HOT TOPICS IN LEASING by Nancy Connery, Esq. Schoeman ...

HOT TOPICS IN LEASING

by

Nancy Connery, Esq. Schoeman Updike Kaufman & Stern LLP

New York, New York

HOT TOPICS IN COMMERCIAL LEASING 2014

Copyright © 2014 Nancy Ann Connery All rights reserved.

Nancy A. Connery | Partner Schoeman Updike Kaufman & Stern LLP 551 Fifth Avenue, New York, NY 10176 (646) 723-1042 direct | (212) 661-5030 main (212) 687-2123 fax [email protected] | www.schoeman.com

mailto:[email protected]

http://www.schoeman.com/


SELECTED ISSUES IN LEASES INVOLVING NOT-FOR PROFITS

1. AMENDMENTS TO NOT-FOR-PROFIT LAW

a. Non-Profit Revitalization Act of 2013. The Non-Profit Revitalization Act of 2013

became effective July 1, 2014 (the “2013 Act”).

b. Internal Consent Process. The 2013 Act facilitates the process of obtaining required consents. For example:

i. Notices of meetings to members, member waivers of notices, member proxies, and member consents may be given by electronic mail.

ii. Unanimous director consents and waivers of notices may now be given by electronic mail or in writing.

iii. The provisions of the Not-For-Profit Corporation Law allowing directors to participate in meetings via conference telephone or similar communications equipment have been clarified and also expanded to add electronic video screen communication.

c. Related Party Transactions.

i. “Related party” transactions are now subject to strict scrutiny. Board members need to consider the “related party” rules if they are in any way involved in the transaction at issue.

ii. In addition, many not-for-profit corporations must adopt policies governing conflicts of interest and policies protecting whistleblowers.

d. Internal Approvals of Real Estate Transactions Involving the Sale, Lease, Exchange or Other Disposition of Real Property.

i. Transactions Involving Less Than All or Substantially All of the Not-for-Profit’s Assets. Board approval requirements for real estate transactions that do not involve the sale, lease, exchange or other disposition of all or substantially all of the corporation’s assets have been relaxed.

1. Under the 2013 Act, the purchase of real property need only be authorized by a majority of the Board of Directors (or a majority of a Board-authorized committee) unless the purchased property would, upon purchase, constitute all or substantially all of the assets of the corporation.

2. Under the 2013 Act, the sale, mortgage, lease, exchange or other disposition of the corporation’s real property need only be authorized by a majority of the Board of Directors (or a majority of a Board-authorized committee) unless the property constitutes all or substantially all of the corporation’s property.

ii. Transactions Involving All or Substantially All of the Not-for-Profit’s Assets. If the real property, if purchased, would constitute all or substantially all of the corporation’s assets, or if the real property being sold, mortgaged, leased, exchanged or otherwise disposed of constitutes all or substantially all of the corporation’s assets, the old rules apply (a two thirds vote of the Board is required unless the Board consists of more than 21 people, in which case a majority vote is sufficient).

e. Attorney General and Court Approval. If the transaction involves the sale, lease, exchange or other disposition of all, or substantially all, the assets of a charitable corporation, the corporation may now obtain the approval of either the Attorney General or the Supreme Court (formerly, court approval was required, with notice given to the Attorney General’s office) unless the corporation is insolvent or would become insolvent as a result of the transaction (in which event Supreme Court approval is required) or unless the Attorney General determines that a court should make the determination.

i. Note that the amendments to the Not-For-Profit Corporation Law with respect to Court approval did NOT modify the requirements of the Religious Corporation Law as to religious corporations.

f. Financial Reporting.

i. Financial thresholds for independent CPA audit reports and review reports have been raised.

ii. New requirements are imposed requiring the Board or an Audit Committee of any corporation required to file an annual audited financial report to, among other things, oversee financial reporting and review audit results.

2. SPECIAL CONSIDERATIONS: LEASES BY AND TO NOT-FOR-PROFITS

a. Negotiation Process 1. Decision making power is often exercised by a group.

b. Due Diligence

i. Internal Approval Process

1. Voting and decision making processes may be informal.

2. Charter documents may be old-fashioned, with voting requirements unclear or impossible to comply with.

3. If quorum requirement, as a practical matter, can’t be met because

of diminishing membership, the Supreme Court may be petitioned for a modification of the quorum requirement. N.Y. NPC Law § 608(e). If quorum requirements, as a practical matter, can’t be met because of the large size of the membership (in excess of 500 members), cost of mailing, and inability to send notice by e-mail, consider publication and posting. N.Y. NPC Law § 605(a).

ii. Consider whether amendments are needed to the Charter or By-laws.

iii. Approvals:

1. Not-for-Profit Lease of Property from Third Party.

a. No statutory requirement of a minimum Board vote or

membership vote. b. Review corporation’s certificate of incorporation and

by-laws.

2. Not-for-Profit Lease of its Real Property – Less Than All or Substantially All of the Corporation’s Assets.

a. Requires authorization by a majority of the Board of

Directors (or a majority of a Board-authorized committee). N.Y. NPC § 509.

b. Review corporation’s certificate of incorporation and by-laws.

3. Not-for-Profit Lease of its Real Property -- All or Substantially All of the Corporation’s Assets:

a. A two-thirds vote of the Board is required unless the Board consists of more than 21 people, in which case a majority vote is sufficient.

b. If members are entitled to vote on the transaction, the Board must adopt a resolution recommending the transaction and submit the transaction to the members for vote. By two-thirds vote, the members may approve the transaction according to the resolution or may authorize the Board to modify the terms of the transaction. If members are NOT entitled to vote on the transaction, then Board approval (see subpar. (a) above) will suffice.

c. Review certificate of incorporation and by-law

requirements.

d. Attorney General or court approval required, unless the corporation is insolvent or would become insolvent as a result of the transaction (in which event Supreme Court approval is required) or unless the Attorney General determines that a court should make the determination.

e. After authorization, the Board may, at its discretion,

abandon the transaction (subject to the rights of third parties to the transaction) without further action or approval.

f. See N.Y. NPC §§ 509, 510.

4. Religious Corporation/Disposition of Assets (including a Lease of

Church Property for a Term Exceeding 5 Years):

a. General.

i. Although the Not-For-Profit Corporation Law is generally applicable to religious corporations, not all of its provisions apply to religious corporations. RCL 2-b provides that the Not-For-Profit Corporation Law applies to every Religious Corporation, subject to specified exceptions. RCL 2-b further provides that if there is a conflict between the Not-For-Profit Corporation Law and the Religious Corporation Law, the Religious Corporation Law prevails.

ii. Notices of Member Meetings and Proxies. Sections

603 (notice of member meetings) and 609 of the Not-For-Profit Corporation Law (proxies) do not apply to religious corporations.

b. Court Approval/Notice to AG.

i. Lease of Real Property By a Religious Corporation from a Third Party. Court approval and Attorney General approval are not required for leases by religious corporations of property. N.Y. RCL Section 6 specifically permits religious corporations to acquire property for, among other things, chapels,

mission houses, school houses, housing for ministers, property for a home for the aged, and property for a day care center. Any disposition, however, must be effected in accordance with the N.Y. RCL §12.

ii. Approval Required. RCL § 12(1) requires every religious corporation to obtain court approval pursuant to NFC Law § 511 (with notice to be given to the Attorney General) for each of the following transactions:

1. Sale of any of the church’s real property

(except in connection with a foreclosure).

2. Mortgage of any of the church’s real property.

3. Lease of any of the church’s real

property for more than 5 years.

iii. Internal Approvals.

1. For certain hierarchical churches, designated bodies or parties must approve the lease.

2. Generally, for those churches whose trustees or governing body are elected by the congregation, approval of the members will be required.

c. Certain Churches. RCL Section 2-B (d-1) exempts certain

churches from the requirement that notice be given to the Attorney General, and RCL Section 12 (2) – (6) requires additional consents from the bishops, Presbyteries, etc. with respect to those churches. The churches include the Protestant Episcopal Church, Roman Catholic Church, Ruthenian Catholic Church, African Methodist Episcopal Zion Church, Incorporated Presbyterian Church, and the United Methodist Church.

iv. Real Property Due Diligence

1. Confirm that the not-for-profit actually owns the property it is leasing.

2. Are there any restrictions on the use of the real property?

v. For religious corporations, will approval of the church hierarchy be required or desirable?

c. Below Market Rents

i. It’s not unusual for a not-for-profit to grant a long term lease to a related not-for-profit whose activities support the activities of the owner of the real property.

1. Rent may be below-market. N.Y. RCL §12.

2. What if the tenant files for bankruptcy?

a. If the rent is deeply discounted, the lease may be very

valuable. Bankruptcy courts generally have the power to order an assignment of a tenant’s interest in a lease without the landlord’s consent to any entity, including a developer or for-profit entity. Generally, the not-for-profit landlord will be concerned about such a result.

b. Thoughts:

i. Set a fair market rent, with the tenant to receive a rent credit only for so long as the property continues to be leased by a not-for-profit tenant in accordance with the lease requirements.

ii. Draft the court order authorizing the lease transaction to clearly limit approval to the tenant named in the petition and to require court approval of any assignment of the lease or sublease of all or substantially all of the premises.

iii. Arguably an assignment of an approved lease with a term of more than 5 years constitutes a new lease of the religious corporation’s property requiring Supreme Court approval. Does the state law requirement trump the trustee’s right to assign?

d. Use Restrictions

i. It’s not unusual for a not-for-profit granting a long term lease to limit the uses to which the property can be put. This may be a function of the

proximity of the leased property to the church’s or not-for-profit corporation’s property or may constitute a quid pro quo for a reduction in the base rent.

ii. What if the tenant files for bankruptcy?

1. The Bankruptcy Code voids any lease provision that gives the

landlord the right to terminate or modify the lease if the lease is assigned by the debtor/tenant or its trustee in bankruptcy. Bankruptcy Code §365(f)(3). This provision has been interpreted to invalidate any number of restrictions on assignment, including narrow use clauses. E.G., Robb v. Schindler, 142 B.R. 589 (D. Mass. 1992) (court refused to enforce profit recapture clause, citing cases invalidating various restrictions on transfer, including narrowly crafted use clauses that impeded assignment and clauses that increased rents to market rate upon assignment). There is the risk, therefore, that a bankruptcy court would invalidate an overly narrow use clause in order to facilitate an assignment of the lease in bankruptcy.

2. Thoughts:

a. Explicitly describe in the lease the nature of the special relationship, if any, between the tenant and landlord.

b. Draft the court order authorizing the lease transaction to clearly limit approval to the proposed use.

c. Arguably an assignment of an approved lease with a term of more than 5 years constitutes a new lease of the religious corporation’s property requiring Supreme Court approval. Does the state law requirement trump the trustee’s right to assign?

d. Limit the property’s use with a Declaration of Restrictions.

3. REAL ESTATE TAX EXEMPTION

a. Property Owned by Not-For-Profit. Real property owned by a corporation or association organized or conducted exclusively for charitable, educational, religious, hospital, or moral or mental improvement (an “exempt property owner”) that uses the property exclusively for such purposes is exempt from real estate taxes. N.Y. Real Property Tax Law § 420-a. Other exempt purposes are set out in N.Y. Real Property Tax Law § 420-b, 446, and 462.

i. If the exempt property owner leases a portion of the property to a commercial enterprise, its exemption will be lost as to the portion so leased.

1. To avoid transferring the exempt owner’s tax exemption to the commercial tenants, the lease will typically require each commercial enterprise to pay its share of increases in the building’s real estate taxes (or its share of such taxes as a direct pass-through), computed as if the property was not benefitted by the property owner’s tax exemption.

ii.If the exempt property owner leases a portion of the property to another

corporation or association organized or conducted exclusively for charitable, educational, religious, hospital, or moral or mental improvement for such tenant’s exempt purposes, the exempt property owner may retain its exemption as to the leased property but only if the rent payable by the tenant does not exceed normal carrying, maintenance, or depreciation charges with respect to the leased portion of the property.

b. Property Owned by a For-Profit Entity and Leased to a Charitable Corporation.

i. Generally, a For-Profit entity that leases real property to a Not-For-Profit

entity is not entitled to a real estate tax exemption with respect to the Not-For-Profit’s occupancy.

ii. Some Techniques For-Profit Landlords and Not-For-Profit Tenants Have

Used to Allow the Not-For-Profit Tenant to Obtain the Benefit of Its Exempt Status:

1. Symphony Space. a. Symphony Space Inc. v. Pergola Properties, Inc., 88

N.Y.2d 466 (1996) b. Property owner conveyed office building to a Not-For-

Profit for nominal consideration, was granted a lease at a nominal rent for the portion of the building not occupied by the Not-For-Profit, and was given an option to reacquire the entire building at the end of a specified period of time. The owner lost the building to the Not-for-Profit because of a Rule against Perpetuities issue that voided the purchase option.

i. Very risky. 2. Leasehold Condominium – Ground Lease.

a. For-Profit owner ground leases its property to a Not-For-Profit that constructs improvements.

b. The Not-For-Profit converts its leasehold estate to a leasehold condominium with fee ownership of the improvements.

c. Condominium units are separately assessed and taxed under NY Condominium Law § 339-y.

i. Note that there may be a lapse in time between the formation of the condo and creation of separate tax lots.

d. See NYC Dept. of Finance Letter Ruling dated February 13, 2009.

i. Lease was for 35 years with renewal options. ii. Tenant owed in fee the building.

iii. Leasehold condo unit tax exempt if §420-a criteria otherwise met.

e. What if Not-For-Profit Acquires Leasehold Estate Through a Non-501(c)(3) Entity Owned by a Not-For-Profit

i. If a leasehold estate is acquired for use by a Not-For-Profit for its exempt purposes, but the leasehold estate is held in the name of a single-member limited liability company owned by the Not-For-Profit (e.g., for financing or liability reasons), is the leasehold condominium unit still exempt from tax?

ii. There are a number of letter rulings from the New York City Department of Finance indicating that property owned in fee by a limited liability company (that is not a 501(c)(3) entity) owned solely by an exempt entity and used by the exempt entity for its exempt purposes, may be exempt from real estate taxes. Would the Department of Finance apply the same reasoning to a leasehold estate?

iii. Note that the letter rulings set out a number of criteria that must be met, including the following:

1. The sole member of the LLC must qualify for a 420-a exemption;

2. The limited liability company’s articles of organization and operating agreement must contain specific language relating to the company’s not-for-profit purposes.

3. There must be commonality between the LLC and its member.

4. The property must be managed and maintained by the single member or leased to another not-for-profit entity that would qualify for an exemption.

5. The rent can’t exceed carrying, maintenance and depreciation charges.

6. Upon termination of the LLC, the property must revert to its single member or another exempt entity. The LLC must continue to be owned by an exempt entity.

7. An annual affidavit must be filed with the Department of Finance.


Restaurant Leases

Copyright © 2014 Nancy Ann Connery All rights reserved.

Nancy A. Connery | Partner Schoeman Updike Kaufman & Stern LLP 551 Fifth Avenue, New York, NY 10176 (646) 723-1042 direct | (212) 661-5030 main (212) 687-2123 fax [email protected] | www.schoeman.com


http://www.schoeman.com/


RESTAURANT LEASES

1. DUE DILIGENCE A. LIQUOR LICENSE

i. Location may be an issue ii. Community Board approval

iii. Application to State Liquor Authority iv. Cooperation of landlord v. Possible termination right

B. HEALTH DEPT. i. Food Service Establishment Permit.

C. BUILDINGS DEPT./FIRE DEPT. i. Public assembly permit (if 75 or more persons indoors; or 200 or

more persons outdoors) (NYC) ii. Possible Landmarks approval (NYC)

iii. Zoning and Certificate of Occupancy 1. Certificate of Occupancy (or amendment) required? 2. Possible barriers to Certificate of Occupancy

A. Violations B. Open Buildings Dept. permits

iv. Consumer Affairs (NYC) 1. Cabaret license (if there’s music, dancing)

D. PHYSICAL DUE DILIGENCE i. Electric

1. Adequacy of electric 2. Direct meter

ii. Water 1. Submeter 2. Cost

iii. HVAC iv. Availability of Gas v. Availability of Steam vi. Drainage/sewer vii.Venting

E. ADA AND ACCESSIBILITY i. What if entrance is not accessible and can’t be made accessible ii. Indemnification

F. SIGNAGE RIGHTS AND STOREFRONT G. SIDEWALK CAFES/PATIOS/OUTDOOR AREAS

2. ASSIGNMENT AND SUBLET A. Investors will need ability to freely transfer interests. Landlord will want

the person who is the driving force behind the restaurant to retain a minimum equity interest and to retain operational control.

B. Concession and licensing rights. C. Franchising rights. D. Right to sell to a public company. E. No profit recapture. F. No space recapture. G. Death, incapacity, transfers to trusts f/b/o named person and family

members, so long as the principal retains control of operations H. Sale of business may be effected by assignment or subletting.

i. Subletting – non-disturbance agreement ii.Assignment – ability to come back in and cure

3. FINANCEABILITY OF LEASE

A. Financing agreements for equipment purchases B. Access agreement for lender. C. Right to collaterally assign lease to lender

i. Mortgage tax

4. USE A. Flexibility of use desirable

5. INSURANCE

A. Commercial General Liability: Serious coverage i. Mountain States Mut. Cas. Co. v. Roinestad, 296 P.3d 1020 (Colo. 2013). sewer explosion caused by buildup of sewer gas arising from buildup of grease not covered by commercial general liability insurance, which excluded damage arising from discharge of pollutants

B. Property Damage Insurance C. Business Interruption Insurance D. Plate Glass Insurance E. Liquor liability insurance F. Increases in fire insurance rates

6. CASUALTY

A. Tenant has obligation to rebuild restaurant. B. Who gets tenant’s insurance proceeds if tenant terminates the lease?

7. RENT

A. Possible percentage rent I. Restaurant located in a hotel or shopping center where significant

business is generated by building operations. B. Operating Expense Escalations/Pass-Throughs

C. Real Estate Taxes Escalations/Pass-Throughs

8. QUALITY OF LIFE ISSUES A. Use of balance of building B. Dealing with noise, odor, and vibration

i. Landlord ability to intervene ii.Immediate measures to ameliorate problems iii.Permanent solutions iv.Tenant indemnification of landlord against lawsuits

C. Pest control D. Garbage

i. Refrigeration of garbage ii.Regulation of garbage pickups iii.When garbage can be left on street (NYC)

9. OWNER REPAIRS AND SERVICES

A. Owner obligations probably limited. B. Tenant may be required to assume responsibility for sewer and water

connections to street if lines exclusively serve the leased premises.

10. SNDA

11. GOING DARK/CONTINUOUS OPERATION

12. RESTORATION AT END OF LEASE

A. What has to be removed i. Trade fixtures ii.Other alterations and installations iii.Any required notice from landlord iv.Trademarked items

February 13, 2009 Re: Request for a Ruling Real Property Tax Law § 420-a Exemption FLR-08-4886 Dear Mr. : This is in response to your request dated February 21, 2008, on behalf of for a letter ruling regarding the application of § 420-a of the Real Property Tax Law (“RPTL”) to a leasehold condominium, created by on an underlying ground lease. On November 3, 2008, attorneys from the law firm of submitted a Memorandum of Law, setting forth additional information concerning the structure of this transaction. On December 31, 2008, pursuant to a request by the Department of Finance (“Finance”) you submitted to Finance, selected articles from the June 6, 2007 ground lease (the “Lease”) entered into between and . FACTS: The facts that we have relied upon for this letter ruling are based on the Memorandum of Lease dated June 6, 2007, selected articles from the June 6, 2007 Lease submitted to Finance, as well as representations made by in the above mentioned Memorandum of Law dated November 3, 2008. At the time of application for exemption, additional documentation may be requested to verify those actions yet to be taken by in support of the exemption request.

is a not-for profit corporation organized or conducted for educational purposes, and is exempt from federal income tax pursuant to section 501(c)(3) of the Internal Revenue Code. is currently a tenant pursuant to the Lease of premises located at . The Lease has a base period of thirty-five years and has the option to extend the Lease for six 10 year periods. Pursuant to the Lease, has a leasehold interest in the land (the “Land”) and has acquired title to the improvements (the “Improvements”). Section 5.1(b) of the Lease provides that “[t]he parties acknowledge that following completion of any New Improvements, Tenant shall hold title to the Improvements until the expiration of the Term.” is in the process of completing a reconstruction of the entire building located at Street (including the construction of additional floors). has advised Finance that expects to spend approximately 80 million dollars in order to convert the building from a parking garage into a first-class research laboratory. The Lease further provides that is solely responsible for all maintenance and property related expenses including paying all taxes assessed against the property.

, Real Property Tax FLR No: 08-4886

The Lease grants the right to use the property for any legally permitted uses other than residential and has indicated that intends to utilize the property for general office, medical research and education uses. The Lease further provides that may create a leasehold condominium and indicates that intends to create a leasehold condominium comprised of two (2) units, which units will be owned in fee for the term of the Lease. ISSUE: May a real property tax exemption pursuant to § 420-a of the RPTL be granted to property owned by that is in the form of a leasehold condominium, where the condominium declaration requires the unit owner to pay all taxes attributable to its units? CONCLUSION: Based upon applicable law regarding leasehold condominiums, real property owned by in the form of a leasehold condominium including the leasehold of the land will be eligible for an exemption pursuant to § 420-a of the RPTL. LAW: RPTL § 420-a provides a tax exemption for mandatory classes of nonprofit organizations in pertinent part as follows:

[r]eal property owned by a corporation or association organized or conducted exclusively for religious, charitable, hospital, educational, or moral or mental improvement of men, women or children purposes or for two or more such purposes, and used exclusively for carrying out thereupon one or more of such purposes either by the owning corporation or association as hereinafter provided shall be exempt from taxation as provided in this section.

Article 9B of the Real Property Law (“RPL”) the “Condominium Act” governs the creation, characteristics and management of condominiums. Specifically § 339-e, of the RPL provides the following relevant definitions:

Subdivision 2. “Common elements” unless otherwise provided in the declaration, mean and include: (a) the land on which the building is located …and (h) all other parts of the property necessary or convenient to the existence, maintenance and safety or normally in common use…

Subdivision 5. “Common interest” means the (i) proportionate, undivided interest in fee simple absolute, or (ii) proportionate undivided leasehold interest in the common elements appertaining to each unit, as expresses in the declaration…

Subdivision 11. “Property” means and includes the land, the buildings and all other improvements thereon, (i) owned in fee simple absolute, or (ii) in the case of a condominium devoted exclusively to non-residential purposes, held under a lease or sublease, or separate unit leases or subleases, the unexpired term of which on the date of the recording of the declaration shall not be less than thirty years…


Subdivision 14. “Unit” means a part of the property intended for any type of use or uses, and with an exit to a public street or highway or to a common element or elements leading to a public street or highway… Subdivision 16. “Unit owner” means the person or person owning a unit in fee simple absolute or in the case either (i) of a condominium devoted exclusively to non-residential purposes or (ii) a qualified leasehold condominium owning a unit held under a lease or sublease.

In addition, RPL § 339-g provides that “each unit, together with its common interest, shall for all purposes constitute real property.” Finally, RPL § 339-y (1) (a) which governs taxation of condominiums, provides in pertinent part that:

With respect to all property submitted to the provision of this article…each unit and its common interest…shall be deemed to be a parcel and shall be subject to separate assessment and taxation by each assessing unit… except that the foregoing shall not apply to a unit held under lease or sublease unless the declaration requires that the unit owner to pay all taxes attributable to his unit.

ANALYSIS: is a not-for profit corporation, organized or conducted for educational purposes. The property in issue will be used by to carry out its educational and scientific exempt purposes. As the statute specifically requires ownership of real property by a corporation or association organized for exempt purposes, the sole issue is whether ownership of condominium units in the form of a leasehold condominium, constitutes ownership of real property for purposes of § 420-a of the RPTL. Under the Condominium Act, a condominium unit, which is devoted exclusively to a non-residential purpose, can be formed on property held by a condominium declarant either in fee or under leasehold with a remaining term of 30 years or more. has entered into a lease with for a minimum term of 35 years, whereby will own the building located at Street and have a leasehold interest in the land. During the term of the lease on the land, will utilize the property for general office, medical research and education use. As a result, each condominium unit will be condominium units devoted exclusively to non-residential purposes. Therefore, the land held under the leasehold will be deemed to be property for purposes of the RPTL. Once the contemplated declaration is filed, will own two units in fee simple for the term of the lease. Generally, the condominium form of ownership is manifested as a division of a single parcel of real property into individual units and common elements in which an owner holds title in fee to his individual unit as well as an undivided interest in the common elements of the parcel. See, Murphy v. State of New York 14 A.D. 3d 127, 787 N.Y.S. 2d 120 (2d Dept. 2004). The condominium ownership interest for units will include title to each unit and the unit’s respective common interest, including an undivided percentage interest in the common elements, which includes the underlying leasehold of the land. Consequently, since RPL § 339-g provides that each unit, together with its common interest, constitutes real property, it follows that the underlying leasehold of the land constitute real property for purposes of RPTL § 420-a. With regard to separate taxation, the Lease provides that is required to pay the taxes assessed on each of its units. Pursuant to RPL § 339-y (1) (a) each unit and its common interest is deemed to be a tax parcel. Accordingly, the tax parcel, which is subject to assessment, will consist of the unit and its common interest including the leasehold of the land. As a result, Finance will be required to assess each unit together


with its common interest in the leasehold as a single tax parcel. Hence, as the owner of two units in the leasehold condominium will be assessed the full value of each unit, which will include the unit’s pro rata share of all of the common elements, one of which is the land.

RPTL § 420-a provides an exemption for real property owned by a corporation or association organized or conducted for an exempt purpose provided the property is used to carry out such exempt purpose. Consequently, a not for profit that does not own the property but is merely a lessee pursuant to a long term lease is not eligible for an exemption. However, we have determined that as the owner of two (2) condominium units created on an underlying ground lease with a term of 35 years or more is eligible for exemption from taxation pursuant to RPTL §420-a.

To receive its exemption will be required to file an application with the Exemption Unit. If the documents and facts presented at the time of the application are consistent with the representations made to Legal Affairs for the purposes of this letter ruling, the tax parcels consisting of the condominium units and their respective common interests should be granted an exemption pursuant to RPTL § 420-a.

Notwithstanding the analysis and conclusions discussed above, Finance reserves the right to review the information submitted.

Very truly yours,

Dara Jaffee Assistant Commissioner Legal Affairs Division

HGT:hgt

HOT TOPICS IN LEASING

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Benjamin Weinstock, Esq. Ruskin Moscou Faltischek PC Uniondale, New

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BENJAMIN WEINSTOCK, ESQ.Ruskin Moscoù Falfischck PC

Su b le qs e Reco gnìtìon Ag r e ements

A method to protect a sublessee ofproperty from the adverse consequencesof a termination or rejection of the primelease by the Landlord.

S u ble as e Rec o gnition Ap r eements

\ilhen negotiating the Prime Lease,

Tenant should require the Landlord toprovide protection to future Subtenants.

Normally, ground leases have very Iiberalassignment and subletting rights.Therefore, Landlords who agree simply tonon-disturb all subtenants may end upnon-disturbing a very weak orundesirable Subtenant.

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S u b less e Reco p nitio n Ag r eements

Who will the Landlord "recognize"?

(a) Sublcase must be arm's length with a

subtenant that is not affiliatcd with thcTenant,

(b) Minimum Tangible Net Worth requirement,or rating agency approval.

(c) Minimum sublease rent is not less than the

[xxx7o multiplel rent ând âdditionâl rentpaid by the Tenant

S u b leas e Reco gnition Ag r eements

(d) Only one recognized subtenânt who occupiesthe entire site.

If thc Landlord is willing to non-disturb multiplesubtenânts, then considcr:

i, The maximum number of subtenânts

ii. Minimum size and shapc of the space

iii. Minimum rent payable by each subtenant

iv, Sixe of Sublesase - contigues floors

2

S u b less e Recog nition Ag r eements

A"Recognized Subtenønf'shall be a retail subtenant

who bas entered into an arms-length sublease withTenant, provided that,

(i) the subtenant is uot an affiliate or subsidiary ofTenant, and not controlled by Tenant,

(ii) the configuration ofthe subleased space is

comrnercially reasonable and would not unreasonably

interfere with or l¡aterially and adversely impair the

utility and rnarket value of any part or parts of the

Leased Prernises not then sublet,

(iii) Subtenant's (or its guarantor's) creditrvorthinessis cornmercially reasonable under the circumstances,

Su b leøs e Reco gnition Ag r eements

(iv) any "free rent" or rent abatement periods are

commercially reasonable,

(v) payrnents offixed or base subrerrt shall notdecrease during the tenn ofsuch sublease,

(vi) Tlre Subtenant is subject to in peßonamjurisdiction in the courts ofthe State ofNew York,and not subject to any immunity from suit unless allsuclr immunity is waived for the benefit of Landlordand Terrant and each present and future LeaseholdMortgagee and Fee Mortgagee,

S u ble øs e Re cog nitio n Ag r ee me nts

(vii) the sublease allows the subtenant to use and occupy its

premises for lawful purposes consistent with the certificate ofoccupancy of the Building,

(viìi) all other terms and conditions of the sublease are

commercially ¡easonable,

(ix) ifthere is a Leasehold Mortgage, the Leasehold Mortgageehas entered (or simultaneously enters or has agreed in writing toenter) ìnto a subordination, non-disturbance, and AttornmentAgreement with the Subtenant, and Tenant has given Landlordwritten evidence thereof, and

(x) the term (including option and renewal terms) ofthe Sublease

shall not extend beyond the Expiration ofthe Te¡m ofthe Lease.

aJ

S u b leas e Re co gniÍio n Ag r eements

Tenant's Deliverables

L Copy of the Sublease and Guaranties

2. Identifrcation of Subtenaut's and Guarantor(s) principals

3. Fìnancial inlormatiou for Subtenant and Guarantor(s)

4. Landlord's review fee (ifany)

5. Plan showing area to be subletif less thanthe entirepremises

6. Leasehold Mortgagee's SNDA

7. Recognition Agreernent with an attornlnelìt clause signed by

the Tenant, Subtenant and Guarantor(s)

S u b le as e Rec oenition A g r eements

Threshold Issues

Do I put the recognition clause in the Lease

draft I send the Tenant?

Do I agree to give "recognition" on

"çommercially reasonable" terms?

Do I negotiate the terms of the RecognitionAgreement in advance of knowing who I ambeing asked 1o " r ecognize"?

S u b less e Re co p nitio n Ag r eeme nts

Landlord, Tenant and Subtenant executea "simple" Recognition Agreement.

It provides, that if the prime lease is

terminated, Landlord will recognize thesublease, which will become a directlease between the Subtenant and

Landlord.

4

S u b le as e Re c ognition Ag r eements

Ground Lease

20 yr. initial term

15 successive 5 year renewals : 75 years

Total = 95 years

S u b le øs e Recog nìtio n Ag r eements

Bis Box Sublease

25 yr. initial term

2 successive 10 year renewals = 20 years

Total : 45 years

S u b leas e Reco gnilion Ag r e ements

Ground Lease B¡g Box Sublease

lnitial Term 20 Years 25 Years

Renewâl Opl¡ons 15 x 5 Years 2 x 10 Years

Tolal Term 95 Years 45 Years

Bese Rent $30,000Payable Semiannually;

$60,000 per annum

$15,000 PayabìeMonthly;

$180,000 perannum

Expenses Triple Ne{ Prorala share of taxesand CAI\4; Subtenant

Pays all ut¡lities

Slructural repairs byLandlord, all other repairs

by Tenant

I\¡arnlenance andRepairs

Triple Net

5

Su b leas e Recopnition Ag r eements

Mission accomplished!

If the Prirne Lease is terrninated, the

Subtenant attorns to the Landlord and

becomes the direct Tenant ofthe Landlord

S u b less e Rec o gniÍion Ag r eements

Non-l)isturbance. So long as the Sublease is in full force and

effect,Subtenant's usc. Dossession. or cniovment of the SublcasePremises be interfered rvith, nor shall the subleaseholdestate granted by the Sublease be affected in any manner, nor

shall any ofthe rights of Subtenant granted under the

Sublease be affected in any manner, by a termination orsur¡ender ofthe Lease, in any action or proceeding instituted

to evict Tenant by reason of ÍI&!3!l!51þbg!!-s!frcL.l!¡9Lease. (ii) Tenant's surrender of the Lease. or (iii) anvtermination of the Lease due to foreclosure, casualtv.condemnation or anv other cause.

