In this episode we talk about the COVID-19 Relief Package for personal liability provisions concerning tenants of commercial leases. At 2:21, Joel Binstok talks about auditing commercial leases on behalf of tenants, strategies brokers can use to save tenants money, and renegotiating terms amid the changing real estate landscape following COVID-19. 

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Hal Coopersmith:     Welcome to Broker’s Angle, I’m Hal Coopersmith and in this episode, we talk about what New York City is doing about guarantees. And our 30 minute or less interview is with Joel Binstok, who talks about lease auditing and how tenants can avoid unnecessary costs. 

Joel Binstok:     That’s a problem that landlords will try to push on expenses that would otherwise be theirs that are really ownership costs and burdens to the tenant. 

Hal Coopersmith:     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 are obligated to say prior results do not guarantee a similar outcome. 

Richard Coopersmith:     But Hal you’re number one. 

Hal Coopersmith:     That is always so kind of you to say, Richard, look, there is a lot going on in the world these days, and there are many forms for that. We would like to take a moment to recognize the great pain and grief in the world and recognize that we also stand against injustice. This podcast is about real estate, and that’s what we’re here to talk about. So let’s talk about the COVID-19 relief package for personal liability provisions of leases for commercial tenants that applies in New York City and only New York City. 

Richard Coopersmith:     This law is intended to prevent the enforcement of personal guarantees, including good guy guarantees under certain circumstances. It applies to restaurants and bars, nonessential, retail, hair salons, barbershops, and tattoo parlors.

Hal Coopersmith:     So it’s only for certain retail tenants and it’s not for office tenants and the way the law is drafted is for a provision in a commercial lease or other rental agreement, and doesn’t necessarily say guaranty. So it is ambiguous. On top of that you don’t even think it’s constitutional. 

Richard Coopersmith:     That’s right. It’s been a long time since I took a constitutional law class, but I don’t see how this is constitutional, whether it be for the Contracts Clause or the Fourth Amendment, but what it is going to do, and what it has already done is inject tremendous confusion into the market. So we’ve already seen a lot of that in our practice and whether it be a landlord or tenant, we do encourage them to contact us. And with that, let’s go to our interview about saving tenants money with Joel Binstok. 

Hal Coopersmith:     So how did you get into lease auditing? 

Joel Binstok:     I got into lease auditing because I had been practicing law for a number of years and I was with a big New York firm, actually the New York office of a large national firm. And we went bankrupt. And when we went bankrupt, I realized I didn’t want to stay in this business of law and not with these guys. And my father in law was in the electrical auditing business, which is auditing electricity charges under leases. And he coerced me, I should say he gave me a partner, an operating partner, a guy who was the CFO of the Minscoffs, which was a big landlord. And he said, why don’t you work with him and you’ll start a business? 

Hal Coopersmith:     Well that is very interesting and we’re certainly going to get to electrical auditing. But you talked about how long you’ve been doing lease auditing. What’s the most you’ve ever saved a tenant over that time? 

Joel Binstok:     Without too much pride it was close to $17 million. It was real estate taxes. 

Hal Coopersmith:     I think you can take a lot of pride in that. 

Joel Binstok:     Yeah, it doesn’t happen every day of the week. It had to do with the base year. And if you can fix the base year in taxes, you can save a tremendous amount of money. So we fixed the base year for a 550,000 foot tenant who had a 25 year lease. So that was 24 years of corrections. And the average was, I don’t know how much, and we anticipated taxes would go up a certain percentage every year and we guesstimated that we would save them about 17 million. 

Hal Coopersmith:     So $17 million is not something that happens every day of the week. But for lease auditing, how much can a tenant expect to really save? 

Joel Binstok:     It really depends on the size of the tenant and the size of the bill. You know, you have to understand that there’s a cost to it. And today, unfortunately, most of the leases say that you can’t hire auditors on a contingency basis, which means just doing it. You know, if there’s a result we get paid. If there’s no result, we don’t get paid. That worked a lot better for the smaller tenants who couldn’t afford to hire us because you’re getting the same expertise, whether it’s a 10,000 foot lease, being looked at or a 200,000 foot lease. And obviously the guy who’s leasing 200,000 feet has a lot more money than the 10,000 foot guy. So it really depends upon what your stomach is and what your goal is. If your goal is to figure out if you’re being overcharged, you may want to spend $10,000, $15,000. If you’re a large company, you should be spending that all the time on your leases because you’re paying millions of dollars in all these expenses and it behooves you to have them checked out by an expert. 

