49: Fundamentals of Leasing

Welcome. This is Real Estate Investing Live from New York with James Nelson, the principal and head of Avis and Young's Tri State Investment Sales Group. In this program, you'll learn about the world of commercial real estate and find out why it is one of the largest investment opportunities in New York and around the world. Now here is your host, James Nelson. And welcome to show number 49 of real estate Investing Live from New York. This is your host, James Nelson, principal head of Tri State Investment Sales for Avis and Young. We are coming up on show number 50 next week as well as 100,000 downloads. Unbelievable. What an amazing year this has been. Want to thank each and every one of you for your support, spreading the word, your comments, your ratings, it's been phenomenal. And the point of the show again is really to teach you how to invest and operate commercial real estate. But really even beyond that, want to teach you how to succeed. And we've heard so many great stories. I've got a little secret to share with you all, which is I have been working on a book I'm a couple chapters in. The working title is for now, Real Estate Investing Live from New how to Succeed in Any Market. So that's what we're trying to do here today. We've got a great panel discussion. This came from the Young Men's and Women's Real Estate Association. We put on a panel on commercial leasing fundamentals that Pierre Debas from Omer Dubos moderated. And we've had Lindsey Ornstein from Transwestern, Melissa Braust Rakov from Brous Realty, as well as Gary Curry from Cornerstone. And really great discussion to teach you what you need to know, especially today after this pandemic, what lease clauses have changed how we're working with this. So really good discussion here and thank you again. So we're going to have a quick word from our sponsors and we'll be right back for that panel.

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I want to welcome you to our, I guess first ever commercial leasing panel. This is a panel discussion, but for those of you who are brokers, you are also going to be receiving continuing ed education. So this was something new. And this is thanks to my friend Pierre Debas, who I'll give him a formal introduction shortly. He's an attorney from his he founded the firm Romer Debos, but he also has the New York Real Estate Center School. So he's now offering continuing education for brokers, which is a really great thing. I know maybe for some of you who are used to taking your online classes, you know, you could just kind of click through. But you know, we figured this would be a lot more interesting for you to hear from some of our industry experts here. So thrilled to have with us also Melissa Browse, Gary Curry and Lindsey Orenstein, YMW REA members who are also subject matters in the or subject experts, should I say in leasing. So we're going to have a really great discussion. Pierre was kind enough to share an agenda. So we'll make sure and hit, you know, the high points to get credit for the course, but really also to dig in and talk about how leases are actually getting done right now. So that's the plan for today. In addition to the YMW REA members who are joining, I'd like to welcome our mentees. So this will be the third program that we've offered to our mentees above and beyond the monthly lunches and we've been having great feedback so far. We've had we have two dozen mentees who are attending Columbia, nyu, Fordham and Baruch and we have teamed them up with many of you who are on the call YMWRE members. So thank you for your service and thank you for giving back. And we had a great session where we talked. We brought in Lisa Flicker and Nata Levy from from Rhodes Associates. They're an executive search firm and they gave a lot of great advice to some of the master students out there who are looking for jobs in this challenging market to say the least. And then the YMW REA board then did a follow up presentation where we talked about our first few years in the business and what it was like to start out and really grateful to a lot of the YMWA members who also joined on and the mentors who gave their advice and now this as well. So really Happy to have you joined as well.

Hi, everybody. I'm Lindsay Ornstein. I'm a partner and co founder of the Transwestern New York office, which as most of you know, is a brokerage, advisory and full service real estate firm. But we are the only firm in New York City that is salary bonus and consulting based. So we are a little bit different than all the other real estate firms. And our practice specifically handles conventional leasing deals, both from a tenant and landlord agency perspective. And we also have a very large nonprofit practice that focuses on the needs of nonprofits throughout all of New York City.

Awesome. Gary, do you want to go next?

Yes.

Hi, I'm Gary. Gary Curry, president of Cornerstone Group Real Estate Services. We are a commercial real estate firm in New York City. We specialize in the outer boroughs. We do a lot of leasing and consulting work to the City of New York, State of New York, School Construction Authority, various things we do throughout the city.

Great. And Melissa.

I'm Melissa Browse Rackoff and I'm the director of New York City Leasing for Brus Realty. My grandfather started Bruse Realty about 90 years ago, which means that our company started about 10 years after the Spanish flu pandemic. And in the company's earliest years, my grandfather navigated through the Great Depression. So reflecting on this drives my own optimism and strong belief in New York City even as our generation confronts its own pandemic. Now, my work focuses on our Manhattan properties that span from Midtown with our headquarter building at 52 Vanderbilt, down to Union Square with a handful of buildings in the West 30s that feature office and showroom space. I'm lucky enough to work with Lindsey on a couple of those buildings. And I was treasurer of YMWRA a while ago. And I'm happy to be here. Thanks for having me.

James, you mind if I say something for a minute about myself in the school?

Absolutely. I was going to give you an introduction, but yeah, roll with it.