S u b le as e Re cog nilio n Ag r eements

Subtenant shall be bound to the Sublease under all of the

terms, covenants and conditions of the Sublease for the

l¡alance ofthe term ofthe Sublease, including any

extension terms (to the extent that Subtenant shall elect or

has elected to exercise any or all ofits options to extend

the Sublease), with the same force and effect as ifLandlord were the sublesso¡ under theSublease... .Landlord shall have all rishts andobligations of Tenant as the sublessor undcr theSublease as thoueh Landlord had originallv executedthc Sublease in place of Tenant. and Landlord shall be

bound by all ofthe terms, covenants and condìtìons oftheSublease, except as otherwise set forth in this Agreement,

6

S u b le as e Rec ognition Ag r eements

The Recognition Agreement convefts thepassive Ground Lease Landlord to an activeoperating Landlord.

Landlord may not be equipped to be an

operator, or, even ifthe Landlord is capable

of active management, the Landlord does notwant to do this.

S u b leas e Reco g nition Ap r eements

Let's make the Ground Lease the operativelease between the Landlord and the

Subtenant, except for the rent clause, whichwill be the rent clause in the Sublease (withsignificantly higher rents).

S u bleas e Recognition AR r eements

. . . and Landlord shall be bound by all of the

terms, covenants and conditions oftheSublease, except as otherwise set forth inthis Agreement.

7

Su ble as e Re co g ttitio n Ag r e ements

except that Landlord shall not be:

i. liable for any representation orwarranty of Tenant, any act or omission of ordefault by Tenant under the Sublease (but the

foregoing shall not relieve Landlord from any

liability to remedy a curable default that iscontinuing which Landlord (as sublessor under

the Sublease) is obligated to remedy pursuant

to the Sublease);

Sublease Recognition Asreements


ii. subjectto any credits, claims, setoffs

or defenses which Subtenant might have

against Tenant as a result of any acts oromissions of Tenant;

S u b le as e Recog nitio n Agr ee ments


iii. bound by rent, additional rent orother amounts which Subtenant may have paidto Tenant more than one (l) month in advance

of the month to which such payments relate,

and all such prepaid sums shall remain due and

owing to Landlord without regard to such

prepayment except as may have actually been

received by Landlord for any period beyond themonth in which the Lease was terminated;

8

S u b le ss e Reco p n it ion Ag r e ements


iv. responsible for repairs in or to the

Building in the case of damage or destructionof the Building or any part thereof due to f,rreor other casualty or by reason ofacondemnation, [unless Landlord (as sublessor

under the Sublease) shall be obligated under

the Sublease to make such repairs]; or

Su b le as e Rec o p nition Ag r eemenls


v. liable under any indemnity provisionofwhatever nature contained in the Sublease,

including, but not limited to, any

environmental indemnification, except to the

extent the hazardous environmental conditionwas caused by Landlord subsequentto the date

that the Sublease becomes a direct Lease

between Landlord an Subtenant;

S u b leas e Recognìtion Ag r eements

Landlord's Exculpation :

The liability ofLandlord under the Sublease fordamages or otherwise shall be limited to Landlord'sínterest in the Prernises (as defined in the Lease)

including rents, net sale proceeds, net insuranceproceeds and net condemnation proceeds therefrom.

Neither Landlord nor any directors, officers,shareholders, members, managers, partners,

principals, agents, servants or employees ofLandlordshall have any personal liability to Tenant,

9

S u bleas e Re c o g nit io n Ag r eements

Landlord's Exculpation:

ii. No other property or assets oflandlord or any

property of the directors, offi cers, shareholders,

rnembers, managers, partners, principals, agents orservants or ernployees ofLandlord shall be subject to

Ievy, execution or other enforcement procedure forthe satisfactior-r ofSubtenant's retnedies hereunder orunder the Sublease.

S ub le as e Re cog nition Ag r e ements

Exclusive Use Provisions:

1. Restrict the excusive use clause to this Property ifit is a multi-tenant proporty.

2. Carve out violations by existing uses on the

Property,

3, Carve out violations that occur as a result ofapermitted change in use under existing leases.

4. Carve out violations that exist on after acquired

properties that are in the restricted territory.

S u b le øs e Rec og nition A g r eements

Fire and Casualty:

l. Is the obligation to rebuild governed by the

Ground Lease or Sublease?

2. IfSubtenant is permitted to use insuranceproceeds to rebuild, is there a mechanism in place

to release the insurance proceeds in the same

mauner as a building loan?

3. Do the Ground Lease or Sublease conflict withthe fee or leasehold mortgages?

10

S ub leas e Re cog nition Ag r eements

Condemnation:

A Ground Lease generally penlits the Tenatìt to

recover the value ofthe unexpired temt ofthe Lease.

An Operating Lease will be t.uore restrictive,allowing the Tenant to recover only the value ofTenant's fixtures takeu. Tenant nay not seek

damages for the value of the unexpired term.

S u b le as e Re co gnitio n Ag r eements

Ownership of Leasehold Improvements and

Buildinss:

A Ground Lease frequently separates ownershipofthe land from ownership ofthe buildings and other

improvements.

Will the Tenant's claim to ownership of the

buildirg and improvements allow Tenant to recover

their value in a taking?

S u bleas e Reco g nitio n A$ eeluqÛlt

OÞportunitv to Fix Mistakes:

The Recognition Agreement may be a

convenient way to corrects matters that wereoverlooked in the original Ground Lease.

For example, the failure to have the Ground Lessee

waive claims to development rights. See MacMilløn,Inc. v. CF Lex Associates,425 NYS2d 377 (1982)

11

Suhlease Asrccm.enls

Overlandlord's Bankruplçy

Will the Overlandlord's rejection of the Overlease

cause the sublease to temrinate?

Bankruptcy Code Section 3 65(h)( I )(A)(ii) permits'fenant to remain in possession attd grants the Tenaut

the right ofoffset for the cost ofproviding Landlord's

services under the rejected Overlease.

S u b le as e Re co g nÍtion Ag r eements

The End Run

The Subtenant may avoid the Recognition Agreement

cornpletely and get the benefits ofthe Ground Lease (cheaper

rent and fewer restrictions on assignment, subletting,alteration and financing) by taking a conditional assignment

ofthe Ground Lease froln the Tenant.

The Ground Lease should prohibit any conditionalassignment of the Ground Lease to a Subtenant or to any

eniity or person that is controlled by or an affiliate oftheSubtenant, ìncluding the Guarantor

Define assignment to include entity transfers.

T2

Æed¡AA&I

New York StlÍe Bar Assocítttiott

Renl Property Law Sectìott.l\r YStì^

Green BuildingLeases

Prcscntcd bl

BENJÂMIN WEINSTOCK, ESQ.Ruskfu Moscou F¡ltischek PC

llhnl is n Green Buìldine?

USGBC

The United States Green Building Council

1

USGBC


LEED Certification

USGBC


ffiffi''"d'ii,;1ïÈìLEED Cerlification

Green Buìlding ønd Leed Certilication

Why do landlords and Tenants want LEEDCertifrcation?

l. Healthier and happier work spaces.

2. Reduction of irnpact on the environlnent.

3. Reduced operating costs and greater profitabiliry

4. Higher rents, Iiigher occupancy rates

5, Higher sales prices.

6. Cornpliance increases project costs only 2o/o.

2

Green Buildittg ttnd Leed Certìfìcatiott

Why do landlords and Tenants rvant LEEDCertification?

7. Energy lndependence and Security Act of2007requires at least an Energy Star rating for US

Covenìnlcnt Âgency leases.

L Local laws are being adopted with increasingmonrentunl, NYC Local Law 86 adopted effective

January 1,2007

9. Non Green Buildings are at risk of becorning

obsolete and relegated to a lower tier of"contps"

Green Leasìng Issues

Term

Longer telm leases generate mole LEED"points" because they |educe waste fromnew buildouts fot'new tenants, with a

col'l'espondil-rg decrease in transpol'tation and

manufactuling of the building materials

Green Leasing Issues

Permitted Use

Even in a straight office use clause or retail

use clause, add:

"...provided such use does not violate the

certification of the building by the U.S.

Green Building Council LEED rating system

or Landlord's Environrnental Managernent

Plan"

3


Assignment and Sublease

Landlord may withhold consent if theproposed assignee or subtenant rnay cause

the Premises not to conform with any

envilonrnental or Green buildiug pt'ovisionsofthe Lease.

Whele no conscnt is needed to assign ot'

sublet, the Lease should prohibit assigntnent

to non-Green users.

Green Le0sitts Issues

Common Area Cnsts "CAM"

'lþnant is obligated to pay its proportionatc

sharc of CAM costs. (or cost rncreases ovcr a

base amount or year) to defray Landlord's costs

of rnaintaining the Buildiug and property.

In a GB, Tennat leased the premises with thegxpectancy of a lower annual cost for CAM.Should the Landlord be held to a perlormauce

standard before passing through operatillg costs

to the Teuant?

Green Leasinp Issues

Common Area Maintenance Costs "CAM"

lrr a Cì8, lhe "Creen" proccss is continuous.

To what extent will the Tenant be involved infuture capital expenditures for additional green

Compliance?

'I'enant's obligation to pay its prorata share forcapital expenditures is limited to the lesser of(r) savings realiz,ed by Tenant lrorn tlie capitalimprovement, and (ii) the prorata share of the

improvement's annual cost atnortized over itsuseful life.

4

Green Leasittg Issues

Utilities (Gas. Electric and Water')

Utility charges should be sepalately rnetered

ol sub metel'ed to a gloen tenant to

incentivize energy savir.rgs throughconservation.

Tenant should requile that the environrnerttalsystems (thermostats and other controls for'

heating and air conditioning, humidistats,water conservation and frltration) should be

undel' Tenant's coutlol.

Green Leasing Issue;

Opelating Covenants

Tenants in Gl'een Buildings need to be aware

that Landlords may lequire thern to complywith operating rules, r'egulations and

scl.redules that may be inconsistent with the

Tenant's business ueeds.


Operatiuq Covenants - Rules and Requlations

Counsel should play close attention to the

ubiquitous rules and regulations schedule oftheLease.

Avoid this:

"Subject to the applicable provisions ofthe Lcase,

Tcnant shall comply with all rules, regulations and

nleasures adopted by Landlord froln time to timein connection with any green/l-EED prograrn(s)

undertaken or maintained by Lartdlord from timeto time."

5

Greett Leosins Issues

Audit Rishts

A'l'enar-rt in a Green Building may be paying a

higher base rent but is attracted to the property

because ofthe lorver operating costs protnised

or predicted,

Tenant should have the right to audit the

operating costs ifthey exceed Tenant's

expectation,


Work Letter

Tlie Tenant's and Landlord's work letters should

identify the sustainability standard that the pârties

have agreed to achieve, i.e.,

Energy Staq or I.,EED - Certified, silver, gold or

platinurn

Landlord nray require Tonant to hire an accredited

LEED Professional to mattage the sustainabilíty

aspects ofTenant's buildout. Tenant may have a

reciprocal requiretnent for Landlord.


Work Letter

Landlord marketed the premises clairningspecific green attributes. Tenant will require

Landlord 10 meot the promised conditions.

It costs more to build and tear-out consistent

with Green standards. Therefore, Tenant

should negotiate for a higher work allowance,

6

Green Leosins Issues

Parking

Extra LEED points arc ar.varded to a property that

does not have excess parking (more than tlre

minirnurn required by the local zoning code).

Solid Wastc Managetnent

LEED points are affected by solid waste

lìranagement. Tlie property needs a SWM protocolwitlr easily accessible locatiorrs for recycling,


S ignage

Signage will affèct the building's I-EED score fbr"Light Pollutiorì Reductìon" and energy

consumption.

Solid Waste Manageme nt

I-EED points are af'fècted by solid waste

mar'ìagelneut. The property needs a SWM protocolu'ith easily accessible locations for recycling.


End ofTenr Rernoval

The award ofl I-EED poilìts takes into cousideration

how tlre Tenant will ret¡ove its FF&E.

'lenant's should avoid tlte lollowing:

"Tenant's removal of leasehold improvernents, trade

fixtures or personal property frorn the prernises shall

be perforrned by'lènartt in an environtnentallysustainable manner, including reuse and recycling,all of which must be reported to the Landlord in the

forrnat requested by the L,andlord."

7


Insurance - "lf vou had a sreen buildinq before the

fire, vou wrll have a sreen buildins after the fire"

Landlord and Tenant have a vested ìnterest in knowingthat their policies cover the increased tinle and cost ol'resloring a Green Building. Increnrental costs include:

L The cost ofLEED ceíified professionals2. AII LEED lees

3. Recycling debris rather than durnping in a landllll4. Purchase ofgrid porver until alternate energy

source is back online5, I.oss ofutility credits while the butlding is under

repair


Property Taxes

Ifthere are tax incentives, rebates or reductions

tied to the LEED Certification, deterrnine in the

Lease rvhether tl-rey benefit the Tenant, the

Landlord or both.

Green Leøsing Issue;

Renewal

Even if the building is not Green now, it rnay

become Green in the fiture. When renewing

expired leases, collsider whether a Green Ridershould be attached for luture Green

conversions.

8

Green Leasins Issues

Remedies

Light Green Leases - the green

requirements are aspilational only.

Dark Green Leases - Traditionalbreach lemedies.

9

.&dl!¡Il New York State Bør Association

Real Property Law SectiottNì¿SI3.l\

Subleøse RecognìtionAgreements

Prcscnlcd by

BENJAMTN WEINSTOCK, ESQ.Ruskin Moscou Fâltischek PC

S u b I e øs e Re co g nition A gr e ements

AKA Sublease NonDisturbancc Agreements,

A method to protect a

sublessee of propertyfrom the adverseconscquences of a

termination or rejectionof the prime lease.

S u bleas e Rec o g nitio n A g r e eme nts

When negotiating the Prime Lease,Master Lease or Ground Lease, (or anyothc¡' leusc lvhere sublettiug is

contcrnplafetl) the Tenant shouldrequire the Landlord to provideprotection to future Subtenants.

Su bleas e Recopnitìon Agr eements

Inability to protcct a subtenant from eviction as

a result of the prinrary tenant's default mayadversely rffect the primary tenant's rbility tosublet.

S u b le as e Re c o g nitio n A g r eeme nts

Normally, ground leases (master leases)have very liberal âssignment ândsubletting rights. Therefore, Landlordsrvho agree simply to "non-disturb allsubtenants" may end up non-disturbing a

very weâl( or undesirable Subtenant.

I

S u bleas e Recop nilion Ag r eemenls

Who rvill the Landlord írecognize"?

(a) Sublease must be arm's length rvith a

subtenant that is not affiliated with theTcnant,

(b) Minimum Tangiblc Ne t Worth requirement,or rating agency approval.

(c) Minimum sublease rent is not less than the

[150%] rent and additional rent pnid by theTenan t,

2

S u b le øs e Re co g nitio n A g r eements

(d) Only one recognized subtcnânt rvho occupiesthe entire site,

If thc Landlord is rvilling to non-disturb multiplesubtcnants, then consider:

i, The maximum number of subtenants

ii. Minimum sizeand shape of thc spâce

iii. Minimum rcnt payable by each subtenant

iv. Size of Sublease Prernises - contiguousfloors, larvfully demised spnces thît âremarketable and codc compliânt

Subleas e Recog nitio n A gr eements

(iv) any "free rent" or rent abatement periods are

commercially reasonable,

(v) payments offixed or base subrent shall notdecrease during the term ofthe sublease,

(vi) The Subtenant is subject to in personantjurisdìction in the courts of the State of _, and

not subject to any immunity from suit unless all such

immunity is waived for the benefít of Landlord and

Tenanl and each present and future Leasehold

Mortgagee and Fee Mortgagee,

S u b le øs e Rec o p nìtion Ag r eeme nts

A"Recognized Subtenanf'shall be a ¡etail subteuant

who has entered into an arms-length sublease withTenant, provided that,

(i) the subtenant is not an Afüliate or subsidiary ofTenant, and not controlled by Tenant,

(ii) the configuration ofthe subleased space is

commercially reasonable and would not unreasonably

interfere with or materially and adversely impair theutility and market value ofany other part or parts ofthe Leased Premises not then sublet,

(iii) Subtenant's (or its guarantor's) credihvorthinessis commercially reasonable under the circumstances,

J

S u ble as e Re c o g nition A g r e eme nts

(vií) the sublease aìlows the subtenant to use and occupy its

premises for lawful purposes consistent with the certificate ofoccupancy of the Building,

(viii) Landlord shall not be required to contribute to any tenant

work,

(ix) if there is a Leasehold Mortgage, the Leasehold Mortgageehas entered (or simultaneously enters or has agreed in writing toenter) into a subordination, non-disturbance, and AttornmentAgreement with the Subtenant, and Tenant has given Landlordwritten evidence thereof, and

(x) the term (including option and renewal terms) ofthe Sublease

shall not extend beyond the Expiralion of the Term of the Lease.

S u bl eas e Rec o g nitio n A p r e ements

Tenant's Deliverables

I . Copy of the Sublease and Guaranties

2. Identification of Subtenant's and Guarantor(s) principals

3. Financial information for Subtenant and Guarantor(s)

4. Landlord's review fee (ifany)

5. Plan showingarea to be sublet if less than the entirepremises

6. Leasehold Mortgagee's SNDA

7. Recognition Agreement with an attornment clause signed bythe Tenant, Subtenant and Guarantor(s)

Su bleøs e Recopnition Ag reements

(xi) The subrent shall not be less than the MinimumRecognized Rent.

The term "Minimum Recognized Renf'shall mean twohundred percent (200%) of the Annual Fixed Rent payable

under this Lease for the portion of the Leased Premises

occupied by a subtenant allocated ratably on a square

footage basis, calculated separately fo¡ retail space and fornon-retail space, with retail space being valued hvice the

value of non-retail space

4

Su bleas e Recog nilion AgreemenÍs

Landlord, Tenant and Subtenant execute

a "basiÇ" Recognition Agreement.

It provides, that if the prime lease is

terminated, Landlord will recognize the

sublease, which will become a directlease between the Subtenant and

Landlord.

S u b le as e Reco Ê nition Ag r e ements

Non-Disturbance. So long as the Sublease is in full force and

effect, the Sublease shall not be terminâted. nor shallSubtenânt's use. Dossession, or eniovment of the SubleasePremises be interfered with, no¡ shall the sub-leasehold

estate granted by the Sublease be affected in any manner, nor

shall any of the rights of Subtenant granted under the

Sublease be affected in any manner, by a tennination orsurrender of the Lease, in any action or proceeding institutedto evict Tenant by reason of (i) Tenant's default under theLease. (ii) Tenant's surrcnder of the Lease, or (iii) anvtermination of the Leasc due to foreclosure. câsuâltv.condemnâtion. bankruptcy or ânv other câuse.

S u b leas e Reco p nition A p r eements

Mission Accomplished!

If the Prime Lease is terminated, the

Subtenant attorns to the Landlord andbecomes the direct Tenant ofthe Landlord

5

Sublease RecosnìtÍon Agreements

Ground Lease

20 yr. initial term

15 successive 5 year renewals = 75 years

Total = 95 years

Annual Rent = $60,000 NNN

S u b le us e Rec o g niti o n A g r eeme nts

Bis Box Sublease

25 yr. initial term

2 successive l0 year renewals = 20 years

Total : 45 years

Annual Rent = $180,000 + CAM andTaxes

S u b le as e Re co g nitio n A gr e e me nts

Subtenant shall be bound to the Sublease under all oftheterms, covenants and conditions of the Sublease for the

balance of the term of the Sublease, including any

extension terms (to the extent that Subtenant shall elect orhas elected to exe¡cise any or all ofits options to extendthe Sublease), with the same fo¡ce and effect as ifLandlord were the sublessor under theSublease....Landlord shall have all rishts andobliqations ofTenant as the sr¡blessor under theSublease as thoush Landlord hnd orisinallv executedthe Sublease in place of Tenant, and Landlord shall bebound by all of the terms, covenants and condìtions oftheSublease, except as otherwise se1 forth in this Agreement.

6

S u b le øs e Re c o g nitio n Agr e emerytt

Ground Lease Big Box Sublease

lnil¡ãl Term 20 Years 25 Years

Renewal Options 15 x 5 Years 2 x 10 Years

Tolâl Tem 95 Years 45 Years

Base Rent $30,000Payable Semiannuallyì

S60,000 perannum

$15,ooo Payable¡ronthly:

$180,000 per annum

Expenses Triple Net Prorala share of taxesand CAI\¡; Súblenant

pays aìl ulil¡ties

I\¡aintenance andRepairs

Triple Nel StructuralLandlord, all

repairs byolher rêpa¡rs

by Tenant

Sublease R Aørc,cmp,nls

The Recognition Agreement converts thepassive Ground Lease Landlord into an

active operating Landlord.

Landlord may not be equipped to be an

operator, or, even ifthe Landlord is capable

of active management, the Landlord does notwant to do this.

Su b le as e Re co gnitìo n A g r e ements

Let's make the Ground Lease the operativelease between the Landlord and the

Subtenant, except for the rent clause, whichwill be the rent clause in the Sublease (withsignificantly higher rents).

7

Su bleas e Recog n ition A gree ments

. . . and Landlord shall be bound by all of theterms, covenants and conditions oftheSublease, except as otherwise set forth inthis Aqreement.

S u bleqs e Recognition Agr eements


(i) liable for any representation orwarranty of Tenant, any act or omission of ordefault by Tenant under the Sublease (but theforegoing shall not relieve Landlord tiom anyliability to remedy a curable default that iscontinuing which Landlord (as Sublessor underthe Sublease) is obligated to remedy pursuantto the Sublease);

Sublease RecosnÍlion Agreements


(ii) subject to any credits, claims, setoffsor defenses which Subtenant might haveagainst Tenant as a result ofany acts oromissions of Tenant;

8

S u h le as e Reco pnilio n Ag r e e ments


(iii) bound by rent, additional rent orother amounts which Subtenant may have paid

to Tenant more than one (1) rnonth in advance

of the month to which such payments relate,

and all such prepaid sums shall remain due and

owing to Landlord without regard to such

prepayrnent except as may have actually been

received by Landlord for any period beyond the

month in which the Lease was terminated;

S u b leas e Re cog nition Agr e ements


(iv) responsible for repairs in or to theBuilding in the case of damage or destructionof the Building or any part thereof due to fireor other casualty or by reason ofacondemnation; or

S ub le as e Re c o p nitio n A g r e ente nts

Fire and Casualtv:

1. Is the obligation to rebuild govemed by the

Ground Lease or Sublease?

2. If Subtenant is pcrmitted to use insurance

proceeds to rebuild, is there a mechanism in place

to release the insurance proceeds in the same

manne¡ as a building loan?

3. Do the Ground Lease or Sublease conflict withthe fee or leasehold mortgages?

9

Sublease Recosnition Agreements

Condemnation:

A Ground Lease generally permits the Tenant torecover the value ofthe unexpired term ofthe Lease.

An Operating Lease will be more restrictive,allowing the Tenant to recover only the value ofTenant's fixtures taken. Tenant may not seek

damages for the value of the unexpired term.

Sublease Recopnition Agreements

Ownership of Leasehold Improvements andBuildings:

A Ground Lease frequently separates ownershipofthe land from ownership ofthe buildings and otherimprovements.

Will the Tenant's claim to ownership of thebuilding and improvements a'llow Tenant to recove¡their value in a taking?

S u bleas e Recognitio n Agreemenls


(v) liable under any indemnity provisionofwhatever nature contained in the Sublease,including, but not limited to, anyenvironmental indemnification, except to theextent the hazardous environmental conditionwas caused by Landlord subsequent to the datethat the Sublease becomes a direct Leasebetween Landlord and Subtenant;

10

S u b I e as e Re cog nitio n Ag r e eme nts

Landlord's Exculpation :

(i) The liability ofLandlord under the Sublease fordamages or otherwise shall be limited to Landlord'sinterest in the Premiscs (as defìned in the Lease)

including rents, net sale proceeds, net insuranceproceeds and net condernnation proceeds therefrom,

Neither Landlord nor any directors, officers,shareholders, members, managers, partners,

principals, agents, servants or employees ofLandlordshall have ary personal liabilitv to Tenant.

S u b le as e Re c o g nitio n A g r e eme nts

Landlord's Exculpation:

(iÐ No other propertv or assets ofLandlord orany property ofthe directors, officers, shareholders,

members, managers, partners, principals, agents orservants or employees ofLandlord shall be subject tolevy, execution o¡ other enforcement procedure forthe satisfaction ofSubtenant's remedies hereunder orunder the Sublease.

S u b le as e Re c o p nition A g r e e ments

Exclusive Use Provisions:

1. Restrict the exclusive use clause to this Property ifit is a multi-tenant property.

2. Carve out violations by existing users on the

Property. Landlord did not create the violation.

3. Carve out violations that occur as a resuìt ofapermitted change in use under existing leases.

4. Carve out violations that exist on after acquiredproperties that are in the restricted territory.

11

S u b le øs e Re c o g n it io n A g r e ements

Opportunity to Fix Mistakes:

The Recognition Agreement may be a

convenient way to conect matters that were

overlooked in the original Ground Lease.

For example, the failure to have the GroundLessee waive claims to development rights. See

MacMillan, Inc. v. CF Lex Associates,425 NYS2d3'17 (1982)

S u b le as e Re co g nition A p r e eme nts

Overlandlord's Bankruptcy

Will the Overlandlord's rejection of the Overleasecause the sublease to terminate?

Under applicable NY Law, the termination of thePrime Lease automatically terminates the sublease,

which is an interest derivative of the Prime Lease.23 I Centre Street Assocs. v. Post Bros. ServiceStations, Inc., 675 NYS 2d 92 (lstDept. 1998).

S u b le as e Rec o g nitÍo n Ag r e ements

Overlandlord's Bankruptcy

Ifthe Sublandlord rejects both the Prime Lease and the

Sublease, the outcome lor the Subtenant is uncertain.

Bankruptcy Code Section 365(hXtXAXiD permits the

Subtenant 1o remain in possession and grants the

Subtenant the right ofoffset for the cost ofprovidingSublaudlord's services under the rejected Overlease.

Flowever, the Sublandlord's rejection ofthe Prime Lease

will result in the termination of lhe Subtenant'spossessory right under state law, leaving the Subtenant's

fate uncertain.

12

Final Agreement Reldined Against Landlord's First Draft

WH-ËNlìl+Ç,8ItÐHÐMlLJe

SUBLEASE NON-DISTURBANCE AGREEMENT

THIS SUBLEASE NON-DISTURBANCE AGREEMENT (this "Agreement") made as

of the _ day of 20-by and among: (i)(hereinaftercalled''Landlord'')havinganofficeat;(ii).

having an office at

_(" Tenant") ; û**+(iiÐhaving an office at

( " S ubtenant " ).iêDdl-iy)

^. havins an of'lìce

a

WITNESSETH:

WHEREAS, Landlord is the owner of that certain parcel of land located in theState of City of and County of "Land") moreparticularly described on Schedule A annexed hereto and the lessor of the Land to Tenantpursuanttothatcertainlease(the''LeaSe'')datedaSof;and

WHEREAS, SubtenanLÇgar;¡l¡qo*I and Tenant have entered into a sublease datedas of . æ (the "Sublease") demising

to Subtenant (the "SubleasePremises"); and

WHEREAS, Landlord, Tenant, anêSubtenant ¿urd Guaranlordesire toenter into this Agreement with respect to the Sublease and related matters.

NOW, THEREFORE, in consideration of the premises and the executionof this Agreement by the parties, Landlord, Tenant-an<{. Subtenant:rnd GualeLntor herebyagree as follows:

l---1---Subordination. Landlord hereby acknowledges receipt of the Sublease.

The Sublease and Subtenant's interest in the Sublease Premises thereunder is now and atall times shall continue to be su$ceurr+e1-subordinate i,n-eaeh-a+:r¿l-e*;et\-re$fleÊt*û-Ll*epro+-isio ns-oÊtl¿cJ=e"ase,

S¡*blease,*h¿ll-nst+ e.-poss1.{;sìt+n^ er.-cx1it¡¡men+<rf

Me-i*r+er*eæ,ilut+Iease-bc-affeetee{ìn-ar4'm¿+nnepno¡,s'h*llarlv-olthr*,rigJ+ts-s'l-Sul+tenaulgranteelurNlet+heáublease-be-+fae+ffx*lh-proee'edin5i*sti{ute&+o-€+iie++€$ffnt bt' rc+se,n elf TeLeíìsii;

+en¿ìÐËs- €lcÊ¿+lt*thr;'retrndE¡r-orby.+€ytsoì+-o{.-Ëen¿ntþ-JìJlrer*c1er*t+f*+he-l--eas*ranel-ifS++)tenen+-sh

'A.--$.ub{cn¿ml-slr*ll-åe-bær+d-ts-+he-S+rblease-+ne1er-a}l-eÈthe4o'r*ns.e$r,eníì+Ìt e-

ineluéling aìry' extensi et-eu=-þa¡'¡elee+e++o

exerreise-ar+y-t+rå11-€ÌÊit'j-epÈions-te>exten++åe€'ühl€@ee-anåeffbel¿tsiS-tandl es4ercb'¡ar+orn-+etanrllold; *r; its ,landlord. srrid atton*rnent to be efTeetive and seli{ìoperati+e-++i,,#et*-{he

exeeutio+r+F*ny+u eeding*e-+he-inferesfi#-jlena*tB*reler tlre Subþase, Lalldlord slmll-have all rights of Tenant as the su.lrlessor-u+rder tlrest¿+ndl<+r*-sha ll-beåotrn@ever+¿l+ts-m#eenditiens-+rÈ+he-Suhle¿scle*ee

lJ--S+ùten¿rnt-*lr.alþbe-beu+r#t+åandkxd-+rndel-,-anel-++ha+l-per.{br{+1-+t}t+trt]H. teilnrr çoven,ent e+R+rmed+y-Subtena*t,hereunde+ forthe .reffietindeï of the $u,blease {erffi. i*el$dir+g aft} extensisn perilods; (t€}

tlx>e,çte*rt{haçSnbteÐarrt-shal}-e}e€+-or-hås-eleete€l--tt+-s.xereis o{:i+s-optit+ns-te

eN+ell4+he-{enar-t#+he{}lnst

tr,anc{lcrx{*-e*thc+-bneae reÈ+he-St#}ease-thaÊ$+bto'r+ant-+n+ght-h+ve-hadtmdePth{rer-r

+ UaUle for enl'represefttåtior-+n+issi de+*@åore ge*ng-shalt.nsçrcfieve+andk¡rtlf +on+- aqv-liab i'li+y+o+'entetþ*eu+

lgâte#**¡--*en+e+y-pursu.tnr-+s-t¡eSublcv*s<l);

,{iubtenanf-mþl+t---har.e-againslrle-nar+l-*s-a-lcostilt-+>Èa*}-aetri-oroneis¡;ir*¡+s-sf lFenar*tr

2

$iubtc,nant-n+ayltwe-p*i*L+<#lìu+ant-n+ore-dralreme-(-1-)-:nor+th-in*d¡'mee of tne urcnt to wprepft iMe--anel-e+ving-te-I'arìÉ+:l€{d--+vi+h€{"t+rcgaxl-to-suc{r-prepayment-exeept-as-ma1'-ha+e-aett+ai-l-+-been

eri od*be-r'or*4+}rc-n*olt+h-ilrr+hiel+M

int+hexetr{:eftie {<+--**s*er-stl+er--easuttlt-*- or--t¡,-¡s¿son-of-aeonden+na+iont-unle@e+--undeþtjce+ut¡+ea*eis

v, li¿'

eonenvilonme*ta{-indenmi{ìe¿*io*-{t*--4ry.-le6{'iabili{y, e'kri*r-<*

n+-ee{ìùired-i+""

interes+i*+heBtri tái-ng¡

G-=lil=S+rglease-.,b++<sas@

i, lltie liaUltitv of Em e-fer_+affiag€#-o1-

i*es"(atù

e{efinerl-.in-+he--teaseþnelr*ef ing-'ents;--aet-+*le-pro eeeds--netrceeeds--thecetieæ.'

