Manhattan Office Leasing

Here at Shenwick & Associates, we are seeing a significant uptick in reviewing and negotiating commercial leases. For those who have never leased commercial office space in Manhattan, you need to be aware that the market and leasing terms are unlike any other commercial real estate market in America. Here are seven provisions that all commercial tenants should request when negotiating an office lease in Manhattan. Failing to consider these points can cost a tenant a significant amount of money and aggravation.

1. Request free freight elevator usage for move in and move out of the space.

2. Make as few alterations to the space as possible. Let the landlord do as much work as possible and request that the landlord not charge the tenant for plan review of the initial alterations for the space. Remember that the sage advice "construction is never on time or on budget" also applies to leased spaces. Tenants also should have the right to make non–structural alterations to the premises without the consent of the landlord.

3. If the tenant alters the space with the landlord's consent, the tenant shouldn't be obligated to restore the space to its original use when the space is vacated.

4. Assignment\Sublet. The standard for landlord approval should be "not unreasonably withheld," and the tenant should request the automatic right to assign or sublet the space if it sells the business, goes public, transfers its assets to a related entity or merges with another entity.

5. Electricity. There are three ways that landlords charge for electricity in NYC–direct meter, sub-meter and rent inclusion. The cheapest and best option for the tenant is direct meter.

6. Security deposit. The tenant should ask if a Letter of Credit can be substituted for a cash security deposit. If the tenant is required to provide a cash security deposit, the landlord should represent in the lease how many days after the lease expires the security deposit will be returned to the tenant (e.g. 20 days). If the Landlord is asking for more than two months of security, then the tenant should request that if there are no monetary defaults under the lease, the security deposit is reduced to two months of fixed rent after the first year of the lease (this is known as "burn down.")

7. The tenant should request the following representations from the landlord; (a) the electrical capacity for the space; (b) that the premises do not contain asbestos or hazardous materials; and (3) that the HVAC, plumbing, bathrooms, electrical and fire panels and sprinkler be in good working order at the commencement of the lease.

The above are just a few points or provisions to consider when leasing commercial space, and tenants should always retain an experienced commercial real estate attorney before entering into a commercial lease. Please contact me with any questions.

Jim

WSJ: Creditor-Proof Trusts Replacing Offshore Accounts

By ARDEN DALE

As offshore accounts draw greater scrutiny, some financial advisers are having their clients use a special trust as an alternative strategy to shield their assets from potential lawsuits.

So far, 15 states allow the creation of domestic asset protection trusts, which safeguard securities or other assets of the owner. In the past, they weren't widely used and few states allowed them.

One big driver of the trend is that offshore accounts--commonly used to ward off creditors--have grown less popular amid an ongoing Internal Revenue Service crackdown. The tax agency, which also contends the accounts help wealthy Americans evade taxes, has beefed up reporting requirements as well as penalties for violators.

Increasingly, some advisers are having more discussions about domestic asset protection trusts as a matter of course with any client who owns a business, works in a high-risk profession like medicine, or worries that a child may wind up in a divorce.

"We have been seeing a lot more of them," said Edward J. Mooney, managing director of BNY Mellon Wealth Management.

Recently, Mr. Mooney raised the matter with a client who owns a shipping construction business in the energy sector. A boom in the fracking business, which carries the risk of liability over environmental damage, has prompted more use of the trusts, the adviser said.

Anyone who wants to set up a domestic asset protection trust has to be prepared to work with a trustee in the state where the irrevocable trust is established. A client in Illinois, for example, can't set one up in his home state. So an adviser can help find the best state, and work to find a good trustee--usually a corporate trustee--to manage the trust there.

Alaska, Delaware, Nevada, and South Dakota were early adopters of the trusts, and have been the most popular locations to site them.

Illinois adviser Michael C. Foltz has been working with a client who is thinking about selling his electronic parts manufacturing business, but wants to keep his estate from having to pay state estate taxes on the proceeds. Mr. Foltz suggested a trust in a state with no state estate or income tax. He also broached the idea of setting up the trust to protect its contents from future creditors.

"First and foremost, the estate planner is trying to find ways to reduce or eliminate estate tax, and if they can layer creditor protection on top of that, so much the better," said Mr. Foltz, a wealth manager at Balasa Dinverno Foltz LLC in Itasca, Ill., with about $2.1 billion under management.

