By JOYZELLE DAVIS
Pity the lawyers. They’re not only saddled with a negative image, but they’re often treated as second-class citizens when it comes to leasing office space.
While most commercial tenants are required to provide some kind of performance guarantee to secure their office lease, such as a security deposit or collateral, law firm partners often have been required to assume personal liability for a portion of the lease expenses.
“Law firms have a bit more risk than your typical tenant,” said Tony Morales, director of leasing for Maguire Partners, landlord of several Bunker Hill office towers. He notes that the structure of a law firm “doesn’t have the accountability to shareholders that other firms have” and thus it’s less complicated for them to disband.
But the law firm of Troop Meisinger Steuber & Pasich managed to sign a $65 million lease in the tight Westside market last year without any personal liability for its partners. The deal was secured using a “lease bond,” a concept that had long been bandied about but never used.
Now that bond-lease transactions are considered a model for law firm lease deals being negotiated in L.A. as well as New York, parties in the original transaction have received dozens of inquiries from brokers.
“The beauty of this is that it meets the needs of both the tenants and the landlords,” said Howard Sadowsky, executive vice president at Julien J. Studley Inc., who represented Troop Meisinger in its negotiations to lease 140,000 square feet at 2029 Century Park East in Century City.
The bond lease works like this: A surety bond is substituted for a personal guarantee by the partners. The law firm pays an annual premium on the bond, like an insurance policy. The bond is then issued and given to the landlord, who can call on the bond in the event there’s a problem with the tenant.
Troop Meisinger’s bond, which was issued by Glendale-based Amwest Surety Insurance Co., secures the tenant’s performance so the landlord knows it could get back its tenant-improvement and brokerage commission costs over the four-year period.
The annual cost of the lease bond is about 1 percent of the guaranteed amount, which is the landlord’s cost of tenant improvements and transaction commissions in the lease. In Troop Meisinger’s deal, that guaranteed amount was about $6 million, meaning its annual premium on the lease bond is about $60,000.
Sadowsky said the bond-lease option appealed to Troop Meisinger because it shields the firm’s partners from personal liability. If the firm’s 41 partners personally guaranteed a $6 million obligation, any of them could conceivably be liable for that entire amount if the firm broke its lease and the other partners were unable to pay. Also, the partners would have to list the breached lease deal on any credit or loan applications, and it would appear on their personal credit histories.
Another alternative for securing a commercial lease is a letter of credit, which is often used when a personal guarantee can’t be negotiated.
But Sadowsky said most tenants consider a letter of credit only as a last resort, because it impinges on their ability to take out loans. Landlords, however, often prefer that method. And therein lies the conflict.
“The (form of guaranteeing performance) is always the last issue to be resolved in lease negotiations,” Morales said.
The bond lease appeals to landlords because it allows them to go to a single source to get their money, rather than chasing down 40 scattered partners.
In the Troop Meisinger deal, the landlord Tooley and Co. was concerned about the length of time it would take to call the bond, said Jeffrey Strassner, vice president at J & H; Marsh & McLennan who brokered the law firm’s lease bond. So a clause was written in that allows the landlord to file a notice of default and collect the bond within 10 days a significant acceleration of the “several weeks” it usually takes to collect a bond, he said.
Strassner added that the most difficult part of devising the lease bond for the Troop Meisinger transaction was drafting documentation for the unprecedented deal. The parties tore through more than 25 different bond forms before they could agree on the language.
Troop Meisinger provided a good test case because it has a strong, “conservative” balance sheet, Strassner said.
But the concept could be utilized by any professional services firm consulting, accounting or advertising agencies that needs a way of guaranteeing its lease performance.
Now it’s just a question of how comfortable landlords and tenants can get with the concept.
“It seems like a viable compromise as long as it’s insured properly,” said Jonathan Larsen, a director at Trammell Crow Co. who represents both tenants and landlords. “But I might wait awhile to see how it plays out with other transactions before I try it myself.”