State legislates lease cancellation; bill clears the way for SUNY, CUNY relocations.

Enabling legislation signed-off by both the State Assembly and Senate last week paved the way for the City University of New York's long-planned consolidation in condo space at the former B. Altman Building at 34th Street and Fifth Avenue. The move, however, raises questions on how owners of state-tenanted properties and their lenders will view transactions with the state in the future.

The bills, Assembly #8285 and Senate #1746-A, effectively allow the state to terminate their ongoing lease for the State University of New York School of Optometry at 315 Park Avenue South (at 24th Street), despite the fact that the lease runs through 2004. Owners of that property, TM Park Avenue Associates of Chicago, are contemplating plans to file a Notice of Claim against the State in either the Court of Claims or Supreme Court to block the move.

The SUNY School of Optometry currently occupies more than 200,000 square feet at a cost of $7 million annually at 31:5 Park Avenue South, constituting approximately 70 percent of the property. Owners say that the pre-mature termination of the lease may cause the building to become insolvent.

In a complicated maneuver designed to save nearly $10 million annually in the SUNY budget, the School of Optometry plans to move into the vacated CUNY space at 33 West 42nd Street, which is owned and operated by the State Dormitory Authority. That space will become vacant when CUNY consolidates its operations of their Graduate School and University Center in 600,000 square feet at the B. Airman site.

If completed, the transaction would completely fill the long-vacant B. Altman development, which has already received commitments for 200,000 square feet from the newly-created Science, Industry and Business Library of the New York Public Library, and another 50,000 square feet from Oxford University Press.

State Senator Roy Goodman, the Manhattan Republican who sponsored the bill, said the CUNY and SUNY campuses would save money by relocating. He said the cost of paying off bonds to be sold by the State Dormitory Authority to finance the acquisition, estimated at about $11.7 million annually, would be less than the $12 million now being paid to lease the School of Optometry's current space and the space adjoining the Graduate Center's main campus.

While the legislation may prove a boon for the owners of the B. Altman site, KMO-361 Realty Associates, whose major players are Earl W. Kazis, Peter Malkin and Morton L. Olshan, and on the surface appears to save the state money, the owners of 351 Park Avenue South are crying foul.

"If this bill passes, it means every landlord will suffer financial hardship," said Stephen M. Mullins, general partner of TM Park Avenue Associates. "Once the government can cancel leases at will, financing institutions throughout the state will be reluctant to lend money to developers with State agencies as tenants."

Senate Bill #1746-A stipulates that "no appropriation shall be available on or after July 1, 1996, or as soon thereafter as the State University College of Optometry shall complete relocation to facilities owned and financed for public purposes, for funding support for privately or commercially leased building space... at 100 East 24th Street/315 Park Avenue South... to reflect the elimination of such funding support due to fiscal deficiencies and unavailability of funds."

According to Ronald H. Sinzheimer and Stephen M. Raphael, attorneys for TM Park Avenue Associates, every real estate lease with the Slate of New York contains an "executory clause." This clause, which refers to Section 171 of State Finance Law, provides, in essence, that if the State agency is abolished and no longer has financial resources available to it, any long-term lease or other financial obligations it has entered into are terminated.

"This move is clearly intended to create a radical re-interpretation of the executory clause," charged Raphael, adding that the legislation will force lenders to view State leases with a skeptical eye. "Up to now, State tenants were considered as close to Triple-A leases as you could get."

"The State is clearly not abolishing the SUNY School of Optometry - just relocating it," said Mullins. "Further, there is no financial hardship to be found. In fact, the State is appropriating an additional $17 million obligation in order to make this deal happen."

Mullins was referring to another element of Senate Bill #1746-A, which appropriates $17.7 million for the "rehabilitation of facilities, planning, construction and equipment' for the School of Optometry. In a separate bill, the State is expected to set aside an additional $80 million appropriation to facilitate CUNY's purchase of the B. Airman space and relocation costs. Owners of that property would not confirm the purchase price.

"The State's position from this date forth is that it will break any lease, regardless of its contractual obligations, to suit its political needs through the guise of legislatively eliminating an appropriation and shifting it to another, more favored, landlord," charged Mullins. "Let no one think this action is being taken with an eye towards fiscal conservatism, as there is no financial savings to the state."

Some financial experts were troubled by the move as well. Frank Harvey of NY Urban, a financing specialist which services lending for such giant insurance companies as John Hancock and Allstate, said "Any owner that has state tenants could be in a precarious situation. If the state can arbitrarily change a law to get out of a lease, then very few people would want to make a loan to those owners."

Conversely, other industry sources said that the owners may backlash against the State, refusing to enter into long-term leases with State agencies without more upfront rent payments and seriously limiting work letter concessions for fear of being stuck with construction costs.

"I think in the near-term this is a very unfortunate situation for this particular owner," commented Bruce Mosler, president of The Galbreath Company. "It also sets a dangerous precedent in that any asset that relies significantly on State tenancy is going to be unfinanceable. It will also make it more difficult for the State to lease space.

In the long-term, I think it will impact State agencies far more. Owners have a choice, and this will make dealing with the State less desirable. It will preclude them from benefitting from market conditions in that owners will be reluctant to offer favorable rent concessions and free-work for fear that the State can arbitrarily cancel a lease."

"The real implication of this legislative sleight of hand is that no landlord or financing institution can be assured that the State will honor its leasehold commitments," said Sinzheimer. "Private owners with government agencies as tenants are in jeopardy."

State agencies currently lease space in more than 100 office buildings throughout New York City, and many lending institutions currently consider these leases to be "Triple-A rated," according to several sources. However, that may change.

"The implications to us are devastating," Mullins said. "But the implications to landlords and banks who finance properties that have State agencies as tenants will be pervasive and long-term."