Thank you. Thank you. So. Hi everyone. Well, thank you all for having me today. It's an honor to be part of the program. My name is Pierre Dubos. I'm a real estate attorney and founding member of a 25 attorney real estate boutique from a midtown called Romer Debos. This is actually our 10th anniversary from when we started the firm, which what a year to celebrate a 10th anniversary of a business. And our firm specializes in all aspects of commercial and residential real estate in New York City with a focus on acquisitions, finance, leasing, development, and related litigation. Today, for the credits that you're receiving. We also founded a school called the New York Real Estate center that we formed. And we've been spending the time in quarantine and actually building a tremendous database, which James and Lindsey have given us the pleasure of partaking in our seminars over the past couple months. And we're actually going to be having a official launch of the school in probably October, rolling out a ton of continuing education that we taped during the quarantine, and also a schedule of weekly live virtual classes, as well as a number of webcasts. So for those of you who receive credits today, you'll get those emails, we'll put you in our email database, and hopefully see you in one of our next and upcoming sessions. For the structure today, it's going to be a little different than most continuing education classes everyone's probably accustomed to. You know, when Lindsey and I last did this, we went through the fundamentals of commercial leasing, breaking down basically the main business terms and how to analyze them from the perspective of a landlord and tenant. We want to take a couple of those main terms to negotiate, to focus on negotiating and more. So talk about how we're navigating today's market in light of COVID How are we handling leases that are currently in effect with defaults, renegotiations? How are we handling new leases that we're negotiating, predictions for the market and potential tenant defaults? So to go into it, one of the most common provisions that we are reviewing these days as a real estate attorney is a lot of tenants are either looking to vacate their space or downsize space. And the first question that oftentimes comes up are, what are my rights under an assignment and sublet clause? And historically, in negotiating assignment sublet clause, we're going to, from a tenant perspective, focus on as broad of rights a tenant may have in order to exercise a sublet right. And for the landlord, there's a number of items, such as not bringing in a subtenant that's necessarily one of the same business, that the landlord has multiple tenants of them in the building or. Or current tenant in the landlord's building. So what I wanted to kind of first throw out to the panel is what are you seeing from the request for subtenants and how are those negotiations going, especially in light of the stats that James just told us. So I guess I'll throw it, if you don't mind. Melissa, can I call you out on this one to start off with?

Sure, yeah. We are definitely seeing tenants inquire with us about their sublet and Assignment clause. We are not seeing significant amounts of tenants that are actually then pulling the trigger, placing their space on the market. But tenants are curious about it, want to know how it works. And I think one important thing that they're sort of going through are the costs that are involved in terms of brokerage, freeze free rent, things like that. We are seeing some tenants also inquire about desk sharing clauses, licensing clauses, things along those lines. And, you know, but again, no, no huge volume that's actually being placed on the market at this time.

Okay. Well, Lindsey, if I could transition to you, what are your projections for increase in subtenant requests in the market? Everything going on.

Yeah. And I'm glad James framed the market data the way he did at the beginning of the call because we as the brokers on the ground really need to understand the fundamentals so that we don't, one, perpetuate fear and wrong messaging in the marketplace. But two, advise our clients appropriately. We are not seeing a massive amount of sublease space yet. Now, that's not to say it's not coming. We all are fairly confident it is coming, but it takes a long time to get there. And the typical trajectory and progression of how space comes to the market after a down cycle event like what we had happened with COVID is first, the smaller tenants just give back the keys to landlords on a direct basis. They just say, I can't make it. I'm going to give back my space. And then you'll start to see a little bit of uptick, as the data just showed us in direct space. And you'll look, and that's going to be mostly in the smaller unit size. You're not getting large blocks of massive amounts of direct space coming back yet. We haven't seen it. And I don't think we'll see that for a little while. Then eventually, tenants make those hard decisions and they painstakingly go through their business and their employees and their expenses and say, can I hang onto my space or not? And when they absolutely just think they can't anymore, then they engage the sublease market. So our prediction has always been, and still is, that we won't really start to see sublease space in a notable way until a year after the event that occurs. So that's March, so, you know, it'll start to ramp up by then. And in March, we'll probably see a good chunk of the sublease space that's going to hit the market, actually hit the market, you know, in and around March. And then hopefully it'll start to taper down from there.

Gary, can we throw it to you?

Let me say something. Because we own and manage buildings, office buildings in Westchester, and no one has asked us for sublet. It's basically rent reduction now. And what we're trying to do is work with our tenants, tenants who have been shut down. We're trying to give them a rent break. Okay. Tenants that have been in full effect. They haven't said anything to us. So that's where we stand with our buildings now.

Well, let me ask you all this while we're still on this topic, negotiating new leases. How are you seeing the request for assignments, sublets and potential termination clauses, change in negotiations now versus pre pandemic?

I'll chime in. I don't, you know, there's not a huge volume of leasing going on right now, but the ones that we are doing, we're not really seeing a material change in terms of those. In terms of that clause specifically. You know, I think it's something that tenants, you know, should and have been focused on in the past and are focused on now as well, you know. And, you know, again, you know, there's, you know, it gives the tenant a lot of flexibility. You know, as an owner, we're also looking out to make sure that we are able to have some approval to make sure that the use is in keeping with the building and things like that. And we, you know, and keeping communication open with the tenants so that we, you know, understand who they're in contact with and what marketing materials they're using. All that stuff is important to sort of codify in the lease so that we're all in the same page, you know, should they decide to pursue that as an option.

Gary, in counseling the city, I mean, are you changing your requests on sublease and termination clauses?

No, we're not changing anything with the city. It's still the same. We're still looking for the same amount of square footage. The only thing is that when we sent our appraisal team out to get a appraisal on the rental market.

Our.

