The Sinreich Group

Attorneys at Law

(212) 317-1131

The Sinreich Group is a New York City based real estate law firm that represents public and private sector clients in connection with the acquisition, development, leasing, financing, repositioning and disposition of real estate throughout the country.

Hudson Yards: Future or Folly?

Hudson Yards on Manhattan’s far west side, and said to be the largest private real estate development in the U.S., opened on Friday to great fanfare. In the works for 20 years, the $25B, 28-acre project will include 15 buildings with 18M square feet of office, retail and residential space, surrounding a $200M climbable public art installation.   

The Shops & Restaurants at Hudson Yards with a view of the “Vessel.”

The Shops & Restaurants at Hudson Yards with a view of the “Vessel.”

Fans refer to it as one of the greatest transformations of a grossly underutilized part of New York City and critics deride it as a sanitized playground pandering to the rich. According to a recent analysis by The New School, public infrastructure financing that paid for the subway extension to Hudson Yards, parks and a new public school for the project, together with job creation tax benefits, add up to a public subsidy of $5.7B for the project, well in excess of the widely criticized $3B offered to Amazon. 

The Related Companies made a $1B commitment to secure the right to develop Hudson Yards. Together with its co-developer, Oxford Properties (headquartered in Canada), Related kept the project going in spite of years of economic decline triggered by the recent great recession. As Hudson Yards began to materialize spurred on by the High Line (the adjacent public park that has garnered widespread praise and attracts throngs of visitors) development opportunities washed over the surrounding neighborhood. Property values have skyrocketed and numerous adjacent sites have been, and will continue to be, redeveloped. 

No matter your perspective on large-scale development projects supported by taxpayer money, it’s hard to ignore the value creation exemplified by Hudson Yards. Once a deserted stretch of rail yards surrounded by a motley array of buildings in various stages of disrepair, Hudson Yards can now boast of job creation numbering in the thousands, tax revenues in the billions and public amenities available to anyone who cares to partake. 

What the Future Holds

As 2019 looms ever larger on the horizon, we’ve shifted our focus to what’s in store for the real estate industry in the new year, based on the Emerging Trends in Real Estate 2019 report recently published by PwC and the Urban Land Institute.

The need for new warehouse and distribution facilities will accelerate.

The need for new warehouse and distribution facilities will accelerate.

Here’s a quick summary of what we have to look forward to.

Emerging Trends in Real Estate

1. Intensifying Transformation. Transformation on multiple fronts will characterize real estate in 2019, including changes in investment criteria, the deployment of technology and big data, and an accelerated reconfiguration of how real estate is used and occupied across all property types.

2. Deceleration of Growth. A declining labor force (the result of lower birth rates and sharply reduced immigration), coupled with low productivity have led to low levels of projected GDP growth and a projected reduction in the growth of real estate markets across the U.S.

3. Renewed Interest in Suburbs. As more and more millennials form family units and have children, there will be an increase in their interest in the suburbs around gateway and 18-hour cities. The U.S. Census Bureau reported that 2.6M people moved from principal cities to the suburbs in both 2016 and 2017 and that number is expected to increase.

4. Amenity Creep. No longer confined to the hospitality industry, hospitality-type amenities and services, such as yoga studios, cold storage rooms for food, and concierges, are being incorporated into retail, office and residential real estate with increasing regularity. Bare bones fitness centers are no longer enough, as tenants push for robust amenities packages.

5. Expected Best Bets. As e-commerce continues to gain speed, and industrial vacancy rates remain at historically low levels, the need for new warehouse and distribution facilities is expected to accelerate. The redeployment of under-utilized retail real estate is also expected to accelerate as reductions on the price of obsolete shopping centers will enable developers to more easily provide mixed-use solutions.

In the Weed(s) Part 3

In September 2015, when we published our first In the Weed(s) post about cannabis-related real estate, medical marijuana had been legalized in ten states (plus D.C.), five of which had also legalized cannabis for recreational use. Fast forward to today, and 30 states (plus D.C.) have enacted laws legalizing marijuana. Equally important, as of October 17th, Canada became the first industrialized country to legalize recreational and medical marijuana use.

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Throughout Canada and in each U.S. jurisdiction where cannabis has been legalized, real estate is a necessary common denominator for cannabis cultivation, transformation and retail distribution. In 2017, cannabis sales topped $9B in North America and according to a recent report by Grand View Research, Inc., annual global cannabis sales are expected to reach $146B by the end of 2025.

Beware of the Feds

If you're thinking this would be a great value creation opportunity for your property, keep in mind other post-2015 changes. Earlier this year, the Department of Justice rescinded Obama administration policies creating a safe harbor against enforcement of federal marijuana laws in states that have legalized marijuana. Thus there is no longer an official federal policy that protects against criminal federal prosecution for the use, possession, cultivation and transportation of marijuana notwithstanding compliance with state law. This potential for federal prosecution extends to a wide range of cannabis-related activities, including knowingly leasing, renting, maintaining, managing or controlling a place where marijuana is grown, transformed or sold.

State Laws Provide De-Facto Shield

Notwithstanding the increased risk of federal criminal prosecution, the de-facto shield of favorable state laws has enabled cannabis-related facilities to continue to emerge from the shadows. Industrial premises used for indoor cultivation and transformation are seemingly as state-of-the art as those found in the more traditional, similarly highly regulated pharma industry. Retail dispensaries are no longer relegated to dilapidated buildings in fringe locations.

