In this episode, Hal and Richard talk about rent inclusions in New York City commercial leases and some things to be on the lookout for when representing a tenant. At 2:58, Michael Berman talks about Fosun’s repositioning of 28 Liberty Street and how he has represented landlords and tenants in his career.

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Hal Coopersmith:      Welcome to Broker’s Angle. I’m Hal Coopersmith and we have a great episode for you where we give you pointers about rent inclusions and our 30 minute or less interview is with Michael Berman of JLL who talks about how he helped in the repositioning of 28 Liberty Street. But first Broker’s Angle is sponsored by the law firm of Coopersmith and Coopersmith, a boutique real estate law firm practicing in commercial and residential real estate for over 87 years. This of course is attorney advertising, so we’re obligated to say prior results do not guarantee a similar outcome.

Richard Coopersmith:          Hal, glad to pass the torch on to you.

Hal Coopersmith:      I had a feeling you might say something like that, Richard. So in this episode we speak to Michael Berman about the repositioning of 28 Liberty Street and so we thought it’d be relevant to talk about rent inclusions. Now Richard, we aren’t just talking about real estate taxes or heat, you find those boring. What specifically should we be talking about?

Richard Coopersmith:          That’s right, Hal. There are buildings inside and outside of New York City where the landlord charges for items generally considered to be part of the overall operation of the building. What’s included or excluded in these specific leases can be both a benefit to the landlord and a burden for the tenant. Over the years we’ve developed a list of these items which should be excluded for any tenant under a New York City lease. And some of my favorites are capital improvements, something which shouldn’t be borne by the tenant or in the alternative amortized over the course of the lease.

Hal Coopersmith:      And that’s especially important in New York City where we have all these green laws coming online and where you can expect capital improvements to come to some of these buildings. And another favorite of mine is for landlord’s negligence.

Richard Coopersmith:          And while it could be quite difficult for a broker to negotiate these items in advance under a lease, it is something brokers should be aware of and it’s a great opportunity to follow up with a tenant after a lease has been executed.

Hal Coopersmith:      That’s right. Follow up is certainly something that we talk a lot about. So with that, let’s go to the interview with Michael Berman. So you’ve had a very interesting career. You started as a broker, then went to the landlord side, then back to brokerage. How did that happen?

Michael Berman:       Basically my first few years I worked with Julien J. Studley, which is now known as Savills and basically learned some of the fundamentals of the business, primarily doing tenant rep work and then morphed into doing a little consulting on the agency side as part of one of the projects I was working on. A particular owner that we were pitching, which was a company that’s called Reckson Associates had offered me a job to come and work with them in-house. And I thought at that particular time, my career, it would have been a very valuable experience to have sort of worked as not just on the brokerage side, but really worked on the ownership side and sort of see how things are handled on the other side of the table.

Hal Coopersmith:      And what has being on the ownership side taught you about being a better broker?

Michael Berman:       A lot. So it’s a very different type of a transaction. So even when brokers are representing owners, you basically function a little bit differently than you would if you’re working in-house as one of the landlord’s employees. When you’re working in-house, you really get a much greater understanding of the assets. So you understand basically things like how is the building financed, how do leasing transactions affect financing, what is the asset strategy for the building? What are the capital plans for the building and how does your leasing program affect that? So it really affords you a much more kind of in depth understanding of how a property functions and what the broker’s role is within that function and what the impact of a transaction is at the end of the day. Once that is done.

Hal Coopersmith:      And once you have that knowledge from the owner’s side, now that you’re bringing that back to the tenant side, how has that made you a better broker?

Michael Berman:       You know I think it’s helped a lot because I think in any negotiation, the more that you can understand the person on the other side of the table, it just sort of strengthens your ability to reach the objectives that you’re hoping to in that negotiation. So as you can understand what a landlord is trying to achieve that can help you sort of structure and formulate a transaction and a strategy to get your tenant the best transaction that they can.

Hal Coopersmith:      What’s been a difficult deal that you’ve worked on and how did you solve a problem?