Rents, we're offering to the landlords a lower rent now. Okay, because it has been a change because of COVID Now we're talking and.

We'Re focusing on office here, and we're talking about how, you know, the full impacts of this are not going to really be realized in office market for six more months. Melissa, you know, is an owner and operator, an investor. Can we talk about retail and restaurant? What's going on There because the impacts have obviously been a lot more immediate in the retail restaurant space, in the office space. How are you seeing retail tenants and restaurant tenants besides throwing the keys to landlords, what else are you seeing? Are you seeing interest in sub tenants coming to the marketplace or is it just we're going to be dealing with a large vacancy rate in that segment of the market for a while to come?

You know, I think that there likely will be a substantial vacancy. I mean, we are, we are seeing and trying to work with all of our existing tenants and, you know, to partner with them to figure out ways to get them open. I mean, particularly in the case of, you know, restaurants, they were completely shut, you know, shut down, you know, zero income. You know, restaurants typically are not, you know, you know, having huge cash reserves that can support them during, you know, such a long closure. And so we're really, you know, looking at, on a case by case basis, working with each restaurant and trying to come up with a way that works to get them open. You know, for now, that means outdoor dining. We're, you know, looking forward to the end of the month when they can open up, you know, 25% for indoor dining as well. And, you know, from our perspective, if we think we have a good operator, we want to work with them. And maybe that's a, you know, percentage of sales for now. And, you know, sort of say, let's work on this from a long term perspective and work together. You know, one thing we do is we meet with all of our tenants before they become tenants. So when we're having these conversations with the restaurant or the retail tenant, whoever it is, it's a familiar face. It's somebody that we have an existing direct relationship with and we're just trying to work it out.

Now, if you don't mind, could you elaborate on the formula of shared profit is in terms of a payment of rent? Because that's been something that's come up a lot in restaurant renegotiations of their rent and leases. Now that I don't think everybody may be familiar with. How are you formulating what rent will be based off of their current income given the fact that their income plummeted significantly?

Again, it's a case by case approach. We're seeing different landlords do different things. There seems to be a range in the marketplace in terms of what percentage of gross sales they should be paying at this point. And that's what we're going off of for the most part. But again, there's not a one size fits all approach, you know, it really does depend on the nature of the restaurant. Some restaurants have been able to open with the outdoor dining, others haven't and are not able to run it profitably until they're able to open some indoor dining. And some are doing really well with the outdoor dining or to go and have really reinvented their businesses. So, you know, so it really just depends one to the next.

Yeah. Before going to strategy, in terms of how strategies are changing with leases, I want to talk about how renegotiations of leases are going, how re amortization of rents taking place. What are you seeing from tenants that are coming to you, both mainly in office, but also retail and restaurant, in terms of what are their requests with leases that are currently in effect, as opposed to new leases that we're going to negotiate. So, Lindsey, let me throw that back to you right now, if that's okay.

Yeah, perfect. So this is where it gets really, really sensitive. And we as brokers can do some of our best jobs for our clients. Not in terms of making money or anything, but just serving our clients well, which is the advice we give them. And here's what we tell all of our clients, and we encourage you to do the same with yours, which is have a conversation with your landlord, give them context and perspective as to what your needs are as a tenant. Because everyone's is different. Relief means different things to every tenant. Some need it now, some need it in the future, some are willing to trade things for it. So, you know, there are a lot of different strategies. And every landlord has different needs too. Right. Depending. Certain landlords, particularly those with institutional quality tenants in their portfolios, they're typically collecting rent right now. So offering to pay up rent now in exchange for giving a, you know, waiving rent down the line. If you're worried about a second wave of COVID or something like that may not help a landlord like that, a smaller tenant or a family ownership structure, sorry, smaller landlord or family ownership structure, who relies much more on that cash flow, may very much be interested in. In cash today in exchange for an abatement down the line. We did that with one client where they said they had about a year and a half left on their lease, and they went to their landlord and said, hey, you know, if I pay you x amount of my remaining obligation now, will you waive the rest? And that cash today meant a lot to that landlord. So that was a successful way of handling that. We've had other clients where we've said, you know what? We need Some relief right now we're willing to give you more term on the back end. Or can you amortize this in over the remaining obligation? You know, things like, things like that. So there's a lot of different ways you can do it. The worst thing you can do for as a tenant, in my opinion, is to lawyer up. Sorry, Pierre, don't have your lawyer call your landlord. That's just by definition, confrontational, out of the gate. You know, this is a hard time for everybody. Landlords are struggling just as much as tenants are. And, you know, everyone wants to just do the right thing for the most part and help each other out and having a narrative and explaining what's happening in your business and what's going on. You know, ideally it's you tenant direct with your landlord. Secondarily, the broker can make a gentle introduction about it. Don't have them have a lawyer call.

With the landlords that are working with tenants. Is there a specific formula? Like for instance, I had one where I was counseling a doctor and we were discussing re amortizing rent and his first comment was, well, if you add up all the, all the deferred rent in the back end, I'll never be able to afford that, even in my best years. So it has to be kind of a balance between some rent forgiveness, reimortization. What are you seeing in terms of, you know, I know there's no precise formula, but what have you seen out there in the marketplace that could be some good examples of this?

Well, what I have done is I reduced some of my rent to tenants. Not half, maybe a quarter of it for now. And I would say I'll continue to do this until December and then I'll see what happens.