Ne m--employees-sha.rehsleler*i.ì+at{ru¡rs,-pì+r+eip*ls;-agent*-or-+er*-ants-<vf=tandlstetr

@?, =*:"N=e=x Lp=ssç, Il=-tlrç=j*pgç h f,srsdn=4,-Lsd=þr;lçaçe-s=qf==l"ç+a$llÞ. ç[=eJ=+glf

thereundeL, or bv ï su.fpLr-Clqf=qf-thgl=e¿se--4rc-rciççtiarroflhe lcase-ln

wi¡hiu-tbirtrl3-()) ¿avs foll owins of th

-l_ç,ase. the "Neil'Lease poses as of the date of fuI"p"minafioq.@

A. The Tenn of the Nerv shall exnire on I lr

lh-e- $rú l,e¡s,c" ttÌç_!.t$i ne a l l

3

þç,le,si,snçl= LJuf

Ç,,,, ,, - $.i.+;=ul1iÌp=çpuÞ--lx:yith=!=hg,çxs-c'slipn=çt,1tL-%N.ç==)=v:=I'p=sq=e=,=$==uþlç$+plsnatt rrav tne neUn

p,.rp.:-viçiççt=l'+ndle¿çl hß,ç, si*yç¡],"wittçn nstiç'ç,,1=o:$uþJ=-e=,n4t=,4, fthg li.Qe=linss-e'=$p-v=

Notice"l of sucn

no-t Latcr than s-ixt-v ffi_0-) days-al,ter-thc--da"tç"s'rchBayne¡.t "was*-d,u"ç"ancl n-o-x Baid, Acopv of anv notice of default fì'om Landlor<l to 'I'enant that is sent to SubtcnantsnaU ne ¿eeme¿ to U

Tçn"ant,[o I"and.lor-d-, or sf]r-e-r-wi.sç Le-c"o-yelçd by"l*a-ndlo-rd"-p-rior.-to--thelçlni¡atisn"llvent shall be cxcluilecl lì'orn the Delinqueff Amount.

ii, |lo other prepertj' or a.¡*ets of Landlerd or an)' proper+v-€fi.1..- l:.-,.^+,--- ^.f-'lì^,--^ ^.,*,.1^.,,.^. .-L^,'^1.^1Ä^-. n¡*i-a¡c

n. Extti¡it n toP-e-rni t-tsd E"xç"çn"ti"çn s",

g. _ Section Z t.0l of t"applic,ablç- ancl sh"all hç" d-e-lçtçct, from -thç N"e-\-v- Lcase-.

e. ilfo amendment, molNloclificalisn)" irr thc S"u"blçasç s-halJ be bind-ins on Landlerd u,nlç-s-s s-Lrch

M==o:çUfJçalisnhíN,hççnítp=prç"yeç1''þv:-L-a¡1çll-oJd,'ldiscretion.

I

thc Sub.lea-se"

4

M$,]rlkineJhisAel;ççmspl,g-L,i$,çsì+ilp=çlipnxilh,'lnvMoclificæion Le _bv feuant-$ubtenarrt oL Çuarantor, sh ferullor S-r"rh"tcna¡t and sha]l he de"çmscl "te be Acl-ditiona-l Rent -utìdçr -th"c l"qas"e. thç-

Sub!,:ase .a[cljbe-N ew Lease-

H, G""uar"alitor shall rsma.in habl,"ç f-o-L ali "o-b[ga'ti.c,"ns gf-T,ç.na"nl""and

tcasgiufuliqNe\ñ Lease, and shal

,liorm annçx-e-cl1o, t]rç l*casç "as- Exhihil D* l-her-e-t"o-,

:. tnterirn Non-nis inninf¡ on the date o

s+r.þl thp",$uþ=lsaçç þçv'pnç1.g,,-lll=æpliçaþl -shdfl.lotlr--qtc.l$r@gü-q!ì¡=sl,l4lt$-_eg4rËltts-q.-ræsse@=sqqtqrrxenrcIÉs=S-Lbtçslsl1¡çpri":ruJrçjr¡.çrlÞ¡s4-r.,:irl¡b:I"andlord'hçïsip:shr¡ll O=prç=rl..ç=¡li Lrt04lsliç1=fiprnpslm¡$=ç=pçisg sll= E+l=Ép,lni+e.anv ,?çIis$.srprocceditl{instituted to e reason of Tenant

qçf 'fu i-:!,h. ¡,p,, l,

uaintainfue any action or proceed

in ttris agLeernent (iiil Lequire ltbcJçnaulsobli.qa-tions as- l"ancll-cixl uncler the S.ublease.

+. fte guildins. Lan

t¡q=]¿=uilsling.,tne Su¡tease. PreProperl)."). In conside¡atio-n of'tlrc Subtçnaft's exec,ution of -the Ngu'Le-ase"

the LanclloLd's Lig SuhrcruLjulbe-sænrarner th,e Çonyçyscl ProBç.rty ,was cqnye::ed -fi,o""m Tçnant tg I"andiord in çp"mtçc1icn

wim,'t¡s==lp ltne ¡lew fease, as t

mamrer as tlle Con Èoperl adS-ubicnail aç:kn-o- w:ledee and -agre-e IhaX ;-Ìoi]r-ing hçrcin, in -the Lças--e- -p-r in 'thç SLrblease

exnlesslv set forth above.

5= 4-*--Covenants of Subtenam

5

,A-, ,Ç-subtenant agrees for the benefit of Landlord that Subtenant

will not pay any rent more than oneQne (1) month in advance of the month forwhich such rents accrue except as may be per .

B, Il--If any act or omission of Landlord or Tenant would give

Subtenant the right, immediately or after notice or lapse of a period of time orboth, to cancel or terminate the Sublease or to claim a partial or total eviction orconstructive eviction, Subtenant shall not exercise such right and no notice ofcancellation;g termination-t¡rabate+l+shall be effective, unless and until:

L i. Subtenant has given written notice of such act oromission to Landlord o[ -an-v: sric,p-çssor to l",andl.o-rd"o-JÌ-w]ic].r S-r-rb"tenanl".has

; and

ii, ü=Lancllgr"d or su-c. andlord shall have notcured the same within the time l-imi+sfpdods set forth in the Sublease'

NetwìthstanelinÊ the feregoing;if streh ele'f.ault is noleElab],*of etne

ì#i+hin:e-60_dayf€riotJ; theft previded th+t Landlo,rd Llas eemrneneed suelr

euru.'withi+the-60-daype+i,oÇthersu allbe-elxtende#so-kxrg

@ef+

Aureemenf .

tunde.l' tlæ Suhlease or rm)' eilreums+anee \ùhielr wêuld entitþ Subtenalí$-to eaßÊel or

teff{+inat$-+1.1e*--Sr}blease-or-.-aba+e-{he-+ents, ae{ditional-+enlv-or-ether-*un+.--p¿yaUlethE e+i*lea¿iem-is-d

ob,l+gæionl+o-eu¡*-sttelrdef-a*l+¡arxtr-$r+btenan+shall-not-tenfthmte-the-Sr*hle¿rse-ol-¿batet-he-rer

l'etr thirtï (30) days a,i+er Landlerd'+ reeei,q*rFsueþ*otieets-eure-st+eh-defäutrt-antl-æ'n*asor+¿r6|srpcriod-o1ìjme-ie-ad€liti€i1-+hereto4}++-+neeì,rÊHrnstanees-aïe

€Ð+"y*er;e+ eh*we;^-or'6Ðtinringnd--a*Te,r-anl-litìgat-i+en-aetio'r,r-ineiucling-a-tìxeck>surq-ba*rkruPtey-ptlssessol-h¿d{on-+r-æes*ila@ei*ea[y*gre Ar¿

f,mdtr+rd{++@6-

of and shallors and As This Agreement shall inure to the benefit

be binding upon Tenant, Landlord-and* Subtenant-an-d Guara¡1or, and their

respective successors and assigns.

7. @. This Agreement shall be governed by and

construed in accordance with the laws of the State of

6

without giving effect to any

principles of conflict of laws which would result in the selection or application of the law

of any other jurisdiction.

[email protected] parties to this Agreement in any number of separate countetparts, and all of said

counterparts taken together shall be deemed to constitute one and the same instrument.

9=Æ.Anynotice,requestordemandgivenormadeunderthisAgreement shall be in writing and shall be hand delivered or sent by Federal Express or

other reputable courier service and shall be deemed given the earlier of when delivered or

one (1) business day after deposit with Federal Express or other reputable courier service,

addressed as follows:

If to Landlord,addressed to:

'¿'i+hlMiú a copy to

If to Tenant, addressed to

withW{h a copy to

Ifto Subtenant, addressed to

*#thWjlþ a copy to

.l.rbreing-unde,rutsoci+n&agr,eeel-that-e-aeb-¡Nlr.þ+n i]l*sc-rcasonabtre-eff'o'r'u;-{<+-sestr

lvh¿rtsoever-+o--the<¡.1{eetivg'Res.xrf;rn).-n<*iee-anaele{o-ei+he+-el[e tlan{-ol:-$iubt€.rlanL

Each party to this Agreementmay designate a change of address by notice given, as

herein provided, to the other party fifteen (15) days prior to the date such change ofaddress is to become effective. Notices may be given by a party's attorneys.

L0- to .I Ven T,aw. Tenant

¿+n<{. Subtenant,ggçfÇg444glg¡ each agrees to submit to the jurisdiction and venue in the

tl

1

appropdate Federal, state or other court in the State of _ and hereby inevocablysubmits to the in personam jurisdiction of the courts of the State of _ or anysuccessor thereto and the United States Courts located therein with respect to any actionor proceeding between Landlord, Tenant-andn Subtenant ansflGuagg¡g¡, and venue shalllie in the county in which the $ Premises ar<¡is located. Tenant+nå-Subtenantrudl¿UglgUtor each waives any and all rights to commence any action or proceedingagainst Landlord before any other court.

-fhi. ^

th..ôôri^ñ+ -:^ ,*,-*,....,.^,I ^.,^l-,-i,,^l-, ¡.-, +L^ -..L.-+^^r.i--, l^,,,., ,-ç +1.,- (-ì+^+^ ,-.0rë\rvvr.rrv¡rr r\t ó\, v çrrrvLl v/\v¡ur)r I vrJ r/J Lu9 !)Lr

- ft{J th,e $â*lte nrü-}';:l

of *ueh-law-th,æ-wo*lil-res+l+-in-+he-seleeti+r*-or-applie.t+irx+-<+Ê-the-lar+-o,f-+ny-ether

$rrrsdietio{l.

AS A FURTHER INDUCEMENT TO LANDLORD TO ENTER INTO THISAGREEMENT, TENANT AND SUBTENANT EACH HEREBY AGREES THAT INANY ACTION OR PROCEEDING BROUGHT BY LANDLORD, TENANT ORSUBTENANT AGAINST THE OTHER ON ANY MATTERS CONCERNING THISAGREEMENT, TENANT SUBTENANT AND LANDLORD DO HEREBY WAIVETRIAL BY JURY.

11, @. This Agreement may not be modified in any marìneror terminated except by an instrument in writing executed by the parties hereto.

1__2,*_.,,,,.,,,,,,

li\ lq\ Terr:rrrl ic l rlrr'lr¡ arrd rra.l irllv exisfinrrp,n=çls=r=!,,hç=ls,ws=qf .Lh='e=*S=t-gle-pf

-*þJ"'I*sn{ìrl']l+l==it¡lçl*ibusiness in - (c) Tenant has the fìlll ririht and authoritv to enter intoths A,gr.ç-e""m.e".nt, and ß) çach Bçr-son s-ignfu"rg pr hçhal-t-o,l,.Tçna"nt""was" and

lii) fa) T.ancllord is ¡fulv firrrnerl anrl valicllv exisfirrrrunder the lar,vs of the State of lbl T,andlorcl has and is

oualified to do business in . lc) Landlord has the firll ripht and

"a,uthor:ity ts -e"nte[in.to this.-4ff-çe-n:çnt, a¡-d (d) -e"ach Be"rs-on srsn]ng enhçhalfìp=f,1=-.rl+ç11,f¿rsll=v4Ð=.anri,=ç=.qnlip"=L=1"ç-s=.ta=þ--e:í+lll]=-o=92=e-4!q çls ss=.

fiiil - þ) SuhJçnanl is duly:-fur¡rçrl and v-ali-ct,ly"çxis-tr¡eunclel the lavr,'s of the Statc of lb) Suhtenant has and ìs

qualine¿ to ¿o Uus

ar"Lthori"t-y t"o çntp.r int"e tlÍs A-gr,e-çmç¡l", anrl (d) çac,h. ppr:son s-iglxn"g cnbehalf of Subtenant r,vas ancl continues to be authorizecl to do so.

li"rì .. h) G"",uaraffqris cl-ul.u Íprmç-çl arld"validl,,-v- çxis"tinsrmcler the larvs of the State of . (b) Gualantor has an<1is

8

a"uthari-t-v- -t-o- çntpr into -tJris- Aer'e-çmçnl "anrj (il çacll p-emon s-ietrrp.e, 0n

þ=qh+tf]rifìfiu+æntslr Js$s

I -ì, Rarifiçati"on,

A. fan¿tor¿ an¿ fen

rq*it;ç,çl*='=ülaereement shall contd

ll, , , *[ìçtlenl*$+þlçne"remain in full forolr"srp.hy mlifi.ecl, I¡-thç çyeff of a c"onl]-i-qt þ-e"tw:çen the ,Subleas-e or G" ua"rarrf,y anrlthis Aercement. this Asreement shall oontrol.

qoygrgd c,$ientioned in this A udno prior agrs-e¡rçLrt, -understa"ndilrg o[ rçp-rcs,e-n'1a-tiou Bcfiai.ning to anlt such nûaf]:c[ s],Ìa]lbe ef'fective filr anv oln'Dosc. Nothinu contained in this Aureement shall be deemecl to be

I-andlor¿'s assttnip

,lã..,,- Exh fl çhy inc-o rp o rale,cj into an 'cl m-a-dç a p, aft "s I this- -Agrp-ç,ment,

IN WITNESS WHEREOF, the parties have executed this Agreement as ofthe day and year first hercinabe+eùovç written.

LANDLORD:

By:

Title:

TENANT

By

Title

SUBTENANT

By:

Title

9

GUA.RANTO-R:

Rv:'['itle:

i0

Subtenant's X'irst Markun Reldined Apain st Landlord's First Draft

SUBLEASE NON-DISTURBANCE AGREEMENT

THIS SUBLEASE NON-DISTURBANCE AGREEMENT (this "Agreement") made as

of the _ day of 20_ by and among: (Ð

(hereinafter called "Landlord") having an offtce at (iÐhaving an offrce at

_("Tenant"); and (iiÐan office

a

athaving("Subtenant")

\ilITNESSETH:

WHEREAS, Landlord is the owner of that certain parcel of land located in theState of City of and County of _(the "Land") moreparticularly described on Schedule A annexed hereto and the lessor of the Land to Tenantpursuanttothatcertainlease(the''LeaSe'')datedasof;and

WHEREAS, Subtenant and Tenant have entered into a sublease dated as of(the "Sublease") demising

to Subtenant (the "SubleasePremises"); and

WHEREAS, Landlord, Tenant, and Subtenant desire to enter into thisAgreement with respect to the Sublease and related matters.

NOW, THEREFOR-E, in consideration of the premises and the executionof this Agreement by the parties, Landlord, Tenant and Subtenant hereby agree as

follows:

;t, lr-ËUþArditatig4. Landlord hereby acknowledges receipt of the

Sublease. The Sublease and Subtenant's interest in the Sublease Premises thereunder is

now and af alI times shall continue to be subject and subordinate*ie*t*€fr-#reryrr'spee{ to the pro+initrru;o$+lrs Lease.

?- A-Ne!Ði$UrbA!çg. So long as the Sublease is in full force and

$uþ1,ç*çtsS===u1,,,, e Sublease shall not be

terminated, nor shall Subtenant's use, possession, or enjoyment of the Sublease Premises

be interfered with, nor shall the sub-leasehold estate granted by the Sublease be affectedin any manner nor shall any of the rights of Subtenant granted under the Sublease be

affected in any manner, by a termination or surrender of the Lease, in any action or

proceeding instituted to evict Tenant by reason of Tenant's default under the Lease, e[otheru'ise. incluclinu anv telmination of the Lease clue to casualtv or condcmnati<ln.

-3, . If the Lease is terminated by reason

of Tenant's default thereunder¡v fen¿nt or l-an¿loLn. or by reason of Tenant's surrender of the Lease, and if Subtenantshall be entitled to non-disturbance in accordance with Section 2 hereof, then:

À ,4-Subtenant shall be bound to the Sublease under all of theterms, covenants and conditions of the Sublease for the balance of the term of theSublease, including any extension terms (to the extent that Subtenant shall elect orhas elected to exercise any or all of its options to extend the Sublease), with thesame force and effect as if Landlord were the sublessor under the Sublease, and

Subtenant does hereby attorn to Landlord, as its landlord, said attornment to be

effective and self-operative without the execution of any further instruments uponLandlord succeeding to the interest of Tenant under the Sublease. Landlord shallhave all rights__ap{=gþþ_dþry of Tenant as the sublessor under the Sublease as

though Landlord had originally executed the Sublease in place of Tenant, and

Landlord shall be bound by all of the terms, covenants and conditions of theSublease, except as otherwise set forth in this Agreement.

B_. l-.].--Subtenant shall be bound to Landlord under, and shallperform all of the terms, covenants and provisions of the Sublease to be

performed by Subtenant thereunder for the remainder of the Sublease tetm,including any extension periods, (to the extent that Subtenant shall elect or has

elected to exercise any or all of its options to extend the term of the Sublease),

and Subtenant shall, from and after the date Landlord succeeds to the interest ofTenant under the Sublease, have the same remedies against Landlord for thebreach of any provision of the Sublease that Subtenant might have had under theSublease against Tenant if Landlord had not succeeded to the interest of Tenant,except that Landlord shall not be+

i=---liable+s*-*or--on+ir*iolro{-or-ele,f,àult-lb.v-:}c.'nanL-unde+-+he-Subleuse-@tr+$+efolepil@@

trnele r-lhe--$r*b.leaseþis-eÈ tigateé-to--rernoeþpurut+an+-ro-{åeSüblerìseÌ

ü--$¡þ.ise+-1o--an]-e+edi+s;-e1*in+s, sæo{å;--gr-<1o'f.enses-whieh

Slu$+er+

efi+'ssi$R.-eÈTc+raãHji.--- bound by rent, additional rent orother amounts which Subtenant may have paid to Tenant morethan one (1) month in advance of the month to which suchpayments relate, and all such prepaid sums shall remain due and

owing to Landlord without regard to such prepayment except as

2

may have actually been received by Landlord for any period

beyond the month in which the Lease was terminated; æd,,=cXççtllas exulesslv nennittecl in the Sublease.

in-+h@destr+e+itm-oÊ¿$e-Bt+ildingor-ttl+--pa*the*¡+t-lr+e-te-fi1eon<le*nn¿ltkrn-tuile'ss-l-¿trullor4-ças-subJ¡¡äsot'-under-the-$iub]t¡¿N;elshs$lre€{t+rêû{ed-ur

l-------liab,[e-ule[eraq..ìndeirurity-pro+'isisn-oF¡*.hatel'er-+l¿ttueeen+a*+edjn=-the-Subl@ot-*ni+e++o;-anyemAffii ln*e+aeti<+n+h¿rt-Éi*t-aeerue#prior{t>Ëhedaie-thâ+-StrbtenanL-aeguire<fi+stu+i*{+eeui+dinÊ.

"Ç, e--If Landlord shall succeed to the interests of Tenant underthe Sublease by reason of this Agreement:

t i---The liability of Landlord under the Sublease fordamages or otherwise shall be limited to Landlord's interest in the

fiuhlcasqPremises (as defined in the tease$uhlease) including rents, net

sale proceeds, net insurance proceeds and net condemnation proceeds

therefrom. Neither Landlord nor any of the directors, off,tcers, employees,

shareholders, partners, principals, agents or servants of Landlord shallhave any liability (personal or otherwise) hereunder beyond Landlord'sinterest in the Sqhlç+gPremises.

i,i, üî-No other property or assets of Landlord or any

property of the directors, officers, employees, shareholders, patlners,principals, agents or servants of Landlord shall be subject to levy,execution or other enforcement procedure for the satisfaction ofSubtenant's remedies hereunder or under the Sublease.

4. 4.^-----Covenants of Subtenant

A, A--subtenant agrees for the benefit of Landlord that Subtenant

will not pay afiy rent more than one (1) month in advance of the month for whichsuch rents accrue excent as may be per .

B- ll--If arty act or omission of Landlord or Tenant would give

Subtenant the right, immediately or after notice or lapse of a period of time orboth, to cancel or terminate the Sublease or to claim a pafüal or total eviction or

constructive eviction, Subtenant shall not exercise such right and no notice ofcancellation, termination or abatement of rents, additional rents or other sums

shall be effective, unless and until:

3

L ì-Subtenant has given written notice of such act oromission to Landlord,.pl*flnl:$ggreceìved \torjtte ; and

tL ü.- Landlord shall have notcured the same within the time limits set forth in the Sublease.Netwithstaffiling the {'o+'eÊ$ifig; i,lì sueh de{,at¡lçìs {ti}t*€aloable*€{*€üre+vi+hì+ra-60<layperilxþheqprevided+hat-L-¿mdlt+r<l-has-€o'mrnefiee.tl-strcheuri*-+'i o-long

ursr*inganJlåç+i@sr*eþdetbtr.l++H,eme$.+r*c.Feir,etu+rsta-nee..

ê-..-Subtcnanlshatl-plon*ptþ-rc+ify-tantflore{-o{_an"+,_de4àult-b¡-l-enantunder+he*Slublease or arr.v eiret*n*stanee lvhietrl rvoukLe+Mte*-rnlna+e-+he--S+rb

thc",reunde.r--a+-tl+e--samsfi+ne-ÉLs.*rì€-h-¿H{sti{ie¿tie*-i-de't+v<vrcxl+o-Iena+r't-spec.i$ing+henatu+ on :tandlerd slmll have tlre right (btrt net theeg+ig+he.+e*F¿lddíti<rnaf.¡ent-sr-other+u+ns?ay*b@on-sflsuch4e{au.l+trniess

ieeiele

c.ire.r*mstæleee-{}re-stre,}r-4hâ+-+¿ú€l-detbu}l+annot-r,ea;ei*abþ-bt-eured-r+i+hin-s*id-1hiÉyp0)dalr-peri+4tn*å¿ndler*åas eenrfiÌeneed and is diligelrtly ptrrstring streþeure, er (ii)+¿tc+i.oll.-or'¿+<; ornbi,nation-+re're+fJ+is-speei{ìe*lh-agreeeltha+-Sr+btenant--sh+1ì-no+reç+ire'

5. . This Agreement shall inure to the benefitof and shall be binding upon Tenant, Landlord and Subtenant, and their respectivesuccessors and assigns.

6. of Law. This Agreement shall be governed by andconstrued in accordance with the laws of the State of without giving effectto any principles of conflict of laws which would result in the selection or application ofthe law of any other jurisdiction.

7,. @. This Agreement may be executed by one or more ofthe parlies to this Agreement in any number of separate counterparts, and all of saidcounterparts taken together shall be deemed to constitute one and the same instrument.

& $-Ng!içgl. Any notice, request or demand given or made under thisAgreement shall be in writing and shall be hand delivered or sent by Federal Express orother reputable courier service and shall be deemed given the earlier of when delivered orone (1) business day after deposit with Federal Express or other reputable courier service,addressed as follows:

4

If to Landlord,addressed to

with a copy to

If to Tenant, addressed to

with a copy to

Ifto Subtenant, addressed to

with a copy to:

It being ufiderstce€lli€s-*lÈ¿e e"*e-*e+lbrd+tpro'n'itleei-horvevefihat-fallt+e+e-deli+-er-st+eFe$p,v-orc=ôp,ies-slrallb¿+*oè--n{æor}ssttlueneer+h*{soever-ts-she-efl@Each party to this Agreement may designate a change of address by notice given, as

herein provided, to the other party fifteen (15) days prior to the date such change ofaddress is to become effective. Notices may be given by a party's attorneys.

9. ---*---8-.-*--"Consent to luris¿ic . Tenant and

Subtenant each agrees to submit to the jurisdiction and venue in the appropriate Federal,state or other court in the State of and hereby irrevocably submits to the inpersonam jurisdiction of the courls of the State of or any successor thereto and

the United States Courts located therein with respect to any action or proceeding betweenLandlord, Tenant and Subtenant, and venue shall lie in the county in which the Premisesare located. Tenant and Subtenant each waives any and all rights to commence any

action or proceeding against Landlord before any other court.

:.Ëhis-AÊre'emenl-is,governeel-e+relus,i-r,<rrly-bfthc-;t+bsklr+ti+sla*çs-o{ì,the-Sta+c'--of

t+

iuris<-l-ie+i,oll,

AS A FURTHER INDUCEMENT TO LANDLORD TO ENTER INTO THISAGREEMENT, TENANT AND SUBTENANT EACH HEREBY AGREES THAT IN

5

ANY ACTION OR PROCEEDING BROUGHT BY LANDLORD, TENANT ORSUBTENANT AGAINST THE OTHER ON ANY MATTERS CONCERNINGTHIS AGREEMENT, TENANT SUBTENANT AND LANDLORD DO HEREBYWAIVE TRIAL BY JURY.

1-0. -L0--Mqdrfiçatþ9. This Agreement may not be modified in any manneror terminated except by an instrument in writing executed by the parties hereto.

t t. necognlze¿ Su

wsl=e=r thç ,l,çasç,..|iu$liçu =liauçlls¿d, pçh+=o,.p=lçç1ggg=+-rcL',

of tne SuUlease. tn cxpire anct ownemh@qf=,,$,ççti,-c,,,,$Þ.,,,,

ttte SuUtease PLe

*tiMry.$t-sl s,+çlçr, thp=. Slùlsaps==þ=ç=efþsts=çt=is=ç14n+]a$49¿:þ.L:-s=ush:4+cxpuaú$ -Lfuhe Lease and l'eversion .

applu

IN WITNESS WHEREOF, the parties have executed this Agreement as ofthe day and year first above written.

LANDLORI)By

Title

TENANT:

By:

Title

SUBTENANT

By:

Title:

6

.&Élllll New York State Bar Assocìation

Real Property Law SectionIJraf3rSA

Overview of Green

Buílding Leãsing

Prcscnted by

BENJAMIN Wf,INSTOCK, ESQ.

Ruskin Moscou Faltischek PC

USGBC


oNE

alrtñr

Haã

USGBC


LEED Certification

1

Green Globes & Energv Slar

¿= l.---.., ^.-.'-^..,-,J t-..-..-.."",.'!*Ll il;"Jlìi*'""

ü irmq$'*'ü

,ir, i i :,_. t;1:¡\¡,ìì^l rrrr:.

Green Buildíng and Leed Cerlílication

Why do landlords and Tenants want LEEDCertification?

l. Healthier and happier work spaces.

2. Reduction of impact on the environment.

3. Reduced operating costs and greater profitability.

4. Higher rents, higher occupancy rates.

5. Higher sales prices.

6. Compliance increases project costs only 2o/o.

Green Building and Leed Certificqtion

'Why do landlords and Tenants want LEED

Certification?

7. Energy Independence and Security Act of 2007requires at least an Energy Star rating for US

Covernment Agency leases.

8. Local laws are being adopted with increasingmomentum. NYC Local Law 86 adopted effectiveJanrary 1,2007

9. Non G¡een Buildings are at risk of becomingobsolete and relegâted to a lower tier of"comps"

2

Green Mandates

GGBP -Greener, Greater Buildings Plan

LL 85 - NYC Energy Conservation Code

LL 84 -Energy and'Water Benchmarking

LL 87 - Energy Audits and RCx

LL 88 - Lighting Upgrades and Sub-metering

Green Benefits

Zoning Incentives - More FAR

Tax Credits

Expedited Permitting

IRS - Energy Efücient Commercial Building Tax

Deductìon

NYS - Tax Credit for Tenants and Landlords forreduced Energy Consumption

NYC - Tax abatements for installation of solar panels

on NYC buildings

Green BuÍldins ønd Leed Certification

Going Green is not a fad.

l. More than 58,000 properties are participatingin the Green Movement in all 50 states and in140 countries.

2. 10.7 billion square feet ofspace are Greenglobally.

3. By the end of20l5, 50%o of all commercialprojects under construction will be Green.

ffi3

Shades of Green

Light Green Leases - the

Green requirements are

aspirational only.

Dark Green Leases -Traditional breachremedies. w

Green LeasÍng Issues

Term

Longer term leases generate more LEED"points" because they reduce waste fromnew buildouts for new tenants, with a

corresponding decrease in transportation and

manufacturing of the building materials

Grcen Leasinp Issues

Permitted Use

In a conventional office use clause or retailuse clause you may find:

"...provided such use does not violate the

certification of the building by the U.S.Green Building Council LEED rating systemor Landlord's Environmental ManagementPlan"

4


Assignment and Sublease

Landlord may withhold consent if the

proposed assignee or subtenant may cause

the Premises not to conform with anY

environmental or Green building provisions

ofthe Lease.

Where no consent is needed to assign orsublet, the Lease could prohibit assignment

or subleasing to non-Green users.

Green f s.cup.s


Tenant is obligated to pay its proportionateshare ofCAM costs, (or cost increases over abase amount or year) to defray Landlord's costs

of maintaining the Building and property.

In a GB, Tenant leased the premises with the

expectancy of a lower annual cost for CAM.Should the Landlo¡d be held to a performance

standard before passing through operating costs

to the Tenant?

Green Leasìng Issues


In a GB, the "Green" process is continuous.

To what extent will the Tenant be involved infuture capital expenditures for additional green

Compliance?

Tenant's obligation to pay its prorata share forcapital expenditures is limited to the lesser of(i) savings realized by Tenant from the capitalimprovement, and (ii) the prorata share of the

improvement's annual cost amortized over itsuseful life.

5

Green Leasíng Issues

Utilities (Gas, Electric and Water)

Utility charges should be separately meteredor sub metered to a green tenant toincentivize energy savings throughconservation.

Tenant should require that the environmentalsystems (thermostats and other controls forheating and air conditioning, humidistats,water conservation and filtration, lightingand power) remain under Tenant's control.

Green Leøsing Issues

Utilities (Gas. Electric and Water)

Energy savings resulting from tenantconservation are too small to be meaningful.

The key to controlling and reducing energy use

in an office building is for the landlord to profitfrom doing so.


HVAC - It's too hot - It's too cold

An identified metric to gauge performance isneeded.

"The building's HVAC system will be operated incompliance with ANSI/ASHRAE Standard 55-2004, Thermal Environmental Conditions forHuman Occupancy and ANSI/ASHRAE Standard

62.1-2004, Ventilation for Acceptable Indoor AirQuality."

6


Operating Covenants

Tenants in Green Buildings need to be aware

that Landlords may require them to complywith operating rules, regulations and

schedules that may be inconsistent with theTenant's business needs.

Green Leqsing Issues

Operating Covenants - Rules and Regulations

Counsel should play close attention to theubiquitous rules and regulations schedule oftheLease.

Watch out for this:

"subject to the applicable provisions ofthe Lease,

Tenant shall comply with all rules, regulations andmeasures adopted by Landlord from time to timein connection with any green/LEED program(s)

undertaken or maintained by Landlord from timeto time."


Audit Riehts

A Tenant in a Green Building may be paying a

higher base rent but is attracted to the property

because of the lower operating costs promisedor predicted.

Tenant should have the right to audit the

operating costs ifthey exceed Tenant's

expectation.

.7


Work Letler

The Tenant's and Landlord's work letters shouldidentifl the sustainability standard that the partieshave agreed to achieve, i.e.,

Energy Star, Green Globes or LEED - Certified,silver, gold or platinum

Landlord may require Tenant to hire an accreditedLEED Professional (or other Green Professional)to manage the sustainabilify aspects ofTenant'sbuildout. Tenant may have a reciprocalrequirement for Landlord.


Work Letter

Landlord marketed the premises claimingspecific green attributes. Tenant will requireLandlord to meet the promised conditions.