Robert J. Robes, an estate attorney with Greenberg Traurig in Boca Raton, Fla., said a domestic asset protection trust won't work for someone who sets it up in the face of an impending lawsuit. Instead, it must be in place well in advance of any litigation.

"Be as proactive as you can," Mr. Robes said. "Oftentimes clients react to potential liability when something is starting to bubble up, which is too late."

And don't put assets into the trust that are needed for the family to live on. Instead, think of it as a way to protect a nest egg, he said.


Copyright 2013 Dow Jones & Company, Inc.  All rights reserved.

Adversary Proceedings 101

Here at Shenwick & Associates, our summer is busy with (among other matters), representing clients in adversary proceedings. An adversary proceeding is a lawsuit that is brought within a bankruptcy proceeding and based on conflicting claims, usually between the debtor (or the bankruptcy trustee) and a creditor or other interested party. Adversary proceedings are governed by special procedural rules under Part VII of the Federal Rules of Bankruptcy Procedure.

Typically, an adversary proceeding is commenced when a business files for reorganization under Chapter 11 of the Bankruptcy Code, and then the case is voluntarily or involuntarily converted to a liquidation under Chapter 7 of the Bankruptcy Code. A Chapter 7 bankruptcy trustee is then appointed. Under § 546(a) of the Bankruptcy Code, the bankruptcy trustee has until the earlier of: (1) the later of two years after the entry of the order for relief, or one year after the appointment or election of the first trustee if the appointment or election occurs before the expiration of the two year period after the entry of the order for relief, or (2) the time the case is closed or dismissed, to commence an adversary proceeding.

Typically, the claims a trustee makes against a defendant in an adversary proceeding are for fraudulent transfers (transfers of the debtor's assets to a third party, with the intent to prevent creditors from reaching the assets to satisfy their claims) under § 548 of the Bankruptcy Code and state law (i.e. New York Debtor and Creditor Law, which has a six year statute of limitations) and preferential transfers (transfers made prior to a bankruptcy filing to a creditor by a debtor to the exclusion or detriment of its other creditors) under § 547 of the Bankruptcy Code and state law. A trustee will usually send the defendant a demand letter for recovery of the debtor's assets to voluntarily settle the claims before filing a complaint and commencing the adversary proceeding.

Adversary proceedings are highly specialized in both their procedural rules and the analysis of the merits of the substantive claims for relief against a creditor or other party. If you're involved in bankruptcy litigation or think you may be (i.e. one of your vendors appears to be having financial difficulty), please contact Jim Shenwick.

NYT: Sublets Lure Manhattan Start-Ups

By C. J. HUGHES

To understand how the current office market for technology companies can resemble a Russian nesting doll, with layer upon layer of increasingly smaller subleases, it might help to consider the upper stories of 568 Broadway in SoHo.

In the cast-iron former sewing factory, Scholastic, the publisher, is subletting two floors of space to Foursquare, a social media company. In turn, Foursquare is subletting one of those floors to a handful of other tech firms, including Fueled, which designs apps for phones.

And Fueled has divided its column-lined room as a co-working space, where $650 a month gets a renter a seat and unlimited snacks from jars along a wall.

One of those seats belongs to David Spiro, a self-employed entrepreneur, who sat alone at the corner of a long table on a recent afternoon, a bag of popcorn by his laptop. “I’ve raised some funding,” Mr. Spiro said, “but not nearly enough to afford a typical lease in Manhattan, so this place is great.”

The sentiment could also apply to the daisy chain of tenants in his building, and more broadly to the surrounding neighborhoods.

In the last few months, the area of Manhattan south of Midtown has been awash in deals where early-stage tech companies have opted to take over office space belonging to another tenant, rather than enter into a direct lease with a landlord.

These sublet deals are often preferred, tenants and brokers say, because the rents are usually slightly cheaper than conventional leases. They can also be for shorter lengths of time than the typical 10 years and require a far smaller security deposit up front.

As important, they say, is that the spaces usually come built out, which means essentials like high-speed Internet lines, air-conditioning and conference rooms are already in place. Getting up and running quickly is critical for companies or self-starters that often measure growth in months, not years, analysts explain.