To chime in, it's sort of like what Lindsey said. Like without having that crystal ball to know exactly when things are going to be back to normal, it's hard to set in place like, okay, this is going to be, you know, how we're going to approach the deferral and the repayment and all that stuff, because we don't even know necessarily what dollars we're talking about. So for us, it's really been on a case by case approach. And as you guys both echoed, you know, having that direct conversation with the tenant where communication is key and making sure that we understand what is going on with the tenant, what are the drivers. There are definitely some tenants that are in need and as you said, there are other companies that are really able to navigate this fairly well and that their revenue streams Are intact.

Yeah, definitely. I'm seeing a combination of both certain industries that have definitely suffered a significant financial impact due to this and other tenants that are just being opportunistic. And I think that that's what landlords are kind of fleshing out these days, which tenants are just being opportunistic and trying to take advantage of this to reduce their rents. One thing I can tell you in counseling landlords, first thing we're asking for is their financials. Demonstrate to us the financial hardship that you're having before we take this in consideration. And if the tenant's unwilling to give you that. I think we just answered the question right there because it really, like you said, Melissa, it's case by case. I say it all the time. It all depends on what industry that specific tenant is in and how much has been impacted.

Another big factor in that is also just when their lease expires, because obviously if we can add term and do some sort of a blend and extend or potentially like front load some concessions as part of an extension, that makes sense. If a tenant has 10 years left on their lease, they're probably less likely to want to do that. But with a nearer term expiration, it does add that as another way of navigating this.

Well, let me ask you all this.

Sorry, I just wanted to interject a question here because it was along the lines of what you were just discussing, but Lucian Cohen asked a good question. How are landlords confirming sales with tenants, particularly with high cash businesses like restaurants? Sometimes you might not be able to determine how well they're actually doing.

Right. It's not a perfect science. Restaurants are extraordinarily difficult to implement this with. You know, you can say tax returns. That's not going to do. A lot of them aren't declaring the cash that they receive. So it's. It's. That's a tough one. Restaurants. Melissa, tell me if you agree, but I don't think you can really take that analysis with a restaurant tenant per se.

It's tricky. I mean, you can ask for the point of sales. You know, I think there has to be sort of a baseline level of trust that you're getting, you know, somewhat of a reputable number out of them. You know, you can obviously monitor just in terms of generally seeing how the traffic is and whatnot. But you're right, it's difficult with businesses where there's so much cash.

You know, one thing I wanted to pose to everybody, too. This whole virtual world of virtual zoom and virtual meetings and working remotely a Lot of people, you know, view that this is going to be a long term trend that we're getting accustomed to and others are kind of on the other side thinking that we can't wait to get back in person to have that human collaboration. And I talk both as an attorney and a small business owner. I own a company of 40 to 50 people and I have now maybe 25% of my entire company here is here today. And I can't wait to have us all back because I think we're missing that human collaboration component that is what drives business and creates ideas and irreplaceable, in my opinion. But I made the old school. I also still write checks. So don't go off with just my opinion. Right. I'm very old school in a lot of ways. Now, for those who think the world is going to remain virtual and if you go to the status of 37% of jobs can be done virtually, are you seeing tenants try to downsize their space now, reducing their liabilities? And do you see companies in the future adapting to this virtual world significantly more so than we would than we have pre Covid or do you think everybody's going to be like me rushing back to the old pen and paper and sitting at a desk and actually being physically in an office can chime in.

I mean, you know, obviously we're optimistic and you know, so we see JP Morgan bringing back, you know, you know, large numbers and I think that's going to have a trickle down effect where they're then going to need, you know, restaurants and services and things like that that will start driving more and more people back to work, you know, in a physical setting and not just in a virtual way. So we are, we were optimistic about that. You know, in terms of what we're seeing with our tenants, there's sort of a balance because some tenants, while they might have staff working from home at this point, they also need to have distance between those that are working in the office. So while they might think that they could, you know, go from 5000 square feet to 2500 square feet, they actually right now still need the 5000, so that they don't have people on top of each other. Especially given, you know, sort of the pre Covid trends of, you know, high density in the offices. So we're seeing discussions about it, but you know, you know, and some tenants are starting to evaluate that, but it sort of hasn't fully settled, you know, from my perspective, because in the near term people are still trying to figure out how to get everybody in their space and keep them six feet apart.

Lindsey? Yeah, I was gonna say, have you seen tenants try to downsize space in their, in their buildings or no?

I think if you talk to architects and we have spoken to many of them, from Gensler down to the boutique operators, they're all really, really busy right now planning, planning, pontificating, strategizing about the worlds of what could be. But very few are actually executing on it. Now a lot of people are curious about how they can reimagine their space for a post Covid world where there is a measure of work from home and remote working built into that, but that's reimagining their space. I think a lot of people are not going to dramatically increase or decrease their space. Of course there will be some who do. Some will take the conservative tact and say I want everybody in and I want them to be more spaced out. We need more space. That will happen for some tenants. We've had some discussions about that. Some will say I can definitely do, you know, a lot more of my employees can work from home. I'm going to reduce my footprint, maybe implement some desk sharing. I'm not desk sharing, hot desking or you know, reservation systems where day of, you know, if you're going to work from home 50% of the time, and so is Sally, you and Sally will share a desk or you'll do a reservation. On the days that you come in, you pick a desk. There will be some of that too where you have a shrinking footprint. But I suspect with my non crystal ball crystal ball, that we will see a lot more of taking your same footprint and reimagining it. And what that will probably look like is a lot more places for collaboration and touchdown. For the very reasons, Pierre, that you said you come into the office in the first place. It's not to sit by yourself in your office with your door closed and do your focused work. You can do that from anywhere. The reason you have an office is to collaborate and to share ideas and to have those accidental collisions with, with somebody on the way to the water cooler and have a conversation. So I think space will go more and more towards facilitating those types of interactions amongst employees. More breakout spaces, more team areas, more casual lounge spaces and then less dedicated desk space. That would be my thought, but I don't foresee a major change in the actual envelope of space tenants need.

