The Stoler Report with Rosenthal & Zimmerman

0:00 Speaker 1 Good morning. This is Mike Stolen for the Stolar Real Estate Report on the CATS round Table. What’s happening in the office markets? What’s unique today in the industry, what’s happening with synthetic leases, condominium leases? I don’t know the answer, so to they have brought together two senior executive managing directors of Hemsley Spear, Richard Rosenthal and lenny’ zim and

0:21 thanks for being here today. Thank you, Thank you Michael, Lenny. So, I have a question for you, what’s this situation with these condominium leases at the thirty year condominium leases?

0:32 Speaker 2 Again, it’s a vehicle that’s been around for a little while. We’re not for profits can get involved in a lease transaction and eliminate real estate factor.

0:44 Speaker 1 Okay, this is section four to twenty of the tax code. Okay, So last year, at the beginning, at the beginning of this year, a building at eleven sixty six eleven eighty Aveny of the Americas was leased to Self Help two flaws for the nonprofit. So what are the benefits for the nonprofit?

1:05 Speaker 2 Again, if they would condom if they had made it into a condo.

1:09 Speaker 1 Yeah, they made it into a condo for the forty eight thousand square feet.

1:12 Speaker 2 No question about it. Again, but just generically, when you make it into a condo, it becomes a separate unit of building within the building. And they’re able under the laws if they set up a synthetic lease to be able to avail of elimination of real estate.

1:30 Speaker 1 Now, this is a thirty year lease, that’s correct.

1:33 Speaker 2 That has to be thirty years, this is the law. It must be at least thirty.

1:37 Speaker 1 Years, okay, and it has to be approved by the AG’s office.

1:40 Speaker 2 That is absolutely correct.

1:41 Speaker 1 Okay. So have you been involved recently with any of these transactions, because the two of you are rather involved with the nonprofit world.

1:49 Speaker 2 Yeah, we’ve done it for a number of people in nonprofit was involved originally years ago. One of the first, or among the first, was for the MTA out in Long Island, and it took the participation of the landlord because there are costs involved, there’s time involved. But again it was the condition that the MTA would consider going in.

2:10 That building was out in gardens.

2:12 Speaker 1 So here’s the question for Richard, So what’s the benefit for besides the real estate taxes that they’re going to save, Okay, which could amount to between seven to ten dollars the square foot the am I correct, I think that’s proper Okay, So what are the other benefits the nonprofit gets? I mean for the savings over there, there are additional savings

2:31 that they can get.

2:32 Speaker 3 Well, it depends on the landlord’s position. But they’re cleaning services sometimes that are included in certain leases that might not otherwise be included. There are operating expenses that are dictated by the landlord that there may be certain benefits that are derived in terms of how they arrange the increases over periods of time, and they the opportunity for

3:02 a much lower market rent than as a result of the taxes. And in addition, the demand that the the landlords now have for space, they’re reaching out for credit worthy tenants and a lot of these non for profits would qualify as good credit tenants.

3:21 Speaker 1 Now as a now you represent both the nonprofit and the landlords.

3:25 Speaker 2 Correct, Yes, we do.

3:27 Speaker 1 Which which is which cases is more the landlords or is a nonprofit?

3:32 Speaker 2 I would say we lean more towards the not nonprofits. We get involved with landlords when we’re talking about synthetical lease for example, for our for our tenant, and we’re being approached by landlords today because they’re interested in the tenants that we have, the not for profits in particular medical and hospital whose credit is exemplary, and they want

3:55 to know what do we have to do to attract your tenant to come to our buildings.

3:59 Speaker 1 So what happens with regard to the financing of the property, because you’re separating the nonprofit from the other sections of the building? Okay, like the one over there at for eighty five Madison, which is the file building they put us for the archdiocese and for self help. They took a portion, as I said, forty eight thousand square feet

4:21 on Avenue of the Americas. What happens to the financing of the building? Is it separated? Do they break it down into two components?

4:29 Speaker 2 Well, it is that becomes two components, and it becomes in and of itself something where the landlad can go out and get financing. If the landlord has to get some financing.

4:39 Speaker 1 So in the case Richard would be a it’s on the credit of the nonprofit.

4:45 Speaker 3 Many cases, Yeah, and interestingly enough, the work that a landlord may be able to provide in certain cases in a traditional lease, there’s a lot of improvement work that’s required by attendant freak when they’re moving into a new building.

5:02 In the case in this situation, it may be that the tenant, the non for profit gets a certain allowance or provides a certain amount of money for themselves to improve the space. And then they are a third party resources that you can go to if the landlords is not willing to provide any additional funding that you can

5:23 go to to which we Lenny and I have access to that will provide additional funding above and beyond whatever their limits are which enable us to move forward.

5:35 Speaker 1 So what type of agencies or organizations provide that additional financing or the additional benefits?

5:41 Speaker 2 Yeah, thank you, A good question. These are insurance companies that we’re working with who have seen that there’s a need with our conversations to them because we know the difficulty of trying to bridge that delta between what the landlord will give what the tenant wants. And again we work with a few we vetted them already, but they

6:04 have to meet certain criteria, meaning not so much the lenders, but the people who they’re going to offer this facility.

