Reducing risk of front-end concessions.Extensive tenant concessions are a way of life today. For tenants signing long-term leases for large blocks of New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of Class A office space, concession packages worth up to three years of fixed rent (apportioned ap·por·tion tr.v. ap·por·tioned, ap·por·tion·ing, ap·por·tions To divide and assign according to a plan; allot: "The tendency persists to apportion blame as suits the circumstances" between work letters, work allowances and free rent periods) are not uncommon. Such packages are clearly high cost. To compound the owner's risk, the rate of tenant defaults has perhaps never been greater than in this economy. However, the lease transaction may be structured to reduce the owner's risk created by large front-end concession packages. This can be accomplished by maximizing the owner's security and properly timing the implementation of the tenant concessions. The extent to which this can be effected, however, is a function of the dynamics of the particular negotiation and the cash position of the tenant. Maximizing Owner's Security Letters of Credit. Tenants generally deplore de·plore tr.v. de·plored, de·plor·ing, de·plores 1. To feel or express strong disapproval of; condemn: "Somehow we had to master events, not simply deplore them" posting significant cash security deposits, even though New York law requires they be deposited in a separate account and not commingled with the owner's general funds. However, a tenant who balks at posting even a small cash security deposit may be receptive to delivering as security a clean, irrevocable letter of credit Irrevocable letter of credit Assurance of funds issued by a bank that cannot be canceled or amended without the beneficiary's approval. ("LC') in an even larger amount. Some owners are reluctant to accept an LC because of their fear that the issuing bank Issuing bank Bank that issues a letter of credit. will deny payment upon receipt of instructions to that effect from the tenant with whom it may have a long-standing relationship. However, a good owner's attorney can minimize this risk by carefully circumscribing in the LC (which would be attached as an exhibit to the lease) the requirements for a draw down; this prevents the bank from "going beyond the four comers of the document" to ascertain grounds upon which to deny payment. From our experience, few banks are willing to risk liability to the owner-beneficiary for refusing to honor a draft drawn and tendered in strict accordance with the terms of an LC. If the tenant resists posting an LC in the desired amount for the entire lease term (which may require the tenant to pledge collateral to the issuing bank for such period), the owner should allow the tenant to reduce the LC at one or more intervals during the term, if not then in default. This technique provides the owner with the maximum security when it is most critical to him, i.e., when he has not yet been able to amortize amortize To write off gradually and systematically a given amount of money within a specific number of time periods. For example, an accountant amortizes the cost of a long-term asset by deducting a portion of that cost against income in each period. most (or perhaps any) of the concession package. Whether or not the lease permits the tenant to reduce the LC, so long as the LC is to be effective, it should provide for automatic renewal by the issuing, bank. The owner must have the right to immediately draw down the LC if not timely renewed well in advance of its scheduled expiration EXPIRATION. Cessation; end. As, the expiration of, a lease, of a contract, or statute. 2. In general, the expiration of a contract puts an end to all the engagements of the parties, except to those which arise from the non- fulfillment of obligations created . Guaranties. Given the attractiveness of the rental and concession package, an owner can increase its leverage upon a tenant's default by obtaining at lease execution an unconditional HEIR, UNCONDITIONAL. A term used in the civil law, adopted by the Civil Code of Louisiana. Unconditional heirs are those who inherit without any reservation, or without making an inventory, whether their acceptance be express or tacit. Civ. Code of Lo. art. 878. UNCONDITIONAL. guaranty As a verb, to agree to be responsible for the payment of another's debt or the performance of another's duty, liability, or obligation if that person does not perform as he or she is legally obligated to do; to assume the responsibility of a guarantor; to warrant. from the principal of a closely held A phrase used to describe the ownership, management, and operation of a corporation by a small group of people. In a closely held corporation, the same people often act as shareholders, directors, and officers, and no outside investors exist. tenant or the parent of a corporate subsidiary. If an unlimited guaranty is rejected, the owner should press for a guaranty limited either with respect to the amount guaranteed or the time period it will remain in effect. Should even a limited unconditional guaranty be refused, as a last resort an owner should request a guaranty which would be effective immediately, but only be enforceable if the tenant should file bankruptcy. This is preferable to no guaranty at all. |
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