Gary, what do you think on this topic? What are you seeing from what about what's the city doing these days? Sorry to throw you on the spot there? That last one, I think. Oh, Gary. Got muted.

Sorry about that. I had it off my mic Off. City's a different entity. There's still again, taking the Board of Ed school construction party. We're looking for space because we're reconfiguring the schools.

Okay.

Because your schools, instead of having 30 kids in a class, they're gonna have 15 in one class. And then they're doing outer space. Right now I'm looking at catering halls, church, church gyms, everything. Because the school construction authority, they're reconfiguring all the schools because you can't have.

30 kids on top of each other.

And you can't. Everybody cannot be on top of each other. So again, what Lindsey is saying that, yes, there's going to be more space taken. Okay. Especially in the outer boroughs there. Because everybody's on top of each other. Yes.

Yeah, it's interesting, you know, I have a lot of people who debate whether all the concerns we have today will be concerns that, you know, we implement in our business strategies moving forward. For instance, you know, five years from now, we sign a lease for 10 years, 15 years. Are we really going to be talking about social distancing, you know, in five years time where we're designing our space where every cubicle is six feet apart and, you know, there's no common areas. And it's like you said, it's not to steal Lindsay's crystal ball, crystal ball line. But, you know, who knows, right? Who knows? Apparently there's talks of a vaccine in two months. Who knows if that's happening?

Let me say this also, when I go out to. Sorry for cutting you up. When I go out to look at space, we're looking to make sure it has the right ventilation, okay? The air conditioning system is very important during these times. Okay, if we go in to look at a catering hall or gym, are there sufficient windows? Because if you're sectioning off kids near each other, they have to have the right distance. So we're doing a lot of things as we go in to look at space there.

Gary, when you talk about schools, you're talking about 15 kids per classroom and analyzing space in that regard. I mean, you're committing to long term leases. That's not right.

Right now as it is, we're committing to one year lease on the outer schools.

Okay.

And the Board of Ed school construction party is taking it year by year now. But we're on a one year plan right now.

Yeah, as I was gonna say, how can you Commit to such, you know, Right.

It's only one year right now because again, we won't know until January, February of next year where this is going.

Right.

Generally speaking, you know, every time a major event happens, we learn from it and we take some of that learning and we impart it into our day to day practice. And some of it's reactionary and in the moment and a lot of that goes away, but some of it stays around. Right. So you know, one of the best things about being a New Yorker and our real estate community is we have short term memories. And I think that is a biological defense mechanism. Ask any woman who's ever had a baby, that's for sure. But we do and that's for our best interest. After 9 11, everyone said nobody will ever be on a high floor again. Setbacks as they were called then. Now they're terraces were locked and they were considered a risk and you had to have extra insurance if you had a setback on your floor. Then after superstorm standy everyone said nobody will ever be on a low floor again. Everybody wants to be up higher. But we did learn from Sandy and right now mechanical equipment is located higher up in buildings and we've taken some of that with us. But generally speaking we're back to normal after this. I think a lot of it will go back to normal. I think there will be a shift towards a more flexible work environment for employees, which is a great thing. We were headed in that direction anyway. This is just going to be a catalyst to get us there faster. It'll help women be involved in the workplace in a much better way. When there is a perceived ability to be flexible. And it's not like a special request to be flexible. If everybody has the ability to be flexible, it'll be a great help and I think we'll see an improvement in certain materials and air filtration and quality of life. You know, landlords for a while were buildings that had windows that were not operable because you know, they wanted to control airflow. And operable windows are really desirable. So I think you might see some operable windows maybe come back into play. Use of materials Antimicrobial potential materialist particularly I think will become part of building practice because the flu season happens. You know, it's not Covid that's flu seasons every year and people get sick every year. So if we can help improve our wellness in our buildings that I think, you know, with air filtration and antimicrobial materials that will be something that sticks around But a lot of this other stuff is going to go away when Covid goes away.

Let me ask you all this. Renegotiations and claim some tenants. Are you seeing tenants try to make the food force majeure argument in trying to terminate leases these days?

I mean, not really. You know, we maybe got like a couple letters early on that were just sort of like, you know, came at us and didn't, you know, from a lawyer or whatever or from a tenant. But, you know, we are not seeing any sort of like active litigation within our portfolio with regards to that, nor are we doing on our leases, seeing any active, you know, focus on that for the new leases.

Lindsey, what about you?