It costs more to build and tea¡-out consistentwith Green standards. Therefore, Tenantshould negotiate for a higher work allowance.


Parkine

Extra LEED points are awarded to a property thatdoes 4g! have excess parking (more than theminimum required by the Iocal zoning code).

Solid Waste Manasement

LEED points are affected by solid wastemanagement. The property needs a SWM protocolwith easily accessible locations for recycling.

I


Signaee

Signage will affect the building's LEED score for"Light Pollution Reduction" and energy

consumption.


End ofTerm Removal

The award ofLEED points takes into considerationhow the Tenant will remove its FF&E.

Tenants should be aware ofthe follo\,ving:

"Tenant's removal of leasehold improvements, trade

fixtures or personal property from the premises shall

be performed by Tenant in an environmenfallysustainable manner, including reuse andrecycling, all ofwhich must be reported to theLandlord in the format requested by the Landlord."

Green Lessing Issues

Insurance - "If vou had a qreen buildins before thefire. you will have a sreen building after the fire"

Landlord a¡d Tenant have a vested interest in knowingthat their policies cover the increased time and cost ofrestoring a Green Building. Incremental costs include:

L The cost ofLEED certified professionals2. All LEED fees

3. Recycling deb¡is ¡athe¡ than dumping in a landfill4. Purchase ofgrid power until altemate energy

source is back on-line5. Loss ofutilrty credits while the building is under

repair

9


Property Taxes

Ifthere are tax incentives, rebates or reductionstied to the LEED Certification, determine in theLease whether they benefit the Tenant, theLandlord or both.

Grcen Leøsing Issues

Renewal

Even if the building is not Green no4 it maybecome Green in the future. When renewingexpired leases, consider whether a Green Ridershould be attached for future Greenconve¡sions.

10

YC(b) Capital Improvements.

Landlord may include the costs of certain Capital Improvements in Operating Expenses pursuant toSection 1.1(a)(v)(16) in accordance with the following:

(i) Capital Improvements Intended to Improve Energy Efficiency. In the case of any Capital.Improvement that the Independent Engineer certifies in writing will, subject to reasonableassumptions and qualifications, reduce the Building's consumption of electricity, oil, natural gas,steam, water or other utilitíes, and notwithstanding anything to the contrary in Section l.l (a)(v):

A. The costs of such Capital Improvement shall be deemed reduced by the amount of anyNYSERDA or similar government or other incentives for energy efficiency improvements actuallyreceived by Landlord to defray the costs of such Capital Improvement, and shall fuither be reducedby any energy efficiency tax credits or similar energy-efficiency-based tax incentives actuallyaccruing to Landlord as a result of such Capital Improvement.

B. For the purposes of this Section l. 1(bXÐ, "simple payback period" means the length of time(expressed in months) obtained by dividing (x) the aggregate costs of any such Capital ImprovemenlbV (V) the Projected Annual Savings. By way of example: If the aggregate costs of such CapitalImprovement are $2,000,000 and the Projected Annual Savings are $500,000, then the simplepayback period for such Capital Improvement is folry-eight (48) months.

C. Commencing with the fust Comparison Year following the year in which such CapitalImprovement is completed and placed in service, and continuing for the duration of the AdjustedPayback Period (as hereinafter defined), Landlord may include in Operating Expenses a portion ofthe aggregate costs of such Capital Improvement equivalent to eighty percent (80%)t of the ProjectedAnnual Savings, so that the aggregate costs of such Capital Improvement will be fully amortizedover one hundred twenty-five percent (L25%)2 of the simple paþack period (such period of time, the"Adjusted Payback Period"). By way of example: If the aggregate costs of such Capital Improvementare $2,000,000, the Projected Annual Savings are $500,000 and the simple payback period for suchCapital Improvement is forty-eight (48) months, then Landlord may include $400,000 of therggregate costs of such Capital Improvement (i.e., an amount equivalent to 80% of the ProjectedAnnual Savings) in Operating Expenses for five consecutive Comparison Years (i.e. sixty (60)months or L25o/o of the simple payback period).

t Actual cost savings from energy efficiency improvements may equal, exceed or fall short of projected savings. Thediscount ofProjected Annual Savings (and the concomitant extension ofthe payback period) is intended to provide amargin of error in case actual savings fall short of Projected Annual Savings.2

See Footnote l.

a

NYC/545725.5 Yl:4/5l20LL

NIIE¡ffiYCMODEL ENERGY ALIGNED LEASE LANGUAGE

Re: Capital Improvements to Improve Energy Bfficiency(Amends typical commercial modified gross lease)

i.1 Operating Expenses

(a) Definitions

(i) "Base Year" means

(ii) "Capital Improvement" means any alteration, addition, change, repair or replacement (whetherstructural or nonstructural) made by Landlord in or to the Building or the common areas orequipment or systems thereof which under generally accepted accounting principles, consistentlyapplied, is properly classified as a capital expenditure. The aggregate costs of any CapitalImprovement shall be deemed to include, without limitation, architectural, engineering andexpediting fees, legal, consulting, inspection and commissioning fees actually incurred in connectiontherewith, but shall be deemed to exclude actual or imputed financing costs in connection therewith.

(iii) "Comparison Year" means each period of twelve (12) consecutive months subsequent to theBase Year.

(iv) "Independent Engineer" means an engineer selected by Landlord from the list annexed heretoas Exhibit _. From time to time, but not more than once during any period of trvelve (12)consecutive months, Landlord and Tenant may each recommend one or more independentprofessional engineers licensed by the State of New York or energy management specialists, in eachcase with at least six (6) years' experience in performing energy audits on commercial propertysimilar in size and use to the Property, for inclusion on the list annexed hereto as Exhibit . Anysuch recommendation(s) by Landlord or Tenant shall be subject to the written approval of the otherparty, which approval shall not be un¡easonably withheld.

(v) "Operating Expenses" means all costs, expenses, disbursements and expenditures (and taxes, ifany, thereon) incuned by or on behalf of Landlord (and whether paid or incurred directly or throughindependent contractors or outside vendors) with respect to operating, maintaining, repairing,replacing, lighting, insuring, staffrng, cleaning, safeguarding and managing the Building and allcommon areas and equipment or systems thereof, including, without limitation...(16) the cost of anyCapital Improvement (as hereinafter defined) if and to the extent includable in Operating Expensespursuant to Section 1.1(b) below, which cost shall be amortized on a shaight line basis over theuseful life of such Capital Improvement (such useful life to be deterrnined in accordance withgenerally accepted accounting principles, consistently applied), except with respect to CapitalImprovements described in Section 1.l(bxÐ below (which shall be amortized as provided in thatsubsection), with the annual amortization amount included in Operating Expenses for theComparison Year in question...

(vi) "Projected Annual Savings" means the average annual base building utility cost savingsanticipated to be generated by a Capiøl Improvement, determined using commonly appliedengineering methods and an estimate provided in writing by the Independent Engineer.

Nvc/545725.5 Yl:4/5/201,1

48

SCHEDULE EENVIRONMENTAL MANAGEMENT PLAN

SECTTON I - ENVIRONMENTAL OBJECTIVES

L I Context

The provisions of this Environrnental Management Plan have been designed to encourage andpronlote the implementation of ceftain environmental objectives on the part of each of theLandlord and the Tenant.

IOPTION 1: The provisions of this Environment Management Plan shall form part of thisLease and cornprise a covenant on the pârt of the Landlord or the Tenant, as the case maybe, rcspectively.l

IOPTION 2: A breach by either the Landlord or the Tenant of any of the provisions of thisEnvironmental Management Plan on the part of either the Landlord or the Tenant to beobserved or performed, as the câse may be, shall not constitute a default under this Lease,but the party committing such breach agrees, to the extent possible under thecircumstances, to use commercially reasonable efforts to cooperate with the other party toremedy such brcach. In addition to the foregoing, the Tenant and the Landlord ågree toconstructively consult with each other on: (i) enhancements that may âchieve theEnvironmental Objectives and the Landlord and Tenant shall consider undertaking anysuch enhancements; and (ii) issues, events and circumstances likely to detract fromachieving the Environmental Objectives.l

1.2 General Objectives

(a) The Tenant acknowledges the Landlord's intention to operate the Building so as

to provide for:

(D a comfortable, productive and healthy indoor environment;

(iÐ reduced eüergy use and reduced production, both direct and indirect, ofGreenhouse Gases'

(iii) reduced use of potable water and the use of recycled water whereappropriate;

(iu) the effective diversion of construction, demolition, and land-clearingwaste from landfill and incineration disposal, and the recycling of tenantwaste streams;

(u) the use of cleaning products certihed in accordance with EcologoM(Canada), Green SealrM (United States) or equivalent standards,

("i) the facilitation ofalternate tlansportation options for individuals attendingat the Building;

(vii) the avoidance of high-VOC ernitting materials, fumiture andimprovements within the Building and individual tenant premises; and

(viii) [Optional] the achievement of such other more specific targets as may beset out in Section 1.3 below.

(b) The Tenant also acknowledges that the Building curently has achieved orqualifies fol the following accreditations, ratings or certifications: [NTD: chooseas applicablel

(i) LEED@ for New Construction and Major Renovations ("NC') certifled

[(silver, gold, platinum, as applicable)l;

(ii) LEED@ for Core ancl Shell ("CS") certified [(silver, goltl, platinum, as

applicable)l;

O Copyright, Real Property Association of Canada, 2009-

49

(iii) LEED@for Existing Buildìngs: Operations and Maintenance ("EB:O&M")certiflred [(silver, gold, platinum, as applicable)l;

(iv) Building Research Establishment Environmental Assessment Method("BREEAM') rating of

(v) ENERGY STAR rating of and/or

(vi) BOMA BESI rating of ffi.The Tenant agrees that the Landlord shall be entitled to operate, manage and maintain theBuilding so as to retain at least such level of accreditation, rating or certification.

(c) The Tenant acknowledges the Landlord's intention to operate the Building so asto achieve and retain:

(D a LEED@ for Existing Buildings: Operations and Maintenance("EB:O&M") certified standard [(silver, gold, platinum) as applicable];

(iÐ a top quartile ranking under BOMA BESt;

(iiD a top quartile ranking under the ENERGY STAR program; and/or

(iv) other. [NTD: add any other specific accreditation, such as GreenBuilding Initiative's Green Globes for Continual Improvement forExisting Buildings ('CIEB"), American Society of Heating,Refrigerating, and Air-Conditioning Engineers ("ASHRAE") or otherstandardl

(d) The Landlord shall be entitled from time to time during the Terrn, to seek suchother and fi.lrther building certifications as may be reasonably necessary, in theLandlord's sole opinion, to ensure the Building remains compliant with allApplicable Laws (including expected enhancements thereto), as well ascertifications prevalent in the marketplace or necessary to attract leading tenantsfrom time to time.

1.3 SpecificObjectives

Notwithstanding the provisions of Section 1.2 in this Schedule "E" above, theTenant acknowledges the Landlord's intention to achieve, and maintain, thefollowing specific targets for the Building, UV ffi [NTD: target date if nottodayl

(Ð electricity use averaging not greater than ffi kilowatt hours per squarefoot of Rentable A¡ea of the Building per year (kWb/sf/yr) [or equivalentkilowatt hours per square foot of Rentable Area where normalization ofdata has occurred];

(iD natural gas consutnption averaging not greater than ffi cubic metres persquare foot of Rentable Area of the Building per year (M3/sf/yr) [orequivalent cubic metres per square foot of Rentable Area wherenormalization of data has occurred];

(iiÐ vr'ater consumption levels averaging not greater than ffi likes per squarefoot of Rentable Area of the Building per year (Vsf/yr) [or equivalent litr.esper square foot of Rentable Area whe¡e normalization of data hasoccurred];

(iu) a waste diversion rate not less than ffiø p.r year; and

(v) indoor CO2 levels compared to outdoor CO2 levels of not gt.eater than ffiParts Per Million ("PPM') measured in accordance with the ASHRAEStanda¡d 62.1-2004 (or later) or equivalent standard as it may be amendedor replaced from time to time.

(a)

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50

(b) The Landlord shall be entitled, acting reasonably, at any time and from time totime, to adjust the foregoing specific targets for the Building based on the type

and intensity of space usage within the Building, having regard to the then curl'enttenant base for the Building, the energy or other resource consurnption prohle ofthe Tenant, or to "normalize" the foregoing specific targets for tlre Buildinghaving regard to the then tenant base ofthe Building, the energy or other resource

consumption profile of the Tenant, and the change iu use or energy consumptionfor various parts of the Building, including underground parking ateas (if any),

food courts (if any) or other Common Areas.

(c) In addition, the Landlord shall be entitled to modify the foregoing specific targets

to accord such targets with the standards that may be established pursuant to a

third party certification or rating schetne such as LEED EB:O&M, ENERGYSTAR, BOMA BESt, or any specific building labelling scheme that may be

promulgated in Canada either on a voluntary or mandatory basis, from time totime.

1.4 RegulatoryStandards

Notwithstanding the provisions of Section 1.2 and I .3 herein, in the event that any govemmentalauthority imposes a resource reduction target on the Building for any utility or resource

otherwise than as set out in Sections 1.2 and 1.3 above, then the Environmental Objectives shallbe deemed to have been amended so as to stipulate such resource reduction target and allchanges required to be made by the Landlord to the Environmental Managernent Plan, or whichare necessitated as a result of such mandatory resource reduction target, shall be deemed to be

included and permitted, as the case may be, pursuant to the provisions of this Section and thisLease.

1.5 Carbon Offset Credits and Carbon Offset Costs

(a) The Landlord shall be entitled to all Carbon Offset Credits that may be created,

credited or recoverable as a result of activities conducted within the Premises orthe Building, excluding Carbon Offset Credits to which the Tenant is entitled inaccordance with Applicable Law. The Landlord shall be entitled to allocate,acting reasonably, to the tenants of the Building, Carbon Offset Credits (net of allcosts of aggregating, auditing and certifying same, not otherwise included inOperating Costs) cleated with the participation of the Tenant and/or other tenants

in the Building.

(b) Where, as a result of energy consumption in the Building, the Landlord is

required to incur a Carbon Offset Cost, such Carbon Offset Cost shall be includedin Operating Costs and recoverable pursuant to the provisions of Section 6.5 ofthis Lease.

1.6 Determination of Compliance

Any issue in respect of the compliance of either party with the general objectives set out inSection 1.2 above or the specific objectives set out in Section 1.3 above shall be determined byan Expert as appointed by the Landlord, and the provisions ofSection 16.6 ofthe Lease to whichthis Schedule foms a part, shall apply to such Experl's determination. Such Expert shall advise,

in respect ofany question pertaining to the achievement ofa specific objective ofthe Building orthe Premises as to why the Building or the Premises, as the case may be, does not appear to be orhave achieved such objective or target, the Expert's perspective on the allocation ofresponsibility for such non-performance, and recommendations for improvement or ways inwhich the prescribed objective or target could be achieved.

SECTION 2 -ENVIRONMENTAL MANAGEMENT PLAN IMPLEMENTÄTION

2.1 The Tenant agrees to conduct its operations in the Building and within the Premises inaccordance with the foliowing provisions:


5l

(a) Comfortable, Healthy and Productive Indoor Environment

(Ð The Landlord shall be entitled at any time and fi'om time to time toundertake Greenhouse Gas production monitoring and testing, includingtesting within the Premises, on reasonable Notice to the Tenant andaccompanied by a representative of the Tenant if required, whichrepresentative Tenant agrees to make available.

(ii) The Tenant shall ensure that all work done within the Premises by theTenant or its representatives shall be undertaken in accordance herewithand with the Tenant Construction Manual. Notwithstanding the foregoing,the Tenant shall specify that all paints, sealants and adhesives used or tobe used within the Premises meet Ecologot, Gr""n SealrM, South CoastAir Quality Management Distlict ("SCAQMD') regulations, MPI GreenPerformancerM Standards or equivalent so as to ensure no or lowemissions of VOCs within the Building. Landlord may from time to timeconduct tests to measure VOCs within the Premises.

(iiÐ The Tenant shall have regard to the Tenant Procurement Guidelines inprocuring fi.rrniture, fixtures, materials, supplies and equipment to bebrought into the Premises.

(iv) Should the Tenant be permitted to undertake its own cleaning of, orwithin, the Premises, the Tenant shall require that in any cleaningcontracts granted directly by it, the cleaning contractor shall use cleaningproducts certiflred in accordance with EcologoM, Green Sealru orequivalent. The Landlord shall reserve the right to approve, actingreasonably, any such Tenant cleaning conhacts, but without liability. TheTenant shall ensure that any cleaning contracts entered into by it requirethe cleaning contractor to comply with elements of the EnvironmentalManagement Plan applicable to it. Particularly, any cleaning contracts letby the Tenant in respect of specialized green facilities, such as waterlessurinals, shall ensure the cleaning contractor properly understands and istrained on the maintenance of such specialized green facilities.

(v) At the Tenant's sole cost and expense, and subject to the approval oftheLandlord acting reasonably, the Landlord agrees to purge Building airduring a Tenant move in to minimize off-gassing of wallpaper, carpet andfrirniture glues and dyes.

(vi) OPTION.A,L: [In undertaking any work within the Premises, theTenant shall ensure that

(A) its contractors follow the air quality approach of the SheetMetal and Air Conditioning National Contractors Association("SMACNA') Indoor Air Quality Guideline for occupiedbuildings under construction, 1995 (Chapter 3) (or later) orCanadian equivalent standard as it may be amended orreplaced from time to time.

(B) filtration media for any air liltration required has a MinimumEffìciency Reporting Value ("MERV") of 8 as determined byASHRAE 52.2 - 1999, or Cânadian equivalent or as amendedfrom time to time and ensure that any such filtration media arereplaced after construction and immediately prior tooccupancy with filtration media having a MERV of 13.

(C) all paints and coatings achieve Green Seal's standard GS-l1 orCanadian equivalent requirement, all carpet meets the Carpetand Rug Institute ("CRI") Green Label Plus Carpet TestingProgram requirements, and any carpet cushion meets therequirements of the CRI Green Label Testing Program orCanadian equivalent,

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52

(D) sustainable cleaning chemicals shall meet the Green Seal GS-37standard or Canadian equivalerrt and carpet care productsshall meet the requirernents of GS-37 or Canadian equivalentand/or Ecologo CCD-1 48.

(E) floor finishers and strippers shall adherc to Green Seal'sstandard GS-40 or Canadian equivalent and/or Ecologo CCD-147.

(F) contractors shall reduce co¡rnected lighting power densitybelow that allowed by ASHRAE/IESNA Standard 90.f-2004(or later) by a minimum of l5o/"1.

(b) Reduce Indirect and Direct Energy Consumption and Greenhouse Gas Emissions

(i) The Tenant agrees to the installation of electricity snìart meters in lespectof the Tenant's consumption of electricity within the Premises, at theTenant's sole cost and expense, payable as Additional Rent under thisLease.

(ii) The Tenant shall take reasonable steps to minimize its electricalconsumption within the Premises such as, by way of example only,adopting conservation practices (e.g. reducing its use of lighting whereunnecessary); the use of ENERGY STAR equipment; the types oflighting, lighting switches, sensors and zones as may be specihed in theTenant Conshuction Manual; and using the types of equipment suggestedin the Tenant Procurement Guidelines or the REALpac Green Lease Guidefor Commercial Office Tenants.

(iii) The Landlord shall be entitled at any time or from time to time to acquire(A) all or part of the power for its Common Area and Facilities; or (B)shared electrical power from sources with low Greenhouse Gas emissions.In addition to the foregoing, where it is considered feasible to do so, theLandlord may install onsite generation capacity either to reduce peak loador to supplement base load requirements for the Building from time totime, and any incremental cost in so doing shall be included in OperatingCosts. Without limiting the generality of the foregoing, the Tenant shall,where available on commercially reasonable terms, ensure that equipmentpurchased for the Premises is ENERGY STAR cerlified where available.

(iv) The Tenant shall be entitled at any time or from time to time to specify inwriting that it wishes to have its electrical power consumption sourced orofßet from renewable energy sources, and if it shall elect to do so, the costof same shall be at the Tenant's sole cost and expense, either payabledirectly by it to the supplier so chosen, or recoverable by the Landlord ifpaid by the Landlord as Additional Rent.

(u) The Landlord shall be entitled to benchmark itself against any buildingrating system for electrical, natural gas, water or other resourceconsumption.

(vi) The Landlord shall operate Building Common Areas and Facilities inaccordance with, and use its reasonable efforts to cause other tenants tooperate in conformity with, the Environmental Objectives.

(vii) [Optional: The Tenant agrees to limit annual average consumption ofelectricity within its Premises to ffi watts per square foot, exclusiveof Building standard lighting and speciflc equipment which may beapproved by the Landlord in writing from time to time.l


53

(c) Reduce Water Consurnption

(i) The Tenant agrees to the installation of wate¡ meters or check rneters inrespect ofthe Tenant's consumption ofwater, at the Tenant's sole cost andexpense, payable as Additional Rent under this Lease.

(ii) Where potable water usâge is not a necessity, the Tenant acknowledgesand consents to the use of t¡eated recycleci or ireated natural water inwashrooms and in other applications within and around the Building.

(iii) The Tenant consents to rainwater collection, treatment and reuse by theLandlord and wastewater collection, treatment and reuse by the Landlordfrom time to time. The Tenant consents to the use of water-savingappliances, such as waterless urinals, and other equipment as may beotherwise consistent with the Environmental Objectives.

(iv) The Tenant shall ensure that any fixtures purchased for the Premises shallbe certified by the United States' Environmental Protection Agency'sWater Sense Program or a Canadian equivalent, if any, and follow theEnergy Policy Act of 1992 (or later amended), for water {ixtureperformance requirements, or Canadian equivalent, as referenced inrelevant LEED Reference Guides.

(d) Recycled Materials Usage and Waste Diversion

(Ð Tenant shall be entitled to use recycled materials in its LeaseholdImprovements and Alterations if so permitted either pursuant to the TenantConstruction Manual, or as may be consented to by the Landlord, actingreasonably. The Tenant agrees to consider locally extracted, harvested,sourced, and manufactured materials where possible in the completion ofLeasehold Improvements, consistent with the terms as set out in theTenant Construction Manual and the Tenant Procurement Guidelines.

(ii) Tenant shall be entitled to use recycled fumiture, fixtures and equipmentin the Premises to the extent consistent with the Environmental Objectivesand the Tenant Procurement Guide.

(iii) The Tenant agrees to recycle or reuse or cause its contractor to recycle orreuse as much as possible any waste created in the demolition of existingLeasehold Improvements or Alterations within the Premises so as tominimize the amount of waste ending in landfill. The Landlord reservesthe right to monitor and measure the amount of waste leaving the Buildingfrom the Premises and going to landfill from time to time. If available, theLandlord agrees to provide to the Tenant a staging area for the sorting andrecycling of materials during construction.

(iv) The Landlord may refuse to collect or accept from the Tenant's Premiseswaste that is not appropriately sorted into the appropriate recyclingcontainer.

(e) Tenant Certifications

(i) The Landlold will use commercially reasonable efforts to co-operate withthe Tenant, at the Tenant's sole cost, in the celtification of the Premisespursuant to any rating scheme, such as ASHRAE standa¡d 189.1, LEED-CI standard (as specified by the U.S. G¡een Building Council untiladopted by the Canada Green Building Council) or equivalent standal'd asthe Landlo¡d may agree to, acting leasonably.

(u) [Optional: The Tenant agrees to limit annual average consumption ofwater within its Premises to ffi litres per square foot of dentableArea of the Premises exclusive of consumption within Buildingstandard washrooms.l


54

(ii) Tenant agrees to provide all reasonable infomration required by tlieLandlord consistent with the accreditation or cefiifications contained inthe Environment Management Plan, in a form acceptable to the Landlold,acting reasonably, within l0 Business Days of request.

(Ð Extemal Environment

[OPTIONAL: The Tenant shall ensure that any exterior workundertaken by it shalì prevent loss of soil during construction, shallprotect any soil stockpiled for re-use, shall minimize soil erosion fromwind and water and shall prevent dust and air pollution due to windblowing over any such soil or other construction materials.l

SECTION 3 - ENVIRONMENTAL ASSESSMENT AND REPORTING

3.1 The Landlord and Tenant, acting reasonably and in good faith, agree to cooperate fi'orntime to time in determining compliance with the Environmental Objectives as set out in SectionI herein and in refining such Environmental Objectives from tirne to tirne. The Landlord and theTenant agree to meet at least ffi annually in order to determine and discuss the achievernent ofthe Environmental Objectives for the Building and the Premises and any further steps that couldbe taken to achieve the Environmental Objectives.

5954546.3

(i)


CURRENT TAX ISSUES AFFECTING REAL ESTATE

by

Howard J. Levine, Esq. Roberts & Holland LLP

Washington, District of Columbia

and

Joseph Lipari, Esq. Roberts & Holland LLP New York, New York

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NYSBA Fall 2014 ProgramAdvanced Real Estate

Current Tax Issues Affecting Real EstateHoward J. Levine

Joseph LipariProposed Regulations under Sections 707 and 752

On January 30, 2014, the IRS issued a Notice of Proposed Rulemaking1 including

Proposed Regulations under Internal Revenue Code ("IRC") sections 707 (disguised sales) and

752 (allocations of liabilities) of the.2 The Proposed Regulations are primarily focused on

limiting the use of debt financed distributions by taxpayers to avoid the impact of the disguised

sale rules of section 707(a)(2)(B). The proposed section regulations have much broader impact,

however and, if adopted in the form proposed, will impact large numbers of transactions.

Background

To understand the reason for the proposal, it is helpful to set forth the

circumstances under which debt financed distributions are employed. They are a common

feature of UPREIT3 transactions. An UPREIT structure is one wherein a real estate investment

trust ("REIT") holds all of its real estate assets through an operating partnership (an "OP") that

the REIT controls. An owner of real estate with, for example, a gross fair market value of $20

million and debt of $5 million may transfer his real estate to an OP in exchange for $15 million

of "Units" (i.e. partnership interests) in the OP. Such a transaction is tax deferred under section

721.4 A property owner, however, will often want to receive a portion (often a large portion) of

1 Notice of Proposed Rulemaking, 79 Fed. Reg. 4826 (Jan. 30, 2014) (hereinafter the "NOPR"), published in Internal Revenue Bulletin 2014-8.

2 Unless otherwise stated, all section citations are to the Internal Revenue Code of 1986, as amended, or the regulations thereunder.

3 Which stands for "umbrella partnership real estate investment trust."

4 In contrast, a transfer of real property to the REIT in exchange for stock in the REIT is generally not tax deferred due to limitations in section 351. In order for a transferor's transfer of real property directly to the REIT to be tax deferred, the transferor would need to control 80% of the vote and value of the REIT's stock after the transfer. See sections 351(a), 368(c). Section 721 imposes no control requirement for tax deferral with respect to transfers of property to a partnership (such as an OP).

2{00327065-5}

the net value of his property in the form of cash. If the OP simply pays cash to the owner, the

transaction will be taxable as a "disguised sale" under section 707(a)(2)(B).

To avoid gain, UPREIT transactions involving the payment of cash to the

property owner are often structured by having the OP borrow funds (either by way of a mortgage

on this or other OP-owned properties or by drawing down on its line of credit) and distributing

these funds to the property owner. Such a distribution will be tax deferred only if the funds

borrowed by the OP are allocable, under section 752, to the property owner. Since the property

owner has only a miniscule percentage interest in the OP, nonrecourse debt will not ordinarily be

allocable to the owner under the applicable section 752 regulations (discussed in more detail

below). If, however, the distribution is funded with recourse debt, and if the property owner is

the partner with the "economic risk of loss" for such debt, the debt will be allocable to the

property owner5 and the distribution will be tax deferred, as the property owner will not have

received a cash distribution in excess of his basis in the OP.6

To accomplish this allocation of the debt, it is necessary for the property owner to

guarantee the loan. Understandably, a property owner is not interested in making a guarantee

that has material economic risk to him since he often could have borrowed funds on a

nonrecourse basis without transferring ownership to the OP in the first place. To accommodate

the property owner's desire for a guarantee with less economic risk, practitioners developed the

concept of a "bottom guarantee." Go back to our example above in which the property owner

transfers property with a net value of $15 million to the OP in exchange for Units. Assume that

the objective of the owner is to receive $10 million in cash. The OP can refinance the mortgage

of the property contributed increasing the amount of the mortgage from $5 million to $15 million

and generate $10 million of net refinancing proceeds which it can distribute to the property

owner. The owner can guarantee the bottom $10 million of the mortgage. Under a bottom

guarantee, the lender can only require a payment from the guarantor if the lender obtains less

than $10 million on a foreclosure sale of the property. Thus, although the lender is lending 75

percent of the gross value of the property, the guarantee only guarantees debt equal to 50 percent

of the gross value of the property. The guarantor's risk can be reduced further if the OP packages

5 Reg. section 1.752-2(a).

6 Section 731(a)(1).

3{00327065-5}

the contributed property with other properties and borrows the $10 million against the group of

properties. In that event, the bottom guarantee may only guarantee, for example, the bottom 10

or 20 percent of the loan, in which event the economic risk is almost nonexistent. In most if not

all of these cases, the lender is indifferent as to whether or not the guarantee is given since the

lender is relying solely on the assets of the partnership to secure the loan.

Relevant Statutory Provisions

Section 721(a) provides that recognition of gain does not occur upon the

contribution of property by a partner to a partnership. Section 731(a)(1) provides for

nonrecognition of gain on the distribution of property by a partnership to a partner.7 However,

section 707(a)(2)(B), enacted in 1984, provides that in the case of "disguised sale," the ordinary

principles of sections 721 and 731 do not apply and the partner must recognize gain on the

transaction. Distributions made to a partner in connection with of a contribution of property by

the partner will generally be treated as a "disguised sale" if, when viewed together, they are

"properly characterized as a sale or exchange of property."8

Existing Regulations

The existing regulations under section 707 provide for a "facts and

circumstances" analysis to determine whether a contribution to a partnership and a distribution

from the partnership together constitute a disguised sale.9 The regulations provide a presumption

that a distribution made by a partnership within two years of a property contribution is a

disguised sale.10 The regulations provide exceptions to disguised sale treatment. In this context

the most relevant exception is that a distribution is not considered part of a disguised sale if (i)

the cash distributed to the contributing partner is traceable to the cash borrowed; (ii) the

partnership distributes the cash within 90 days of borrowing; and (iii) the debt is properly

7 Except in the case of cash or marketable securities distributed in excess of the taxpayer's basis in the partnership.

See section 731(a)(1), (c).

8 Section 707(a)(2)(B).

9 Reg. section 1.707-3(b).

10 Reg. section 1.707-3(c).

4{00327065-5}

allocable to the partner receiving the cash under section 752 and the regulations thereunder.11

The theory of this regulation is the same theory that applies to the receipt of loan proceeds by the

owner of real estate. A borrowing is generally not treated as a sale of the property because the

taxpayer is obligated to repay the debt.

The question then becomes, "How do the current regulations enable a bottom

guarantee to be effective?" For those of you interested in ancient history, when we started

practicing in the 1970's, Reg. section 1.752-1(e), which was adopted in 1956, set forth the rules

on allocations of debt among partners. It consisted of one paragraph of three sentences, as

follows:

Partner's share of partnership liabilities. A partner's share of partnership liabilities shall be determined in accordance with his ratio for sharing losses under the partnership agreement. In the case of a limited partnership, a limited partner's share of partnership liabilities shall not exceed the difference between his actual contribution credited to him by the partnership and the total contribution which he is obligated to make under the limited partnership agreement. However, where none of the partners have any personal liability with respect to a partnership liability (as in the case of a mortgage on real estate acquired by the partnership without the assumption by the partnership or any of the partners of any liability on the mortgage), then all partners, including limited partners, shall be considered as sharing such liability under section 752(c) in the same proportion as they share the profits.