Of course, the office within an office within an office can carry risks. If the first, second or third tenant goes bankrupt, a subletter could find itself without a home. But because their own leases are so brief, these low-rung tenants can also easily wind down operations quickly if, say, their app never catches fire.

“They don’t know about the future, so flexibility is key,” said Heidi Learner, the chief economist at Studley, the commercial real estate firm, who is the co-author of a report on the tech sublet trend. “You don’t know about what head count will be, whether you will get any venture capital funding, or whether you will be acquired.”

In general, subletting is becoming more popular. In the Midtown South area, or from Canal Street to 30th Street, sublets accounted for 19 percent of major leasing activity this year, up from 11 percent in 2010, Studley said.

And between January and April of this year, 33 percent of all the leases signed in Manhattan by tech companies — a major driver of the current economy — were sublets, the report said. Sublet tenants among other industries within the same period were less than half that.

The report also states that the average length of tech subleases is about four years.

Not just any space will do; tech firms almost exclusively want prewar buildings with lofty ceilings and open floors, said Sean Black, a broker with Jones Lang LaSalle. Since that type of converted industrial space is clustered mainly around the Broadway corridor, supply is limited, he added, and demand is robust.

“They like the ‘old world meets new world’ look,” said Mr. Black, whose many tech clients include Foursquare. A lack of walls and cubicles, with eclectic art on the walls, embodies a certain attitude. “The last thing they want to do is conform with corporate America.”

Technology firms have been subletting a bit more space than they personally need, reflecting awareness of heightened demand from a flourishing industry that allows them to rent out extra room to similar companies. Besides, locking in the space at today’s asking rents, which for sublets is about $45 a square foot in Midtown South, according to Studley, is considered wise, because rents are expected to climb, companies say.

“It’s a great way to hedge the lease,” said Derek Stewart, who handled leasing for Foursquare before leaving the company this summer.

Foursquare, which has 120 employees in New York, paid about $45 a square foot in 2011 in a seven-year deal, Mr. Stewart said. But he estimated that with companies like ZocDoc, a physician app service, and Thrillist, a lifestyle site for men, under the same roof, the building had gained a bit of buzz as a popular tech address. That means the space could command $55 a foot today, he said.

But so far there has been little urge to profit off the subtenants, he added, saying that Fueled and the other subtenants also pay about $45 a foot for their space. “We felt kind of badly making money off it,” Mr. Stewart said. “We didn’t want to have a bad name in this tight community.”

Mr. Stewart, who now works for David Tisch, a tech investor, also pointed out that subleases were essential for the survival of the tech community.

In San Francisco, where Mr. Stewart leased two spaces on behalf of tech companies, start-ups can afford direct leases, which often require just three months of rent for a security deposit. But in New York, 12 months of rent is common. “Landlords here are just so risk-averse,” he said.

In a business where a company’s start-up phase can be hypercompressed — Instagram was founded in 2010 and bought by Facebook for $1 billion two year later — short sublets are not unusual.

The news site BuzzFeed, for example, has signed a two-year sublease for space in the new headquarters of Tiffany & Company at 200 Fifth Avenue, across from Madison Square Park. BuzzFeed, which had been based on West 21st Street in a 20,000-square-foot space, will take an entire 58,000-square-foot floor, which is one of seven floors Tiffany has there.

The rent was not disclosed, but Greg B. Taubin, the Studley broker who represented Tiffany, said that comparable sublet space in the area went for $65 a square foot.

 “Companies like this don’t sign long-term leases because they don’t have a crystal ball,” Mr. Taubin said. But for Tiffany, which doesn’t need the space immediately, there’s an upside in cost reduction, too, he added.

Other advantages include having lights on and more people in the elevators, said Bonnie Shapiro, the director of leasing for Allied Partners, an owner of 568 Broadway. “You don’t want tenants touring the building and seeing dark, unused spaces,” she said.

For tenants that may be consolidating or downsizing, the new demand for sublet space may come at a fortunate time. Credit Suisse, the investment bank, which has undergone several rounds of layoffs in recent months, has managed to sublet all its former office space at 315 Park Avenue South, one of three locations it has in Manhattan.