6:10 Speaker 1 Now, what’s happening with the Class B and C buildings.

6:16 Speaker 3 Very good question, because the demand has been over this last couple of years during the pandemic certainly, and from that point on, the Class A buildings have been the one that attracted all the major tenants, which opens up opportunities for a lot of different uses in the Class B and C buildings, opportunities where those landlords would previously

6:39 not welcome, for instance, a medical use, they may now and frequently will be urging us to show their buildings and they will incorporate whatever the physical needs are as best they can to attract tenants to the property.

6:56 Speaker 1 I mean, as you know, it is exemplified by Nyu lang Own. They’ve taken over a number of buildings, you know, the store building on forty first Street of Third Avenue, and then on fifty third Street and Third Avenue the building next to which was a portion of the Boston Properties building. They’ve converted these sections to medical uses.

7:20 Speaker 3 That’s correct.

7:21 Speaker 1 Do you see that happening more often?

7:24 Speaker 2 Yeah, yeah, definitely I do. And again I think you began this by asking about the B and C buildings that are around. What’s happening today is we went from trying to have conversations, which we did with the landlords explaining the benefits of the tenant that we have major tenant, great great credit, specifically in the medical and it was

7:50 a tough sell in the beginning those type of tendencies. They’re concerned with what kind of medical and do they have disease? And they’re coming in and will it affect other tenants that I have in the building. Quite the contrary, today, they’ve come to us and said, how do we attract these tenants? Their buildings have tremendous vacancies, and again they’re

8:12 under a lot of financial pressure with their lenders. And what we’re doing is again they’re coming to us saying, you have this tenant. You have these tenants, we know who they are, the credit is excellent. Can you bring them to us? What do we have to do? And then we have this dougy.

8:29 Speaker 1 What about expansion? Okay, if a nonprofit signs they at least for thirty years and they they’re going to grow, they hope to grow, how do you take care of the expansion space within the building.

8:40 Speaker 3 That’s a very very good question. It’s as if they’ve got to have certain initially when you’re making your document for the kind of minimization of the property you might want to have in the arrangement, the fact that in the event the expansion is going to be required, that the Lando would be willing to go ahead and offer

9:01 that as an opportunity, because you’re absolutely correct. The issue does come up if they’re in the kind of minimum space and they want to get out of the condominium space for some reason, they want to shrink their space and relocate or do something along those lines, then they have to operate on their own and figure out how

9:19 they do that.

9:19 Speaker 2 As a traditional text, Lenny, I would only add that with regard to medical and I’ve been doing this for We’ve been doing this for a very long time. We have never seen them contract. We have seen them only expand.

9:33 And the only time we’ve ever seen them contract is when an area became tremendously gentrified and again the rents reached a point where they could get much more from other tenants. Other than that, when we approach a deal with our tenants, when we’re talking to the landlords, it is a very important and that’s why it was a

9:52 great question. It’s a very important question that we have to answer. We have to get answers to it’s very much part of the original transaction.

10:00 Speaker 1 Now, what about the use of conversion of a B C building to a residential tower, which could be utilized for nonprofit because they need dormitories and they need other residential requirements.

10:17 Speaker 3 Just stepping back one second, in terms of the B and C buildings, the idea of repurposing them and repositioning them for different uses is very substantial trend in that marketplace today because the landlords have to be made much more familiar with what’s involved with medical uses as an example, the types of space that they’re going to need, whether

10:38 it be additional air conditioning, enhanced air conditioning systems, more power that the building doesn’t.

10:46 Speaker 1 Have leadline was leadline?

10:48 Speaker 3 Well, that’s ordinarily be up to the customer, but you’re right because it has a lot of requirements for a lot of equipment. So we have that.

10:57 Speaker 1 So where do you see the market. Do you see growth in the healthcare market as a major upcoming tenant for the future.

11:04 Speaker 3 We think, we think and Lenny and I have been going over this in the last year, maybe more in terms of from the pandemic going forward. For sure, has been a tremendous increase in interest in medical space. There, the how to service patients and how to get the medical needs met for various patients is becoming more and

11:29 more needy or necessary. I guess you should say that they’re interested in putting the term care back in the word healthcare.

11:41 Speaker 1 But with regard, I just want to finalize this. Yeah, Lenny and I spoke the other day. We were talking about repurposing of the building three Times Square, the former Routers building which was converted to Toro University, which is a perfect example. They needed expansion space, they wanted it in the one roof. They had a building that was

12:00 not really attracting to many other companies. So the nonprofits are going to win and the landlords elect to lynn tremendous example.

12:09 Speaker 3 Not only did they take approximately two hundred and fifty thousand square feet initially, which was a tremendous fine in the center of Times Square, which is so difficult to rent, but they since then have enhanced that requirement and they’d taken an additional sixty thousand square feet and they were able to do that under their arrangement with the ownership.

12:28 Speaker 1 So I’d like to thank Lenny Zim and Richard ROSENTHALP for being with me today. I’ll see you next week.

12:34 Speaker 3 Thank you very much, Michael

12:36 Speaker 2 Thank you Michael,