The regulations distinguished between recourse and nonrecourse debt and set

forth different rules for each category, concluding reasonably in most cases that recourse debt

should be shared in accordance with loss allocations and nonrecourse debt should be shared in

accordance with profit allocations. Over time, as partnership transactions became more

complicated, Treasury and the IRS felt the need to elaborate on many of these issues. In

addition, the 1984 Tax Reform Act overruled12 the Court of Claims decision in Raphan v. United

States,13 which held that a partner who guaranteed partnership debt was not personally liable for

11 Reg. section 1.707-5(b), (f), ex. (10).

12 See section 8.A of the NOPR.

13 3 Ct. Cl. 457 (1983), aff'd in part, rev'd in part 759 F.2d 879 (Fed. Cir. 1985) (the Federal Circuit reversed with respect to the issue at hand).

5{00327065-5}

such debt. The Act directed Treasury to prescribe regulations relating to the treatment of

guarantees.14

In 1991, new regulations under section 752 were promulgated,15 and unlike the

earlier version, cannot be printed due to space limitations. The important point to keep in mind

is that the regulations define nonrecourse debt as debt for which no partner nor person related to

a partner has economic risk of loss ("EROL").16 If the debt is nonrecourse to the partnership, but

a partner (or person related to that partner) bears any EROL with respect to such debt, then such

debt or the portion thereof was treated as partner nonrecourse debt.17 Partner nonrecourse debt

was required to be allocated to the partner who bore the EROL.18 A partner would have EROL if

such partner (or a person related to that partner) either made a loan to the partnership or

guaranteed a third party loan and did not have a right of reimbursement from other partners.19

More significantly, the regulations adopted a simple if unreasonable explanation

of how to determine whether or not a partner had an EROL. The regulations provided that, for

this purpose, it is assumed that all assets of the partnership, including cash, are disposed of for

zero consideration.20 The only exception from the zero consideration assumption is for assets

that secure debt for which the lender has no other recourse; such assets are deemed disposed of

for the amount of the debt they secure.21 If, under these assumed circumstances, the partnership

lenders have any rights to collect any sums from any of the partners or related persons, such

partners have EROL for the amount they would be obligated to pay. The amount of debt would

then be allocable to such partner.22

14 See section 8.A of the NOPR.

15 Adopted by T.D. 8380 (Dec. 23, 1991).

16 Reg. section 1.752-1(a)(2).

17 Reg. section 1.704-2(b)(4).

18 Reg. section 1.752-2(b).

19 Reg. section 1.704-2(b)(4).

20 Reg. section 1.752-2(b)(1).

21 Reg. section 1.752-2(b)(1)(ii) and (iii).

22 Reg. section 1.752-2(b)(5).

6{00327065-5}

The ability to utilize a bottom guarantee to avoid disguised sale treatment, thus, is

a direct result of this simplistic choice in the regulation. If all of the assets of a partnership are

assumed to be worthless, any partner guarantee, no matter how unlikely to be enforced, is

considered to be a real liability. Notably, in addition to the assumption that the partnership can

pay none of its liabilities, the regulations assume that all partners and related persons who are

obligated on partnership debts can perform those obligations, irrespective of their net worth,

absent facts that indicate a plan to circumvent the obligations.23

Prior IRS Attempts to Limit the Perceived Abusive Use of Guarantees

Prior to the issuance of the proposed regulations in January, the government had

taken two steps to limit debt financed distributions claimed to be exempt from the disguised sale

rules. First, Treasury issued regulations on guarantees by disregarded entities. These regulations

were meant to deal with the situation where a partner in a partnership held its interest through a

wholly owned LLC that was disregarded for income tax purposes. If a disregarded entity with

no assets other than its partnership interest guarantees partnership debt, in theory funds could be

distributed tax free under the debt financed distribution rules to the disregarded entity and then to

the partner with no economic risk. To stop that abuse, the IRS issued regulations in 2006

providing that disregarded entities would only be treated as having an EROL in an amount equal

to their net worth, which regulation provides elaborate rules setting forth the timing and

methodology of computing the net worth of disregarded entities.24 Nevertheless, this regulation

is so easy to work around (by creating entities that are not disregarded) that it is unlikely this

regulation had any material impact.

More significantly, the IRS successfully litigated Canal Corp.,25 a large case using

the anti-abuse exception to the rule that presumes that guarantors (or indemnitors) will be able to

perform their obligations mentioned earlier. In Canal Corp., taxpayer's subsidiary was a partner

in a joint venture (the "JV"),26 which made a debt financed distribution to the subsidiary. Prior

23 Reg. section 1.752-2(b)(6).

24 Reg. section 1.752-2(k), adopted by T.D. 9289 (Oct. 10, 2006).

25 Canal Corp. v. Commissioner, 135 T.C. 199 (2010). See, similarly, CCA 201324013.

26 The joint venture was a partnership for income tax purposes.

7{00327065-5}

to the distribution, the subsidiary gave an indemnity to the other partner in the JV, who had

guaranteed the JV's debt. The subsidiary's only substantial asset (other than the partnership

interest) was a promissory note from its parent corporation, the ultimate recipient of the

distributed funds.27 The net worth of the subsidiary (excluding its interest in the JV) was

approximately 21 percent of the amount of the indemnity, an amount that the taxpayer's tax

advisors considered sufficient to avoid being disregarded. However, the Tax Court concluded

that the indemnity could be disregarded on several grounds, most notably that there was no

requirement that the subsidiary maintain any net worth (it could have canceled or distributed the

note to its parent).

Impact of Proposed Regulations on Characterization of Debt

The January 2014 proposed regulations reflect in many ways an almost complete

reversal of the approach taken in the current regulations. In general, the proposed regulations

revert to the view of the original 1956 regulations that partnership debts are paid out of

partnership profits and that profit allocations are the most relevant criteria for determining how

to allocate partnership liabilities.

More significantly, the proposed regulations largely eliminate the use of

guarantees by imposing requirements that will be impossible to meet even in those cases where a

lender insists that partnership debt be guaranteed. A partner or related person will be treated as

having an obligation to pay a partnership liability only if it satisfies the following (among other)

requirements:28

(1) The partner must be required to maintain a commercially reasonable net worth

throughout the term of the payment obligation or be subject to commercially

reasonable restrictions on transfers of assets for inadequate consideration;29

(2) The partner or related person must be required periodically to provide

commercially reasonable documentation of its net worth;30

27 The subsidiary also owned a corporate jet.

28 See generally Prop. Reg. section 1.752-3(b)(3)(ii).

29 Prop. Reg. section 1.752-3(b)(3)(ii)(A).

30 Prop. Reg. section 1.752-3(b)(3)(ii)(B).

8{00327065-5}

(3) The partner's payment obligation does not end before the term of the partnership

liability31

(4) The partnership or some other party may not be required to hold liquid assets in

excess of its reasonable needs32

(5) The partner receives arm's length consideration for entering into the guarantee33

(6) The partner's obligation may not be subject to reimbursement or indemnification

by another party, whether or not a partner or related person, even if the obligation

of the other party is insufficient to cause such debt to be allocable to such other

partner.34

In practice, these requirements will result in disregarding virtually all guarantees,

even those undertaken for commercial purposes. Requirement (2) that the guarantee obligation

remain in place for the entire term of a loan is more restrictive than most guarantees which burn

off when the debtor satisfies certain economic criteria (e.g. completion of construction, payment

of rent by tenant, etc.). Requirement (4) is generally considered problematic. Guarantee fees are

rarely paid and it is not clear whether the partnership interest obtained by a developer for, among

other things, guaranteeing a loan would satisfy this requirement.

Requirement (5) is designed to eliminate bottom guarantees but does so in a way

that eliminates any horizontal slice guarantee other than the top slice. As an example, the

proposed regulations provide that if one partner, A, guarantees $300 of a $1,000 partnership debt

and another partner, C, agrees to indemnify A for $50 if A pays on its guarantee, C is considered

to have the economic risk of loss on $50 but A is considered not to have any economic risk of

loss and the remaining $950 of debt is considered nonrecourse debt for debt allocation

purposes.35

31 Prop. Reg. section 1.752-3(b)(3)(ii)(C).

32 Prop. Reg. section 1.752-3(b)(3)(ii)(D).

33 Prop. Reg. section 1.752-3(b)(3)(ii)(E).

34 Prop. Reg. section 1.752-3(b)(3)(ii)(G).

35 Prop. Reg. section 1.752-2(f), ex. (11).

9{00327065-5}

Overall it is rare that a guarantee in a normal commercial real estate transaction

will satisfy these requirements and be treated as creating EROL for purposes of the proposed

section 752 regulations. Consequently, almost all third party real estate mortgages would be

treated as nonrecourse debt regardless of the possibility that a portion of that debt may under

various circumstances be borne by one or more of the partners or the likelihood of that occurring.

Effect of Proposed Regulations on Allocations of Nonrecourse Debt

In addition to causing most real estate debt to be characterized as nonrecourse, the

proposed regulations would appear to change substantially how partnerships allocate such

nonrecourse debt among its partners. We used the phrase "appear to" because, frankly, we do

not see how tax preparers will be able to comply with the proposed allocation provisions.

To appreciate the issue, it is helpful to review the existing section 752 regulations

governing allocations of nonrecourse debt.36 As a general matter, the regulations reflect the

common understanding that allocations of pure nonrecourse debt (i.e. debt for which no partner

nor related person has EROL) are basically arbitrary as only the third party lender bears any

economic risk. The regulations are largely designed to cause partnerships to coordinate debt

allocations with corresponding allocations of income and deductions. The regulations do this by

setting up three tiers of allocations. First, nonrecourse debt is allocated to correlate to future

allocations of partnership minimum gain (i.e. gain attributable to the excess of the nonrecourse

debt over the tax basis).37 For example, a partnership agreement between a developer who

contributes 1 percent of the capital and a money partner who contributes 99 percent of the capital

may provide that, once the capital accounts of the partners are reduced to zero by means of losses

or distributions, further nonrecourse deductions will be allocated 50 percent to each (their

ultimate profit percentages once certain IRR hurdles are satisfied). Since, in this case, the

deductions are allocable 50/50 each partner will be allocated 50 percent of the nonrecourse debt.

A similar result would exist if, under the partnership agreement, excess loan proceeds were

distributed 50 percent to each partner.

36 Reg. section 1.752-3.

37 Reg. section 1.752-3(a)(1).

10{00327065-5}

The second tier of allocations is an amount equal to the gain (generally referred to

partner minimum gain) that would be allocated to a partner by reason of either (i) a section

704(c) allocation with respect to property contributed by the partner to the partnership; or (ii) a

so-called reverse 704(c) allocation with respect to a revaluation of partnership property.38 Since

the book value of partnership property upon contribution or certain other events is increased to

its agreed value, such property does not have partnership minimum gain (i.e. the book value is

not less than the amount of the mortgage). To avoid triggering gain to the partners who will

have section 704 allocations, the second tier regulation allocates them sufficient debt.

The third tier allocations is in accordance with the partnership's allocations of

profits (or by certain other methods). 39 This regulation, however, provides a partnership with

substantial flexibility in determining how to allocate this third tier. In particular, so long as the

allocation of profits for purposes of purposes of allocating nonrecourse liabilities are consistent

with an allocation of "some other significant item of partnership income or gain," the

agreement's allocation will be respected. In practice, partners are generally considered to have

wide latitude in determining the allocation of profits for purposes of allocating nonrecourse

liabilities under the third tier. Thus, in the example we gave above, the partnership could

allocate the third tier debt 99/1, 50/50, and in many cases somewhere in between those

percentages.40 As an alternative, excess nonrecourse liabilities may also be allocated among the

partners in accordance with the manner "in which it is reasonably expected that the deductions

attributable to those nonrecourse liabilities will be allocated."41 As an additional alternative,

since 2000, the Regulations have specified that a partnership may first allocate an excess

nonrecourse liability to a partner up to the amount of built-in gain that is allocable to the partner

on section 704(c) property subject to the nonrecourse liability (to the extent that this nonrecourse

38 Reg. section 1.752-3(a)(2).

39 Reg. section 1.752-3(a)(3).

40 Although Reg. section 1.752-3 does not specify that an allocation of excess nonrecourse liabilities in the range between allocations of "significant items" is permissible, the regulation on allocation of nonrecourse deductionsdoes. Reg. section 1.704-2(m), ex. (1)(ii), specifically allowed allocations of nonrecourse deductions in any ratio between 90/10 and 50/50 where there were allocations of significant items of tax at 90/10 and 50/50 ratios.

41 If a partnership uses this method of liability allocation for purposes of section 752, the method apparently would apply for disguised sale purposes as well.

11{00327065-5}

liability was not already allocated to the partner under the second tier).42 This change was meant

to avoid gain recognition to a contributing partner as the amount of section 704(c) gain (and

correspondingly the amount of second tier debt) burns off due to depreciation deductions with

respect to the contributed property taken after the contribution.43

The proposed regulations would eliminate the provisions of the third tier

allocation, which provide flexibility in determining the share of profits and deductions.

Although the regulation as amended would still provide that the third tier is allocated in

accordance with profits (or in accordance with 704(c) or reverse 704(c) gain not allocated under

the second tier), the elimination of discretion is likely to create substantial confusion in all cases

where profits are not done on a simple percentage basis. The proposed regulations eliminate a

partnership's ability to allocate excess nonrecourse debt in accordance with a "significant item"

of tax, or in a manner that "in which it is reasonably expected that the deductions attributable to

those nonrecourse liabilities will be allocated."

Instead, the proposed regulations substitute in a method whereby excess

nonrecourse deductions are allocated in accordance with profits under a liquidation value

approach.44 Under such liquidation value approach, the profits are periodically tested based on

assumptions of how distributions would be made if the partnership were liquidated on the testing

dates (i.e. the dates of formation and the dates when partnership book revaluations could occur

even if they are not made). This relief provision will not help most partnerships that do not

regularly have revaluation events.

In general, most accountants preparing partnership tax returns do not spend a

great deal of time parsing the terms of the partnership agreement or the existing regulations.

Rather they take a practical approach and report debt allocations in accordance with a simple

overriding principle; any partner with a negative tax capital account must be allocated sufficient

partnership debt to avoid gain recognition. Under the existing regulations, most accountants and

42 Adopted by T.D. 8906 (Oct. 31, 2014).

43 This method of allocation of nonrecourse debt is not available when allocating debt for purposes of the disguised sale rules under section 707.

44 Prop. Reg. section 1.752-3(a)(3).

12{00327065-5}

lawyers could feel comfortable that, one way or another, the debt allocation made is permissible.

Under the proposed regulations, it will be far harder to do so.

Effective Dates

In general the proposed regulations are effective with respect to debt incurred

after the regulations become final.45 To avoid triggering gain attributable to a change in the

character of debt incurred prior to the effective date, the regulations proposed with respect to

EROL and guarantees set forth a seven year transition period.46 There is no transition period for

the proposed disguised sale regulations or the proposed changes to the allocation of excess

nonrecourse liabilities.

Recent IRS Informal Announcements

In recent weeks word has come out that the IRS is looking for ways to limit the

impact of the proposed regulations, for now, to disguised sales under section 707 rather than

apply the proposed regulations generally under section 752.

45 Prop. Reg. sections 1.707-9(a)(1), 1.752-2(l)(1), 1.752-3(d).

46 Prop. Reg. section 1.752-2(l)(2)(i).

SIGNIFICANT DEVELOPMENTS IN LIKE-KIND EXCHANGES

by

Howard J. Levine, Esq. Roberts & Holland LLP

Washington, District of Columbia

and

Joseph Lipari, Esq. Roberts & Holland LLP New York, New York

SIGNIFICANT DEVELOPMENTS IN LIKE-KIND EXCHANGES*

New York State Bar Association Advanced Real Estate Practice

December 5, 2014

Howard J Levine, Esq. Joseph Lipari, Esq.

Roberts & Holland LLP Washington, D.C. and New York, N.Y.

202-293-3408

I Like Kind Property

A. Real Estate

1. PLR 200842019

Query whether a taxpayer can use exchange funds to enter into a new 30 year lease with no future annual rent. In my view, this should not qualify, although some practitioners believe it does on the basis of language in Rev Rul 66-209 and are citing PLR 200842019 to support that conclusion. That ruling involved (among other issues) a taxpayer who transferd his leasehold interest (I am assuming there was 30 years remaining including options, but I cannot tell from the redacted PLR), including tax ownership of improvements that were constructed, in exchange for a new lease on a new building (again, I am assuming there was at least 30 years, although I cannot tell from the redacted PLR), which included improvements to be constructed for the exchange. The IRS concluded this it was a good exchange without any discussion about the significance of taxpayer being treated as the owner of the improvements for tax purposes (the IRS appeared to think that the taxpayer will be the owner of a portion of the improvements because a portion was being funded by the buyer of taxpayer's relinquished property - the rest was being funded by the new landlord) and without requiring any allocation of the exchange proceeds between the improvements and the amount allocable to the ground lease.

Among other questions, one has to wonder (a) whether the use of the QI was significant here, i.e., would the IRS have issued a favorable ruling on this issue if a QI was not used, (b) why no allocation was required, (c) whether the result would be different if a fee, rather than a lease, was being transferred, (d) whether it mattered if taxpayer was (or was not) the owner of any portion of the improvements for tax purposes, and (e) whether this ruling is consistent with the IRS's position on an exchange of a fee interest for improvements (assuming there was premium value to new lease).

2. Improvements

The IRS has asserted at public forums, and in the February, 2008 Fact Sheet on Like-Kind Exchanges Under IRC Code Section 1031 (which was part of the IRS Tax Gap series) that land can never be considered like kind to improvements, apparently relying on language (taken out of context) in Rev Rul 67-255 (dealing with the inability to use condemnation proceeds to build improvements on land already owned). This blanket statement is erroneous. In a situation where the Bloomington Coca-Cola rationale would not be applicable (i.e., the taxpayer is not simply paying for services rendered) and the transferor to the taxpayer would, under substantive principles of tax law, be considered the owner of the improvements, there is no support for the proposition that, as a matter of law, improvements cannot be like kind to a fee interest in land. This can be readily seen in the following example: Assume A leases vacant land to B for more than 30 years. The terms of the lease are such that B may, but is not required to, construct improvements at his expense and B may modify, replace or just tear down the improvements at any time. The lease states that B will be the owner of any improvements created and he will be

the person entitled to depreciate the improvements. The lease rentals are at fair rental value and do not, and will not, reflect any value attributable to any improvements. B builds improvements, which are considered an interest in real estate under local law. The following year, when there are still more than 30 years remaining on the lease,1 B transfers the improvements, subject to the ground lease, to C, an unrelated Taxpayer, who acquires the improvements as replacement property in an exchange in which he transfers fee title to an office building. The rental payments C is required to make to A are still at fair rental value, i.e., there has been no appreciation in the value of the land itself. Is there any doubt in this example that C has acquired property that is like kind to the office building transferred? Clearly, the answer is no. Furthermore, since C is still paying fair rental value for the lease of the land, there also cannot be any doubt that the payment made by C (through the QI) to acquire the property was all attributable to the improvements, not the lease of the land. a. Compare with the PLR discussed above. b. PLR 200901004 - In what only can be described as a strange ruling, the IRS held that a like kind exchange occurred where the buyer of taxpayer's property constructed a facility (as the replacement property) on land over which the right of way easements were owned by the taxpayer. Taxpayer assigned the easements (on a non exclusive basis) to the buyer to permit him to build the facility. At the end of the exchange, the taxpayer preserved all the rights he had in the easements. Both the facility transferred by the taxpayer in the exchange and the replacement property facility consisted of real estate and personal property. The ruling, which was limited to the non real estate and focused only on how the multi-asses exchange rules work, completely ignored the issue of the impact, if any, of the facility being built on land over which the taxpayer had a right of way easement, and any possible DeCleene issue. However, the ruling states at the end that it is being issued "subject to all other requirements of section 1031 not specifically addressed in this letter." 3. Development Rights a. PLR 200805012 - This PLR involved the acquisition of Development Rights (“DTR's”) as replacement property where the holding of the rights permitted the taxpayer to develop the property with greater "floor space" or "floor area." The DTR's were purportedly "as of right," and not discretionary with any city agency, despite the fact that they require, as a condition to the transfer of the DTR's, (a) the recording of certain easements as required by the City, and (b) evidence of such filings and City Planning Department approval submitted to the City. In determining whether the development rights are real property, the IRS recognized that the local law was not clear or even consistent but looked primarily at the classification for local state tax law purposes.

1 It is not at all clear that “more than 30 years remaining” is required to prove the point, but we am assuming that to be the case so as to avoid an extraneous debate.

Taxpayer represented that it will receive no tax credits or "direct" incentive of any kind from the Sate or the City in connection with the transaction. The rights were not expressly in perpetuity but the IRS assumed they were because they were "as of right" and not discretionary (??) and there was a deed transfer of the rights. The DTR's were transferred to property already owned by the taxpayer. The IRS analogized this to the acquisition of a leasehold interest on land already owned by the taxpayer, which the IRS approved in Rev Rul 68-394. The IRS did not, however, explain why this is not more similar to the acquisition of improvements on land already owned by the taxpayer which the IRS would presumably say is not like kind based on Rev Ruls 67-255 and 76-391 (and not just based on the rationale of Bloomington Coca-Cola). b. Similarly, see PLR 200901020 – Development rights were both transferred and received and was subject to approval by the County. The rights received were to be used, in part, on land already owned by the taxpayer. c. In both of these rulings, it appears that being able to file with the county a new perpetual, restrictive covenant, which confirmed the decreased density in the property retained, was very important to reach the conclusion. 4. ILM 201238027 (April 17, 2012) Gas pipeline that is treated differently for local law purposes in each state is real estate for Federal tax purposes and are like kind to each other. Similarly, steam turbines treated differently under local law are like kind to each other, although are personal property for Federal tax purposes. The definition of "tangible personal property" under the section 48 regulations was deemed relevant for purpose of classification, as was section 1245. What does this say about cost seg studies and section 1031?

B. Intangibles

1. ILM 200911006

In FAA 20074401 and TAM 200602034, the IRS said that newspaper mastheads, subscriber relationships, advertiser relationships and trademarks were so closely related to goodwill or consist of goodwill that they fall within the per se rule excluding goodwill from being treated as a like kind property. (Treas. Reg. §1.1031(a)-2(c)(2)). Historic definition of goodwill based on “customers returning to the old place of business” versus modern definition of goodwill as a residual value, determined only after allocating value to intangible assets that can be separately identified and valued. 338/1060 allocation regs; 1.367(a)-1T(d)(5)(iii) definition of foreign goodwill; Newark Morning Ledger; Ithaca Industries: “It is no longer appropriate to classify an intangible asset based on its resemblance to the classic conception of goodwill or going concern value”; section 197.

a. This was not consistent with Newark Morning Ledger and Code §197 which

recognizes trademarks and tradenames as assets separate from goodwill. b. What is the rationale for the goodwill regulation providing the per se rule that

goodwill and going concern value are never like kind? What if the businesses exchanged are in the identical business? What about 50 years of IRS rulings to he contrary?

c. Was very likely to be litigated (there was a case pending which was settled).

d. Compare PLR 200823014, which held that income generated from the sale of goodwill (together with real estate assets) will be treated the same as the income generated on the sale of the real estate for purposes of determining REIT qualification. ILM 200911006 (Feb 19, 2009) was a complete reversal from the IRS's prior position. The IRS now says that “except in rare and unusual situations, intangibles such as trademarks, trade names, mastheads and customer based intangibles can be separately described and valued apart from goodwill.”

II RELATED PARTY EXCHANGES A. PLR’s 200810016 and 200810017 In a prior PLR (PLR 200440002), the IRS permitted a taxpayer to purchase replacement property from a related party where the related party did its own exchange and both parties held onto their properties for two years. The rationale of the ruling was that neither party cashed out of their investments. The IRS took this a step further in PLR 200616005.2 There, a trust and an S corporation were related parties within the meaning of §1031(f)(3). The trust owned Building A and the S corporation Building B. The trust wanted to exchange Building A for Building B and avoid gain recognition. The trust and S corp. entered into an exchange agreements with a QI. Pursuant to the exchange agreement, the QI was treated as transferring Building A to the buyer and acquiring Building B from the S corp. and transferring it to the trust in exchange for Building A. Since the proceeds from the sale of Building A exceeded the cost of Building B, the QI transferred the excess cash, i.e., boot, to the trust. The QI, pursuant to the S corporation’s exchange agreement, acquired replacement property from an unrelated party and transferred it to the S corporation in exchange for Building B.

2 December 22, 2005

The Service ruled that §1031(f) would not apply to either exchange provided both trust and S corporation did not dispose of their respective replacement properties within two years of each properties’ receipt. Trust was required to recognize gain on the cash it received from the QI. The ruling is significant because the Service held that trust’s related-party exchange qualified even though the trust partially cashed out of its investment in Building A. In PLR’s 200810016 and 200810017, the Service took this even further by permitting the related party to retain cash boot. In PLR 201048025, the IRS permitted three successive related party exchanges. This could certainly be used as a means of extending the 180 day period.C:\Users\gbucciero\AppData\Local\Microsoft\Windows\Temporary Internet Files\Content.Outlook\R08FZFYL\UrlBlockedError.aspx The other interesting parts of the ruling are (a) the IRS is now saying that no "material" amount of cash can be retained (whereas in the prior rulings it said no cash can be retained, even though there was some cash retained), and (b) the IRS did not dispute the taxpayer's treatment of unamortized prepaid rent as a liability assumed by the buyer - the taxpayer cited the regulations under 467 for this purpose. See also LTR 201216007 (January 9, 2012).

B. PLR 200709036 This ruling involved the purchase of property from the taxpayer REIT by a related taxable REIT subsidiary ("TRS"), which would subdivide and develop the property and sell most, or all, of it within two years. The IRS held that the related party exchange rules of 1031(f)(4) were not applicable because the taxpayer did not purchase property from the TRS (despite the TRS's intent to develop and sell the property). See also LTR 200712013 and LTR 105512-07 (April 12, 2007). Query whether the ruling could be used to avoid the time restrictions and/or cost of an EAT. So, for example, the related party purchases the relinquished property in a simultaneous exchange with the taxpayer (who receives the replacement property) and then sells the relinquished property whenever it can (even if it is more than 180 days). However, in PLR 201027036, the IRS permitted (in a very convoluted ruling) a related party to acquire relinquished property from a related party where the plan was to sell it within two years. In the prior PLR involving a REIT, the IRS permitted a TRS to acquire property from the REIT and immediately subdivide and sell the property, on the theory that 1031(f) does not apply to the acquisition of relinquished property by a related party. This PLR does not mention that analysis at all and instead appears to permit the exchange because allegedly high basis property was not exchanged for low basis property in anticipation of the sale of the low basis property. The PLR does not state the bases of the properties. Query whether this means there is no blanket exception to 1031(f) simply because a related party is acquiring relinquished property.

C Teruya Brothers, Ltd & Subs. v. Comr. This Tax Court decision3 involved two separate exchanges, the Ocean Vista exchange and the Royal Towers exchange. The Ocean Vista exchange involved the transfer of land underlying condominiums. The taxpayer leased the land to a third party which in turn leased the property to a condominium association. The condominium association desired to acquire title to the land. The taxpayer agreed to sell the property to the condominium association provided it was part of a like-kind exchange for a property owned by Times Super Market, Ltd. ("Times"), which was owned 62.5% by taxpayer. Taxpayer entered into an exchange agreement with a QI. The QI agreed to acquire the replacement property with the funds from the sale of the Ocean Vista land and additional funds provided by taxpayer. Taxpayer sold the land to the Association for $1,468,500. It had a basis in the property of only $93,270. Taxpayer provided an additional $1,366,056 to the QI which acquired Kupouhi II, the replacement property, for $2,828,000. Times had a basis of $1,352,639 in Kupouhi II and therefore recognized a gain of $1,352,639 on the sale. In the second exchange, taxpayer transferred the Royal Towers apartment building to Savio Development Co. (“Savio”). Taxpayer and Times agreed that taxpayer would acquire Kupuohi I and Kaahumanu, two parcels of real property owned by Times. Pursuant to the exchange agreement, taxpayer transferred Royal Towers, in which it had a basis of $670,506, to Savio for $11,932,000, with the funds paid to the QI. Taxpayer also transferred $724,554 in additional funds to the QI. The QI acquired from Times the Kupuohi I property for $8.9 million and the Kaahumanu property for $3.73 million. Times realized a loss of $6,453,372 on the transfer of Kupuohi I but since Taxpayer and Times were related parties, it could not recognize the loss under §267. Times realized and recognized a gain of $2,227,040 on the sale of Kaahumanu. The IRS argued that the exchanges ran afoul of §1031(f)(4) and the Tax Court agreed. It found that the transactions were economically equivalent to direct exchanges between taxpayer and Times, followed by Times' sale of the properties to third parties. According the Court, Taxpayer's counsel provided no explanation for utilizing a QI. The Court concluded that the exchanges were structured using a QI for the purpose of avoiding the §1031(f) restrictions and as a result, §1031(f)(4) applied. The case is significant because contrary to the prior position of the Service, the Tax Court and the Service seemed to agree that for purposes of the special holding requirement rule in §1031(f)(1), the QI is not considered an agent of the taxpayer and that only §1031(f)(1) applies to direct related party exchanges. The Service had previously claimed it could pick and choose between §1031(f)(1) and §1031(f)(4). The Court rejected the Service's assertion that if an exchange would fail under §1031(f)(1) if it were recast as a direct exchange without the QI, it must fail under §1031(f)(4).

3 124 T.C. 45 (2005).

At the oral hearing, DOJ made arguments inconsistent with IRS position (i.e, litmus test not relevant; interposition of QI not relevant). On September 8, 2009, the Ninth Circuit affirmed the Tax Court. However, is so doing the Court said in a footnote that the loss of NOL’s by the related party might have been relevant if it equal or exceeded the tax that the taxpayer deferred. However, the taxpayer did not make that argument. D. IRS Litmus Test

1. IRS National Office officials have stated publicly that they will apply a comparative litmus test, i.e., they will compare the tax savings from the 1031 exchange to the tax paid by the related party seller. If the tax savings are greater, that will (in their view) create a strong presumption that the non tax avoidance exception of 1031(f)(2)(C), which is subsumed in 1031(f)(4), will not apply.