Hal Coopersmith:     Well, that’s a great segue because I want to know how do landlords include costs? What are some of the ways that landlords sneak in these additional costs? 

Joel Binstok:     So, what’s happening in the real world today is that, I’ll even give you as an example, a large lease that a big tenant will make, let’s say it’s 200,000 feet. And so they have a very quality broker for that kind of money, right? And they have a very highly qualified lawyer who does hopefully a lot of leasing and they will negotiate, could be four months, which starts off as a long document and they will mark it up and include all sorts of exclusions and changes and things that the tenant is looking for in terms of the financial deal. And when you do that, you think that you’re getting what is written in the lease. Because if you’re a tenant and you’re thinking, okay, well I’m supposed to get a TI of a million dollars, I’m going to get a TI of a million dollars. Well you better have somebody checking that and hopefully they’re checking the terms of that TI allowance. And the same thing goes for the operating expenses. You could have all sorts of exclusions from the operating expenses. For example, you tell the landlord, no, I’m not going to pay for the repair to the lobby because we had the expectation that the lobby would be all fixed up by the time we moved in and he didn’t do it. And this was the basis for why you’re paying a hundred dollars a foot and not $85 a foot. So you put it in the lease and low and behold, what happens is the other tenants in the building are paying for the lobby and the landlord says, okay, we were going to include it for everybody because generally they have so many tenants, they don’t have enough accountants. It’s not good business for them to check every lease and especially things that are favorable to the tenants. Why should they include them, if you know what I mean? It’s almost like they’ll never know. And most tenants don’t know. All they know is they get a bill, it looks reasonable and most of the tenants who call us are the ones who think it’s unreasonable. There are some tenants who’ve been around enough that call us because they know that if they’re making a big lease, they should be doing some homework and actually checking to see that they’re paying the right numbers. So, you know, it depends on the motivation of the tenants and you will see that people have different motivations. The same way they have different motivations about negotiating. They’ll accept some clauses which you think are very harsh and other clauses they’ll make a big stink out of it. Just the same way with operating expenses. 

Hal Coopersmith:     So a couple of things that you’re saying. First of all, make sure that there are certain exclusions for a lease and we have some of the exclusions that you have. We’ve added it to our list and excluded some major things that a landlord might do. The second thing that someone should be aware of is that if a landlord’s doing a large capital project or something out of the ordinary, make sure that that’s not included in your operating expense increase. And that’s usually a time where a tenant could be paying something that they otherwise wouldn’t be or wouldn’t be obligated to pay. 

Joel Binstok:     That’s correct. So really the real deal for tenants is to pay only for things that are of a recurring, ordinary nature. Your deal is really not to pay for things that enhance the value of the building. If he puts in a new elevator system, and the building is that much more valuable and he can raise the rents, that’s not for the tenants to pay. Sure you’re going to say, oh, so then it’s more comfortable and better elevators and we like better elevators. Yeah, that’s true. But who says that you have to pay for it. And that’s that. That’s a problem that landlords will try to push on expenses that would otherwise be theirs that are really ownership costs and burdens to the tenant. The same way if he does a financing, he’s not going to send you a check if he refinances the building, if you’re one of his tenants because you’re not his partner. And that’s the upside of being a partner. The downside of being a partner is paying for expenses that he has. He may ask his partners for expenses, well he says, okay, I won’t ask the partners, I’ll get it from the tenants. And that’s an attack that some landlords take. 

Hal Coopersmith:     And let’s take it back to the beginning for you electrical costs. How do you make sure that a tenant is paying the proper electrical costs and what are some of the ways that landlords will sneak in some extra costs for electrical? 