Minimize Risk

To strike the right balance between the enormous opportunities this industry represents for landlords and tenants and the risks of owning, leasing and occupying cannabis-related real estate, a collaborative landlord/tenant approach to strict regulatory compliance and conflicting real estate needs is key. That way, neither party gets stuck with the whole bill but none of the benefits.

Rags to Riches?

Earlier this year, I visited Asbury Park, New Jersey, which, like Detroit, suffered a prolonged decline after enjoying a storied past. In Asbury's case, its good fortune was fueled by a seaside location and thriving music scene. Race riots, suburbanization, and competition from other shore towns ultimately drove 30+% of its population below the poverty line, and by 2000 most downtown properties were vacant and boarded up.

Historic music venue a block from the boardwalk

Historic music venue a block from the boardwalk

The Revitalization Challenge

Fast forward to today and Asbury Park is in the midst of a dramatic redevelopment, including its mile-long boardwalk area and adjacent 30+ acres. While the revitalization of Asbury Park and Detroit differ in scale, there are many similarities. These include massive infusions of money, talent, and the determination needed for sustained success, as well as a dizzying, stubborn risk of failure.

Asbury's ascent began in 2002, when the city approved a redevelopment plan, and Asbury Partners (later acquired by iStar) was named Master Developer. In 2007, Madison Marquette entered the market to develop the boardwalk and adjacent venues into a retail/entertainment nexus.

Preserving a Rich Heritage

The redevelopment plan seeks to preserve Asbury Park’s cultural richness, evident in the re-purposing of Asbury’s iconic boardwalk venues such as the Paramount Theater, the Convention Center and the rotunda shaped Howard Johnson’s beachfront restaurant. Interestingly, Madison Marquette has opted not to lease or license these venues to third party operators. Instead, it has maintained tight control over programming designed to attract a diverse audience by partnering with top tier sources of high-quality entertainment, including the New Jersey Performing Arts Center (NJPAC) and Live Nation.

Looking Ahead

iStar has been developing new residential and hospitality projects in recent years, with its sights now firmly set on completing the Asbury Ocean Club, a 17 story mixed use building that will include residential condominiums, a luxury boutique hotel and 23,000 sq. ft. of retail space. With prices for one bedroom units starting at $900,000, brisk sales of Ocean Club apartments would be a strong indicator that Asbury Park’s fortunes are changing.

Time will tell whether Madison Marquette and iStar’s vision for Asbury Park will become a reality, and we applaud both companies for taking it on.

Time Kills Deals

As we head into the dog days of summer, the importance of keeping everyone’s foot on the gas pedal during commercial lease negotiations is magnified, given the tempting distractions of summer. Adhering to this ‘urgency mandate’ is one of our key Black Box strategies for getting retail, office and industrial leases over the finish line.  

The legal lease negotiation process

The legal lease negotiation process

Following up on our April Back to Black blog post, this month we take a deeper dive into the underpinnings of the legal process of commercial leasing for the landlords, tenants, brokers and lenders whose real estate fortunes are tied to its success.

Precision vs Urgency

Our focus today is on the precision vs urgency axis: the conflict between the need to get everything right and the reality that time kills deals. To effectively traverse this axis, the starting point for me with every new client is to earn the right to move fast. By demonstrating command over the details and nuances of the transaction at hand in a way that transcends that particular transaction, I make sure that my client gains a strong level of comfort that they made the right choice of attorneys.  

 Simultaneously I find out where my client’s focal point is on the urgency/precision continuum generally and specifically for the lease we are working on.   
Some of my clients read every word of every document they sign and for them, precision down to crossing every “t” and dotting every “i” is crucial. I have other clients who take more of a big picture approach. In fact one said to me: “We’re not interested in crossing the ten “t’s” in every sentence, eight out of ten will do. We’re much more interested in getting the deal DONE.” 
“But of course,” he added, “We need to protect ourselves and make sure the document accurately reflects the deal.”

Achieving Precision

As this client articulated, no matter where a client stands on the precision vs urgency axis, every client needs to know they have an acceptable amount of precision insurance. And no lawyer worth their salt would ever finalize a document they knew to be sloppy, wrong or ambiguous.
During lease negotiations, I actively manage two aspects of the precision goal. The first is expressing each concept in the lease with clarity so someone else can understand it, both today and ten years from now. The second is coherence: making sure all the provisions work together. For example, if the landlord’s work can’t be performed until the tenant’s plans are complete, other provisions of the lease that need to come together to trigger the all-important obligation to commence rent payments have to be coordinated accordingly.

Respecting the Urgency Mandate

At a certain point in every transaction, urgency trumps precision. Managing this tension with the endgame in sight is one way we make sure the process doesn't jeopardize the outcome. And that’s part of our strategy for creating value as we toil away in the black box.

Traversing the Cutting Edge

I was in Washington, D.C. last week to lobby on Capitol Hill on behalf of the real estate industry, and had the pleasure of meeting with friend and colleague Margarita Foster, Editor-In-Chief of NAIOP’s Commercial Real Estate Development magazine. Here are three concepts recently featured in the magazine that captured our attention:

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Meet Me in the Trees

In response to employee requests for non-traditional workplaces that offer connections to nature, fresh air and sunlight, Microsoft has developed three outdoor meeting spaces in the Douglas fir trees surrounding its Puget Sound headquarters. Ranging from 500 to 900 square feet, these meeting spaces are located 12 feet above the ground and are anchored by a towering 150-year-old fir tree.