Tech subletters in the 20-story Beaux-Arts tower, which is at East 23rd Street, include VaynerMedia, X+1 and Responsys, as well as Adap. TV, which this month took the entire seventh floor measuring 16,000 square feet. The new space features a red wall decorated with words like energy, creativity and passion, and executive offices around the perimeter have been turned into shared conference rooms. The space is a far cry from its cramped, plain-jane 4,000-square-foot space at 915 Broadway, said Gerry Manolatos, the communications director for Adap. TV.

Mr. Manolatos would not disclose the terms of his lease, only that it is for less than a decade. But in the merry-go-round of the tech sublet market, Adap. TV is cashing in itself; its former space on Broadway is also being sublet to a tech firm, he said.

“It’s like one deal leads to the next,” Mr. Manolatos said. “Everybody’s thinking, ‘Who knows where we will end up next?’ ”

Copyright 2013 The New York Times Company.  All rights reserved.

Budget sequester suspends bankruptcy case audits

Here at Shenwick & Associates, many of our clients have complex bankruptcy cases involving factors that often lead to increased scrutiny by the Chapter 7 Bankruptcy Trustees assigned to the cases, as well as by the United States Trustee Program (USTP), a component of the U.S. Department of Justice that oversees the administration of bankruptcy cases and Bankruptcy Trustees. Some of these factors include:
• High levels of income, expenses and/or assets
• Tax debts
• Business debts

As part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the USTP established procedures for independent accounting firms to audit petitions, schedules, and other information in consumer bankruptcy cases.
However, due to the federal budget sequestration that began on March 1, 2013, the USTP has indefinitely suspended its designation of cases subject to audit and notified the independent accounting firms performing the audits. At the conclusion of fiscal year 2013 (Sept. 30th), the USTP will make public information concerning the aggregate results of the debtor audits performed during fiscal year 2013.

To find out how you can minimize the chances of an audit of your bankruptcy case through pre–bankruptcy planning, please contact Jim Shenwick.

NYT: Because the Board Says So

By JOANNE KAUFMAN

No long chats with the doorman.

No umbrellas or wet boots in the hall.

No welcome mats or decorations on the front door.

No wearing flip-flops in the lobby.

These are but a few of the more extreme rules that apartment boards in New York City have imposed, or at least thought about imposing, on the residents of their buildings.

The average co-op or condominium has two dozen house rules. “Typically, they’re quality-of-life rules meant to benefit everyone in the closed community,” said Toni Hanson, a vice president and senior managing director of Douglas Elliman.

While there’s good sense behind many of these rules — don’t hang or shake things out the window; lay off the stereo before or after a certain hour — certain strictures can charitably be described as quirky, not to say capricious or overreaching. Your home is your castle? Think again.

It’s all, of course, in the interest of helping a building full of strong-minded New Yorkers coexist in (relative) harmony. Co-op boards have long issued directives about deportment and decorum, and condo boards are increasingly following suit. For the most part, they are well within their rights. Residents can either get with the program or get behind a co-op coup to remove the big-brother board members in their midst.

Generally, thanks to what’s known as the business judgment rule, boards have broad latitude in making, amending and rescinding house rules — the good, the bad and the decidedly wiggy. If board members think a situation needs to be addressed, they can address away without input from residents.

According to Steven D. Sladkus, a real estate litigator at Wolf Haldenstein Adler Freeman & Herz, one of the few exceptions is a stricture with a financial impact, for example, a proposal to institute a flip tax. “Then,” he said, “there has to be an amendment to the governing document, which requires a vote of the shareholders.”

Certain boards are more controlling than others, said Aaron Shmulewitz, who heads the co-op-condo practice at the law firm Belkin Burden Wenig & Goldman. “Some seek to regulate everything you do in a building, which I think would make it a less enjoyable building to live in,” he said. “But some residents like that, because they say it keeps inappropriate behavior out and keeps prices up.”

Rules tend to fall into several categories, including the use of shared spaces like the lobby or the elevator, pets and their comportment, and outward appearances — both of the apartment owner and the apartment itself. And then there’s the whole vetting process to even get into a building.

For one woman, an office coordinator in her late 20s who moved into a one-bedroom in the Clinton Hill section of Brooklyn last summer, it was the application request that took her by surprise.

In addition to the employment, asset, credit, reference and background checks a co-op board generally requires before scheduling The Interview, the officers of this particular building also demand that a security company check out the current residence of would-be buyers, a visit for which applicants must pick up the $50 tab.