Michael Berman:       It’s sort of an interesting transaction was when I was working with Brookfield and Brookfield after 9/11 obviously had a lot of disruption within their downtown portfolio as a result of some of the recovery from those events. And one of the larger deals that had just been done right before 9/11 was a pretty sizable transaction with Lehman Brothers for a 20 year term of over 500,000 square feet. After 9/11, I think they were the only tenant who decided not to come back to the project. They basically, in about two or three weeks time, had bought a building in Midtown and made that decision. Nonetheless, they had this obligation for about 20 years and were living up to their obligation trying to sublease their space. And after about a year’s worth of time, they found an opportunity with a law firm Cadwalader that was interested in the space but couldn’t do the deal because of the complexity involved as a subleased transaction. So as a result, they needed to do the deal as a direct lease with ownership. So, from the position that that we were in and myself being on, Brookfield’s side of the equation, we basically had to structure a deal that did a termination of a very large transaction from Lehman Brothers, a new transaction with a very large law firm. And we also had certain credit issues, which seem pretty ironic now. But Lehman brothers at the time was a large, you know, very well financed company and law firm credit is viewed very differently than than they were. So we had to figure out how to negotiate that piece of it and how to organize that transaction. So it basically was a three party transaction between Lehamn, Cadwalader and us and took a number of months to do. But, you know, for us it was a really important deal because, that was a significant amount of space within a pretty large project that was basically just recovering from 9/11. So to have successfully gotten that law firm and a very prestigious law firm into the complex was important for us to do. But there was a lot to work through in terms of how do you work through the details of structuring something like that.

Hal Coopersmith:      So that’s a very complicated and nuanced transaction. How were you able to assist in that in everything that was going on and what did you learn from it?

Michael Berman:       One of the things that was most complicated is that, you know, each party had its own sort of set of objectives and sort of guidelines that they could work within. And they each also had their alternatives and what they could do if they didn’t do that transaction. So I think, you know, what was important for myself and the team that was working on that was really understanding what were the tenant Cadwalader’s objectives and what was it that was going to make sense for them? What was it that Lehman needed to do to relieve itself of that obligation and what were the financial implications to them? And then from our perspective, you know, we could do nothing and basically have a lease stay with a lease in place. That was by that point, actually slightly above market. So at the end of the day, what we were able to engineer is that we got the credit enhancement that we needed from Lehman to do the law firm deal. But we also were able to get a significant increase above and in place above market rent. So for us it was a tremendous win, especially since it was, you know, such a big amount of space. And from Cadwalader’s perspective, they actually prevailed as well because they got a brand new space they can move into at a rent that was being subsidized by Lehman, since Lehman needed to get out of there, their obligation from Lehman side, they had a contingent liability that was hundreds of millions of dollars that went on, you know, for 20 years. So they got out of that obligation and by us doing a direct lease, release them of it, there were some credit enhancements as well, but put them in a much better, much healthier position. And I guess what I really learned out of it was, you know, how important it is to get an understanding of all of the parties’ objectives and what points you can press and what you can press and how does that interplay with what you need to achieve.

Hal Coopersmith:      And from going from the landlord side, back to the tenant representation side, how were you able to gain new clients, establish those relationships or reestablish the relationships that you’ve had before?

Michael Berman:       Well, I actually do both. So I do tenant rep work as well as agency work. So as it ends up, Brookfield is now a client of mine. So I work on the agency side of that with them in doing leasing work for Brookfield Place. I also am a leasing agent at 28 Liberty with Fosun, which is another significant asset downtown. And then on the tenant rep side, you know, we have, just from being in the business, you know, there are certain relationships that, that I’ve had for, you know, over 20, 30 years or so. So I know a lot of the tenants that are going to be active in the market, but we also, the way that we’re structured, which is pretty much the way that most medium to large size real estate companies are structured is that we have people of different level that are prospecting for different business. And you know, we create a team, which part of it is the business generation piece of it. Part of it is the execution piece of it. So in working within a team we uncover opportunities that way as well.

Hal Coopersmith:      And what do you think the modern tenant is looking for? What do you think tenants are looking for in the market?

Michael Berman:       You know, it really depends on the tenant. It depends on the industry and you know, so if it’s a large organization that has offices around the country, they tend to like to pick either one or a couple of providers that basically act as a real estate arm of their company and they establish sort of a relationship with that company to scale them to be able to do different transactions in different markets so they don’t have to reinvent the wheel each time that they have a requirement in a different market. Smaller companies, they are usually very strapped for time and resources. So to the extent that you can help them sort of streamline the process that you can help them with providing resources that normally might be expensive for them and get them very comfortable with the fact that you’re a trusted advisor first to them and really are looking out for what their best interest in a market like New York City, which is very complicated and has a lot of issues to consider.