Yeah, I think the same. I have to say I'm pretty glad that notion got quashed early in the pandemic that this was not going to be a force majeure event, because it would have collapsed the entire real estate market if it went through. Right. It just. All the dominoes would have fallen. And I know tenants are looking out for themselves, but I think we as brokers, and particularly YMWREA members who care about our city, have to make sure when we're advising our clients to. Not to look at the bigger picture. Because when we advise clients or. One thing that really bothers me, and I see this in the press sometimes now, are these brokers who are instilling fear and the market's falling apart. You gotta move now. That's terrible. Don't do that, please. You're not helping anybody. All you're doing is incipating fear in the marketplace. And people are gonna start to panic or do irrational things because they think the market's behaving a certain way when it's not. You know, don't look out for just that one deal, you know, with sacrificing the bigger picture, because you're going to end up hurting yourself in the long run when there's no market behind you to come back to, to do a deal with. And the same thing goes with force majeure. It just doesn't. It doesn't make sense to let. Because literally every tenant in New York would be able to get out of their lease or at least some of their payments. And landlords couldn't make their mortgage payments. Mortgages couldn't. You know, the whole domino effect after that, the whole whole economy would collapse.

So, Pierre, while we're on the litigation front, I have a question for you. And this kind of goes back to the, you know, maybe one of the reasons why, besides just Good business practice for a landlord and tenant to speak first. But I think the reality is, if you wanted to, you know, bring an action, if I'm not mistaken, Governor Cuomo's order on litigation for holder proceeds proceedings was extended until September 20th. And I know the city council also made a law that you could not collect on personal guarantees during the time of COVID So, you know, I was speaking to a litigator the other day about a restaurant that actually hasn't been paying rent even since before COVID Right. And unfortunately, they didn't start, you know, the action, which in hindsight was a big mistake. But I spoke to a couple litigators, and they were saying that it could be a year and that the New York City courts are so backed up that some landlords are now trying the Supreme Court route and trying to go to the federal. So I don't know if you want to comment on that or Melissa has any thoughts on the timing and the backlog that we're certainly going to find face.

Well, it just speaks to our point of, you know, both parties coming to the table and trying to strike a deal. You know, at our firm, we have probably four or five litigators, with one specializing in landlord tenant matters, both residential, commercial wise. And, you know, we're telling everybody you're going to be stuck in court for one to two years with exactly what you said, the backlog of cases. I mean, my, my. One of my litigation partners is two doors down. He hasn't put on a suit in six months. He's never going to court again. At this point, you know, everything is this. You can imagine that the courts of the judicial system is not operating nearly as functionable under these circumstances, thus resulting in a tremendous backlog in cases. So no one wins in court right now, is my theory. And we're doing everything we can to strike settlements. Melissa, I don't know if you're having the same experience in your end.

Yeah, I mean, pretty much. I mean, we have a similar situation as the restaurant you referred to, where we had some ongoing litigation that preceded, where tenants weren't paying their rent even before all of this. And those are the ones that, you know, even now are still, you know, because of the backlog, not, not really able to get, you know, any traction or process. And, you know, to the extent that we can, it makes all the sense in the world to talk to our tenants and to work with them and figure out that route, you know, and I think in terms of giving advice to tenants, I think it is really key that those 10 tenants reach out to their landlords, start paying something. I think all of those things are really important to the longer term relationship that needs to take place. And then also avoiding litigation at some point, because at some point it will be an option. But right now it is a mess.

Yeah, I've seen with the PPP funds that were issued back in April or May, the government revised the guidelines where up to 40% could be used for rent. And we advise all tenants like you're receiving government funds for the purposes of staying paying your rent because like we said earlier, the landlords are suffering a huge financial detriment from this. Right. And it's a triple up effect if, you know, business cannot operate, tenants cannot pay rents, tenants can't pay their landlord, landlords can't pay their mortgages, and you risk a commercial loan default crisis. So that was kind of, in a sense, part of the whole purpose of the PPP funds is to continue the ecosystem that we need to survive and that lead counts at all. Tenants show a sign of good faith. Pay what you can pay, especially use the PPP funds and that's going to help your chances in going to the table to come up with some kind of settlement or renegotiation to keep you afloat for the foreseeable future. And from my experience, 90 something percent of people took that route. I saw very few people who tried to pursue an aggressive or combative route over the last six months.

That's another thing that we too used as sort of a diagnostic tool when we were talking to tenants who were looking to us for relief. It was like, well, did you apply for the ppp? And obviously not every tenant is eligible based on, you know, maybe not being a US entity or whatever it might be. But that was another thing that we looked at and we said, listen, you know, we shouldn't be the only ones that you're looking to for, you know, relief. You should be getting the ppp. You should be working with, you know, your other suppliers and things like that.

So, James, before we jump to the next topic, any questions on this before we move on?

No, I think we're good in that department.

Well, I want to spend a good amount of time talking about how you're negotiating leases currently for new leases and predictions for negotiations moving forward. I know it's hard to, you know, predict, but just items such as, you know, security deposits, how is that changing? But more so in a broad perspective, how are you all dealing with lease negotiations now in light of, in light.

Of COVID.

Or new strategy. I should rephrase that. New strategies that are being implemented in negotiations. Probably a better way to phrase it.

