Owners and lawyers react to recent embassy decisions.

The real estate industry has been renting space to the diplomatic community for many decades and has in most cases, come to terms with the foreign governments. Nevertheless, recent incidents have caused attorneys, owners and building managers to re-think policies and consider tactics that might be used as defenses before renting to missions.

Waivers of certain immunities, letters of credit, higher rental amounts, being picky about the country, and resorting to self-help with the blessing of the State Department were some items suggested - and in some cases qualified - by real estate experts.

Real estate transactional and finance lawyer Kevin R. Hackett, a partner with Fried Frank Harris Shriver & Jacobson, advised if you want to lease space to a mission or to a consulate anywhere in the United States, especially in New York City, "you must have a stout heart and most important, a very high risk-tolerance, because as a practical matter you cannot evict such a tenant."

Hackett says the best thing an owner can do is to negotiate the highest possible letter of credit security, together with other ways to mitigate any potential damages. "You can request a waiver of the immunities granted by Federal confiscation but it's not free from doubt that those waivers are enforceable, especially the inviolability," Hackett explained. There are no court cases, he says, where benefits of the Geneva Convention were waived.

"You can ask for a waiver of sovereign immunity clauses and a waiver of the Geneva Convention that protects foreign missions," agreed Robert J. Ward, a partner with Richards & O'Neil who tried cases against both Zaire and the United States government for actions it took it shutting Yugoslavian offices.

"But ultimately," continued Ward, "there is no way to protect yourself. If you can get a letter of credit or a guarantee from a third party that would not be subject to a government freeze, you might be okay, but there would be perils in renting to any government agency."

At 800 Second Avenue, Stephen L. Green was the managing agent when the Israeli government took a lease. That government agreed to a clause stating the rent was not subject to immunity, recalled Green.

Koll's Gil Robinov, the broker who represents the Israeli government, said the clause allows the owner to go after the Israeli assets in this country on questions of rent.

As Hackett noted, that kind of waiver has not yet been tested in courts, where it could be open to interpretation. It might be decided, for instance, that a government, like a rent-stabilized tenant, does not have the right to waive its immunity.

Zaire was also involved in a residential action, recalled Ward, who represented the owners of the office building in litigation with regard to the country's offices. "When you are dealing with straight commercial realty, there's no limiting the diplomatic immunity or the foreign sovereign immunity," he said.

Nancy Packes, president of Feathered Nest, that handles apartment rentals to diplomats, said owners take a chance when they rent to diplomats and also advised considering the country involved. "It's clear that diplomatic immunity is not waivable, and such a waiver is not enforceable," she agreed.

But the owners do rent if they feel the country is politically stable. "They are lovely people," Packes said of the diplomats. "The only fly in the ointment is if something happens with the country."

Scott E. Mollen, a partner with the law firm of Graubard Mollen Horowitz Pomeranz & Shapiro, who has studied and written about these cases, said 'The general reaction in the marketplace is that, absent an enforceable letter of credit arrangement, Owners view renting to many foreign embassies as hazardous to their economic health."

Mollen said exception might be made for certain countries that have a long-standing track record of stable and responsible course of dealings. However, he noted, the recent decisions send a message that owners would run a risk of substantial legal fees with an uncertain result.

Ward felt his clients were lucky with the Zaire mission in that they could use the self-help remedies, i.e. turning off utilities and discontinuing other building services, but stressed that they worked out an agreement with the State Department prior to acting.

While Mollen said self-help is permitted under New York law in such a situation, "provided its done in a peaceful manner," there is a possibility that the State Department might oppose an effort to employ self-help. "Conceivably, if a foreign government sought injunctive relief at a time the State Department believed sensitive foreign interests were involved, it's entirely possible the State Dept. might support, either formally or informally, an injunctive application by the foreign embassy."

Owners should not take much comfort in self-help, advises Hackett, who believes to the extent an owner tries that, it might affect the inviolability of the mission. The owner can't kick them out because the premises are inviolate, he said, but if you affect the workings of the mission, the owner may be subject to a claim. "I wouldn't want to be the owner that had to defend a claim of violating a treaty," Hackett added.

He says the best protection is from a letter of credit security, but only from a New York clearinghouse member bank in as high an amount as they can possibly get. "Then I would rely on chance, luck and statistics as to how often this really happens." Hackett said.

Robinov noted that since the late 40s, when the United Nations came into existence and the foreign community began claiming diplomatic immunity, there was a general consensus that if they wanted to be accepted as tenants they must all live up to their obligations. "Because as soon as there is a crack, no one will want to take any of them," explained Robinov. "Or they will have to post security. So it is an honor code."

When African countries began receiving independence, the former home country would guarantee their leases. "Even though England was no longer the colonial power in control, they guaranteed the rent for Nigeria for three to five years," Robinov recalled. "There are various ways of getting over this situation. In general, they are isolated incidents, because if there is a bad apple it ruins it for the whole bunch."