Hal Coopersmith:      And knowing these or having that perspective, how are you positioning the buildings that you’re representing on the agency side, 28 Liberty and Brookfield Properties to attract those tenants.

Michael Berman:       So, you know, on the marketing side of the equation, there’s definitely been some advances in technology and how outreach is done to the brokerage community as well as directly to tenants. But in terms of the resources that we can bring to bear that offer far more visibility to ownerships that we represent, that has been really key because at the end of the day, things like how do they price a building? How do you do your underwriting? You know what kind of downtime you’re performing that needs to align with where market conditions are and data really is king. So to the extent that you can harness that kind of data, have it accessible in a way that’s easy to understand I think is something that ownerships are increasingly looking towards so that they can make very smart decisions and make right decisions and they can really maximize the value of their assets.

Hal Coopersmith:      And specifically, how are you positioning the assets that you are representing now?

Michael Berman:       So it depends on which asset. If it’s an asset that has a high vacancy and is going through a repositioning, you know, there’s a heavy marketing campaign that gets underway, which is creating a strategy for the building first and foremost. Who are the types of tenants that you’re going after? What is important to those tenants? How do you reflect that into your capital plan? If you’re going to be redeveloping or repositioning a building, and then working with your marketing people to develop a marketing program that kind of addresses that. If it’s a asset that is relatively full, it doesn’t have a lot of vacancy or role that’s coming up, you know, that’s a different type of an exercise. That exercise then becomes more of how do I maximize the most value in a way that is not so apparent. So where do I see opportunities within the tenant base to either move things around to do some early renewals, to do some relocations of tenants and be able to recapture below market leases. Like finding opportunities like that in an asset, which on the surface may not seem like it has a lot of opportunity.

Hal Coopersmith:      Do you have an example of how you’ve either repositioned a building or extracted more value from an asset?

Michael Berman:       Sure. So I think probably, the most recent one is the building that we’re currently still working on, which is 28 Liberty and that building had been Chase’s headquarters building when it was first built in 1958. They were the primary occupant of it. And then over the years, as they phased out of some of the building, still retained ownership of it, still heavily branded Chase Manhattan. In fact, Chase Manhattan Plaza, which it was known as, and then decided about five years ago they wanted to sell the building. They sold the building to a company called Fosun, which is the one who is our client. They basically bought the building with, over half of the building being vacant and Chase moving out of just about all of the building and eventually phasing out of the rest. We basically looked at that asset and working with folks in and with their team thought that the best strategy was to completely reinvent what that building was. So from a being an institutional building, primarily occupied by a bank, we embarked on a capital plan, which looked at creating an amenity base in the lower level of the building, redoing the Plaza, reinvigorating the Plaza with an arts and events program, doing a deal with a Danny Meyer restaurant on the top of the building, creating event space. And as we, started to physically rebrand the building and remove sort of the Chase branding on the building, it gave us an opportunity to attract a much wider audience. And in particular the most active tenant segment that was in the lower Manhattan area, which is technology companies. So we’re able to have a lot of success with that where we have a few transactions which are underway now, which once those done we’ll be at 99% at least, and we’ll have leased about 1,000,008 square feet in about 48 months. That’s been a great example of a true repositioning of a very large asset, had a lot of moving parts but really required an understanding of the market, really required an understanding of you know, what you can do with an asset like that and putting together a team and working with their team to basically effectuate something like that.

Hal Coopersmith:      How were you able to come up with that strategy? You mentioned a lot of different elements in terms of reinvigorating the Plaza, coming up with a Danny Meyer restaurant at the top, which I think a lot of people are familiar with. How did you arrive at all those different elements?