I guess one thing that is different is, you know, it is important, you know, from. For me to make sure that the tenants that we are getting into our buildings are in good standing with the landlords that they're leaving. You know, again, there's a lot of different ways to work things out with your landlord or whatever it might be. But we don't want to take on a tenant who has not handled, you know, the past six months in at least a reputable manner. So that. That is definitely something new. You know, also, we're. We're probably approaching the lease duration differently. You know, we are. We know that New York City real estate will come back and that rents will go higher. And so, you know, if we are talking about a lower rent level now, then maybe we're talking about a shorter term so that we can, you know, recapture that upside in a couple of years when the market's even higher than it was pre Covid. You know, we are definitely. We've always looked at security deposit in a pretty rigorous way to make sure that our leases are properly secure. You know, we are continuing to do that. You know, there is sort of a little bit of a trade off now between, you know, security deposit and free rent. And we're sometimes seeing that use as a lever where, you know, if a tenant isn't able to reach the security deposit we want, then maybe it's a little less free rent. You know, another big change for us is we normally meet with each of our tenants in person before we sign a lease. And obviously we're not meeting with them in person, but we are still doing it over zoom.

Gary, you want to talk about new strategies on your end?

On my end, it's just basically, again, as I said before, it's the rent that we're negotiating at and also the free rent. Otherwise, after that, we go through the normal mechanics of a city lease of investigating the landlord background check, and that's it. Another thing is how much work can we get from the landlord, too? That's very important about leases.

Well, I was going to ask how is that changing now in terms of tenant improvement allowances or work the landlord's willing to do at this time?

Now, we're getting a lot of work done, interior work done at a reasonable price here. And also, when it comes to free rent, it's not all up in the first year. We're doing subpart first year. Second year and the third year.

Now, as a result of this, you're not seeing an increased request or. Sorry, a request for increased security deposits?

No, we don't give security deposits here we are. The city doesn't give us security deposits. Okay, it's the city. It's a guaranteed.

Well, let me. Let me throw it at Lindsay. More normal tenants who actually have the right of security.

Normal tenants? Yes.

How are you seeing, you know, our landlords, I debate. Right. Because on one hand, you don't want to ask for too much because clearly, you know, the market is in a tough stage. On the other hand, you know, the risk for the landlord is obviously significantly increased. Are you seeing landlords increase, ask for more security than normal or different security? What are you seeing?

Yeah, logic would tell you that, that, you know, hey, it's riskier time, therefore more risk equals more security deposit. We're actually succeeding the opposite way, saying cash is king. Right now. Our clients just can't put up that much cash when we're talking about from a tenant's perspective. And, you know, we can maybe instead of having it burned down after year three, we can look at burning down maybe a little later, but we can't put as much up front. We just need to preserve our cash position as best we can right now. So we've actually had success in getting lower security deposits during COVID than we typically do.

That's a really interesting point. What about tenant improvement allowances? What are you seeing?

What are you seeing in the aggregate? On smaller deals, we're looking at a total of about, on average 10%. Smaller buildings, family ownerships, it could be up to 20%. And bigger buildings, more institutional, it's maybe 5% swing in total economics and deal terms. So that's a combination of rent coming down a little bit, increasing the free rent, and particularly on the ti side. So things that would have been on the tenant to do before, we can now push onto the landlord as base building work. Or landlords who were maybe going to build to a cap before will now just build it for you or just give you a larger TI allowance. Because again, it's all about preserving capital today. So tenants want to be in do deals where they have to come out of pocket as little as possible. I've even had tenants ask for and landlords be open to amortizing in the cost of furniture. So we were out with a proposal. We went to all the big landlords, and most of them, not all, but most, were willing to entertain the concept of some form of a Credit towards amortizing the cost of the furniture, whether that was additional ti, amortizing it into the rent on a straight line basis, or giving additional free rent to offset it, you know, but there was some way of helping the tenant not have to come out of pocket on the furniture, you know, and that's not to say that you can't lease furniture because a lot of tenants these days are leasing furniture for that very reason. But even that has costs, so landlords are really reaching to try to help mitigate capital costs.

Are you seeing any difference in terms of Good Guy guarantee negotiations?

Not so much. I mean, it doesn't apply to our nonprofit clients. They can't sign Good Guys because nobody owns it. But as you know. But on our, I haven't seen much change and I think, I don't think we will. I think that's it's been pretty universally acceptable a Good Guy guarantee, provided the landlords aren't overreaching like some of the cute ones have done where they, you know, make a nine month notice provision before you get, you know, that you have before you could vacate, which, you know, really is overreaching, things like that. But as long as it's, you know, reasonable notice period and not overbearing, I think Good guys are pretty solid still.

Melissa, what do you think on that end?

Yeah, we haven't seen too much change in that where people are still willing to sign them. In the case where there's no sort of proprietor, it's a little bit more challenging and that's where we then would sort of kick in some additional security. Obviously now it's a little bit hard on the enforcement side, but for the most part, I think people sort of understand the, you know, that they, what they signed up for and are living up to that obligation in terms of either, you know, understanding that if they can't afford the rent, it's their obligation to move out. But we're not seeing any more pushback than before.

COVID Yeah, you know, it's interesting. I do a lot of the media and I get asked every week about how the world of commercial leasing is changing drastically and being revamped as a result of this. And my response is rather boring for them in that the fundamentals of commercial leasing are remaining the same. I'm not seeing tenants come in with creative force majeure clauses trying to get out of leases if there's a second wave. I'm not seeing landlords ask for astronomical Good Guy guarantee provisions that aren't typical. The fundamentals of what we do have remained intact, which I think really speaks to the health of our market in the future of the marketplace.