Though two of the structures are covered, none are heated, and all are open to the elements. These treehouses have been so popular that their hours of operation were extended to seven days per week within a month of opening, and use of the two that  are covered is not deterred by rain. Although there is no hard data yet, it is expected that these non-traditional workspaces will facilitate creativity and out of the box solutions.  

Freight Mobility

While efforts to improve human mobility have garnered a lot of attention, the technological innovations triggered by the out-sized demand for new and better freight mobility are also compelling. We’ve discussed the emergence of drone deliveries in past blog posts, and were intrigued to learn about two other innovations that are currently being tested: truck platooning and hyperloops.   

Truck Platooning. Truck platooning is the connecting of two or three trucks traveling from one place to another (which can be done wirelessly or physically) to take advantage of fuel-saving aerodynamics allowing the truck(s) in the back to coast in the wake of the lead truck. Resulting cost savings are estimated to be +/- 15%.  
Hyperloops. Hyperloops are vacuum tubes through which pods containing passengers and/or freight can travel resistance-free over long distances at high speeds. The Maryland Department of  Transportation has conditionally approved its portion of a hyperloop proposed by Elon Musk that would connect New York City and Washington, D.C. 

Future-Proof Your Leases

We believe that new transportation modalities, whether for people, freight, or both, and new types of office space, will impact the built environment in ways that can’t be envisioned yet.

Detroit: A Tale of Two Cities

Detroit is a fascinating example of stark contrasts. After spending the better part of a week there with 4,000 other real estate professionals at the Urban Land Institute Spring Meeting, I am inspired, impressed and eager to see what the future holds for the Motor City. 

Detroit Challenged.png

Detroit’s Rise and Fall

As the home of the automobile industry, Detroit thrived for the first half of the 20th century, and by the 1940's was the fourth largest U.S city. Home to over 2 million people in its heyday, Detroit boasted iconic commercial buildings and mansions and widespread home ownership. But as the fortunes of U.S. car manufacturers waned, so went the fortunes of Detroit. Decades of public and private disinvestment resulted in a population that dwindled to fewer than 700,000 inhabitants, deserted neighborhoods and the largest municipal bankruptcy in American history.

An Urban Renaissance

Fast forward to 2010, when Dan Gilbert decided to relocate his Quicken Loan empire from the Detroit suburbs to downtown. In conjunction with this relocation, Gilbert's companies have invested billions to revitalize and redevelop the city, triggering what can easily be characterized as the most exciting urban renaissance in modern history. Rotting buildings throughout the downtown core have been redeveloped into well-occupied office, retail and residential properties. Population loss has been transformed into population growth, and land prices are said to have doubled over the past 18 months alone. There is a food scene, a music scene, a new 19,000 seat arena, new retailers and a real sense of optimism and opportunity.

Challenges Ahead

On the other hand, and not surprisingly, much remains to be done. The 'neighborhoods' which occupy the majority of Detroit's 139 square miles remain blighted, deserted and challenged. The verdict is not yet in on the extent to which the renaissance of the past 8 years can be sustained and expanded. I came away from the conference enthusiastically optimistic about the future of Detroit, but only time will tell.  

In order to minimize the risk of what the future holds in cities everywhere, both landlords and tenants need to consider now how to split the resulting costs and benefits. That way neither party gets stuck with the whole bill but none of the benefits.   


Back to Black

As the real estate industry braces for what is likely to be a challenging point in the boom/bust cycle, getting each commercial lease over the finish line  takes on greater importance and requires greater finesse. As each lease we work on presents unique challenges shaped by the current real estate climate, we’ve found that our Black Box strategies for minimizing the time, cost and risk of the legal leasing process are more important than ever.        

We originally published our Black Box series in late 2014 and early 2015, and think this is a good time to revisit it.

Here is our introduction to the Black Box.

The legal lease negotiation process

The legal lease negotiation process

For most real estate professionals, the legal leasing process is a black box. Once the brokers and principals agree to a few salient business terms, the lease disappears into that black box and there is little understanding of exactly what the process is, let alone how to successfully manage it.

Opening the Black Box

The legal process of commercial leasing can, at its most basic level, be summed up by imagining two intersecting axes of conflict that the attorneys need to traverse as they move toward the finish line (see illustration above).

The first axis represents the conflict between precision and urgency. The need for precision can be likened to the need for adequate insurance. The hope is that you’ll never need to depend on it, but boy if you do, having it is essential.  

The conflicting tension at the other end of this axis is the urgency to get the lease signed. This stems from the reality that time kills deals and the longer your lease lingers in the black box, the more likely it is that the other party will be distracted by a cute new puppy or the shiny penny over there that will trump the lease in the box.

The second axis represents the conflict between the desire to get it all, or go for the jugular, and the need to accommodate the other side and pursue win-win solutions.  

At a certain point in every transaction, urgency trumps precision, and the need to accommodate trumps the desire to get it all. But there is an infinite number of paths to that all-important point, and figuring out the most direct one is often tricky. In addition, knowing you’ve arrived at that point can be elusive and requires an intuitive sixth sense even the most experienced attorneys don’t always have. The result is often a process that takes too long, costs too much and jeopardizes the outcome. 