Michael Berman:       Well, one of the trends that I think is pretty central to buildings now are creating an amenity base, a truly meaningful amenity base for tenants in the building. And increasingly tenants are looking for that and the ones and the owners that are investing money into their assets to develop those types of amenities are distinguishing themselves from their competitors. So clearly we knew that creating an amenity base that was going to be meaningful to the tenants was an important part of it. The other thing that we looked at that helped us to develop our strategy was really understanding, you know, who were the active tenants in the market and how could we have as broad of an approach as possible by changing up the, not just the amenities of the building, but by rebranding the building and understanding that a column free floor plate, that is in the 35,000 square foot range size is one that’s an extremely efficient footprint for an open layout, which is very consistent with what technology companies are typically looking for. The other thing that we had understood, and this was just from a historical perspective, is that law firms had been attracted to the building because of the dimensions and the location of the asset. So we wanted to appeal to both. So we kind of bifurcated our strategy and developed amenities that we knew were going to appeal to both. The amenities also included, besides the Danny Meyer restaurant upstairs, taking 200,000 square feet of lower level space and creating a entire food court area which would have high level grab and go food stations, a new restaurant as well as on the lower, the lowest level an Alamo Drafthouse, which has 12 theaters. It’s a place where you can have dinner watch a movie, very, very interesting place. And then between those two, really filling that with experiential type of uses, things that are sports types of uses things that, you know, people could be very interactive with. That piece is still being developed. But the other programming for those other two pieces as well as the development of the Plaza area and putting in a very large, screen in the lobby, which would allow us to host and show different events both indoors and outdoors really sort of helped just recreate what that asset had historically been.

Hal Coopersmith:      So it’s no secret that amenities in large buildings are attracting tenants, but why those amenities and then how did you settle on the amount to invest in the building and how did you strategize that with ownership?

Michael Berman:       At the end of the day it approached $200 million, which is a significant slug of money to spend on a capital improvement. And to have an asset that has a large amount of space that can be influenced by the type of amenities you have was significant. So I think if we didn’t have that, it would be very hard to justify it even though that might look good, sound good, and be something that the tenants liked. It’s only in being able to illustrate that by doing this, these programs or starting to engage in converting the building to those uses that you could a shorten the amount of time that it would take to lease up your building. So, significant value in that. And we felt pretty strongly demonstrated by some of the homework we had done in the market that we could get a better rent as a result of it too.

Hal Coopersmith:      And what was that homework?

Michael Berman:       So we basically looked at what other buildings were offering and charging and we aligned ourselves with our competitors and said we basically have a couple different choices. If we decide not to invest the money our rent would be X if we decide to invest the money our rent would be Y if we decide to invest a little bit of money our rent would be Z. And then applying that to the rent up of the building and applying that to a more truncated lease up period and then looking at what those numbers look like over the term of the lease, capitalizing what the value is and then weighing that against what that cost is for those different programs, allowed you do that. But that only makes sense if you can demonstrate that in the market. And by looking at your competitors and in that context understanding that you can get rents that outstrip your competitors if you invested that money in those different scenarios.

Hal Coopersmith:      What do you think makes your approach different from other brokers?

Michael Berman:       You know, I think personally for me it’s really important to have a pretty solid team. The transactions or the agencies we work on are pretty large and everybody has different skillsets. And I think if you put together a team that has a strong individual and team components that really just makes you that much better, I think at conducting the business. So when I say teams, I mean like financial workplace strategy, people, project development services as well as obviously on the brokerage side, you know, having the right one or two or three brokers with you on a team.

Hal Coopersmith:      And as you’re assembling your team, what do you look for in a team member?

Michael Berman:       Well, you know, different strengths in those different disciplines. Having somewhat of a track record and having done that before there’s also an integration of different team members that they work well together and you know, have worked well together in a lot of situations. You know, I think I’m fortunate in that my company has consistently very skilled people in a lot of different areas. So for us to draw upon those resources, you know, for us is not that hard of an equation because we do have really, you know, very solid people.

Hal Coopersmith:      Well that is a great note to end things on. But I do want to ask this of all our guests one piece of advice that you have to other brokers.

Michael Berman:       Probably if I had to pick one piece of advice, it’s having staying power. And by staying power I mean when things don’t go your way, that you just sort of keep at it, that you are committed to working long hours and never really giving up. And I think the brokers who are successful consistently have those kinds of characteristics and traits. I think an ethical strain is very important that in our business that that helps distinguish you as well as having, a very good work ethic.

Hal Coopersmith:      Michael Berman, thank you for joining the Broker’s Angle.

Michael Berman:       Thank you.