Joel Binstok:     Right? So most tenants of any size today, and there is a law, a local law, we’re talking in New York City, anything over 5,000 feet has to have its own submeter. So it’s essentially you have a meter for your space dedicated to your space, not used by anybody else that will really tell you how much electricity you’re using and when you’re using it. And the typical formula in a lease is landlord’s cost plus a percentage. And the landlord’s cost is what it costs the landlord. It’s very obvious. Okay. But it’s really necessarily that there are many ways to calculate the landlord’s cost. And if you’ll see a lease, you will see that a well-defined lease will actually define it. Specifically, how do you get landlord’s cost? Well, the landlord gets bills from Con Edison, let’s say, and then he has to figure out what is his cost? Well, he may have all sorts of offsets that reduces costs and yet he will not pass those on to you. Okay, so the formula gets to be landlord’s cost plus, let’s say 5%. 5% is fairly reasonable. It’s not great. It would be better if it were 2%, you’d pay less money, but it’s all a real profit incentive to the landlord because it’s just a number. First they started talking about it and justifying it as an administrative fee, but everybody knows it’s not an administrative fee. It’s a total profit for the landlord. The cost of actually measuring the bills and doing that is maybe a couple of thousand dollars a year for the whole building. The landlord will collect hundreds of thousands of dollars in from those percentages and maybe even more. The problem with those percentages is that, as you know, the city and all the governments in the country are trying, or at least most of these smarter ones are trying to get people to use less energy, less electricity. And that’s been what we’ve been trying to do in this city since Mayor Bloomberg came in. And what does this do? Well, the landlord’s formula is really counter to that policy. The landlords do not want you to lower your electricity usage in your office space because they would prefer that you spent $2,000 and take 5% of $2,000 then cut your electric bill to $1,000 and take 5% of that because they collect that much less money if you use that much less energy. And that is an issue. That is an issue. And that’s why for many reasons you haven’t seen the landlords jump on the bandwagon to reduce their energy footprints in their office buildings. But today it’s a whole other ball game. We’ll see. 

Hal Coopersmith:     Well there’s local laws for green energy compliance and I wanted to touch on that a little bit. What’re your thoughts on those costs being passed along to tenants for the cost of a landlord to retrofit a building or make certain improvements? 

Joel Binstok:     Yeah, well that’s very controversial and it’s very costly and I don’t believe that the tenants were really part of the dialogue when it came to passing those laws and I think whichever tenants did get involved and there were some big corporate tenants who did, but I think they were totally misled and they bought into it that somehow they should share with the landlords in paying for energy reduction measures. If you look at the old leases, I mean, the whole idea, just like an elevator, as I said to you before, if an elevator is obsolete, you replace it. I would say 99% of the landlords would not bill a tenant for the cost of the new elevator. That’s a capital improvement. If they did that, that would be really horrendous. But they have no problem in the fact that there are all these local laws that make certain parts of their building obsolete from an energy perspective. And yet there they feel that they can pass it on and it’s really a sign of the times and it’s a sign of leverage. And I’m not a believer in not using leverage. And I think today with what’s going on in the market and what may be going on in the market because of our pandemic, leverage will swing very much into the tenant’s favor and the strong credit tenants who’re willing to pay good rents will have a lot more to say about paying for all these additional costs. 

Hal Coopersmith:     Well, I certainly want to talk about operating costs and how that will increase as a result of COVID-19. But before we do that, obviously you were at the end of the lease performing the auditing. A lawyer like me will review the lease and make sure that there are certain exclusions. But what should a broker do before the lease’s ever drafted to make sure that a tenant pays as little as possible? What are some techniques and advice that you have for brokers to better represent their tenants? 