Office Space Evolving

This month we explore the intersection of corporate real estate and the co-working revolution that is transforming office use globally. This was the topic of conversation at a recent meeting of Fortune 100 company real estate executives, as related to me by Ed LaGrassa, President of Chilton Real Estate International, who chaired the meeting. 

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Much of the give and take at this meeting focused on the benefits and challenges of adapting co-working environments most commonly associated with start-ups and small companies to the real estate needs of large organizations.  

Enterprise Space: The Next Step     

This hybrid concept is often referred to as enterprise space, a term coined by WeWork, the purveyor of 12M+/- square feet of co-working and enterprise space in 15 countries around the world. The essential difference between enterprise and co-working spaces is that enterprise space is solely occupied by one company.  

For the corporate executives at the meeting, the primary allure of replacing traditional offices with enterprise space can be summed up in one word: flexibility. Ideally, long lead times, tedious lease negotiations, up-front capital intensive tenant improvement costs and lengthy, set-in stone occupancy periods would be eliminated.  

But beware, the executives warned each other. Before committing to an enterprise location, it's critical to consider how the densely occupied, often noisy co-working model that enterprise locations are based on, may need to be modified to  accommodate a particular large organization. 

Understanding the Economics   

One topic that the executives were not able to pin down is the economics of occupying enterprise space. While the capital-intensive, up-front investment in tenant improvements is eliminated in co-working transactions, the up-front price tag is not likely to be eliminated when it comes to enterprise space that is designed and built to suit the specific needs of its sole corporate occupant.

Co-working space bears a premium that is hard to translate to enterprise space. A sampling of co-working office pricing across the U.S. by JLL in 2017 revealed a per square foot price of $139, compared to an average downtown Class A rental rate of $49.59: a 181% premium. Factor into this pricing an average co-working density of 52+/- square feet per person and adjust that for the lower density rates that, according to these corporate executives, would be more suitable to enterprise space, and the pricing becomes uncertain and potentially more extreme. 

 Stay Tuned 

In spite of these challenges, corporate occupants, including Microsoft, Facebook, Bank of America, Starbucks and HSBC, have signed on for the enterprise experience. These early indications are positive, but it remains to be seen whether the enterprise product will enjoy long term, meaningful success.   

Breaking News — NYC Retail

As we move into 2018, the challenges faced by brick and mortar retail continue to garner interest. Armchair pundits loudly proclaim New York City retail is in especially deep decline. But the facts don't support this conclusion, as evidenced by the recently published tenth annual New York City State of the Chains, 2017 ranking. This thorough and carefully researched report by The Center for an Urban Future (CUF) presents a more balanced view of NYC retail. 

Chelsea, NYC

Chelsea, NYC

Here are some of their conclusions:  

Growth Spearheaded by Food

The number of chain store locations across the city increased for the ninth year in a row, but fewer chains expanded in 2017 than in the past.

Growth was spearheaded by restaurants and food-related retailers. Overall, food-related chains are responsible for 41% of the growth in national retailer locations in NYC over the past decade, exceeding all other retail categories.

34 new retailers were added to the NYC ranking in 2017. Among them were Adidas, Aldi, Advance Auto Parts, Argo Tea Coffee, Dig Inn, Bonobos, Fresh & Co., Paris Baguette, Warby Parker, Baked by Melissa and Bareburger, bringing CUF's list of national retailers to 349, with 7,873 locations city-wide.  

Dunkin' Donuts & MetroPCS in the Lead

For the ninth consecutive year, Dunkin' Donuts topped the list as the largest national retailer in New York City, with a total of 612 stores. A new retailer took over the number two position in 2017. MetroPCS, the cellular phone services provider, added 119 locations in 2017 to edge out Subway, with 445 stores across the city to Subway's 433. MetroPCS is now the top cellular phone services retailer in each of the five boroughs. Spurred by the growth of MetroPCS, mobile phone retailers finally overtook NYC apparel retailers in 2017.

Rounding out the list of the top 10 national retailers in NYC are Subway, Starbucks, Duane Reade/Walgreens, T-Mobile, Baskin Robbins, McDonald's, Rite Aid and CVS.

The following national retailers experienced significant growth in NYC last year: Dunkin' Donuts, MetroPCS, T-Mobile, Crumbs Bake Shop, Children's Place and Pret a Manger; and the following national retailers downsized significantly in 2017: Duane Reade/Walgreens, Radio Shack, Payless and Hale and Hearty Soups.  

2017 Chain Store Activity Was Stable

The vast majority of national retailers in NYC, 66%, maintained the same number of locations as last year, in contrast to the year before when just 33% remained flat. Only one in seven increased its footprint, vs one in five the year before. About 20% of the chains closed locations in 2017, including retailers American Apparel and Second Time Around.

Thus, all things considered, NYC chain store activity in 2017 was characterized by stability, not wholesale contraction. Of course, we'd all prefer expansion to be the name of the game, but let's see what 2018 brings.

Unibail-Rodamco Acquisition of Westfield

Co-Authored by Merrie Frankel

For those of us in the retail real estate industry, the December 12 announcement that Unibail-Rodamco, Europe’s largest listed commercial property company, reached an agreement to purchase Westfield, the Australian owner of Class A malls in the US and UK for cash and stock worth approximately US$16B, or $25B including assumption of liabilities, was big news.  