Yeah, Lindsey, it's a great point. And certainly lenders are pulling back as far as the leverage that they're giving so that the loan to values, which used to be 65, 70%, a lot of these lenders now are at 50%. So the rates are still good. But yeah, to your point, they're getting a lot more conservative because they really, in some cases it's tough to bank on these, even the longer term leases. I mean, when you talk about retail, like what does credit even mean today? Right. And maybe I don't need to call out any of the tenants who sent their landlords, they sent out a thousand letters to every single landlord saying we can't pay the full rent. And I guess seeing what stuck. But I mean you've got companies that have billions of dollars on their balance of sheet saying that they can't pay rent. And I, you know, maybe it's a question for Melissa, but it's almost like some landlords are saying, you know, I'd rather have that mom and pop tenant. You know, when it comes to retail, where they really invested, you know, their time and effort and they want to salvage their business and they want to make it work. So it's, it's. Yeah, from a lending perspective, no doubt the lenders are pulling back. They're becoming more conservative, which makes the deals more expensive for the investors because they have to come up with more cash and equity is obviously more expensive than debt. So that's why you're seeing pricing adjustments anywhere in the ballpark of 10 to 20, 25% and asset class dependent. I mean, I think multifamily to your point, even if the vacancy rate is jumping up, you still have, you can kind of get your head around. All right, well, If I lose one tenant out of 100, you know, there is going to be another 10 at a certain rent. Whereas with office. Yeah, you might have to wait. And you know, retail is I think a whole nother ball of wax. I have a question for the panel as far as kind of new features that are being new terms being offered to get leases done. I had heard that some of the big landlords were giving kind of two, three year fair market option gut checks, which is basically like, you know, a rip cord for a tenant. You know, if they come in at too high of a rent today and two, three years from now, you know, the rents drop, that they have a chance to renegotiate. I heard that maybe one or two of the landlords were doing that, and I don't know if they've already kind of shut that window. But, I mean, Melissa or Lindsey or Gary, are you all seeing any of that where landlords are saying, okay, we can all, you know, take a look at where leasing values are in a couple years and kind of talk about maybe revisiting rent or locking in more term then?

No, I haven't.

We've heard the same sort of rumor that, you know, you have, that some deals are getting done that way and, you know, now is the time to get creative and try and figure out ways to work it out. We've not, you know, signed anything that has such an adjustment clause. I mean, you know, to some degree, if you have a clause like that, it basically means, like, you're agreeing to talk later because at that point you're going to either agree on the fair market value range or you're not, and you can then part ways. So it's sort of just kicking the can down the road to some degree. It could give the owner some flexibility as well, but we've not done anything along those lines. Yep.

It sounds like a new marketplace Lutnick would create to do a short sale on rent. Put a hedge in or short your rent for the future, though I haven't seen that, though.

Okay, that's great. I have another question about if you all are seeing any of your tenants or hearing about companies either moving to the suburbs or at least having kind of contingency and backup space. I'm certainly anecdotally hearing about some of that here, although it seems like it's mostly just temporary space. They're not giving in on their office space in the city here. Yeah, but they are having, you know, if they want to open up 2 or 3,000ft and Stanford or Greenwich and kind of wait to ride this out. I think we are hearing about it. I was on the line with Sean Cahill, who's our managing director for our Norwalk office, and he said in the last six months, there's been over two dozen New York companies that have come up again, but all these deals are like, under 10,000 square feet. That being said, I did hear at what point that Citi was looking for contingency or backup space, if I'm not mistaken, either in Long island or New Jersey. So anyone experiencing that?

We've had a couple of clients. I haven't had any in our firm yet. That direct experience where they wanted to wholesale give up their space to relocate. But we've had one to one supplement with a satellite office in the suburbs. So, you know, and a lot of that has to do with where the CEO lives. So, you know, we have one that we know where the CEO or the, you know, leadership of this one group lived in, you know, in and around the Short Hills, New Jersey area. And lo and behold, they now have a satellite office there. So, you know, I think we're seeing some of that and some of that also has to do with just giving employees optionality and flexibility. We talked about that earlier as a trend that we think that will come out of COVID is the employee's ability to have flexibility in their in how they choose to work. And that could be from a schedule perspective, from a location perspective, from a technology perspective. But it's all about giving employees optionality and choice. And having touchdown spaces outside the city is a great option for that. We're seeing some, but our New Jersey team in particular said that they've been really busy with a lot of that, that they've had a lot of requirements for tenants who want an extra office outside the city, but not as many just wholesale giving up their office for the suburbs. It's New York. Everybody needs to be in New York. If you want to recruit talent, you got to have an office in New York.

Well, it's the same thing after 9 11, you had a lot of companies taking space, New Jersey, Connecticut, Long Island. Then after things calmed down, they all came back to the city.

I think that's a great way to conclude the session. Thank you. Thank you for having me today. Thank you everybody on the panel for participating. I thought it was a great, great way to hear everybody's perspective with everything going on. And thanks for everybody who joined us today. Hopefully it was helpful and informative and anything you need. I think everybody has all our contact information. So hope to see you all again soon.

Thank you for tuning in this week to Real Estate Investing live from New York. Please join your host, James Nelson for another program next Tuesday at 7pm in New York, 4pm Pacific Time on the Voice America Business Channel. All shows are rebroadcast Wednesday mornings at 7:00am Eastern Time, 4:00pm Pacific Time, as well as always on demand. We'll talk again next week.