Joel Binstok:     So Hal, you asked a very good question. And this is something which I love to emphasize. Whenever I teach a class of lawyers or brokers or anybody, which is that you have to do some due diligence on the space and it really behooves you to get copies of the operating expenses from prior years if operating expenses are going to be charged. If you’re going to pay a real estate tax escalation, then look at the real estate taxes for the building. Whether you get that from the landlord or you get it from the city’s records for the taxes, you should get those records and get some history. It would behoove you today, obviously because of somewhat of a financial crisis that we’re in, that a good tenant broker will look at the mortgage situation of an office building to make sure that the landlord’s finances are not screwed up, that he isn’t in default or could be in default because he’s over leveraged. And you should do all those things in making your decision, but when it comes to the operating expenses and the real estate taxes, it really helps to look at those old statements to know what you’re talking about when you’re negotiating the lease. Let’s say you see that the operating expenses do not go up very much, I’ll give you a building that a landlord who really knows how to manage, doesn’t try to inflate his expenses, doesn’t try to hurt the tenants, really does it in a way that he wants to keep you as a tenant and keep the relationship. Not to say that we haven’t done audits in his buildings and found money. We have, however, he’s a lot more above board than many of the other landlords. But if you look at his increases, they’re not that tremendous. So you know tenants will have budgets and if it goes up 3% that’s okay. But if we just saw a lease, where it was in one building, where the lease went from 18 to 19, the OPEX went up 13%, that rings about 17 different bells. So that’s how you do the homework. You look at that, you look at the trends, you know who you’re dealing with, and that’s the due diligence that a broker should do. And lawyers can get involved in that too. They may understand the real estate tax situation a lot better if there’s a case pending or something like that. That’s important if there’re tax abatements. And if you don’t understand that as a broker, you should talk to your lawyer and they will be lot more knowledgeable, they know a lot about the abatement system and the exemption systems. 

Hal Coopersmith:     One of the things that’s interesting, particularly as there’s development going on, is new buildings. What are some things that brokers should look to negotiate for a new building? 

Joel Binstok:     Well, a new building since it’s not fully assessed when your tenant is going to move in, especially if they move in early and the occupancy rate is low in the building and because the city assesses on the basis of the income of the building, so less tenants, less income, less value means that the earliest year of your lease, your base year normally would be too low and that’s unfair to you as a tenant. Just like you gross up operating expenses and want to have the building at 95% occupancy. It’s unfair to look at a base year with a 30% occupancy or a 50% occupancy. So what? What do you do? You sit around and you wait and hopefully after you move into the building, several other tenants move in and the building occupancy in the year after that and the year after that gets closer to a more normal level. May not be 95% could be 80% or it could be 60% but for sure it’s going to be better than the 30% because today new buildings are desirable. That’s why all the big companies who can afford it made those leases because those are the technologically proficient and best in technology buildings. So you’re in one of those buildings, you wait a couple of years, what is your base year? It’s not 2020-21 it may be a blend of 2021 2022 2023 and take the three of them and average the amount. And that will be your base year. Same thing with operating expenses. There are certain things that are done in operating expenses, which in a base year are not done. It’s a new office building. It requires less maintenance. There are warranties that are in effect so that the landlord does not have to buy an elevator maintenance contract or some technology contract that he bought or whatever else he bought on the warranty. And you want to wait until that cost is in the base so that you as the tenant are paying only the escalation of that cost and not the entire cost and not on a net basis, but on an escalation basis. If you’re paying on net fees or net expenses, all of this is okay, but when you have a base as you do in New York in most of the leases, this kind of averaging or a look back and reassessing the base year for taxes and for operating is key. These new buildings pose a lot of challenges to the leases and these are just very basic old concepts that would be applied to the new buildings. 

Hal Coopersmith:     Well you mentioned a increase in operating expenses. I think we can certainly expect to see an increase in operating expenses as a result of COVID-19, HVAC cleaning. How can tenants protect themselves as a result of what’s happening? 