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Here are some fast facts about the companies, the transaction and our thoughts about it:

Overview of the Portfolio: Unibail-Rodamco currently owns 69 shopping centers in 11 European countries and Westfield owns 35 malls in the US and the UK, with no geographical overlap. The combined company, with a projected market valuation of $72B, will maintain the Westfield brand and REIT status in the US, and will operate malls in premiere markets throughout the US, UK and Europe, including London, Los Angeles, Munich, New York, San Francisco, Stockholm, Vienna, Madrid and Warsaw[1]. The combined company will be the second largest retail real estate company in the world, behind Simon Property Group. Proposed revenue and cost synergies will emanate from branding strategies and salaries as the Westfield senior team is stepping down.

Deal Structure: Shareholders of Unibail-Rodamco and Westfield will hold stapled securities consisting of one Unibail-Rodamco share and one Newco share that will trade as a single security. A Dutch Newco will hold the US assets and Unibail-Rodamco will hold the European assets and services.

Financing: Unibail is financing the transaction through the issuance of Unibail's stapled securities and US$5.6 million in cash. A EUR$6.1 billion bridge facility will be refinanced over time with unsecured senior debt, subordinated hybrid securities and property sales. A plus for the combined entity currently and going forward is the better cost of capital (both equity and debt) in Europe vs. the US.

Credit Perspective: Rating agencies cited the initial pressure on various debt and leverage metrics with the combination, but anticipate improvement over time. An extensive EUR$12.3B development pipeline will allow the combined company to fine-tune offerings and property dynamics over time, but could impact earnings if not completed as projected.

Unibail-Rodamco: S&P affirmed the A-rated unsecured debt rating with a stable outlook. Moody's assigned an A2 issuer rating to Unibail with a stable outlook. Fitch placed Unibail's ratings (issuer rating currently at A) on rating watch negative.

Westfield: Moody’s placed Westfield's A3 issuer rating on review for upgrade and S&P placed Westfield’s BBB+ ratings on Creditwatch positive, which could raise its ratings to A, consistent with Unibail.

Three-Way Split in Retail: Unibail's CEO Christophe Cuvillier, who will be CEO of the combined company, sees a three-way split in the future of retail between the internet, convenience/transport shopping and destination retail. He noted: “We, like Westfield, are destinational...” and said in a statement that the acquisition “is a natural extension of Unibail-Rodamco’s strategy of concentration, differentiation and innovation.”

Busy Week for Retail: Europe’s Hammerson and Intu announced a merger and Brookfield Property Partners bid US$15 billion to buy the remaining 66% of GGP Inc. that it does not currently own.

Is Bigger Better? Some analysts predict that the combined company will be better positioned to withstand the current retail downturn given its heft, but dominance does not address the fundamental issues underlying the downturn, including the accelerating incursion of e-commerce into the brick and mortar turf. At 3Q17, approximately 91% of US retail sales[2] still took place in brick and mortar stores notwithstanding a 15.5% increase in the pace of e-commerce from 3Q16. This progression shows no signs of subsiding as consumers demand value and convenience. In addition, both brick and mortar retail and e-commerce will continue to evolve in response to the shifting shopping habits of baby boomers away from malls and the more minimal shopping habits of millennials that may evolve as they mature.

Ownership Concentration: While concentration of ownership is not always welcomed by tenants, current tenants of Westfield and Unibail-Rodamco properties will not likely experience much of a change in how their properties are operated. One benefit for their retail tenants will be broader access to new markets in different countries. Unibail is also known to have substantially fewer anchor tenants in their malls vs. US malls, which is a formula they might be well served to apply to Newco's US properties to address the decline of some department stores, which have traditionally served as anchors in US malls.

Retail Differentiation: It remains to be seen if the properties of the combined company will retain or increase their appeal as destinations to consumers who are drawn to unique and authentic experiences. The combination may well contribute to the homogenization of global retail, which is already evident on high streets and shopping centers throughout the developed world, or it may enable the combined company to deliver more of what its global consumers need.

Ellen Sinreich, Esq., Partner, The Sinreich Group, provides legal services to the real estate industry.

Merrie Frankel, President, Minerva Realty Consultants, provides REIT and rating advisory services.

[1] Since both companies use international Financial Reporting Standards (IFRS) accounting vs US GAAP, portfolio values are market values vs. book value, which is used in US financials.

[2] US Dept. of Commerce, Quarterly Retail E-Commerce Sales, 3rd Quarter 2017, Nov 17, 2017.

Reading Tea Leaves

As a strong 2017 accelerates to a close, we've picked our heads up for a moment to look ahead. Here's what we see in two of the real estate sectors that we're active in, based on our own book of business, industry forecasts, and the collective expertise of our clients and colleagues.  



In spite of what seems to be the prevailing wisdom, brick and mortar retail is not dead. Our retail leasing practice continues from coast-to-coast, with fast-casual restaurants, fitness concepts and off-price stores consuming most of our leasing time.  

Cushman & Wakefield's third quarter Retail MarketBeat reports that sales were up $121.6B thru July 2017, with projections of 2017 sales growth of 3.9%. Notwithstanding these positive data points, retail is undergoing a fundamental transformation in response to evolving shopping habits and preferences, and the increasing importance of e-commerce.  