2. This so called litmus test should be only one factor in determining whether §1031(f)(4) applies. 3. Yet, in PLR 200706001, involving the exchange by Taxpayer with a Trust and Taxpayer's three siblings of her undivided twenty-five percent interest in one parcel for a one hundred percent interest in another parcel, there was no discussion of a comparative test. 4. PLR 20073002 – Exchange of undivided interests among family members permitted. Interesting discussion about when “relatedness” is relevant. PLR says that relatedness is looked to at time of exchange and it is irrelevant whether parties were related just prior to exchange. What if parties are not related at time of exchange abut are related just after exchange? E. Ocmulgee Fields, Inc., 133 TC No 6 (March 31, 2009) 1. Similar to Teruya except there were efforts to acquire unrelated property before the relinquished property was transferred. However, there was no identification of any property (i,e., taxpayer was relying on the fact that the replacement property was acquired within 45 days). Not only should there have been an identification (and the replacement property acquired as late as possible within the 180 day time frame) but there should have been documented efforts to at least consider acquiring other properties after the relinquished property was transferred. The Court did not believe that the taxpayer intended to acquire other property. 2. Taxpayer acquired property from a related party that it had previously owned. This probably did not help the taxpayer's case. 3. The Court agreed with the IRS that the facts of this case are similar to the Teruya case and that a QI was interposed to circumvent the related party rules. However, the circumstances in this case were quite different in the sense that there was a showing that taxpayer had made efforts to locate property from unrelated parties and, perhaps more importantly, the exchange was not a simultaneous exchange (so that the use of a QI was clearly necessary). There

was no discussion of this latter point and one wonders if taxpayer did not adequately addressed this in its brief. 4. The Court held that taxpayer had the burden of proof to establish the non tax avoidance purpose in section 1031(f)(2)(C). The notice of deficiency stated that "You have not established that you have met all of the requirements of Section 1031(f) for nonrecognition of that gain." However, the Court did not address why the IRS did not initially have to allege in its Notice that the transaction was structured to avoid the related party rules or why the IRS does not have the burden in that regard. On the other hand, the Court might be saying that the IRS does have this initial burden but that all related party exchanges involving a QI meet the burden and it is then up to the taxpayer to come forward and show why there was non tax avoidance under 1031(f)(2)(C). 5. The test that the Court applied here is very different from the test the Court applied in Teruya, although I think the Court (mistakenly) believed it was the same test. In Teryua, the Court compared the tax savings to the taxpayer from the exchange to the tax consequences to the related party on the sale to Teruya. In this case, the Court compared the tax consequences to the taxpayer if it had sold the relinquished property in a taxable sale, to the tax consequences to the related party if it would have received the relinquished property from the taxpayer and then sold it to the ultimate buyer. 6. The Court stated "We are not prepared to say that, as a matter of law, a finding of basis shifting precludes the absence of a principal purpose of tax avoidance..." This appears to be contrary to what the DOJ attorney argued at the oral hearing before the Ninth Circuit in the Teruya case. 7. The Court refused to apply penalties because the taxpayer relied on a tax advisor and also because section 1031(f)(4) "is not without its interpretative difficulties." F. Ocmulgee Eleventh Circuit Opinion (August 13, 2010) The standard of review in the Eleventh Circuit is whether the Tax Court's decision was "clearly erroneous." The Eleventh Circuit affirmed the Tax Court. The Court cited the combined effect of three factors in reaching its conclusion: (1) the actual consequences of the transaction was that taxpayer and the related party, as an "economic unit," "cashed in" their low basis property because the related party would up with cash, (2) there was no reason, other than tax avoidance, to do a four party exchange since the decision to acquire related party property was already made at the time of the transfer of the relinquished property, and (3) despite taxpayer's claim that the related party property was "merely a fall back position," taxpayer "examined only a small number of potential properties" and then entered into a contract to acquire the related party property "just six days after" it engaged Security Bank as a qualified intermediary." The Eleventh Circuit implied that, under certain circumstances, identifying a related party property as a fall back position might work. Those circumstances would appear to be where (a)

bona fide (and provable) efforts were made to locate a number of different non related party properties prior to the expiration of the 45 day period, (b) provable efforts were made to acquire the non related party properties formally identified, (c) there is no record or evidence of a decision having been made to acquire the related party property until well into the 180 day period, and (c) the acquisition of the related party property does not occur until the latter part of the 180 day period. G. Chief Counsel's Advice Memorandum 201013038 Taxpayer transferred certain equipment, through a QI, to an unrelated party and received back, as replacement property, like kind equipment that was acquired from a related equipment dealer. Taxpayer cited several business reasons for acquiring the equipment from the related dealer (instead of from an unrelated dealer). The IRS concluded that the exchange was a related party exchange that failed under 1031(f)(4) because by using a QI, the related party was able to immediately resell the relinquished property with no gain recognition. This conclusion seems wrong. Taxpayer presumably could have traded in its vehicle with an unrelated dealer (without using a QI) and avoided gain. What is more troubling is the statement that "as a matter of interpretation, the Service has consistently limited the 1031(f)(2)(C) exception to the situations that Congress specifically described in the legislative history [i.e., an exchange of undivided interests, an exchange in nonrecognition transactions or an exchange that does not involve basis shifting between parties]." Those were always intended to be just examples. H. Shouldn’t the test be whether taxpayer actually structured the transaction to avoid the related party rules? 1. What if taxpayer did not even know about the related party rules? 2. Teruya appears to have honestly believed that a continuation of investment was the critical test under 1031(f). Its sales contract stated that the transfer of the relinquished property was contingent on finding and acquiring replacement property. Ocmulge appears to have actually thought that because its overall tax burden would eventually be greater (as advised by its accountant), it would not be subject to section 1031(f). How could it be said that Teruya or Ocmulgee “structured the transaction to avoid the related party rules?” III UNDIVIDED INTERESTS A. PLR 200826005 The above PLR involves a very interesting two party TIC arrangement which the IRS held not to be a partnership. What is most significant about this PLR is that (a) there were numerous properties involved which were owned in each case by affiliates of the same two unrelated entities ("A" and "B"), (b) there was a shotgun buy-sell agreement (as there was in a prior PLR involving a two party TIC), (c) it appears that the non recourse loans for each property were guaranteed by A and B (even thought different affiliates were the TIC owners), (d) each of the properties were in part leased to an affiliate of B, and (e) there apparently were restrictions on

the co-owners' rights to engage in activities that could diminish significantly the value of the other 50 percent interest in the property, such as pledging the interest in the property as collateral or otherwise encumbering the interest without the approval of the other co-owner. This PLR goes quite a bit further than the prior PLR's and is certainly inconsistent with some of the Rev Proc 2002-22 requirements. It is not clear to what extent the two person ownership played a significant role in the IRS's willingness to give this ruling. B. PLR 200829012 and 200829013 - Also permits a shot gun buy-sell and lease to affiliated entity. C. California Franchise Tax Board Tax News Announcements – 1. November, 2007 Announcement - Rev Proc 2002-22 conditions are a minimum requirement for rental real estate. This suggests that the FTB would invalidate every syndicated TIC deal (relevant where a California resident is a TIC owner, irrespective of the location of the property). 2. The California FTB Protest Unit recently issued a decision that, despite compliance with Rev. Proc. 2002-22, an exchange of real estate for a TIC did not qualify for 1031 treatment because the transaction was in substance a partnership. In reaching its decision, the FTB noted that a lender requirement that the TICs roll up within a designated time period was an indicia that the TICs intended to enter into a partnership from the outset. The decision states, that while it would seem that the TIC should be qualified due to its compliance with Rev. Proc. 2002-22, the Rev Proc is not a safe harbor. The FTB describes it as merely a guideline where the IRS has provided that, so long as its standards are met, the taxpayer can apply for a private letter ruling, but that even if all 15 standards are met, a taxpayer can still be denied a TIC ruling if the substance of the transaction is a partnership. D. November 10, 2008 Bankruptcy Filing of DBSI, Inc., one of the nations largest TIC sponsors. E. A Chief Counsel Memorandum (CCM), designated as Program Manager's Technical Advice (PMTA) 2010-005, responds favorably to tenants in common who had to take interim action to deal with the master tenant's bankruptcy. The owners' appointment of interim agents, and temporary non-pro-rata contributions by some tenants in common, will mot cause the owners to be treated as partners in a partnership for federal income tax purposes. IV TAX AND REPORTING RULES FOR ESCROWS USED IN DEFERRED LIKE-KIND EXCHANGES A. Re-proposed 2006 Regulations4

4 For an interesting debate about these regulations, compare Weller & Alton, Treatment of Section 1031 Exchange Intermediaries as Borrowers under New Prop. Reg. §1.468B-6, 104 J. of Tax’n 338 (2006), with Levine, A (Necessary) View of the Re-Proposed Prop. Regs 1.468B-6 on Interest Earned from §1031 Exchange Accounts,” 47 Tax Mgt Memo. 307 (2006).

On February 7, 2006, the IRS re-proposed regulations under §468B setting forth rules to determine whether the taxpayer or the Qualified Intenrmediary (“QI”) should report interest earned on the proceeds held in an exchange account.5 The general rule under the regulations is that the proceeds held by the QI in an interest bearing type account (irrespective of whether they are held in a trust or escrow account) or in a bank account, are treated as loaned by the taxpayer to the QI.6 The only exception to the general rule is where all the interest earned from the exchange proceeds is to be paid to the taxpayer. In that case, the proceeds will not be treated as loaned and all the interest income will be taxed to the taxpayer.7 As a general rule, the regulations apply a deemed interest charge equal to the investment rate on a 182 day Treasury bill determined on the auction date that most closely precedes the date that the exchange proceeds are received by the QI.8 Alternatively, the “approximate method” may be used.9 The interest imputed would be the difference between the imputed amount and any actual interest paid on the account. If the QI commingles the funds with other funds it has received, the taxpayer will be treated as having received all the interest if the earnings from the commingled account are allocated to taxpayer on a reasonable pro rata basis.10 Any payment of various “transactional expenses” from the exchange account earnings are treated as first paid to the taxpayer and then paid by the taxpayer to the recipient.11 The purpose of this rule is to make sure that the transactional expenses paid do not reduce the amount of interest to be charged to the taxpayer. While not explicitly stated, presumably interest is to be reported by the taxpayer in the year earned (not in the year actually received). This was clearly stated in the 1999 regulations, and when issued, the final regulation will likely contain similar language. The QI must issue a Form 1099 to the (non corporate) taxpayer.12 In a situation where all the earnings are to be credited to the taxpayer, the amount of the interest will be easily determinable. In all other cases where the proceeds are treated as loaned to the QI, the amount of the imputed interest will have to be determined by the QI and reported on the Form 1099. The regulations become effective upon finalization. In the interim, the IRS will not challenge “a reasonable, consistently applied method of taxation for income attributable to

5 REG-113365-04, 71 Fed. Reg. 6231 (proposed February 7, 2006).

6 Prop. Reg. §1.468B-6(c)(1).

7 Prop. Reg. §1.468B-6(c)(2)(ii).

8 Prop. Reg. §1.7872-16(a)(4).

9 Prop. Reg. §1.7872-16(a)(5).

10 Prop. Reg. §1.468B-6(c)(2)(i)(B).

11 Prop. Reg. §1.468B-6(c)(2)(i)(A).

12 Prop. Reg. §1.468B-6(d).

exchange funds.”13 It is unclear whether this was intended to give taxpayers a “bye” for prior exchanges which would have been treated as involving a loan from the taxpayer to the QI under the re-proposed regulations. C. As a result of criticism that the IRS did not properly take into account the impact on small business, the IRS, in April, 2007, issued a revised Regulatory Flexibility Analysis asking for information from the QI industry on certain practices. Unclear when the final regulations will come out, if at all. D. Final Regulations On July 9, 2008, final regulations were issued. 1. The regulations are generous and, for the most part, QI favorable. As explained below, they also attempt to level the playing field between independent QI's and QI's owned by a financial institution. 2. Several years ago, Treasury proposed eliminating the QI system and turning it into a rollover. These regulations seem to go to the other extreme.

3. The regulations keep the concept from the proposed regs that the exchange

funds are treated as loaned to the QI (with interest being imputed if the amount of interest paid is less than the test rate, which has been changed to the thirteen week Treasury bill rate) except where all the earnings from the funds are paid to the taxpayer. However, there is a $2 million exemption which relates to the amount of exchange funds, not the purchase price for the property. This means that a $20 million transaction which is 90% leveraged would qualify for the exemption (since the exchange funds will not exceed $2 million). In addition, the regulations say that all earnings are in any event deemed to be paid to the taxpayer if all of the funds are held in a separately identifiable account under the taxpayer's name and ID #. Query: What if no interest is paid? 4. The $2m exemption may lead QI's and taxpayers to aggressively separate out one exchange into two or more exchanges. This can happen where real estate and personal property are being transferred (e.g., a hotel) or where more than one parcel is being sold to the same buyer. The 1031 regulations permit the IRS to treat two or more exchanges as "part of the same exchange," although no guidance is given as to how one is to make that determination. 5. A QI can apparently receive (a) a marketing fee, (b) interest paid by a financial institution from a master account (in excess of interest to be credited to taxpayers in each sub account), (c) a credit balance type fee, or (d) a 12B-1 type fee for administrative services rendered, without such fees or interest being treated as part of the earnings from the exchange account. It also does not matter whether the fee is paid by a related institution (nor is the related institution's earnings taken into account). This is Treasury's attempt to level the playing field between independent QI's and QI's owned by a financial institution.

13 Prop. Reg. §1.468B-6(f)(2).

a. The regs do not impose any type of customary or normal fee requirement with regard to what the QI can receive from the financial institution as a marketing fee, master account fee, credit balance or 12B-1 type fee for services rendered. This may lead to QI's negotiating with financial institutions and taxpayers receiving less interest (with QI's receiving greater fees). 6. Reg. 1.7872-5(b ) states that the $2m exemption will not apply if the taxpayer structured a transaction to be a loan for less than $2m and one of the principal purposes was the avoidance of Federal tax. Query whether this would allow the IRS to say the exemption is not applicable where the circumstances in 4 or 6 apply. 7. The regs surprisingly appear to not at all be concerned about the bankruptcies that have occurred. Co-mingling is not at all discouraged (provided that the QI uses a reasonably consistent method to calculate a taxpayer's pro-rata share of account earnings attributable to the taxpayer's exchange funds which takes into account the time the funds are held in the account, the actual rate or rates of return, and the respective account balances). In fact, the regs seem to sanction the ability of the QI to co-mingle exchange funds of the taxpayer, not only with exchange funds of other taxapyers, but with non exchange fund assets of the QI, irrespective of whether those funds are held "for investment or otherwise." 8. Example 1 makes it clear that interest earned in the exchange account during year one is taxed to the taxpayer in year one. 9. These regs are likely to encourage some taxpayers to choose not to pay any fee and not receive any interest. 10. Some taxpayers have wondered whether a fee paid to a QI at the very beginning of the exchange blows the exchange. The regs treat QI fees (except where they are contingent or to be paid only from the earnings) as "transactional expenses" under 1.1031(k)-1(g)(7)(ii), which means they are permitted to be (and treated as) paid out to the taxpayer and paid by the taxpayer to the QI. This seems to confirm that they can be paid out without blowing the exchange. 11. Query to what extent will (or should) a QI have to disclose to the taxpayer that it is receiving a marketing or master account type fee? This is a non tax issue. 12. It appears clear that to the extent the exemption will not apply, the QI must keep adequate records to determine the amount of imputed interest and report it on a 1099 (unless a 1099 would not otherwise be required under 6041 regs). 13. The regs apply to transfers of relinquished property made, and cash received by the QI, on or after October 8, 2008. However, for transfers made after August 16, 1986, but before October 8, 2008, the IRS will not challenge a reasonable consistently applied method of taxation of earnings attributable to exchange funds. Query whether this means that a QI who has not been receiving marketing fees, 12B-1 type fees or master account fees cannot now receive such fees and exclude them from all earnings until October 8.

V Capitalization of Expenditures to Acquire, Sell, Produce, or Improve Tangible Property The recent regulations regarding the capitalization of expenditures to acquire, sell, produce, or improve tangible property specifically provide that compensation for the "services of a qualified intermediary or other facilitator of an exchange under section 1031" must be capitalized.14 Some think this is a change from (or a necessary clarification of) current law. Taxpayers have not treated the QI fee in a uniform manner. For example, when the fee is paid out of the exchange account, it will technically constitute boot but will be offset by the same amount (i.e. as a payment made by the taxpayer in connection with the exchange). However, the issue then becomes, does the taxpayer get any further tax benefit from the payment? There are at least four possible alternatives. First, some taxpayers capitalize the QI fee into the replacement property basis, thereby allowing the taxpayers an additional depreciation deduction. Alternatively, some treat the QI fee as an expense or cost of sale of the relinquished property serving to reduce the amount realized. Under this alternative, the taxpayer would not realize any tax benefit. A third method of accounting for the QI fee is splitting the fee between the relinquished and replacement properties, and treating the fee in the manner discussed above. The last alternative would be for the taxpayer to currently deduct the QI fee (and not capitalize it), thereby receiving an immediate tax benefit. The regulations in effect eliminate this issue by attributing the entire fee to the acquisition of the replacement property. The entire fee would therefore be added to the basis of the replacement property and the taxpayer will get some tax benefit through depreciation (unless it is vacant land). VI MAGNESON/BOLKER ISSUES A. In two prior PLRs15, the Service concluded that a transfer of replacement property to a partnership as a result of a termination of a testamentary trust which distributed LLC interests to its beneficiaries, did not invalidate an exchange under the IRS’ position in Magneson/Bolker, because the termination of the trust was independent from the exchange (i.e, the trust was not acquiring the replacement property with the intent of disposing of it pursuant to a prearranged plan and the §1031 exchange was independent from the acquisition and disposition of the replacement property). These rulings suggested that the Service would use an independence-type test in Magneson/Bolker type situations. 1. PLR 200652130 More than a year later, the Service ruled in PLR 200652130, also involving the same trust discussed above, that the §1031 exchange of real property undertaken by an LLC created by a trust will not fail to qualify under §1031 merely because the contract for the disposition of the

14 Reg. §1.263(a)-2(f)(2)(ii)(K).

15 See PLRs 200521002 and 200528011

relinquished property initially was entered into by the trust prior to its termination. Because the LLC was continuing the real estate business previously conducted by the trust and was functionally a continuation of the trust, and because the like-kind exchanges were "independent" of the impending termination of the trust, the Service held that the transfers of the relinquished properties to LLC subject to contracts for their disposition did not violate the holding requirement of §1031(a). 2. Subsequent Ruling on Same Trust A 708(b) termination which occurred as a result of the termination of the same trust did not adversely affect the qualification of replacement property received just prior to the termination. See PLR 200812012. B. California Franchise Board (“FTB”) Developments The FTB has taken the position, administratively, that Magneson is not determinative in the Ninth Circuit with respect to current forms of partnerships because of (a) California’s enactment of the Uniform Partnership Law of 1994 (“1994 UPA”) - The argument apparently is that under the 1994 UPA, the partnership is an entity separate from its partners, and (b) the receipt of a limited partnership interest is not the continuation of an investment in a fee interest. Oregon has taken a contrary position. C. LTR 201024036 IRS held that, in the context of an affiliated group filing a consolidated return, a subsidiary’s holding purpose was attributed to the parent upon a distribution to the parent which then exchanged the property in a 1031 exchange. This is the first statement by the IRS on the application of the post 1995 consolidated return regs in the context of 1031 and there is NO analysis. It is not clear that the reg requires the holding in the context of a 1031 exchange, but it would have been nice to have some analysis, particularly because the IRS appeared to hold to the contrary with regard to the pre-1995 consolidated return regs. See PLR 8548013, in which the IRS withdrew its holding in PLR 8414014 that affiliated members of a consolidated group have a common holding purpose. D. National Office Comments Steve Toomey, from the IRS National Office, indicated at an ABA Tax Section meeting in May, 2012, that he would not be inclined to litigate Magnenson issues. Query how this can be reconciled with the outstanding published rulings and the questions that were added to the Form 1065? VII OTHER SIGNIFICANT §1031 DEVELOPMENTS A. QI Activities 1. PLR200803003 – QI is not a disqualified person because of activities of affiliated entities who provide investment advisor services, insurance brokerage, financial planning and/or banking. IRS determined affiliates were not agent of taxpayer based on nominee

cases, as opposed to applying a benefits and burdens of ownership test which is currently being litigated in the Bartell case, infra. See also PLR 200803014 2. Nevada, Idaho, Washington State, Virginia, Colorado and Connecticut (the later, effective October 2013) have enacted or are considering regulating QI’s and/or requiring that separate accounts be maintained in escrow or through a trust. a. Some of the provisions (e.g., Virginia) require use of a Qualified Trust or Qualified Escrow. Query whether failure to meet the requirements could have any impact on the taxpayer for state and/or Federal tax purposes. 3. California recently enacted legislation that would require a person engaging in business as a QI (or EAT?) to comply with certain bonding and insurance requirements, and to notify existing exchange clients whose relinquished or replacement property is located in the state of any change in control, as defined, of the exchange facilitator. The bill would also require a person engaging in business as an exchange facilitator to, among other things, act as a custodian for all exchange funds and to invest those funds in investments that meet a prudent investor standard, as specified. The bill would prohibit these persons from performing specified acts, including, but not limited to, making material misrepresentations and engaging in conduct constituting fraudulent or dishonest dealings. The bill would make any person who violates these provisions subject to civil suit in a court of competent jurisdiction and would provide that a person claiming to have sustained damage because of a failure to comply with these provisions may file a claim on specified bonds, deposits, or letters of credit to recover the damages. These provisions would remain in effect until January 1, 2014, at which point they would be repealed. 4. PLR 200908005 (November 18, 2008) The QI, in midstream during several exchanges not yet completed, changed from a qualified Sub S subsidiary, which was ignored for tax purposes, to a C corporation because the ownership had changed. The IRS held that even though the transfer resulted in a change in the tax identity, the change did not invalidate the exchanges because the legal identity of the QI will not change and, for state law purposes, the the entity providing the services before the transfer is no different from the entity that provides the services after the transfer. This is a generous PLR. The fact that the entity before and after the transfer is the same for local law purposes should have no relevance under the Internal Revenue Code, since the C corporation is considered a new entity for tax purposes. In any event, it does provide flexibility for QI's to achieve business combinations or transfers. 5. PLR 201030020 - The IRS held that a QI entity could also serve as the trustee of a qualified trust. It is not clear from the ruling if there were separate trust and exchange documents. Of course, this is all separate from whether using having one entity act as both the QI and trustee creates a potential bankruptcy remoteness issue for the taxpayer. [Query whether a valid trust under local law is required.] The ruling also held that a midstream merger does not result in a different QI. 6. Rashti v. Gadoshian, Cal. Ct. App. (Nov. 10, 2010).

This case is likely to cause quite a bit of discussion and introspection among attorneys and accountants who advise clients about 1031 exchanges and routinely refer their clients (and others) to QI's. The Court of Appeals, reversing a lower court, held that the accountant was under a duty to recommend the client to a QI who could "orchestrate" and "implement" the exchange. As I read the opinion, this means that the accountant would have an obligation to make sure the QI properly proceeds, which I would assume means both substantively and procedurally. Presumably this also means that the attorney or accountant has exercised due diligence to make sure the funds will be protected. See also Kreisers, Inc., v. First Dakota Title Limited Partnership d/b/a First Dakota Title and d/b/a The Title Resource Network, CIV. 09-4999 (South Dakota Circuit Court, July 10, 2013) holding a QI liable for negligence in failing to properly advise on and document a built to suit exchange. B. Pending Tax Court case on Non Safe Harbor Reverse Exchange. 1.George D. Bartell, TC Docket # 022829-05. Trial was held in October, 2006 with no decision yet. The case apparently involves the issue of whether the ownership test for the accommodator, in the context of a non safe harbor exchange, is burdens and benefits (as in FSA 20050203F) or formalistic (as in PLR 200111025). 2. Patricia Bragg, Cal Bd of Equal, 567669 (November 14, 2012.) The Board basically held that a benefits and burdens test applies and that the generous PLR that had been issued (PLR 200111025) to be either be irrelevant or overruled by the later FSA. It also upheld penalties. This may be an indication of how the Bartell case will be decided. C. Barry E. Moore; T.C. Memo. 2007-134; No. 11002-03, May 30, 2007 The Court seems to be saying that if a vacation property was never rented out, and bona fide efforts were not made to rent it out, the fact that the property was acquired only because it was expected to appreciate and later be sold at a gain is not enough to qualify under 1031 where there has been some personal use. D. Defalcation of Several QI’s. a. Within the last seven years, there have been several QI’s that have had significant financial problems (some because of bankruptcy and some because of theft or embezzlement). Last month, Land America Exchange Company, and its parent who guaranteed its obligations, filed for bankruptcy. b. This is causing taxpayers and their counsel to be more careful in selecting QI’s and to more carefully review the documentation and the structure, as well as making sure that the funds are secure. c. A number of technical issues have arisen for those taxpayers caught up in the bankruptcy but are still trying to complete their exchanges.

d. Other technical issues arise for those who could not complete their exchanges. g. August 24, 2007 letter IRS sent to Congressman Frank indicating that agency was considering what it could do to help. h. June 6, 2008 letter sent by IRS (IT&A) to Congressman Delahunt stating that the gain must be recognized but that a loss under §165 might be allowable. This is a blow to some taxpayers who were claiming that the transaction should be treated as an "open type" transaction with no gain being recognized until proceeds are actually received. Aside from a possible mismatch in timing and/or character, the loss allowed under sec 165 will not be of sufficient help in those situations where the relinquished property was heavily leveraged. The statement that the QI must acquire the replacement property "with the cash proceeds from the sale of the relinquished property" might suggest that the taxpayer could not have used his own funds to complete the exchange, but it is doubtful that was intended. i. On August, 18, 2008, the FTC denied a petition filed by the FEA to regulate QI’s. j. The Inspector General's Report on the use of QI's, dated August 27, 2008, reflects an alarming misunderstanding of the differences between the QI safe harbor and the other safe harbors and issues that can arise when an “accommodating buyer” is used (e.g., Court Holding, agency, etc.”. The report encourages taxpayers to use the other safe harbors and not the QI safe harbor. k. There was an item on the IRS/Treasury Business Plan titled "Guidance under sec. 1031 regarding the treatment of accounts held jointly by the taxpayer and a qualified intermediary." Apparently this was the IRS's limited attempt to help avoid taxpayers getting caught up in further bankruptcies. Nothing was published and it was deleted from the Plan. However, the IRS did issue Rev Proc 2010-14, which provided a safe harbor method of reporting gain or loss for certain taxpayers who initiated deferred like-kind exchanges but failed to complete the exchange because a QI defaulted on its obligation to acquire and transfer replacement property to the taxpayer because it went into receivership or bankruptcy. E. PLR 200718028 a. Relinquished property identified after the 45th day will qualify under Rev Proc 2000-37 where it was transferred on or before the 45 day. b. Query: A taxpayer could have multiple exchanges and QEAA's going on at the same time with multiple properties. Why should the fact that a relinquished property is sold mean that it necessarily ties in to a certain QEAA agreement? F. State Taxes a. New Jersey – Double taxation in EAT structure.

b. Pennsylvania – same result (see November, 2007 final Realty Transfer Tax Regulations. c. NY and DC have reached the opposite conclusion. d. Pa - a recent PA Board of Finance decision that reversed the prior refusal by the Board to recognize 1031 treatment for individuals doing a deferred exchange. e. California - Effective 1/1/14, non residents who exchange Cal property for non Cal property must file annual return. Failure to file will result in immediate tax on the gain, as opposed to when it is ultimately sold. G. PLR 200728037 IRS held that a 1031 exchange does not count as a “sale” for purposes of the safe harbor exception to the prohibited transaction rule of §856(b)(6). Does this provide an argument, by analogy that a 1031 exchange should not be taken into account for purposes of applying the “primarily for sale” exception to 1031? H. Failed Exchange - PLR 200813019 The IRS allowed a taxpayer to revoke an election our of the installment sale rules because he relied on his accountant who did not realize that he could defer the gain for one year form a failed 1031 exchange. Of course, this makes sense only where the 453A interest charge does not come into play. I. Changes to Form 1065 a. Questions on like kind exchanges. b. Magneson/Bolker type questions. J. September 17, 2007 Report on Like-kind Exchanges Issued by Treasury Inspector General. Criticizes IRS for lack of guidance and not penalizing taxpayers for failing to file Form 8824. In particular, warns about positions taken with respect to vacation homes. IRS promised to follow up and do better. K. Notice 2008-25 sets forth certain recapture rules in a 1031 exchange involving Gulf Opportunity ("GO") Zone property. Section 1400N(d) allows a 50 percent additional first year depreciation deduction for GO Zone property, which is the portion of the Hurricane Katrina disaster determined by the President to warrant assistance from the Federal Government under the Stafford Relief Act or the Emergency Assistance Act L. Rev Proc 2008-16 The IRS is providing a very generous and helpful safe harbor for exchanges of vacation homes and dwellings that are used, to some extent, for personal purposes. An exchange of such property will automatically qualify as trade or business or investment property if: 1. In the case of relinquished property, (a) The dwelling unit is owned by the taxpayer for at least 24 months immediately before the exchange (the "qualifying use period"); and

(b) Within the qualifying use period, in each of the two 12-month periods immediate preceding the exchange, (i) The taxpayer rents the dwelling unit to another person or persons at a fair rental for 14 days or more, and (ii) The period of the taxpayer's personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12-month period that the dwelling unit is rented at a fair rental. 2. In the case of replacement property: (a) The dwelling unit is owned by the taxpayer for at least 24 months immediately after the exchange (the "qualifying use period"); and (b) Within the qualifying use period, in each of the two 12-month periods immediately after the exchange, (i) The taxpayer rents the dwelling unit to another person or persons at a fair rental for 14 days or more, and (ii) The period of the taxpayer's personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12-month period that the dwelling unit is rented at a fair rental. There apparently is no requirement that any portion of the realized gain be allocated between personal use and non personal use. Note, however, that that rental to a relative is included as a day of personal use unless the relative pays fair rental value and it is the relative’s principal residence (of course, this is only a safe harbor). 3. Tony R. Goolsby, T.C.Memo 2010-64 (April 1, 2010). The Tax Court held in the above case that a taxpayer did not acquire replacement property for investment when he used it as a personal residence two months after the closing and after some minimal attempts to rent the property out (there were other indications that he may have intended to use the property for personal use). What is particularly interesting about the case is that the Tax Court said "Mr. Goolsby's interactions with IPX, the qualified intermediary, are further evidence of a lack of investment intent at the time of the exchange. Before purchasing the [replacement] property, Mr. Goolsby sought advice from IPX regarding whether petitioners could move into the property if renters could not be found." It is unclear whether the IRS obtained this from IPX (by subpoena or otherwise) or whether the petitioners voluntered this information (while doing so would have been foolish, it was a pro se case and the taxpayer may have thought it was helpful - perhaps to avoid penalties). Note that the IRS did not contest that there was no 1031 exchange at all - another property, which was received somewhat later, was stipulated to be good qualifying property. I would have thought the QI's use of cash to acquire non qualifying property, prior to the receipt of qualifying property, could have blown the entire exchange. I suspect the IRS just missed the issue. M. PLR 200807005

This PLR holds that (a) an acquisition of partnership interests from all the partners is treated as an acquisition of the underlying assets, and (b) a wholly owned LLC can be a partner for local law purposes with the taxpayer in a local law partnership since the LLC is a disregarded entity. Nothing very surprising but these are factual scenarios that often arise. Ruling obtained on EAT’s acquisition of partnership interest where remaining interest held by taxpayer. See PLR 200909008. This is significant. N. PLR 200732012 Actions of second tier LLC in signing exchange agreement, and actions of new LLC in acquiring replacement property, are attributed to taxpayer. O. 2008 Farm Bill - This is a Senate description of the 1031 provision that was included in the Farm Bill which became law on the Senate and House override of the President's veto. ”Section 1031 Eligibility for Mutual Ditch, Reservoir, or Irrigation Company Stock - Flexibility for Landowners with Water Rights: Some state water rules keep farmers and ranchers from selling their land when they need or want to. The bill will allow the tax-free exchange of stock that represents a holding of water rights, just as allowed for real property under Section 1031 of the tax code.” Query whether this allows a tax free exchange of the stock for land or improved real estate. The provision technically only states that such stock is not included in the exclusion for stock in 1031(a)(2)(b). It does not state that the stock will necessarily meet the basic like kind test. P. CCA 201025049 Taxpayer purchased equipment on a continual basis which he then rented out by the hour, week or month. The rental agreement permitted the renter to purchase the equipment but contained no terms. About 90% of its "income" (does this mean net income?) was in fact generated from sales, and 9% from rentals. 100% of its cost was recovered through sales. A "substantial amount" of the equipment was sold "relatively" soon after acquisition and even prior to generating any rental "income." The IRS concluded that the taxpayer was neither entitled to 1031 treatment nor depreciation. 1. Compare TAM 2002030001 where only 68% of income was generated from sales and the item was released several times. 2. This issue is on the 2012-2103 IRS/Treasury Business Plan. Q. Ralph E. Crandell,Jr., TC Summary Opinion 2011-14 (2/15/11) In what can only be described as total misunderstanding by all parties involved, the Tax Court held that a taxpayer was not entitled to 1031 treatment in a deferred multi party exchange because the escrow agreement did not expressly limit the taxpayer's ability to obtain the funds and therefore the escrow was not a qualified escrow. That apparently was the IRS' sole argument as well. The clear implication was that if the necessary language in the escrow were present, the