Joel Binstok:     Well, it’s interesting. The tenants who can protect themselves are the ones who are making the new leases because in the old leases, most of the leases did not contain any kind of language that would protect them. And what I’m talking about is I’m referring to where there’s a change in the situation of the building and the way the building is operated or if even if you add on two floors into a building, there are leases that don’t say that. If you add two floors to a building and therefore the operating expenses increase that you won’t pay for it, well you will pay for it. But what you can do is put in language into a lease and this is a negotiable point and it’s very much a business point. It’s that you will look back and see what the operating expenses were in your first year. So for instance, if you had a base year of 2020 and the landlord’s doing all sorts of cleaning costs and all sorts of things that are very expensive, well that’s going to be your base year and the year in the comparison year. They may go up even further and what you do is you may want to say, okay, well we’re not going to use that as our base year. We may use an average of the first two years because the landlord himself didn’t know how he was going to operate the building. He didn’t know how many personnel he was going to use for all, you know, he brought on 10 extra people and then they went down to five because the vaccine came in and you didn’t need it anymore. You know, situations can change and what I would say is if you can put in some language or at least have an understanding with the landlord that there’ll be some fluidity and some accommodations made with respect to the operation of the building. That would be a big plus. A very big plus for the tenants who have signed the lease already and have an older base year. There’s really nothing you can do. There’s really nothing you can do. The only argument that a smart guy, like Hal could make, would be that it’s if you have 10 porters and you add 10 more porters because you need them, that that’s sort of a capital improvement and you don’t pay for capital improvements. But on the other hand, it’s really a stronger argument that it’s really an expense. We’ve been down this road actually on security, especially after 9/11 when that got beefed up. 

Hal Coopersmith:     I appreciate you calling me a smart guy, Joel, but I’m going to disagree with you and say that it shouldn’t necessarily be just for new leases right now at this time. Obviously seeing a lot of lease modifications lend and extend, and if a tenant’s in a negotiation with a landlord in terms of what they’re going to be doing next for the lease, it’s certainly a great opportunity to reevaluate operating expenses and come to terms with the landlord in terms of how they’re going to be managing the building in the future. 

Joel Binstok:     I didn’t think of that. And I think you’re correct. I agree with you that if you know that subject is open for discussion and you can have that kind of discussion with the landlord about those costs, then I would say yes, you can discuss it, you should discuss it. I’m just not so optimistic that existing tenants will have very much ability to talk about that. I think the tenants, from what I understand, they’re very concerned and they’re going to be spending a lot of their own money, as you all know because a lot of the burden is going to be on the tenants to buy the Purell, to buy the face masks for the offices, to have people policing their own people and how they behave and how they come into the building and what they do. All of that will take manpower, not only by the landlord, but I think a lot of it the landlords are expecting the tenants to do. 

Hal Coopersmith:     You’ve provided a lot of great advice to brokers in terms of operating expenses, but we always ask this question to our guests, and I’m sure you’ve dealt with a lot of brokers and performed a lot of educational training for brokers. If you had to say one piece of advice for brokers, what would it be? 

Joel Binstok:     I think the key is to focus on the terms that are the most important, that you’ve determined are the most important and would be the ones that would be coming to play during the term of the lease. So I think a very important clause is the assignment and sublet clause. I think those clauses can be really important. I think the alterations clauses can be very important, especially in the buildout. There are other clauses which aren’t that important. Lo and behold, everybody didn’t think that the force majeure clause would be important and it hasn’t been for a very long period of time. And yet it’s like one of the most important things that, you know, at least in everybody’s mind today and how to get out of a lease. But nobody could have foreseen that. But I would focus on what you think are clauses that the landlord could apply in a way that may not be good for your client. And then that’s where you have to protect them. 

Hal Coopersmith:     Well, those sublease clauses are certainly going to be scrutinized, particularly as people evaluate their real estate footprints. And maybe look to downsize a little bit. Joel, thank you for being on the Broker’s Angle. How do people find out more about you and your lease audits? 

Joel Binstok:     So York Lease Audit. We have a website and the name of our company is the York Group. We’re working with office tenants. We’re working now with retail tenants. We’ve branched into lease administration and abstracting and all those kinds of corporate services because they’re all connected. And you really have to understand all of these different areas in order to do a good job in operating expenses. We always took pride in the fact that one of my partners is a PE and facility manager and for many years and worked for National Grid and when it comes to utilities, we know about utilities, but you could find us at our website, my email, jbinstok@yorkleaseaudit.com and we’re based in Manhattan, but we work nationally.

Hal Coopersmith: That wraps up our interview with Joel Binstok. For more visit brokersangle.com or follow us on social media @brokersangle and please feel free to email us at angle@brokersangle.com