Downtown Office Faces Post-Sandy Backwash
NEW YORK CITY—It’s been more than 190 years
since Lower Manhattan was hit head-on by a
hurricane. Yet thanks to a record-breaking
storm surge, Hurricane Sandy wreaked more
than enough havoc in the neighborhood.
In the storm’s aftermath, the Bloomberg
administration estimated that there were
445 residential and commercial properties
Downtown that were uninhabitable,
although they may have incurred no structural damage. In the office sector, Jones
Lang LaSalle estimated that about one-third of Lower Manhattan’s 101 million
square feet of space remained dark more
than a week after the storm. Tenants ranging from AIG to Morgan Stanley and the
New York Daily News were displaced, operating from temporary space elsewhere.
At the New York University Schack
Institute of Real Estate Capital Markets in
Real Estate conference, experts wondered
whether the effects on the office sector
could last longer than the weeks or months
needed to clean up. “There’s been value ero-
sion Downtown,” Reuters quoted Howard
Lutnick, chairman and CEO of Cantor
Fitzgerald LP and BGC Partners Inc., as say-
ing at the conference. “It had just started to
come back. Fear of flooding is going to
At the same conference, the subject was
broached by Darcy Stacom, vice chairman at
CBRE. Citing prolonged building closings
and power outages, Stacom similarly pre-
dicted Sandy would take a toll on values.
Fitch Ratings—itself displaced from its
Downtown offices by the storm—took a
walking tour of the neighborhood two weeks
after the hurricane brought 14-foot storm
surges into Battery Park. While office assets
such as Silverstein Properties Inc.’s 7 World
Trade Center and Brookfield Office
Properties’ One Liberty Plaza were operating on a business-as-usual basis, “the same
cannot be said for other properties, among
them One New York Plaza and 100 Wall St.,
which are still undergoing repairs,” reports
Fitch. “In fact, the areas east of Battery Park
and south of Water Street appear to have
sustained the worst damage from flooding.”
The ratings agency said the office sector
as a whole—including the CMBS backed by
the properties—would not feel much of an
effect from the hurricane’s fallout.
“However, insurance premiums and deductibles are likely to increase.”—Paul Bubny
Protecting Against Tenant Bankruptcy
In the aftermath of the financial crisis, landlords are increasingly sensitive to the
financial viability of tenants. While a landlord’s first line of defense is to perform
due diligence to understand the creditworthiness of a potential tenant and to create an appropriate security package, there are other steps that an owner can take
to reduce the likelihood of facing a tenant in bankruptcy, and, if a tenant enters
bankruptcy, to be in the strongest possible position to enforce ownership’s rights
and apply security without violating the Bankruptcy Code.
In evaluating the financial strength of a prospective tenant,
due diligence should include the performance of a credit
check, as well as UCC, bankruptcy, federal and state tax lien,
litigation and judgment lien searches
on both the tenant entity and any
guarantor; and review of certified
financial statements and/or tax returns for recent multiple
years with respect to both the landlord and any guarantor. An
Internet search may also disclose potential concerns.
Regarding existing leases with tenants not in bankruptcy, a
landlord should also be aware of signs of a tenant in financial trouble. The most
obvious sign of trouble is delinquency in the payment of rent. Thus, it is advisable
for a lease to provide for very limited notice and cure rights for defaults, monetary
defaults in particular.
Further, if a tenant is in default, it is best to act quickly. A landlord should be
prepared to promptly send a default notice to the tenant. Once a tenant does
enter bankruptcy, a landlord would first have to obtain relief from the automatic
stay in order to enforce its rights under the lease.
While a landlord is entitled to seek relief from the automatic stay under certain
circumstances, bankruptcy courts will generally not grant relief unless either such
relief is necessary to prevent immediate irreparable damage, which is a high standard for a landlord to meet, or a tenant fails to perform its post-bankruptcy petition obligations under its lease.
In addition, a landlord should keep in mind that consents of third parties, such
as lenders or joint venture partners may be required to terminate a lease.
As thorough as landlords may be in both performing due diligence on potential
new tenants and monitoring existing tenants, a landlord may still encounter a tenant that has entered bankruptcy. Once a tenant is in bankruptcy, recovering upon
a cash security deposit will not be possible without obtaining relief from the automatic stay.
Two alternatives to a security deposit are a letter of credit and a third party guaranty. Both have the benefit of not being subject to the automatic stay, if properly
drafted, as the obligations of the issuing bank or guarantor (assuming the guarantor is not also in bankruptcy) are viewed as independent of the obligations of the
tenant, with the payment thereunder not involving the property of the tenant’s
bankruptcy estate. Both also potentially avoid the cap on landlord’s damages proscribed under the Bankruptcy Code.
These are but a few of the measures available to a landlord to assure the best
possible position both to avoid being subject to a tenant in bankruptcy, and to
reduce exposure if a tenant does enter bankruptcy.
By Jason T. Polevoy
(A longer version of this column originally appeared on GlobeSt.com.)
Jason T. Polevoy is a partner in the real estate practice at Kleinberg, Kaplan, Wolff & Cohen PC
in New York City. He may be contacted at firstname.lastname@example.org. The views expressed here are
the author’s own.
Vital Signs...Manhattan hotel sales are expected to average $890 per sf in 2012, up from $752 in 2011.—Jones Lang LaSalle