Tax Court and the IRS would have agreed it was a good exchange. Of course, it still would not have been a good exchange because the QI safe harbor was not utilized. R. Inadvertent Receipt of Cash In Peter Morton v. United States, Ct Cls, April 27, 2011, the Court of Claims held that a transfer of exchange funds from the closing escrow agent to the taxpayer's checking account, which was made in error and which was returned the following day, did not blow the exchange. While the conclusion may be correct, the court apparently misunderstood the (g)(6) limitations and the role of the QI. The court said the taxpayer was: "bound by contract not to receive, pledge, borrow or otherwise obtain the benefits of the Exchange Value' for at least 45 days....Legally, he could not do anything but return the funds to the proper account. If he had done anything other than return the funds, he would have been liable for conversion, or even theft." It is doubtful that the exchange agreement said the taxpayer cannot receive the funds prior to the 45th day (and of course the contract is between the taxpayer and the QI, not the taxpayer and the closing escrow agent). It probably said that the taxpayer had "no right" to receive the funds from the QI prior to the 45th day, which is very different. Moreover, if the taxpayer did not return the funds, it is doubtful that he would have been liable for theft (even assuming the exchange agreement did not state that the QI is the agent of the taxpayer for non tax purposes). S. Dulles World Property, LLC, T.C, Docket # 13098-11 (filed August 18, 2011). Section 1031 treatment was denied in a very complicated factual setting which the IRS has analogized to a listed transaction described in Notice 2001-16, as clarified by Notice 2008-111. More interesting, perhaps, is the receipt of loan proceeds, secured by the replacement properties which were 32 CVS triple net leased properties, the day after the completion of the exchange. The IRS argued, as an alternative argument, that the loan proceeds were boot. According to the RAR, tax opinions were apparently given by Reed Smith, not only on this transaction, but on ten other similar transactions involving CVS's. According to a footnote in the pleadings, the other transactions involved a refinancing of existing debt while this involved original financing, but Reed Smith did not change the wording of the factual portion of the opinion to reflect that difference (shades of Canal Corporation in which the Court upheld significant penalties despite a law firm's opinion). It is understood that the IRS may have conceded this case. T. July 15, 2011 IRS Guidance for Examiners and Managers on the Codified Economic Substance Doctrine. Query whether the IRS might try to apply section 7701(o) to certain types of exchanges (e.g., foreclosure, bankruptcy, related party exchanges where the parties are not technically related). See Steps 2 and 3. U. Reesink, T.C. Memo 2012-118

The Tax Court held that a taxpayer, who was a co-owner of a six unit apartment house, had the necessary investment intent with respect to replacement property, despite the fact that he started using the property as his primary residence only 8 months after acquisition. The Court relied on the facts that unsuccessful attempts were made to rent the property out and that taxpayer's financial situation changed after acquisition (although taxpayer had significant debt at the time of acquisition and the events might have been foreseeable). No other argument was made to deny 1031 treatment, although there perhaps could have been (e.g., partnership)? V. Transfers in Foreclosure 1. Deed in lieu of - PLR 201302009 (January 11, 2013). 2. Foreclosure a. Transfer to QI may trigger bad boy clause and/or transfer taxes. b. Assignment of loan documents, including any right of redemption, to QI? W. LTR 201242003 IRS permitted two related entities to enter into separate QEAA's for the same property with the same QI. This is a very generous ruling. There is a requirement that Taxpayer have a bona fide intent to acquire Property as replacement property in a like-kind exchange under § 1031 at the time EATX acquired qualified indicia of ownership in Property. Affiliate has also submitted representations that it had an identical intent with respect to Property. In addition, Taxpayer's qualified exchange accommodation arrangement (QEAA) provides that Taxpayer acknowledges that EATX had entered into a concurrent QEAA for Property with Affiliate, which gave Affiliate rights to acquire Property, in whole or part, to complete like-kind exchanges. Under Taxpayer's QEAA, Taxpayer's right to acquire Property is subject to it giving notice to EATX of its intention to acquire Property, in whole or part. This was subject, however, to a proviso that Taxpayer's rights terminate upon prior delivery of such notice by Affiliate. The agreement also provides that if Affiliate gives prior notice of its intent to acquire Property, EATX has no further obligation to transfer Property to Taxpayer, whether in connection with the exchange described in the agreement or otherwise. The agreement also provides that if Affiliate states its intention to acquire only a portion of Property, EATX's obligations to transfer the balance of Property to Taxpayer are unaffected. Affiliate simultaneously entered into its own QEAA with EATX for Property, listing Taxpayer as the other party that may acquire Property under Taxpayer's QEAA, under substantially the same terms and conditions. LTR 201416006 (January 17, 2014) is even more generous. It not only permitted three QEAA's for the same property but confirmed that only partial interests can also be acquired. X. William P. Adams, TC Memo 2013-7 Taxpayer/semiretired electrical engineer's purchase of house he rented to his son with proceeds of sale of other rental property qualified as 1031 like-kind exchange: although taxpayer charged his son slightly below market rent, replacement property still qualified because taxpayer

had intended to hold that property for investment/rent at time of exchange and because rent was fair when considering that son, who had extensive homebuilding and home renovation experience, assumed substantial responsibilities for renovating, maintaining, and repairing house, which was in substantial state of disrepair when purchased. Taxpayer's testimony that rental of house was “gift” to son was construed to mean that he wished to offer son reduced rent in exchange for working on house. Y. Jessie G. Yates, T.C.Memo 2013-28 Pro se married couple was required to treat alleged bed and breakfast property received in multiproperty like-kind exchange as boot for 1031purposes: notwithstanding taxpayers' claims of intending to use property as bed and breakfast business, there was no credible evidence of same and instead, record showed that they moved into and used that property as personal residence mere days after purchase. However, they were entitled for computation purposes to rely on FMV allocations set out in operative agreement, which was entered between adverse parties and as such was afforded presumption of business reality. IRS, which had burden of proof on this issue, failed to prove to contrary/that parties weren't in fact adverse or that values should be reallocated and didn't otherwise effectively counter evidence that agreement best represented willing sellers' and buyer's contemporaneous views of properties' FMVs. Z. FSA 20124801F (October 26, 2012). The FSA concludes, for several different reasons, that there was constructive and actual receipt in an LKE type program. The taxpayer apparently did not claim that the program met the requirements of Rev Proc 2003-39. The IRS may not have been able to reach some of its conclusions if the program would have qualified under the Rev Proc. AA. ILM 201325011 The National Office concluded that utilizing exchange proceeds that were deposited into a joint exchange account to pay down debt from lines of credit that were secured by both exchange properties and non exchange properties, in which the lines of credit were used to purchase both exchange and non exchange properties, did not result in constructive receipt. The taxpayer was obligated to use the proceeds to pay down the debt, although this is arguably different from a sale of property subject to a debt where the closing agent is required to pay off an existing mortgage. It also appears (but not clearly stated) that the exchange proceeds, while in the joint account and prior to being used to pay down the debt, would also have secured the lines of credit (even though the g6 restrictions would have prevented taxpayer from being able to pledge or benefit from the use of the proceeds). BB. VIP's Industries Inc. et al. v. Commissioner; T.C. Memo. 2013-15; The Tax Court held that a 21 1/3 year lease is not like kind to a fee. That holding is not surprising, but more interesting is the discussion concerning improvements. Taxpayer argued that even if the 21 1/3 year lease is not like kind to the fee, most of the value was in the improvements and they were like kind to the fee. The court said that under the lease, the

improvements belonged to the lessor so they were not the taxpayer's to transfer. The obvious implication is that if the lease would have provided the usual language to make sure the lessee is treated as the owner for tax purposes (e.g., being able to tear down the improvements on termination of the lease), the improvements would have (or might have) been considered like kind to the fee. Contrast this with the statement in the IRS Fact Sheet, referred to above. This may also suggest that a taxpayer should be able to lease its own property to a QI and have the QI build the improvements (the IRS would seem to have a stronger case against an EAT doing this because the Rev Proc is a more limited safe harbor). I have no doubt, however, that the IRS would strongly contest such a position. CC. Rev Rul 2013-14 Mexican land trust, which was created only to hold title to Mexican land by non Mexican residents, and has no powers to do anything, is not a trust within the meaning of § 301.7701-4(a). Therefore, the trust would be disregarded as an entity for purposes of a 1031 exchange. This ruling is similar to Rev Rul 92-105 involving an Illinois land trust. DD. LTR 201308020 (November 15, 2012). Providing exchange tracking software does not make person a disqualified person. EE. LTR 201332010 (April 22, 2013) The taxpayer was using an Exchange Accommodation Titleholder ("EAT") in a reverse exchange under Rev Proc 2000-37 to exchange used vehicles for new vehicles through a Qualified Intermediary ("QI"). Taxpayer represented that it was engaged in a mass asset LKE program that qualified under Rev Proc 2003-39.

The EAT acted as the procurement company reseller for state sales tax purposes. It acquired legal title to relinquished property and replacement property and obtained certain licenses and registrations to carry out the required transactions. The EAT registered to do business as a foreign corporation in all states where the taxpayer had transactions, and obtained and maintained a valid sales tax permit in virtually every state that levied a sales tax. The issue in the PLR was whether the EAT was a "disqualified person" (the definition being the same as for a QI) because of the services in acting as a procurement company reseller.

Despite the fact that the services go way beyond what is expressly permitted in Rev Proc 2000-37, and, in performing such services, the EAT was presumably acting as an agent of the taxpayer, the IRS held that the services did not result in the EAT being a "disqualified person," on the theory that they were "reasonably connected" with facilitating exchange transactions." Query whether the IRS would have reached the same result outside of the mass asset Rev Proc 2003-39 type of LKE program.

FF. NORTH CENTRAL RENTAL & LEASING v. U.S., 112 AFTR 2d 2013-XXXX, (DC ND), 09/03/2013

This case involved a related party exchange where the related party apparently purchased the property from the manufacturer solely for the purpose of conveying it to the taxpayer through a QI, as part of an LKE program. The related party was able to defer payment (which it received from the taxpayer) to the manufacturer for up to six months. The court held for the government. This decision seems to be wrong and my Portfolio cited this type of situation (although without the deferment of the payment) as one which arguably should come within the exception to 1031 (f)(4). The case is on appeal to the Eighth Circuit. GG . Rev Proc 2014-3 The IRS added related party 1031(f)(4) transactions (i.e., the non tax avoidance exception thereto) to the list of areas they will not issue rulings on. HH . Frank J. Blangiardo v. Commissioner; T.C. Memo. 2014-110; No. 11978-13 Tax Court held that taxpayer’s son who was an attorney and acted as a QI, was a disqualified person. II. PLR 201408019 In PLR 200251008, the IRS permitted a related party to lease land to an EAT which constructed improvements and transferred the improvements, subject to the ground lease to the taxpayer. In Rev Proc 2004-51, the IRS said that it was studying whether this type of transaction will be permitted (it is clear the IRS would not permit the taxpayer to lease the land to the EAT). In PLR 201408019, the IRS issued a ruling similar to PLR 200251008. As a condition of the ruling, the taxpayer had to represent that both the taxpayer and the related party would hold onto their respective interests for at least two years. Does that make sense? JJ. Fragmentation There may be situations where a taxpayer might attempt to have a taxable sale of high basis property and a 1031 exchange of low basis property to the same buyer, pursuant to one contract. Whether this fragmentation would be recognized should depend on several factors, including whether the contract is contingent on all properties being conveyed (as opposed to just a reduction in the purchase price in the event one property cannot be conveyed), whether the properties must legally or practically be used together, whether they are contiguous, whether there is one contract and whether they were purchased from the same buyer). An IRS official recently said fragmentation is achievable. KK. Cosentino v. Comm'r, T.C. Memo. 2014-186 (September 11, 2014). The Tax Court held that payments made by an accounting firm to a taxpayer in satisfaction of a malpractice claim for advice in connection with a 1031 exchange is not income to the taxpayer. What seems to be different here from other cases involving malpractice payments not resulting in income is that the tax liabilities did not result from an error made by

the accountants but rather from an abusive tax avoidance scheme structure (i.e. a "listed transaction"), but yet the Court still held the payment was a return of the taxpayer's capital and not income. LL. TAM 201437012 This is a very generous TAM. The IRS allowed the taxpayer, in an LKE program, to retroactively rematch replacement property because the original replacement property was considered to be held primarily for sale. I doubt the IRS would have reached the same conclusion in a non LKE setting. Assume Taxpayer commenced an exchange on day 1, and commenced a different exchange on day 3. The first exchange was determined not to qualify because the replacement property was held primarily for sale. On the second exchange, the replacement property was identified 40 days later and acquired 100 days later and there was excess replacement property acquired. Could the excess replacement property be matched with the first exchange? Very unlikely.

VIII Effect of Series LLC Regulations? The recently issued proposed series LLC regulations could create opportunities for taxpayers doing like kind exchanges, particularly if the structure could be utilized instead of the typical multi LLC structure with a master LLC and numerous wholly owned LLC's. IX FUTURE OF 1031 A. President’s Economic Advisory Board Tax Reform Proposals, dated August, 2010, presented the pros and cons of repeal or modification of §1031. B. New York Times article dated January 7, 2013 and New York Times editorial dated March 17, 2013 urging repeal of section 1031. C. Recent tax reform proposals from President Obama, House Ways and Means Committee Chairman Dave Camp, and former Senate Finance Committee Chairman Max Baucus would either repeal section 1031 or limit the amount of deferral for real estate to $1m per year. The JCT recently doubled, last year's five year estimate of loss of revenue from 1031, from $47.3 billion (2013-2017) to $98.6 billion (2014-2018). D. Nevertheless, it is doubtful there will be any overall tax package this year. E. States are also desperately seeking revenue and there could be changes at the state level. On Nov 12, 2008, the California Legislative Affairs Office, which is a Government office that provides advice to the California legislature, recommended total repeal of 1031. Members of

the Tax Section of the California Bar have written a letter to Treasury and IRS recommending converting 1031 into a rollover provision.

F. Except perhaps in the mass asset exchange area, there does not appear to have been significant Federal audit activity in the 1031 area. There has been New York State and California activity.

CAREFUL WHAT YOU SAY: ETHICS IN REAL ESTATE

by

Luise A. Barrack, Esq. Rosenberg & Estis, P.C. New York, New York

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2014 Advanced Real Estate Transactions Friday, December 5, 2014

NYSBA Co-Sponsors: Real Property Law Section

Committee on Continuing Legal Education

CAREFUL WHAT YOU SAY: ETHICS IN REAL ESTATE Luise A. Barrack

Managing Member - Rosenberg & Estis, P.C.

AGENDA

I. Introduction

II. Transactions with multiple parties

Addressing conflicts

III. Achieving your clients’ goals without violating ethical rules -- You can get there from here

Truthfulness in Statements to Others

Conduct involving Dishonesty

IV. Ethics in Negotiation: Fact, Fiction and Fantasy

Who can you speak with?

What do you do when…?

V. 21st Century Ethical Issues

Electronic transmissions and Social networking sites

VI. Q&A

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A presentation of the essential ethical questions and issues relevant to real estate transactions

INTRODUCTION: First, let me say I am delighted to have been asked to return to speak at the Real Property Law Section of the NYS Bar Association. As you can see from the Agenda, I have been asked to speak about ethics and you may wonder what I did to draw the short straw! But, actually, all joking aside, I am excited to be speaking about this, which is funny considering the topic of this discussion is “Careful What You Say!” Which I will be – Those of us who practice law in private practice on behalf of an interest – a party – a client -all want to practice as well as we can for our clients. Our success as attorneys depends on it. However, no matter how important it is for any of us to do “our best” and represent our clients zealously, ethics teaches us that there are important bounds to what we can do on behalf of our clients. We are constrained in what we can say and what we can do and are confronted with situations in which we must be guarded in what we say and do and in what we allow our clients to say and do on a daily basis. In fact, we can be constrained in who or what entities we can represent.

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II. TRANSACTIONS WITH MULTIPLE PARTIES Who can you represent? This should generally not be a difficult question to answer. We represent the party that retains our services. However, all of us have likely been confronted with circumstances or heard of circumstances in which we are unable to represent a party who wants us to represent them. Why is that? First and foremost it is because we, as attorneys, owe our clients a duty of loyalty and that means that we cannot have conflicting loyalties or we must refrain from representing the party or parties who are dividing our loyalties. We can all think of instances in which it is obvious that such a conflict exists – it is easy to see that an attorney cannot be both a prosecutor and a defense attorney. What about the same attorney or the same firm representing a purchaser and seller where the business terms have been agreed upon in advance by the parties? Some instances are not at all as obvious to counsel and must be considered. I have sat at tables at which an attorney is representing more than one party in a transaction, including myself. How does that happen? For example, you represent a party that is interested in acquiring a piece of property and have been retained to advise the client on the property –meaning the good, the bad and the ugly. You are thereafter contacted by another long term client that is also interested in acquiring the property and wants to engage you to perform the same due diligence. No one wants to have to tell a long term client that you can’t represent them but you already represent a party in the transaction. What can you do? Can you represent both parties? In most instances, the first question, if you think you have a potential conflict, is can you represent and protect both the client that you already represent and the other client that you want to represent? If you have answered that question affirmatively, the next question is whether that potential conflict can be waived and if the clients will waive the potential conflict. You must discuss the potential conflict with the client that you already represent and ask if they will waive the conflict so that you can represent the other party and then obtain that client’s waiver as well. The conflict waivers should be in writing.

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Issues may also arise in a circumstance in which an attorney is asked to represent both the lender and the buyer in a real estate transaction. Typically, this would be a waivable conflict. However, the NYSBA has provided guidance in this area. In Opinion 952, the NYSBA determined that a lawyer may not represent both the buyer and the lender in a transaction when the lawyer regularly represents the lender in transactions and the lender regularly pays the buyer’s legal fees. This is especially so where the lender closes a high-volume of loans to multiple buyers and commonly refers the work to that firm. In that event, the NYSBA has deemed that the conflict would not be waivable, as the typical buyer in a residential transaction is not as sophisticated as an institutional lender and the attorney in this instance has a much stronger and more profitable relationship with the lender that routinely refers work to the firm. Another interesting circumstance which arises is when an attorney is acting as both an attorney and as a non-attorney, for example as a broker. The NYSBA has ruled that such dual representation is a non-waivable conflict, as a broker’s commission is typically dependent upon the successful closing and the attorney’s capacity in the transaction would conflict with the interests of the attorney who is acting as a broker and is likely receiving a higher fee for brokerage than the attorney is receiving for the transaction. The NYSBA recently issued Opinion 1015, which provides some guidance for an attorney who represents the seller of property and also wishes to act as the broker in the same transaction. The NYSBA determined that the conflict might be waiveable if the broker’s services are paid as a fixed and non-refundable fee, rather than as a commission contingent upon closing. In that circumstance, the attorney’s loyalty to their client and their judgment as an attorney is not being impacted by the prospect of a substantial brokerage fee that is dependent on the closing of the transaction. Accordingly, in that instance the attorney may represent the seller while acting as the broker in the transaction, as long as the seller properly waives the conflict. However, if a waiver is obtained, because the non-legal broker services would not easily distinguishable from the legal services provided, the non-legal work performed would then become subject to the same privileges and ethical obligations as an attorney-client relationship.

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When in doubt err on the side of caution. Remember it is a violation of

professional ethics to represent conflicting interests except by express consent of

all parties after a full disclosure of the facts. At least two areas of ethical concern

are impacted – divided loyalty and the possibility of divulging client confidences.

III. ACHIEVING YOUR CLIENT’S GOALS W/O VIOLATING ETHICAL RULES We are also constrained in what we can say and what we can do. Your client is selling or renting a piece of property and tells you that he or she wants x $ but will take y $ to sell or rent the property. The law restricts what we can/can’t do with that information. An attorney may not lie on his /her client’s behalf. TRUTHFULNEES IN STATEMENTS TO OTHERS NY Rules of Professional Conduct- Rule 4.1 prohibits an attorney from knowingly making a false statement of fact or law to a third person in the course of representing a client. You may say my client wants x amount of $ which is true- You can say my client feels the property is worth x amount (because that is a statement of opinion not fact. Can you say my client won’t take x amount even if you know he/she will? Yes. Estimates of price or value regarding the subject of a transaction and a party’s intentions as to an acceptable settlement of a claim are ordinarily not taken as statements of fact. Therefore it is considered permissible for you to state that your client would not take less than x amount even if he/ she would be willing to do so. A lawyer may downplay his or her client’s “bottom line”. Does this run afoul of Rule 8.4(c)? A lawyer or law firm shall not engage in conduct involving dishonesty, fraud, deceit or misrepresentation.”

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The American Bar Association (ABA) addressed this issue with respect to its model rule which is effectively identical to Rule 8.4 (c) and has issued an opinion stating that. Rule 8.4 does not require greater truthfulness than is required by Rule 4.1(a) There is a difference between permissible puffery about your clients “bottom line” and the following scenario: Your client really wants to sell a property for $10M- the prospective purchaser has offered $9M. You client asks you to tell the prospective purchaser’s counsel that your client has an appraisal of $11M (which you know is not true) to get your adversary to increase the price? No Doing so would violate Rule 4.1 which prohibits you from making a false statement of fact or law to a third person. ABA Model Rule 4.1 inserts “material” before statement of fact or law. Does that change our answer? It would be reasonable to conclude that would be material. What if your client asks you to state “someone was in to look at the property yesterday.” You know someone was in to see the property but that they had no interest. The statement here is literally true but you have created a misimpression.

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IV. ETHICS IN NEGOTIATION Who can you negotiate with? Can you contact the other party regarding the terms of the deal? It depends. Does the party have counsel? If so, you may not communicate with the party directly absent their counsel’s express consent. Nor can you as counsel use an intermediary to do so in violation of the “no contact” rule. The rule’s basis is a concern for over-reaching by adverse counsel and –interfering with the attorney- client relationship. You cannot escape the prohibition by having a third party non-attorney act as your conduit. Rule 4.2 “A lawyer may not make a communication prohibited by this Rule through the acts of another.” Rule 4.3 A lawyer is prohibited from stating or implying that he or she is disinterested, requires the lawyer to correct any misunderstanding as to their role and prohibits the attorney from giving advise except advise to secure counsel if the other party’s interests are likely to conflict with the lawyer’s client. [Unrepresented party] Can your client contact the other party directly even though the party has counsel? The general answer is yes with caveats. A lawyer is not prohibited from advising a client concerning a communication the client is legally entitled to make. [That said there are times that counsel for the party has proscribed communication between his or her client and the other party except through him or her. In such instance, you be castigated by opposing counsel if your client ignores those instructions. ]

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The thornier question is to what extent you may advise + assist your client in communicating with a represented party. There is an interesting discussion in the ABA Opinion that is part of the materials and there are a lot of unanswered questions about this area. There is not a lot of authority regarding the guidance an attorney can give his or her client regarding the communication. You can advise your client in fact you are duty bound to do so but there have been opinions stating that you cannot “script” or mastermind the communication although what that means is not entirely clear. You cannot have your client contact the other party effectively as your alter ego to avoid the proscription against contacting a party that has counsel. What should you do when? Do any of our answers change to the above scenarios if your client does not ask you to make the statements but makes the statement his or herself? No, the answer is the same. You cannot knowingly make a false statement of fact or law and you have an obligation as counsel to speak up if your client makes a false statement of fact. Your silence may be construed as assisting the client in fraudulent conduct. Rule 1.2(d) “a lawyer shall not –assist a client --- in conduct that the lawyer knows is illegal or fraudulent.” Is there a difference between your client stating that “there are no limits to developing the property” when you know that a zoning issue will impede development or if you know that there is a zoning issue but neither you nor your client says anything to the buyer about the issue. You don’t have an ethical obligation to reveal the issue although the deal could be voided based on unconscionability. In fact, Rule 1.1(c) suggest that you should remain silent as a lawyer shall not intentionally “fail to seek the objectives of the client through reasonably available means permitted by law and these rules or (2) prejudice or damage the client.

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What about if you learned that a case was just decided that would change zoning and the purchaser’s ability to develop the property. You could not make an affirmative representation about the law but you do not have an affirmative obligation to disclose the change in the law to your adversary. I want to draw a distinction here to what is said in a court appointed mediation or a tribunal where an attorney owes a duty of candor toward the tribunal pursuant to Rule 3.3(a)(2) and Rule 1.0(w). V. 21ST CENTURY ISSUES Electronic communications I am going to go out on a limb and say that all of us use e-mail in our day to day communications. There are unique challenges attendant to those communications. We all have provisos on the bottom of our e-mail reminding the party receiving the e-mail that the communication is meant for a specific person and that to the extent that it has been received in error the party receiving it should delete it and notify the sending party that it was sent in error. The rules require an attorney to use care in using technology to communicate with clients. However, while the American Bar Association Rule 4.4(b) states that an attorney who receives a document relating to the representation of the lawyer’s client’s and knows or should reasonably know that the document was inadvertently sent should promptly notify the sender”, both the comments to the Rule and ABA opinions clarify that the notification requirement does not require that the attorney refrain from examining the materials or to abide the sending attorney’s instruction to delete the materials. Social Networking sites We are also all familiar with social networking sites that contain personal information- like Face Book- My Space, Linked in etc. To the extent that information is available to the public there is no proscription against an attorney accessing and utilizing same. However, what you cannot do nor have anyone acting on your behalf do is to “friend” that person in order to obtain information that would not otherwise be available to you.

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VI. Q&A

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BIOGRAPHY:

Luise A. Barrack is the Managing Member of Rosenberg & Estis, P.C. and co-heads the firm's Litigation Department, imparting her thirty plus years of trial and appellate experience to the firm. Her straightforward manner and exacting approach have led to her success and helped make Rosenberg & Estis, P.C. the tough and highly respected law firm it is today. Ms. Barrack's real estate practice concentrates on representing developers, lenders, commercial owners, hoteliers, not for profit corporations and educational institutions. She has substantial expertise in all facets of real estate litigation, at both the trial and appellate levels, and is an experienced practitioner in the Commercial Division of the New York State Supreme Court. Her Ms. Barrack is also one of New York City's leading Loft Law experts, handling legalization, valuation of loft fixtures, and the costs of code compliance. Ms. Barrack also represents owners and developers in construction litigation, developments, demolitions and assemblages, and disputes including succession rights, non-primary residence, and owner occupancy. In addition, she is seasoned in cooperative, condominium, and shareholder disputes. In one such matter, Ms. Barrack obtained a judgment for maintenance withheld by a real estate attorney shareholder for his Park Avenue co-op and an order requiring him to pay the bulk of the attorneys' fees he caused his co-op to incur. Other matters handled by Ms. Barrack include: defeating a claim that a developer was required to conduct an environmental study before filing an administrative application for permission not to renew rent stabilized tenants' leases in order to demolish a Central Park South building; reaching a multimillion dollar deal and property exchange with Columbia University for a client's property; representing New York Law School in recovering a site essential to building its new urban campus; and defeating a party claiming an option to purchase an interest in a High Line building.

AMERICAN BAR ASSOCIATION STANDING COMMITIEE ON ETHICS AND PROFESSIONAL RESPONSI BILITY

Forma l Opinion 11 -461 August 4, 2011 Advising Clients Regarding Di rect Contacts with Represented Persons

Parties to a legal matter have the right to communicate directly with each other. A lawyer may advise a client a/that right and may assist the client regarding {he substance of any proposed communication. The lawyer's assistance need not be prompted by a request from the client. Such assistance may not, however, result in overreaching by the lawyer. J

A lawyer may not communicate with a person the lawyer knows is represented by counsel , unless that person's counsel has consented to the communication or the communication is authorized by law or court order. ABA Model Rule 4.2 (sometimes called the "no contact" rule). Further, a lawyer may not use an intermed iary, i.e., an agent or another, 10 communicate directly wilh a represented person in violat ion of the "no contact" rule. 2

It sometimes is desi rable for parties to a litigation or transactional matter to communicate direct ly with each other even though they are represented by counsel. Two examples may be where the parties wish to cement a settlement or break an impasse in settlement negotiations. In this opinion, the Committee explores the lim its within which it is ethically proper under the Model Rules of Professional Conduct for a lawyer to assist a client regarding communications the client has a right to have with a person the lawyer knows is represented by counsel. Even though parties to a matter are represented by counsel, they have the right to comm unicate direct ly with each other.) In add ition, a client may require the lawyer's assistance and a lawyer may be reasonably expected to advise or assist the client regarding communications the cl ient desires to have wi th a represented person. A client may ask the lawyer for advice on whether the client may lawfu lly communicate directly with a represented person without their lawyer 's consent or their lawyer being present. The comments to Rules 4.2 and 8.4(a} state that such advice is proper.' Even if the cl ient has not asked fo r the advice, the lawyer may take the initiative and advise the client that it may be desi rable at a particular lime for the client to communicate directly with the other party.

For example, a lawyer represents a client in a marital dissolution. The client's husband a lso is represented by counsel. The part ies and their lawyers have reached an impasse in their negotiations over various issues. The c lient may ask her lawyer if she may commun icate directly with her husband to see if an agreement can be reached on some contested issues. Alternatively, the lawyer might independently

I This opinion is based on the ABA Mode! Rules of Professional Conduct as amendcd by the ABA House of Delegates through August 20 I I. The laws, court rules, regulations, rules of proft!ssional conduct, and opinions promulgated in individual jurisdictions arc controlling. 1 Rule 8.4(a). The Rule stales: "[ilt is professional misconduct for a lawyer to violate or altempt to violate the Rules of Proli:ssionat Conduct, knowingly assist or induce another to do so. or do so through the acts of another." ABA Comm. on Ethics and Profe~sional Responsibility. Formal Op. 95-395 (1995) (,"Since a I~wyer is barred undcr Rule 4.2 from communicating with a represented party about the subject of the representation, she [under Rule 8.4(a») may not circumvent the Rule by sending an investigator to do on her behalf Iha! which she is herself forbidden to do."); ANNOTATEO MODEL RULES OF PROFESSIONAL CONOUCT 408 (ABA 7'h ed. 2011) ("A lawyer may not, however, "mastermind" a client's communication wi th a represcnted person."). J See Holdren v. General Motors Corp., !3 F.supp.2d 1192, 1195 (D. Kan. 1998) ("there is nothing in the disciplinary rule~ which restrict a client's right to act independently in ini tiating communications with the other side, or which requires that lawyers prevent or anempt to discourage such conduct." (citing New York City Bar Association Formal Opinion No.199 1-2, at 5-6)): Dorsey v. Home Depot U.S.A., inc., 271 F.supp.2d 726, 730 (D.Md.2003) ("Nothing in the law prohibits litigants or potential litigants from speaking among and between themselves, as opposed to anorneys for such panies attempting direct communications with represented panies."); Northwest Bypass v. U.S. Army Corps of Engineers, 488 F.Supp.2d 22, 28-29 (D.N.H. 2007) (no! improper for represented party to communicate directly with represented opponent) . • See Rule 4.2 em!. 4 ("A lawyer may nol make a communication prohibited by this Rule through the acts of another. See also Rule 8.4(0.) cm!. I ("Lawyers are subject to discipline when they violate or aHempt to violate the Rules of Professional Conduct, knowingly assist Or induce another to do so or do so through the acts of another, as when they request or instruct an agenllO do so on the lawyer's behalf. Paragraph (a), however, does not prohibit a lawyer from advising a client concerning action the dient is legally entit led to take." ).

11-461 Formal Opinion 2

suggest that the possibility of resolving outstanding issues would be enhanced if the client communicates directly wi th her husband. The client also might benefit from the lawyer's advice on how she should conduct such settlement negotiat ions, the topics or issues to be covered, and the goals or objectives to be reached. The client also could ask the lawyer to prepare a marital settlement agreement with the goal of having her husband execute the agreement during her meeti ng with him.

The language of Rule 4.2 Comment [4) raises the primary question addressed in th is opinion, to what extent may the lawyer advise and assist the client in communicating direct ly with the represented husband without violating Rule 4.2 through the acts of another, i.e. , the c lient. S However, there is tension between Comment [I] to Rule 4.2 and Rule 8.4(a). In ABA Formal Op. 92-362 (1992), this Committee opined that, without violat ing Rules 4.2 and 8.4 (a), a lawyer may ethically advise the client to communicate directly wi th a represented adversary to determine if the adverse party's lawyer had infonned them that a settlement offer was pending. 6 The inquiring lawyer in the opinion represented the plaintiff in a civil case in which the defendant also was represented by counsel. Previously, the plaintiff's lawyer made a settlement offer to opposing counsel. Pla intiff's lawyer had received no response, and the case was set for trial in two weeks. Plaintiff's lawyer suspected that opposing counsel had not informed the defendant of the offer. In that opinion, the Committee concluded that, a lthough the plaintiffs lawyer could not communicate the senlement offer directly to the defendant wi thout violati ng Rule 4.2, the plaintiff's lawyer had an ethical duty under Rules 1.1 , 1.2(a), and 1.4(b) to advise the client that the lawyer believed his sett lement offer had not been commun icated by defendant's counsel to the defendant and that the plaintiff had the right to speak directly wi th the defendant to detennine whether the settlement offer had been communicated.