For 2018, we project continued disruption and opportunity in the retail sector. Strong locations and retailers that figure out how to remain relevant will remain buoyant. Secondary and tertiary locations will eventually have to consider adaptive re-use options. Retailers who can't keep up will have to reinvent themselves. Flexibility on everyone's part is going to be the name of the game. 


The recent $850M purchase by WeWork of the iconic Fifth Avenue Lord & Taylor building is a great example of value creation through adaptive re-use, as well as a testament to the ongoing strength of the sharing economy in the office sector. As a result of the co-working trend, we're seeing new office concepts that combine varying elements of traditional and collective work spaces.  

One of our clients recently chose to lease an office in a particular midtown Manhattan building because the short term (three vs five to ten years), build-to-suit lease included the right to shared amenities on a separately dedicated floor, including a kitchen fully stocked with snacks and beverages, a fitness center, conference rooms, and mail room. 

We agree with the 2018 Emerging Trends Report by ULI and Price Waterhouse, that owners of office space will be rewarded for providing offices that are tailored to satisfy the latest iterations of workplace trends, combining, as fashion dictates, different elements of co-working spaces, traditional offices, hospitality concepts, and green design features.  

Our Outlook

Overall for 2018, we anticipate continued positive leasing velocity in the office sector, and pockets of leasing velocity in the retail sector. Mark Zandi, Chief Economist of Moody's, in a recent presentation to the NY real estate industry shared our optimism. Based on strong fundamentals, he predicts continued economic growth for the next two to three years.

In the Weed(s) Part 2

In September 2015, when we published our first In the Weed(s) post about cannabis-related real estate, medical marijuana had been legalized in 10 states (plus D.C.), five of which had also legalized it for recreational use. Fast forward to today, and 29 states (plus D.C.) have enacted laws legalizing marijuana.

States that have legalized some form of marijuana use. Source:

States that have legalized some form of marijuana use. Source:

In each of these jurisdictions, real estate is a necessary common denominator for cannabis cultivation, transformation and retail distribution, currently a $7B industry. Bloomberg Markets estimates that number will be a $50B by 2026.

Beware of the Feds

If you're thinking this would be a great value creation opportunity for your property, keep in mind what hasn't changed since 2015: the use, possession, cultivation and transportation of marijuana is illegal under federal law, along with a wide range of related activities, including knowingly leasing, renting, maintaining, managing or controlling a place where marijuana is grown, transformed or sold.

What Has Changed

Notwithstanding the lingering risk of federal criminal prosecution, the shield of favorable state laws has enabled cannabis-related facilities to emerge from the shadows. Industrial premises used for indoor cultivation and transformation are seemingly as 'state-of-the art' as those found in the more traditional, similarly highly regulated pharma industry. Retail dispensaries are no longer relegated to dilapidated buildings in fringe locations.

Minimize Risk

To strike the right balance between the enormous opportunities this industry represents for landlords and tenants and the risks of owning, leasing and occupying cannabis-related real estate, a collaborative landlord/tenant approach to strict regulatory compliance and conflicting real estate needs is key. That way, neither party gets stuck with the whole bill but none of the benefits. 

Over Our Heads

As we move into the fall season of a year studded by hard-to-conceive-of events, capped (so far) by the horrific devastation of Hurricanes Harvey and Irma, we are struck by two recent hard-to-believe innovations that could further revolutionize retail and industrial real estate.


Over Our Heads

Both Amazon and Walmart are working on creating alternatives to traditional warehouses. Amazon was recently awarded a patent for "airborne fulfillment centers" or AFCs that would float at an altitude of 45,000 feet, stocked with products waiting to be delivered. Within moments after an order is placed, drones housed in these AFCs would deliver the goods, requiring little power as they glide down to reach their destinations.

Another use envisioned for Amazon's AFCs is quasi-retail in nature. Deployed at major sporting events, Amazon AFCs would launch drones to deliver food and merchandise to thousands of fans at a moment's notice.

Walmart is not far behind, having filed a patent application in August for a flying warehouse that would hover at much lower altitudes of between 500 and 1,000 feet to similarly make deliveries via drones.
Both Amazon and Walmart's flying, movable warehouses would eliminate the challenges of traffic and driving distances, reduce delivery costs and serve wider distribution areas as they move from one location to another based on real time orders.

Under Water

Amazon has not stopped there. They recently filed a patent application for an under water storage facility.  Their aquatic product-filled warehouses would be laden with water tight containers outfitted with cartridges that mimic the swim bladders of fish to control depth. To retrieve a container, acoustic waves would be sent to activate the cartridge necessary to send a particular package to the surface. According to Amazon, these underwater warehouses could stack products in endless piles of boxes with no need for humans or robots to move them around, thus eliminating the inherent inefficiencies of the pathways and shelving needed in traditional land based warehouses. 

Reinventing Real Estate - The Scoop

A stellar panel of retail real estate experts convened last week in New York City for the Urban Land Institute’s Reinventing Retail program to answer this $64,000 question: what’s in store for retail real estate?

Starbucks’ global dominance could not be predicted.

Starbucks’ global dominance could not be predicted.

Here’s what they had to say:

The Industry is Healthier Than it Seems

According to David Zoba, Chair of JLL’s Global Retail Board, the 37,000 retail real estate professionals that attended RECon this May were not passing out resumes, as they have during past industry downturns, they were  negotiating leases, a sure sign of health.

