Its title alone seems bland enough to make your typical office tenant yawn, but when it comes to the “assignment and sublease” clause in a prospective lease agreement, one better not be caught napping, warns commercial broker Joseph Sciolla.
“It’s a big provision,” said Sciolla, whose Cresa Partners represents companies seeking space. “We focus on it specifically when we negotiate on behalf of our clients.”
Not everyone has been so vigilant, however, as witnessed by the growing tendency of landlords to scoop up underused or vacated space that the tenant no longer needs in order to re-lease it at a higher premium. The so-called recapture option had been largely dormant until being stirred recently by the improving market, but the trend is now in full swing, according to industry observers.
“Most landlords today, if they have an opportunity to recapture the space, will do so,” said Cushman & Wakefield Managing Director Mark Winters. “It’s almost standard fare now.”
In the past, the tenant usually would sublease the excess space for the remaining term, sharing any profits with the property owner. While a landlord might have always had the right to recapture, the difference between the current tenant’s rent and the prevailing rate often was not substantial enough to warrant such a move, Sciolla noted.
“It depends on how big the spread is,” he said. “It has to be pretty large for the landlord to take all of the leasing risk and the cost of tenant improvements themselves.”
Apparently, however, the gap has widened for deals inked even just three or four years ago, with Sciolla and others reporting a flood of recapture moves occurring these days. At 70 Franklin St. in downtown Boston, more than 40,000 square feet of office space recaptured from the May Department Store has been re-leased to new tenants, including eYak, an Internet firm, as well as the state’s Division of Energy Resources. In the Hub’s Back Bay, Cohen Properties successfully employed a similar strategy at the Park Square Building, while the Intercontinental Cos. grabbed approximately 80,000 square feet back at 141 Portland St. in Cambridge from the erstwhile US Trust Co.
“It’s clearly more prevalent in a strong market like we have right now,” said R.M. Bradley Co. Executive Vice President Don Campbell, whose firm is exclusive leasing agent at 70 Franklin St. “There’s a lot less risk in today’s [environment], and that’s why you’re seeing it more.”
Campbell and Vice President Timothy J. Locke worked with the landlord, Cornerstone Real Estate Advisors, to determine that the best approach would be to recapture the remaining three years on May’s lease and put it back on the market. Campbell, who said “we’re very happy with the end result,” added that he believes May was equally satisfied to be relieved of the obligation.
“They don’t want to be in the real estate business,” Campbell said. Calls to the company at its St. Louis headquarters were not returned before press time.
Careful Negotiations
In many cases, according to observers, the tenant does indeed gladly surrender the space and its accompanying headaches. Even if that is the mindset, however, Sciolla said Cresa advises tenants to make the language as favorable as possible for themselves to retain flexibility. When the market is as hot as it currently is, he said, it may prove worth the landlord’s while to “cut a check” to the company in order to regain control of the space, but that will only occur if the original terms favor the tenant.
Waiving such rights “negates the tenant’s negotiating position with the landlord,” Sciolla said. “That clause can create an asset and it can create a liability, but it has been our experience that a lot of tenants don’t focus on it as much as they should.”
According to sources, for example, Cohen Properties recaptured the top floor of the Park Square Building after tenant Inso Corp. had retained a local broker to sublease the space. The landlord’s ability to do so has allowed them to re-lease the space at more than double what Inso Corp. had been paying on its 10-year-deal, which is set to expire in 2004. Whereas Inso was paying just under $20 per square foot, Cohen is reportedly fetching more than $40 per square foot from the Yankee Group. In fact, sources said Cohen then recaptured about 25,000 square feet from the Yankee Group, which was relocating into the Inso Corp. space from another floor in the building. The old Yankee Group portion was then leased to PaperExchange.com for a higher rate.
The timing of when a lease was signed may very well determine whether the sublease language favors a tenant. When vacancy rates were in double digits during the early 1990s, tenants normally had the bargaining power to strike their own terms, but the lack of new supply and booming economy have swung the pendulum back in the landlords’ favor since the mid-1990s, Winters said. As a result, he said, “you find very few subleasing opportunities today.”
Copley Place in Boston has successfully leased up a significant portion of space given up by IDX Corp., which recently retrenched to its headquarters at nearby 116 Huntington Ave. While declining comment on specific numbers, Copley Place Leasing director Peter J. Dominski said last week that the recapture proviso did prove beneficial to the property owners, although he insisted “there were no sour grapes” on the part of IDX. In any event, such well-known firms as Morgan Stanley Dean Witter ultimately committed to the space, reportedly at rates above $40 per square foot. IDX supposedly was paying in the $20 range.
Given such potential, Copley Place is usually reluctant to change its recapture language in a lease deal, said Dominski, who estimated that 95 percent of the leases written for the 845,000-square-foot complex contain such a clause. Whenever the opportunity presents itself, he said, Copley will look to recapture.
“I can almost guarantee it will happen again in the near future at Copley Place,” he said.