“The lease on my rental was up, so I was staying with my parents on Long Island,” said the woman, who requested anonymity to avoid offending the co-op board. “I don’t think my childhood bedroom was going to give any clues about how I live, but if that was the policy, that was the policy. I wanted the apartment, so I was willing to do what I needed to do.”

The scrutinizing, which took 45 minutes, included questions about the number of beds in each room, the number of people who slept in the beds and the nature of the flooring. The inspector also took photos of the interior of the house, the applicant and her parents.

Reader, she passed muster — but remains puzzled. “I guess the board members wanted to make sure I was a regular person,” she said.

When it comes to the space right outside an apartment, Eva Talel, a partner at Stroock & Stroock & Lavan, said that in certain buildings (and not just those that cater to the hoity-toity), tenants who deploy welcome mats, keep the front door propped open when they’re home, decline to lock the door when they leave and hang decorations on that (unlocked) door, are guilty of inappropriate behavior — guilty, in any case, of breaching house rules.

“But one person’s decoration is another person’s religious symbol,” Ms. Talel said, referring to mezuzas, prayer cases that observant Jews affix to their door frames. “They can create controversy as well as a lawsuit. But the goal is uniformity within the building.”

That seems to be the goal at the Upper East Side building where Mr. Sladkus lives. There, it’s “a violation to leave wet umbrellas, boots, shoes, et cetera, in the hallway outside your door,” he said. Mr. Sladkus received a reminder of this stricture via a building-wide memo one wintry night after his two young daughters — “briefly,” he said — left their snowy boots and umbrellas leaning against the door jamb.

“I responded with a terse, intemperate e-mail how absurd I thought it was, since this is a family-friendly building,” Mr. Sladkus recalled. “And the response was that the building was redoing the halls and didn’t want to get them mucked up.”

He then wrote back: “I can see if we had mahogany-lined hallways it might make sense, but we’re not living in the Taj Mahal.” And, he added defiantly, he continues to leave his umbrellas in the hall. 

Lucky for Mr. Sladkus, he doesn’t live in the Midtown East co-op where Dennis Paget is the president of the board, and where the “no umbrellas and boots in the hallways” rule is also in place.

“I tell the staff people to confiscate them,” Mr. Paget said.

Other “thou shalts” and “thou shalt nots” seem like a throwback to an upstairs, downstairs world. “The more controversial rules have to do with which people are required to use the service elevator,” Ms. Talel said. “Some buildings require it of everyone but residents and their guests. Some buildings may make an exception for nannies if they’re with their charges, and home health care aides if they’re with their patients.”

Mr. Shmulewitz represents a Park Avenue building that for a few decades had a house rule barring nannies and other domestic employees from using the passenger elevators at any time. “The children had to be taken down by their caregivers in the service elevator,” he said. “It wasn’t a coincidence that they were often of a different ethnic persuasion than the shareholders.”

“I think this shocked the conscience of the residents,” Mr. Shmulewitz continued. “There was enough shareholder dissent that the law was rescinded five years ago.”

In some buildings, the double standard doesn’t involve residents and the hired help; it concerns residents and temporary residents. At a condominium on East 79th Street, people subletting apartments are not permitted to have pets, smoke or use the gym. “When a condo board imposes rules like this, they want to maintain differentiation and to keep things special for permanent residents,” said Gary Malin, the president of Citi Habitats. “They’re trying to make sure amenities like the gym don’t get overtaxed. The funny thing is that gyms rarely get used anyway.”

Dogs are another bone of contention, thus the source of some singular rules. One East Side condo allows man’s best friend but specifically bans pit bulls, Rottweilers, German shepherds, Doberman pinschers, huskies, malamutes and chow chows, and reserves the right to prohibit additional breeds.

Steven Wagner, a real estate lawyer, is on the board of a Midtown East co-op that is broad-minded about breeds but requires prospective canine residents to submit to an interview. “It’s a funny rule,” Mr. Wagner said. “I’m never sure what to ask. I just say: ‘Nice doggy,’ and I pet the dog. And then I say, ‘I have no more questions.’ No dog has bitten me yet. I think that would be a problem.”