Brick and Mortar Retail Is Here to Stay  

Brittany Bragg, Partner and COO of Crown Acquisitions, which owns high street retail in dense urban locations from New York City to Las Vegas to London, cited the global success of the Apple store, in spite of the fact that their products are well suited to online sales, as evidence that people want a physical shopping experience. She also noted that in spite of the very visible retail vacancies in New York City, new leases are being signed and new stores continue to open.  

Creating That Unique Experience

Brian Pall, President of Hudson Bay Real Estate, the lone retailer on the panel, drilled down on the challenges that retailers are facing. Brian stressed that the key to brick and mortar retail success is the ability to offer consumers a compelling experience that goes beyond great food, merchandise, service and prices and makes them actually look forward to leaving the confines of the internet. From his perspective, the current barrage of retailer bankruptcies, store closings and shrinking revenues is evidence of just how hard it is to do that during what he characterizes as a period of industry transformation. 

The Rules Are Being Re-Written   

In keeping with this theme, Mary Rottler, EVP of Seritage Growth Properties, which owns 42M square feet of existing and former Sears and Kmart stores throughout the country, observed that traditional notions what a shopping center is and what drives traffic to a shopping center are up for grabs. Uses that once would have been “laughed at” are now considered desirable, one example of which is that supermarkets, which were traditionally confined to open air centers, are now anchoring enclosed malls.  

We Can’t Predict the Future

Brittany noted how hard it is to predict what the future holds, citing the rise of Starbucks. Even 20 years ago, she observed, the “experts” weren’t able to foresee that 25,000 Starbucks coffee shops would span the globe.

Will Tax Reform Slam Real Estate?

This April, we turn our attention to tax reform and its effect on the real estate industry. A variety of real estate associations, including the Real Estate Roundtable, the International Council of Shopping Centers, and the National Association of Realtors are educating their members and Congress about the likely consequences of various tax reform proposals for the real estate industry. Here's our take on two of them: 

Border Adjustment Tax

A border adjustment tax would impose taxes on goods manufactured outside the U.S. that are imported and sold here, while rebating taxes on goods manufactured in the U.S. exported and sold abroad. This would shift taxes away from domestic production and toward domestic consumption. Proponents claim this would incentivize American job creation and strengthen the dollar, while opponents argue that this is a regressive tax that would chill the domestic retail industry.

Between 95% (apparel) and 15% (food) of all goods sold in the U.S., whether in brick-and-mortar stores or online, is imported. So for the real estate industry, while retail real estate would be hardest hit, we expect that industrial real estate (used for warehousing and distribution) will also be negatively impacted. Some retail real estate owners are already feeling the pinch, as retailers put plans to open new locations and renew existing leases on hold until they have a better understanding of whether a border adjustment tax will be enacted.

Carried Interest Taxation

A carried real estate interest is a financial interest in the long-term profitability of a real estate investment given to the developer by investors to compensate the developer for sweat equity and risk assumption. The income flowing from the carried interest is currently taxed at the lower capital gains rate of 20%, rather than the personal income tax rate, in the upper 30% range for high earners.

Proponents of taxing this income at the higher rates view the current taxation as unfair. Opponents point out that this income results from a long-term, inherently risky ownership stake in real estate that should not be treated as if it were a guaranteed salary.

IRS figures show that 3.2 M partnerships (46% of which are real estate related) and more than 22 M business partners would be adversely affected by such an increase. The likely impact of taxing carried interest income at a higher rate would be to reduce the profitability of real estate investments as there will be less after-tax income to go around.   
The uncertainties that tax reform presents make it all the more compelling to minimize the time, cost and risk of getting your leases over the finish line.

A Fresh Perspective

Spring is (finally) in the air and it's a great time to evaluate what your company stands to gain by taking advantage of the fresh perspective new leasing counsel can provide.

Here are three ways that working with a new attorney can save you time and money and reduce the risk of not getting your commercial leases over the finish line.   

Is Your Form Lease a Dinosaur?

Do you know if your form lease is one of those dinosaurs that slows down every lease negotiation?  One of our clients used its time-worn form for years until we made them aware that not only was it ridiculously one-sided, it was also outdated and internally inconsistent. Cleaning it up required overcoming strenuous internal resistance, but resulted in quicker, easier lease negotiations. 

Are Negotiations Getting Bogged Down?

How long has it been since you've reviewed your standard negotiating positions? If your company's stance on issues such as casualty restoration and insurance coverage trigger long, drawn-out deliberations, that's a wake-up call for a thorough re-evaluation. When we took over the legal leasing work for a suburban office building in New Jersey, we worked closely with the leasing team to update and standardize the landlord's bottom line on non-deal-specific issues. Within 36 months, the property reached full occupancy. 

How Capable Is Your Team?

When is the last time you took a hard look at the real capabilities of your leasing team? Do you know if your leasing reps are skilled deal-makers? Are your construction, property management, and accounting departments responsive and accurate when providing support to the leasing team? In one recent case, a client brought us in to negotiate a retail anchor lease, replacing its long-standing retail attorney. During the negotiation, we helped this client recognize that its broker was jeopardizing the deal before there was a fatal blow. With the help of a new broker, the lease was signed and the tenant is about to open for business.

