassle. The Lakecrest evictees were eventually able to find cut-rate space nearby. "It's over, and we have no hard feelings," says Tom Bonds, an employee at one of the defenestrated tenants, engineering firm Allen & Hoshall Inc.

Lenders to troubled properties can make life difficult for tenants in other ways. Sometimes, they thwart prospective tenants by refusing to O. K. already signed leases out of fear that the deals are too generous. That can hang up the office-space seekers for long periods. E. J. Rhodes & Associates, a Manhattan executive-search concern, got trapped this way when it tried to move to a more prestigious address.

Greycoat Real Estate Corp., the owner and lone occupant of the Fifth Avenue building, dangled a package of goodies in front of Rhodes: a $33 per-sq.-ft. rent (down from $42 at its current office), six months' free rent, and free internal improvements worth $50 per foot. But the Bank of Nova Scotia, the mortgage holder, balked. Steven J. Liff, a Rhodes partner, says his firm spent six months in limbo and laid out thousands of dollars in legal and architectural fees before the bank finally nixed the deal in November.

The firm has had to start all over looking for a new home, although Greycoat did reimburse Rhodes for expenses. "I guess these things can happen in this market," sighs Liff. Greycoat says it now is trying to sell the building, and the bank declined to comment.

LOCKED IN. Tenants also are thrust into purgatory when partners in a building venture disagree over leasing strategy in a down market. Consider Newport Office Tower, a vacant structure in Jersey City, N.J., owned by Melvin Simon & Associates Inc. When the building was still on the drawing board in the late 1980s, The Limited Inc. agreed to lease the entire tower, intending to sublet at then-high rents. By the time construction had finished, though, the market had collapsed. The Columbus (Ohio) clothing retailer and Indianapolis-based developer Simon took to squabbling over how to share the burden. That forced a major financial-services company that had agreed to move in to put its plans on hold for most of 1991. After shelling out $150,000 to attorneys, the company walked away last fall.

Tenants often find it's just as hard to get out of a building as in: Landlords are loath to let them out of leases because replacements, if they can be found at all, will pay lower rents. As part of its bankruptcy restructuring, E-II Holdings Inc. offered several hundred thousand dollars to a Los Angeles landlord if he would cancel the lease on a warehouse for its clothing subsidiary, Jody Apparel Inc. No dice. Says K. Cory Benson, the E-II executive in charge of the talks: "We had to sublease it for a lot less than we're paying in rent."

Lately, many tenants are getting smarter by researching a building's status before signing up. Some are exacting agreements from building lenders to honor leases after a foreclosure. The tenant may be king these days, but his shaky throne still needs some solid shims and braces.

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