Jeffrey S. Reich, a lawyer at Wolf Haldenstein Adler Freeman & Herz, recently encountered an Upper East Side building that allows residents with pets to ride on the passenger elevator, but requires maids or dog walkers tending resident pets to use the service elevator.

“A shareholder took offense,” Mr. Reich added, “because she didn’t think the service elevator was clean enough for her dog.”

Some board fiats are catchalls to deal with unforeseen behaviors and situations. “A lot of the rules are reactive,” Ms. Talel said. “They’re a response to a negative experience in a building or a response to something that happened in another co-op. People will hear about it and they say, ‘we can’t let that happen in our building.’ ”

That may explain the Chelsea co-op where a shareholder offered music lessons at home and the board responded with a rule that “no resident or their guests shall sing or coach another singer for more than two hours followed by a break of at least two hours — up to a maximum of six hours per day.”

Several years ago, Mr. Sladkus said, his firm did work for an Upper East Side co-op with “a nice elderly woman who enjoyed spending her days in the lobby. She would read, she would greet the children as they came in after school,” he recalled. “She was lonely is what she was. She wasn’t doing anything destructive, but the lobby wasn’t sprawling.”

Thus, some shareholders took issue and the board took action, drafting a rule prohibiting lobby visits that exceeded two hours. “It was passed,” Mr. Sladkus said, but some residents took pity on the lobby greeter and the rule was rescinded.

Similarly, Mr. Shmulewitz tells of a building whose shareholders were perturbed that a wheelchair-bound resident was spending long periods of time in the lobby. “They felt it detracted from the look of the building, so they drafted a house rule that said ‘no wheeled vehicles in the lobby,’ ” he said. In the end, the rule was not enacted. “But,” Mr. Shmulewitz said, “a crafty board with an experienced lawyer can make a rule to address something they think is objectionable without seeming to target the situation that caused the problem in the first place.”

Lobbies, it seems, are as much a flash point as elevators. Recently, Jay Molishever, a sales agent at Citi Habitats, took a client to look at an apartment on First Avenue in the high 50s. “It was a rainy day, but the doorman said there was a rule that buyers and brokers were not allowed to wait inside,” 

Mr. Molishever said. “My buyer was furious. He’s Israeli but looks Hispanic and he was concerned that it was prejudice.” When the selling broker showed up, the buyer announced he didn’t want to live in the building. “He thought the rule was rude and exclusionary and not the sort of place that merited it,” Mr. Molishever recalled. “He said: ‘This isn’t a Park Avenue building.’ ”

In some instances, house rules seem more than anything like pre-emptive strikes. An Upper West Side co-op that wanted to bar a shareholder from using his apartment to screen what Mr. Shmulewitz characterized as “a highly charged politically controversial movie.” Thus, house rule No. 33, which in addition to limiting gatherings to 20 nonresidents and demanding — in advance — the names and addresses of all guests at a gathering of more than 10 people, also prohibited any gathering with a fund-raising purpose — a key component of the event in question.

Penalties for noncompliance vary. Fines are one option for a board. “They can seem like slaps on the wrist — $50, $100,” Mr. Sladkus said. “But they do start adding up for repeat offenders.” Some buildings set at a certain amount for a first offense, with subsequent offenses carrying steeper fines.

“And some governing documents provide for unpaid fines to be treated like unpaid maintenance or common charges,” Mr. Sladkus said, which would mean that offenders could lose nonessential services like food deliveries and use of the gym. And persistent violations could land the shareholder in the cross hairs of a claim “that gets your lease terminated,” he said.

Most boards think carefully before passing a rule and take pains to look at it from all angles, said Ms. Hanson of Douglas Elliman. “They’re residents, too,” she said, “so it’s in their best interest to be judicious.”

Perhaps checking out a building’s fiats isn’t quite as important as checking out its financials. “But you do want to see if they suit your lifestyle,” Ms. Talel said. “If you’re having 100 people to a party, some buildings require you hire someone to stand at the front door to identify everyone. Some buildings even have a limit on the number of these parties you can give each year.”

Still, whether it’s the cachet of the address, the flow of the rooms or the view from the library, “if you’re in love with an apartment you’re not likely to change your mind based on a house rule,” Mr. Shmulewitz said. “There are very few egregious enough for that.” 

Copyright 2013 The New York Times Company.  All rights reserved.