The Devil You Know

As we move further into the new year, change is palpably in the air. The inclination to cling to what's comfortable and familiar is being challenged locally, nationally and globally. From our vantage point on the front lines of the legal leasing process, challenging what's comfortable and familiar is a great way to get rid of what's not working, and improve everything else.

The Benefits of Shaking Things Up

In opening the Black Box of the legal leasing process we’ve brought transparency to many time-worn, counter-productive habits, including use of the dinosaur form lease, negotiating outside the sphere of reasonableness, and the tendency to ignore the urgency mandate that time kills deals.
Underlying the seemingly irrational adherence to these and other practices is the addictive draw of comfortable old shoes and the devil you know, i.e., the insistence of most commercial landlords and tenants on using the same leasing counsel they've always used, whether it be in-house counsel, outside counsel, or a combination of the two.  
Blind to the hazards of not trying someone new every so often to shake things up and see first hand what they may be missing out on, most companies continue to plod along and instead, vent their frustration over the time, cost and risk of getting leases over the finish line.

You’ve Got To Measure Performance

In addition to using the same counsel year after year, for better or worse, most commercial landlords and tenants have not developed metrics by which the performance of counsel can be measured, managed, and continuously improved.
Do you know if your leasing counsel is providing ‘best-in-class’ legal services?  What metrics do you use to measure this? What procedures do you have in place for selecting new counsel?  
If you can’t answer these questions, you probably don't really know if your form lease is hurting or helping you, or if your lease negotiations are consistently efficient and effective, or whether (or not) your leasing teams remain vigilant as the lease nears the finish line. 

A Brave New World

Healthcare is on everyone’s mind these days, as the Trump administration promises (or threatens, depending on your perspective) to repeal and replace the Affordable Care Act. With or without the Act, the healthcare landscape will continue to evolve, and it's altogether likely that today’s urgent care center, which did not exist yesterday, will be unrecognizable tomorrow. 

Healthcare Leases: A Moving Target

For those of us tasked with leasing commercial properties for healthcare uses, planning for these changes is comparable to the future-proofing challenges we face as a result of the rapid changes the retail, office, industrial, residential and hospitality property sectors are undergoing.
In addition to striking the right balance between flexibility and certainty so landlords and tenants can respond to the ever-changing healthcare landscape, here are some basic safeguards that are particular to healthcare leases every real estate professional should keep in mind.

Safeguard Your Leases

First, beware of the stark reality that healthcare properties are subject to federal and state laws (some of which are often referred to as Stark Laws). These may impose strict liability and criminal penalties for, among other things, financial arrangements that would otherwise be benign, including below market rents and percentage rent.

Second, healthcare properties give rise to operational risks and responsibilities that must be allocated ahead of time between landlord and tenant so the wrong party doesn't end up on the right side of liability. Heavy water use, as can be expected in ambulatory surgical centers, can give lead to mold, which goes hand in hand with challenging remediation and disclosure requirements.  Unsuspecting landlords entering a healthcare property to perform repairs could find themselves inadvertently guilty of violating patient privacy rights if those rights haven't been appropriately safeguarded by the tenant.

Beware of Certain Uses

Third, specific healthcare uses pose specific risks. Leasing space to a medical marijuana dispensary is a violation of Federal drug laws irrespective of state laws that sanction them.  Women’s health centers may become targets of protests and violence, putting other tenants and occupants at risk.
Finally, because healthcare uses don’t fit neatly into typical retail, office, or residential land use categories, a landlord may not have the right to enter into a healthcare lease. Zoning rules and private contractual restrictions can get in the way.


Making Sense of It All

Having just witnessed one of the most important transitions in U.S. and world history with the 2016 Presidential election, and having just returned from Dallas and Fort Lauderdale where thousands of real estate professionals and I participated in the Urban Land Institute (ULI) Fall Meeting and the International Council of Shopping Centers (ICSC) Law Conference, I’m focused on making sense of it all.  

My take away from the election results is that no matter what side of the aisle you’re on, this election is a call to action. Change is in the air, and each of us has a role to play.  

Shaping Change

This also applies to the real estate industry and the legal leasing process. Technology, the sharing economy and even the expanding legalization of marijuana are contributing to a dizzying evolution of residential, retail, industrial and office spaces. Distinguishing factors between these property types are shifting and blurring.   
As a result, landlords, tenants (and their attorneys) need to be considering and communicating about new ways to define and evaluate their long term relationships and the properties that bring them together.
At the recent ICSC Law Conference, I spoke with the general counsel of a public REIT that owns regional malls throughout the country. He pointed out that retail landlords and tenants are missing the point when they value retail stores based on in-store sales, even if they expand what is considered an in-store sale to include online sales that touch the store (e.g., where merchandise ordered online is picked up at the store). 

Don't Miss the Point

The more important point is that to accurately measure the value of retail properties that may also serve as showrooms, warehouses and fulfillment centers, the aggregate value of all of the store’s uses is a far better metric to use. The technical ramifications of using this broader metric to assess valuation must then be addressed during the legal leasing process.  
There’s no one right answer to these questions of first impression for those of us toiling away in the Black Box of the legal leasing process and the landlords and tenants we serve. But if we don’t start thinking like the change agents that we need to be, we'll be stuck a status quo that doesn’t serve us or our clients, akin to the one that so many American voters strikingly rejected. 

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