Steven Spinola, president of the Real Estate Board of New York, said there have been problems in the past and then, naturally, many of the owners stopped leasing space to embassies. Still other owners, he advised, are careful about which countries they rent to.

"Because of the diplomatic immunity that has been imposed, owners have fewer rights," he said. "You have to be careful and think twice before you sign a lease with a foreign government and look at the history of the country."

Watch Office Condos

Sales broker Peter Hauspurg, president of Eastern Consolidated Properties, said the issue can and has held up certain sales, particularly with office condominiums.

A condo arrangement might work, said Michael T. Cohen, president of Williams Real Estate Co. Inc., "but if I were buying into a building with Zaire I would wonder. You might be able to fool another tenant that would co-habitate, but not an educated owner."

William G. Cohen, executive vice president of Newmark & Co., agreed there is a trend towards foreign governments buying these spaces. "They are exempt from the real estate taxes and that makes up $6 to $9 of the [rent] equation," he said.

In the past, these foreign governments sought ownership in small buildings, but these buildings don't really work as office space, he said. Newmark is helping to convert 820 Second Avenue to an office condominium and the target market is foreign governments.

In the formation of a condominium a building, the owner transfers the risk of default to all of the condo owners, and the owner takes its money out. "If a mission owns a condo unit and fails to pay, the condo, absent immunity, has the right to have a lien on the condo unit," said Hackett. "But if Zaire owns the condo and welshes, the Board of Managers of the condo is out of luck."

He advises such a condo could protect itself by obtaining security for payment of the condo charges in the form of a Letter of Credit as a condition of the mission buying into the condo. "Remember, the seller, unless retaining condo units, doesn't have a reason to keep security because it has an exit strategy," Hackett added.

In a straight rental deal, Hackett also advised having the rent reflect the increase in risk, but warns that may not be effective because the market might not allow it.

Broker Mike Zaleski of CB Commercial, who represents a foreign government, reinforced that advice when he stated there will always be an owner ready to rent space to such an entity.

"Eventually you will find an owner that is desperate enough, and you lock up the credit," Zaleski said. "The country could also take some space that is not so great or in a tertiary property. They may not go into the Daily News or Crystal Building [at 801 Second Avenue], but will go with someone who will roll the dice."

Those owners won't be represented by Michael Cohen, who is taking a hard line against certain nations. "I would tell them not to lease to any marginal or Third World country," he said. "I would be very concerned with the Somalias, the Chads and other countries that are in turmoil."

He suggests the Federal government should identify a building and undertake its operation. "Once you intrude on the right to contract, you will scare people away," Cohen said.

Newmark's Cohen says he avoids foreign governments "like the plague," but had been involved in a Yugoslavian tenancy.

"I got lucky because the Federal government paid for the time on the lease and then took everything," he recalled. "They took all the belongings and probably are still paying to store it somewhere."

State Action Reaction

The recent New York State repudiation of the lease at 315 Park Avenue will have an effect "like any other calamity," the Williams & Co. broker said. After the first incident, owners won't lease to certain tenants, he said, or will insist on security deposits or the government will have to enact legislation to protect the owners.

"If a Zaire or Uganda defaults, no one will know," Cohen said, "But if the state defaults on 315 Park Avenue South, everyone knows. It's a function of the magnitude of the calamity."

Other real estate executives noted there is no precedent for the state to have repudiated a lease. "Whichever way it ends up, the state is taking an enormous gamble," said one owner who asked not to be identified. "The losses are going to be in the eight figure range. I would fight this battle because the stakes are big enough. It's also uncharted territory."

Cohen of Newmark says losing that tenant would render that building insolvent, because the cost of replacing that tenant is nothing less than three years' rent. "The state is abusing a loophole that was never intended for that purpose," he said. "The outcome is that lenders and owners will not make deals with state agencies."

Of the State's actions, owner Abe Hirschfeld says, "It's a terrible, terrible thing. They are paying $50 million for 200,000 square feet. For $4 million, I can give them a whole building of 500,000 square feet like anyone else Downtown - and it would be near transportation and everything."

Turning back to the issues of renting to foreign missions, Hackett said, "You must have high risk-tolerance because there is no legal way to structure around this. You make an analysis of credit-worthiness and price the deal to a large degree based on the risks you are facing. You go on your business instincts. There is no way to eliminate the risk, but there are ways to mitigate the losses, perhaps to get a year or two's rent."

Concurred Mollen, "There are enough problems in the real estate market and enough challenges that many owners simply conclude that they would rather avoid the issue entirely. When you are dealing with a foreign embassy, legal theories and legal principles are impacted by sensitive foreign relations that are not within the control of the owner. Owners want rent, not law review articles."