ABA Formal Op. 92-362 acknowledged tens ion between the lawyer's decision to advise the client of the right to communicate directly with a represented adversary and Rule 8.4(a)'s prohibition against the lawyer's doi ng indirectly what the lawyer cannot do di rectly. Nevertheless, the Committee concluded that "where the purpose of the communication is to ascertain whether a settlement offer has been communicated to the other party, Rule 8.4(a) should not be read to preclude the lawyer's fulfilling the lawyer's duty, reasonably expected by the client, fu lly and fair ly to advise the c lient of the lawyer's best professional judgment as to the exercise of the client's rights in furtherance of the representat ion. ,, 7 The Committee expressly indicated that it was not addressing what the lawyer might tell the client to say to the other party and where the line might be crossed before running afoul of Rule 8.4(a). The Committee was careful to note that if the c lient was on ly going to find out if the other party had been told of the offer, there would be no violation of the rules. Several bar ethics comm ittees likewise have concluded that it is not a violation of the professional conduct rules for a lawyer to suggest or recommend that the c lient communicate directly with a represented person. '

The decision to communicate di rectly with a represented person may be the cl ient's idea or the lawycr's. Some decisions and opinions suggest thaI counsel may be violati ng the rules prohibiting communication with a represented party by encouraging or failing to discourage a client speaking directly

j We conclude that a lawyer's client is "another" for purposes of Rule 8.4(a). In re Marietta, 569 P.2d 92 1 (Kan. 1977) (lawyer sanctioned for preparing release and advising client 10 pass it on to represented adverse party); S.F. Bar Informal Opinion 1985- 1 (1985) r·it would be inappropriate ... for la] lawyer 10 use the client as an indirect means of communicating with the adverse pany" in sellJement negotiations). 6 ABA Comm. on Ethics and Profl Responsibility, Formal Op. 92-362 (1992) (Contact With Opposing Pany Regarding Senlement OlTer). in FORMAL AND INFORMAL ETHICS OPINIONS 1983-1998 (ABA 2000) al 85, 88. 7 !d. at 89. , See. e.g .. Massachuseus Bar Op. I 1-03 (20 I I) (nOI violation of Rules 4.2 and 8.4(a) for lawyer to advise client to urge another pcrson to release allachment on client's property. even though other person is represented by counsel); Oregon Eth. Op. Op. 2005-1 47 (1997) (Direct Communication Between Represented Panies) ("Allowing the panies themselves to discuss the issues and possible avenues for senlement does not conflict with the policy behind the rule [prohibiting a lawyer from causing another to communicate on the subject of the representation]." ): Calilbmia Comm. on Prof I Resp. and Conduct Formal Op. 1993-131 (1993 ) (lawyer may confer with client as to Strategy to be pursued in, goals to be achieved by, and general naturc of communication client intends to initiale with opposing pany as long as communication itself originates with. and is directed by, client and nOllhe lawycr); Michigan Elh. Op. CI-920 (1983) (in domestic relation case. it is permissible for lawyer to give client draft settlement proposal even when lawyer knows client may discuss document with spouse who is represented by counsel); San Francisco Bar Assoc. Infonnal Op. 1985-1 ( 1985) (lawyer may allow or encourage his client to attempt to resolve dispute by communicating directly with opposing party, so long as client is not directly or indirectly acting as agent of lawyer).


to the other party. 9 The "no contact" rules applied in these opinions, however. differ from the Model Rules in that they do not contain the relevant language in Rule 4.2 Comment [4) that "a lawyer is not prohibited from advising a client concerning a communication that the cl ient is legally entitled to make." As the Committee observed in Fonnal Op. 92-362, other rules may require that, in some situations, a lawyer advise the cl ient to consider communicating directly with her represented adversary about a matter related to the representation. Rule 1.1 requires that "[a] lawyer shall provide competent representation to a client." Rule 1.4{a)(2) requires the lawyer to consult with the client as to the means by which the client's objectives are to be accomplished. 10 These fundamental ethical principles, coupled with the comments to Ru les 4.2 and 8.4(a), suggest that the assistance a lawyer may give to a client extends beyond advising her of her right to communicate with her adversary.

Rule 8.4(a)'s prohibition against a lawyer's violating the rules through the acts of another raises questions about what a lawyer mayor may not say to the lawyer's client, or what the lawyer may do to assist the client in communicating directly with the represented opponent. These issues were explicitly left unaddressed in Formal Op. 92-362. When Formal Opinion 92-362 was issued. the comments to Rules 4.2 and 8.4 did nOI contain the current language that expressly permits the lawyer to advise the client regardi ng communications the client is legally entitled to make and actions the client is legally entit led 10 take. There is very little authority that provides guidance in any context regarding the scope of assistance and advice a lawyer may give a client under the comments to Rules 4.2 and 8.4. Some authority states that because of Rule 8.4(a)'s proh ibition against violating or attempting to violate the Rules of Professional Conduct through the acts of another, a lawyer may not "script" or "mastermind" a client's communication with a represented person and may violate Rule 4.2 by preparing legal documents for the cl ient to have a represented person sign without the assistance of theiT counsel.l I What constitutes "scripting" or " masterminding" the communication is not clear, but such a standard. if too stringently applied, would unduly inh ibit pennissible and proper advice to the client regarding the content of the communication, greatly restr icting the assistance the lawyer may appropriately give to a client. 12 Relying on language similar to Comment [4] of Model Rule 4.2, the Restatement (Third) o/The Law Governing Lawyers (2000) ("the Restatement') explains:

The lawyer for a client intending to make such a communication may advise the client regarding legal aspects of the communication, such as whether an intended communication is libelous or would otherwise create risk for the client. Prohibiting such advice would unduly restrict the cliem's autonomy, the client's interest in obtaining important legal advice. and the client's ability to communicate fu lly wi th the lawyer."ll

9 See. e.g., Miano v. AC & R Adv.:rtising, Inc. 148 F.R.D. 68, 82 (S.D.N.Y. 1993) ("where a client directly asks hisor her 3ttorney whether he should approach a n:preSCl\l.:d adversary, the attorney may not t:lhically recommend or endon;e such action·'); N. Y . City Ethics Op. 2002-3 (2002) (if client "conceives of the idea" of communicating with represented adversary. lawyer may advise client about it but must avoid helping client to eilher elicit confidential information or encourage other party to proceed wilhoul counsel); Massachusetts B3r Op. 82-8 (1982) (lawyer who has prepared senlcmem agreement on client's behalf should discourage client from speCifically discussing settlement with other party or directly sending lener that addresses settlemem wilhout consent of thaI party's lawyer). 10 See ABA Formal Op. 92-362, FORMAL AND INfORMAL ETHICS OPINIONS 1983-1998 al 88. II See, e.g., Holdgren v. General MOlors Corp., 13 F.Supp.2d 1192, 1193-96 (D.Kan. 1998) (lawyer in age discrimination case violated rules of professional conduct "through the acts of another" by encouraging client to obtain affidavits from coworkers, advising him of difference between "out of court statements" and signed affidavits for trial purposes, and advisin8 him how to draft affidavit); In re Pyle, 91 P.3d 1222, 1228-29 (Kan. 20(4) (lawyer "circumvented the constraints" of Rule 4.2 by, at client's request, preparing affidavit for her to deliver (o represented defendant in personal injury case); California Comm. on prorl Resp. and Conduct Fonnal Op. 1993-131 ("An attorney is also prohibited from scripting the questions to be asked or statements to be made in the communications or otherwise using the client as a conduit for conveying to the represented opposing party words or thoughts originating with the attorney.· '); Massachusetts Bar Op. ! 1-03 ("We believe, however, that the lawyer would cross the line if she prepared a release of the attachment and presented it to the sister tor execution wi thout the knowledge and express permission of the siSler's lawyer .. · J. 11 See n. ll. iJ RESTATEMENT (THIRD) OF THE LAW GOVERMl'G LAWYERS § 99 cml (k) (2000). See also John Leubsdort; Communicating With Another Lawyer's Client.· The Lawyer's Veto and Ihe Client's IntereSIS, t27 U. PA. L. REV. 683, 697 (1979) ("An extension of the (no-contact] rule to communications between clients is hard to reconcile with its ostensible purposes. Whatever dangers flow from the confrontation of professional guile with lay innocence are absent


Restatement § 99 Illustration 6 clarifies this point with the fol lowing scenario. A lawyer represents a client who has a dispute with a contractor. On her own, the client drafts a letter outlini ng her position in the dispute and shows a copy to her lawyer. Viewing the draft as inappropriate, the lawyer redrafts the letter and recommends that the cl ient send it out as redrafted. The client does so. The Restatement concl udes that the lawyer's assistance to the client was not an improper communication with a represented person.

The lawyer also may draft a document fo r the cl ient to del iver to the represented adversary although authority restricts the lawyer's assistance to situations where the el iem originates the communication, stating that it is improper for the lawyer to originate or direct the proposed communication. I' Section 99 of the Restatement does not explicitly address this question, a lthough Comment (k) and Illustration 6 are based on the el ient having ori ginated a proposed communication with a represented adversary. The line between pennissible advice and impermissible assistance may not always be clear. This Committee does not think that line should be drawn based on who ini t iates the fi rst draft ofa communication with a represented adversary. Such an approach favors only those clients who have the sophisticat ion to ask the lawyer to draft a document fo r the cl ient to give to a represented adversary. In addit ion, a llow ing the lawyer to assist only if the cl ient originates the substance of the communication leaves the unsophisticated client without the benefi t of the lawyer's advice in formulating communications that the ru les allow the cl ient to have with a represented person. Instead, the li ne must be drawn on the basis of whether the lawyer s assistance is an attempt to circumvent the basic purpose of Rule 4.2, to prevent a cl ient from making uninfonned or otherwise irra tional decisions as a result of undue pressure from opposing counsel.

This Commi ttee bel ieves that, wi thout violating Rules 4.2 or 8.4(a), a lawyer may give substantial assistance to a client regard ing a substant ive communication with a represented adversary. That advice could include, for example, the subjects or topics to be addressed, issues to be raised and strategies to be used. Such advice may be given regard less of who--the lawyer or the client........-<:onceives of the idea of having the comm unication.

This Committee favors the approach taken by Restatement § 99 Comment (k). Under that approach, the lawyer may advise the client about the content of the commu nications that the client proposes to have with the represented person. For example, the lawyer may review, redraft and approve a letter or a set of talking points that the elient has drafted and wishes to use in her communications with her represented adversary . Such advice enables the client to communicate her points more articulately and accurately or to prevent the client from disadvantaging herself. The cl ient also could request that the lawyer draft the basic terms of a proposed sett lement agreement that she wishes to have with her adverse spouse, or to draft a ronnal agreement ready for execution. Rules 4.2 and 8.4(a) may pennit the lawyer to ful fill the cl ient's request without violating the lawyer's ethical obligations. However, in advising the clien!, counsel must be careful not to violate the underlying purpose of Ru le 4.2, as explained in Rule 4.2 Comment f1 ]:

This Ru le contributes to the proper function ing of the legal system by protecting a person who has chosen to be represented by a lawyer in a mailer against possible overreachi ng by other lawyers who are participati ng in the malter, interfe rence by those lawyers with the client- lawyer relationship and the uncounselled disclosure of information relat ing to the representation. I'

when twO nonlawyer.; communicate .... Perhaps we huve again come across the desire to keep disputes safely in the control of lawyers."'); James G. Sweeney. Allorneys' Arrogance: Worning Unheeded. N. Y. L.J., June 17, 1991, at 2 col. 3 ("To dcny or deter the client from the Opportunity of entering into the gauging process of what value is to him in a particular dispute by denying him an opportunily to sit al the bargaining table with his adversary works against the very fundamental idea of the se lfand of human autonomy."). 14 See, e.g. . Cal ifornia Comm. on Profl Resp. and Conduct Formal Op. 1993-13 1 e'When the content of thc communication 10 be had with the opposing party originates with or is directed by the attorney, it is prohibited by ru le 2- I ~O."').

I~ See ABA Fomllli Opinion 9S-396 (1995), in FOR."IAL AND iNFORMAL ETHICS OPINIONS 1983-1998 (ABA 2000) at 330,334 ("The anti-contact rules provide protection orthe represented person against overreach ing by adverse counse l, safeguurd the c lient-lawyer relationship from inlerference by adverse counsel, and reduce the likelihood that clients will disclose privileged or other infonnation thai might harm their interests."). See also Niesig v. Team I, 558 N.E.2d 1030, 1032 (N. Y. 1990) ("By preventing lawyers from deliberately dodging adversary counsel 10 reach-and-exptoit the client alone, Ithe rule prohibiting communicating with a person represented by counsel] safeguards against clients making


Prime examples of overreaching include assisting the cl ient in securi ng from the represented person an enforceable obligation, disclosure of confidentia l information, or admissions againsl interest without the opportunity 10 seek the advice of counsel. To prevent such overreach ing, a lawyer must, at a minimum, advise her client to encourage the other party to consult w ith counsel before entering into obligations, mak ing adm issions or d isclosing confidential information . If counsel has drafted a proposed agreement for the client to deliver to her represented adversary for execution, counsel should include in such agreement conspicuous language on the signature page Ihat warns the other party to consul t with his lawyer before sign ing the agreement.

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lmprovidem sel1 lemenlS. ill-advised disclosures and unwarranted ooncessions."); State v. Gilliam, 748 So.2d 622, 638 (La. Ct. App. (999), writ denied, 769 So.2d 12 I 5 (La. 2000) (rule intended to "prevent disclosure of attorney-client communications and to protect a party from 'liability-creating statements ' elicited by a skilled interrogator"); Messing, Rudavsky & Weliky, P.e. v. President and Fellows of Harvard College, 764 N.E.2d 825, 830 (Mass. 2000) (ru le preserves counsel's "mediating rule" and protects clients from overreaching by other lawyers); Polycast Tech Corp. v. Uniroyal. Inc., 129 F.R.D. 621, 625 (S.D.N.Y. 1990) (rule prevents lawyers from eliciting " unwise statements" from opponents, protectS privileged information, and facilitates sett lements by allowing lawyers to conduct negotiations); CHARLES w. WOLFRAM, MOOERN LEGAL ETIlICS, § 11.6.2, at 6 11 (1986) ("The prohibition is founded upon the possibility of treachery that might result if lawyers were free to exploit the presumably vulnerable position of a representcd but unadvised party"); EC 7- 18 ("The legal system in its broadest sense functions best when persons in need oflegul advice or assistance are represented by their own counscl."). 16 This opillion does not address situations in which a lawyer advises a client wilh respect to using nn investigator or

agent to gather facts from a represented person. These situations may involve II variety offactoTS. not considered in this opinion. rclevant to the presence or absence of overreach ing.

AMERICAN BAR ASSOCIATION STANDING COMMITTEE ON ETHICS AND PROFESSIONAL RESPONSIBiLiTY 321 N. Clark Street, Chicago, Illinois 60654-4714 Telephone (312) 988-5310 CHAIR: Robert Mundheim. New York, NY • Nathaniel Cade, Jr., Milwaukee, WI • Lisa E. Chang, Atlanta, GA . James H. Cheek, III . Nashville. TN • Robert A. Creamer, Evanston, IL • Paula J. Frederick. Atlanta, GA . Bruce A. Green, New York., NY • James M. McCauley, Richmond, VA . Philip H. Schaeffer, New York, NY • E. Norman Veasey, Wilmington. DE CENTER FOR PROFESSIONAL RESPONSIBiLiTY: George A. Kuhlman. Ethics Counsel; Eileen B. Libby, Associate Ethics Counsel

itl2011 by lhe American Bar Association. AU rights reserved.

,)p, ' IAI I5~Uf : WHAT'S NEW IN ETHICS AND PRIVILEGE

Ethical Obligations Regarding Inadvertently Transmitted E-Mail Communications By Eric M, Hellige

On a daily basis, with a click of the mouse, hundreds Df l'·mails are (,xchanged behvel'1l attorneys and their diI:'nts. Mud. of this tfil(fiC constitutes harmless correspondence, but often the con tent of the e-mai! includes sensitiw, confidential or privileged information. Occasionally, in the constant stream of ~'-mail exchange, an e-mail will inadvertently be sen t directly or copied to the wrong party. This s ituation presents a serious concern for attOT

neys charged with milin taining their own confidentiality, as wel l as thai of their clients. Desp ite how regularly these circumstances arise, there is no clear consensus among the relevant ru les of professional conduct or the ethics opin~ ions interpreting the rules on a ttorneys' ethica l resp()nsi~ bi li ties regarding inadvertently sent or received e-mails, nor does the case law provide consensus concerning any USl' th~ ftXipient may make of inadvertently rt.'Cf-'ived e-mails, or their impact on the waiver of attorney-clien t privilege. As a result, attorneys face ,1 conundrum when they l"t'"Ceive inildvertently disclosoo e-mails. This article presents attorneys practicing in the State of New York with som(' basics that will enab le them to better deal with inadvertently transmitted communications.

Histori ca l Development In 1992, the American Ba r Association (the "ABA")

Committee on Ethics and Professional Responsibil ity is~ sued ABA Formal Opinion 92-368, "/uadvtrlenl Disclosure o/G.mjidcntial Mnteria/s," which prov ided that

la]lawyer who receives materials that on their face appear to be subject to the attorney-clien t priv ilege or o therwise confidentiaL under circumstances where it is clear they were not intended for the receiving lawyer, should refrain from t:'Xamin ing the materials, notify the sending l<nvyer and <lbide by the i.nstructi.ons of tht' lawyer who sent thl:'!m .1

However, the ABA Model Code of Professional Rt:'sponsibi lity (the predecessor to the ABA Model Rules of Professional Conduct) provided no real basis for tht:' duties imposed in ABA Formal Op. 92-368. In fact, ABA Formal Op. 92-368 was deigned to admit that "fa] satisfactory il ilswer to the gUl'stion posed cannot be drawn from a narrow, literalistic ~ading of the black letter of the [ABAI Model Rules."2 As a result, the ABA Committee exp lained thai it had derived th~st' du lies from five main principles:

18

(i) the importance the [ABA] Model Rult'S give to lllilintaining client confidenti ality, Oi) the law govern ing waiver of the attorney-client pr ivilege, (iii) the law governing missent property, (iv) the similarity between the circumstanct.'S here ad dressed and other conduct the p roft:'ssion universally condemns, and (v) the receiving lawyer's obliga tions to his client .3

Following the issuance of ABA Forma l Op. 92-368, New York weighed in with its responses. The New York County Lawyers' Association Com mittee on Professiona l Ethics issued Formal Opin ion 730, "Ef/lienl Oliligatiofls UpOI1 Receipt oj IlIarlvertently Disclosed Privilegerllnjormatioll," in 2002, which basically rei teril ted Formal Op. 92-368.~ In 2003, the Association of the Bar of the City of New York (the "ABCNY") Com mittet.' on Professional and Judiciill Ethics issued Formal Opinion 2003-4, "Obligations Upon Rl'Cf'it,illg II Cll lllrlltlllicnlim! C(lIIluillillJ.; Ctmfirlences or Secrets Not il/tentied for fI/!: Recipient," which concluded tha t

a lawyer receivi ng a misdire(ted communication containing confidences or secrets (1) has obliga tions to promptly notify the sending a ttorney, to refrain from rev iew of the com munica tion, and to return or destroy the communication if so requested, but, (2) in limited ci rcumsta nces, may subm it the communica ti on for in cam-em Te\'iew by a tribwlal, and (3) is not ethically barred from using information gleaned prior to knowing or having reason to know tha t the communication con~ tains confidences or secrets not in tended for the receiving 1;I'Nyer. However, it is t.'Ssential as an ethical matter tha t the receiving attorney promptly notify the send ing atlornt:'y of the disclosure in order to give the sending attorney a reasonable opportunity to promptly ta ke whatever steps he or she feels are necessary.5-

In reaching this conclusion, ABCNY Formal Op. 2003-4 backt:'d. away from absolute im position on lawyers of the duties olltlined in ABA Furmal Op. 92-368. [n 2004, the New York State Bar Association (the "NYSBA") Com~

millee on Professional Ethics, in Opi nion 782, "E~n/Uilil/g

NYS BA Inside 1 SpringlSummer 20 12 1 Vol. 30 I No . 1

c, p, IA. bSUE: WHAT'S NEW IN ETHICS AND PRIVILEGE ,

()pClml"l!t~ That May Cnl/faill Hiddrll Data Rl'jlecting C/ienl Confidel/ces and Secrets," described the standard of care lawyers should follow when using e-mail communication, stating thai "a lawyer who uses technology to communicate with clients must use reasonable care with respect to such communication ... /t lhe extent of [which] v.lrliesl with the circumslances,"t>

Addressing the Confusion For many years, confusion remained as to whether

tilt., thrt.'E' dut ies set forth in ABA Formal Op. 92-368 were appropriate sta temen ts of professional responsibility to which lawyers must ad here. As a consequence, in the last major revision of the ABA Model r~ules of Professional Conduct, the ABA adopted new rules governing inadvertent disclosure. ABA Model Rull! 1.6(3), "Confidentiality of illformation," prevented attorneys from reveaLing information abou t a client without consent and required them to protect confidential client information? Comments to the rule required lawyers to safeguard client information from inadvertent or unauthorized disclosure, and 10 take reasonable precautions to prevent information from reaching unintended recipients.s ABA Model Rule 4.4{b), "Respect .filr Rights of Third Persolls," reduced the ethical dulies imposed on attorneys who receive inadvertent e-mails, leaving only the duty to notify the sender of the inadvertent transm ission.'} As a result of that change, in 2005, the ABA Committee on Ethics and Professional Responsibility iS~lIed ABA Formal Opinion 05-437, "lnndz>crteIJt Dischl.~WT '~f COIJfidential Materials: WitlJdmwal of Formal 0l'illi(ll/ 92-368 (NoVLmbl'r 10, 1992)," withdrawing its previously expressed opin ions in ABA Formal Op. 92-368.10

Despite the ABA's adoption of rules governing inadvertent disclosure, the New York Lawyer's Code of Professional Responsibility, which governs thl' conduct of New York ilttorneys, Lacked provisions expressly governing inildvertent disclosure until 2009. State courts and ethics comm ittees struggled with how to deal with such situa tions, and a body of law developed to expressly address such iSsues. However, the New York Rules of Professional Conduct, which became effective on April 1, 2009, attem pted to rectify this gap by including a provision tha t specifical ly addressed inadvertent disclosure. New York Ru le 4.4(b), "Rcspcct for Rigllls of Third Person," st<1tes that "[a]lawYl!r who receives a document rela ting to the representation of the Lawyer's client and knows or reilsonably should know that the document was inadvertently sent shall promptly notify the sender."11 Given the brevity of New York Rtdc 4.4(b), the commen ts to the rut£', WlllCh sp~l'ificalty provide that the term "document" includes any electronically stored information tha t can be read (including t.'-maits), are more helpfut in providing guidance to attorneys. The com ments state ilS follows:

NYSBA Inside [ Spring/Summer 2012 I Vol. 30 I No.1

!l J Responsibility to a cl ient rt.'qu ires a lawyer to subordinate the interests of others to those of the dient, but that responsibility does not imply thai a lawyer may disregard the fights of third persons. It is impractical 10 catalogue alt such rights, but they include legal restrictions on methods of obtaining evidence from th ird persons and unwarranted intrusions into privileged relat ionships, such as the client-lawyer rela tionshi p.

[2] [Rule4.4(b)J recognizes that lawyers sometimes rl'(eive documents that were mi stakenly sen t, produced, or otherwise i.nadvertently made available by opposing parties or their lawyers. One way to resolve this situation is fo r lawyers to enter into agreements contai ning explicit provisions as to how the parties will deal with inadvertently sent d ocuments. In the absence of such an agreement, however, if a lawyer knows or reasonably should know that such a document was sent inadvertently, this Rule requires only that the lawyer promptly notify the sender in order to permit that person to take protective measures. Although this Rule d oes not require that the lawyer refrain from reading or continuing to read the d ocument, a lawyer who reads or conti nues to read a documen t tha t contains privileged or confidential information may be subject to cou rt-imposed silnctions, indudi ng disqualificCl tion and evidence-preclusion. Whether the lawyer is required to take additional s teps, such as returning the original document, is a matter of law beyond the scope of these Rules, as is the question w hether the privi leged status of a document has been waived . Similarly, this Rule does not address the legal duties of a lawyer who receives a document that the lawyer knows or reasonably should know mily have been wrongfully obtained by the send ing person. For purposes of thi s Rule, "document" includes e-mail and other electronically stored information subject to being read or put into readable fo rm.

[3] Refraining from reading O f continuing to [ead a document once a l<1wyer realizes that it was inadvertently sent to the wrong address and returning the docu-

19

SPf ' IAL ISSUE : WHAT'S NEW IN ETHICS AND PRIVILEGE

men! to the sender honors the policy of th~se I{utes to p rotect the principles of clien! confidentiality. Because there arc circu mstances wlwrt! a lawyer's eth i-C,)! obliga tions should not bar use of the information obtaint;.'CI from an inadvertently $en t docu ment , however, this Rule does not subjt,'ct a lawyer to professional diScipline for reading and using that information. Nevertheless, substantive law or procedural rules may require a lawyer to refrain from read ing an inadvertently sen t document, or to return the document to the sender, or both. Accordingly, in dedding whether to retain or use an inadvertently n.'Ceived document , some lawyers may take into account whether the attorney-cl ient privilege would attach. But if applicable law or rules do not address the situation, decisions to refrain from read ing such documents or to return them, or both , il re matters of profeSSional judgment reserved to the lawycr. 12

Addressing the S,1me issue two years later under the AHA Model Rules of Professional Conduct as amended by thro> ABA House of Delegates through August 2011, the ABA Standing Committee on Ethics and Professional Responsibility issued two opinions that address a ttorneys' e thica l obligations concerning inadvertently disclosed correspondence under the ABA Model Rules.

ABA Formal Opinion 11-459, "Duty to Protect the COllfidelltiality of E-mail Communications with Olle's Client" l'xplains that lawyers have a duty to warn clients about the risks of sending or receivi ng electronic communications wht're th~re is a sign ifiCilllt risk that an employer or third party may gain access to privileged e-mail corr€'spondenceP As a general nile, the ABA explains, lawyers should advise clients about the importance of communicating with the lawYl'r in a manner that prutt'c!s the confidentiality of e-mail communica tions, and warn the client against discussing their com munications with others. A lilwyer shou ld also instruct the cl ient to avoid using an t:lllp loyer-issued computer, telephone or other electronic device to receive or transmit confidential communications. Despite e-mail becoming a common replacement for le iters and in·person meetings, e-mail communications without sa feguard s can be just as risky as having a confidential facc+to-face conversa tion in a setting where it (",111 be overheard .14

The ABA also points to various factors that tend to establish an ethica l duty on the lawyer to protect clit'n tlilwyer confidentiality by warning the client against

20

using business devicL>S for commu nications with their own counsel. Clients should be warned if (i) they have engaged in, or indicated an intent to engage in, e-mail communicatiuns; (ii) their employment provides access to wurkplace communication devices; (iii) given the circumstances, the employer or other third party has the abili ty to access e-mail com munications; or (iv) as fa r as the lawyer knows, the client's employer's policies and the jurisdiction's laws do not clea rly prutect those communications. 15

ABA Formal Opinion 11 -460, "Duty Wherl Lowyer Rl.'ceives Copies of (l Third Party's E-mail Communiclltions with C01mscl," exp la ins that when an emp loyer's lawyer receives copies uf an emploYl't"s private comm unications with counsel, ABA Model Rule 4.4(b) does not require the employer's lawyer to notify opposing counsel of the receipt of the commun ications.16 With ABA Formal Op. 11-460, the ABA has provid ed a clear distinction for dealing with inadvertently received communications based on how they Wl're disclosed to the unintended recipients. In the case of a communication that is inadvertently sen t to an unintended recipient by one of the parties to the communication, ABA Model Rule 4.4(b) "ob ligates the receiving lawye r to notify the sender of the inadvertent transmission promptly. "I? However, when the communica tion has been re trieved by an unintended recipient from a public or private space where it is stored, such as in the context of an employer 'S access 10 an employee's files, then the ABA opines that ABA Model Ru le 4.4(b) d oes not require the third party to notify opposing counsel of the receipt of the communica tions. ls

It is important to note that the ABA Model Rules and the ABA formal opinions afe not bind ing, and merely provide guidance to the states regarding the ABA's position on the rules of professional cond uct, and how to interpret those mies. Therefore, attorneys should pay attention to developments on ethical issues in the sta te laws, ethical rules and case law of their local jurisdict ion.

Curr@nt Exp@ctations of Professional Conduct To review, the following are the current positions of

the ABA and the State of New York uf which every lawyer should be aware when he or she receives an inad vertently disclosed e-ma il :

ABA

Send er's Duty When Tra nsmitting E-mails The sender has no explicit duty regarding the sending

of e+mails. A lawyer's general duties with rega rd to the confidenti ality of client information under ABA Model Rl11e 1.6 apply to e-mail communications as well. 19

NYSBA Inside I Spring/Summer 2012 I Vol. 30 I No.1

C; "f lA, "'SUE: WHAT'S NEW IN ETHICS AND PRIVILEGE

Must the Recipient Notify the Sender Upon Receipt of an Inadvertently Transmitted E-mail?

Yes. Under ABA Model Rule 4.4(b), <I " lawyer w ho receives a document relating to the representation of the lawyer's client and knows or reasonably should know that the document was inad vcrtently sen t shall promptly notify the St'nder."20 However, ABA Formal Op. 11 ·460 dMifit!s thil t ABA Model Rule 4.4(b) does no t impose notificiltion obligations on lawyers thai retrieve inadvertently disclosed communications from a public or private ::pher~, rather than receiving them from a specific sendt'r.~ l

May the Recipient Review an Inadvertently Transmitted E-mail?

Yes. ABA Forma l Op. 05-437 sta les that although ABA Model Rule 4.4(b) "ob ligates the receiving lawyer to notify the sender of the inadvertent transmission promptly," it "does not require the receiving la wyer either to refrain from examini ng the materials or to abide by the instructions of the sending lawycr.,,22

New York

Sender's Duty When Transmitting E-mails NYSSA Op. 782 notes that "a lawyer who uses tech

nology to comm unic<l te with clien ts must usc reason<lble care with respect to such communication, and therefore must assess th ~' risks attendant to the use of that tedmoloSY and dt:'tcrmine if the mode of transmission is appropri<l te under the circumstances."23 The extent of reasonable care varies with the circumstances.

Must the Recipient Notify the Sender Upon Receipt of an Inadvertently Transmitted E-mail?

Yes. ABCNY Formal Op. 2003-4 concludes that an attorney who rt.'Ceives a communica tion and is exposed to its contents "prior to knowing or having reason to know that the communication was misdirected ... is not barred, at least as ,111 ethical matter, from using the information," but also states that "it is essential as an ethical matter that a receiving attorney promptl y notify the send ing a ttorney of an inadvertent disclosure in order to give the send-ing attorney a reasonable opportunity to promptly take wha tever steps hc or she fee ls are necessary to prevent any further disclosure."24

May the Recipient Review an Inadvertently Transmitted E-mail?

Yes. The comments to New York Rule 4.4(b) sta t .. that while "refrain ing from reading or conti nuing to read a document once a lawyer realizes tha t it was inadvertently scnt to the wrong address" honors the policy of the Rules, since there may be "circumstances where a lawyer's

NYSBA Inside I SpringlSummer 2012 I Vol. 30 I No.1

ethical obliga tions should not bar use of the information obtained from an inadvertently sent document, (the] Rule does not subj~'C t a lawyer to professional discipline for reading and using that information."25 The comments to New York Rule 4.4 do, however, warn lawyers to take into account any applicable law or rules before reviewi ng inadvertently received e-ma il s. In the absence of such law or rules, "decisions to refrain from reading such documents or to return them, or both, are matters of professional judgment reserved to the lawyer."2b

Endnotes t. ABAConlm. on Ethics and Prof'l Resp<)ll.~ibility, Formal Op. 92·368

(1992).

2 hl.

3. 101.

4. NYCLA Conun. On Prof'l Ethics, Formal Op. 730 (2002).

5. fl.BCNYComm. on Prof'! and Jud. Ethics, ]:orma] Op. 2003-4 (20(H).

6. NYSBA Comm. un Prof·! Ethics, Formal Op. 782 (2004).

7 Model r~\llcs of Prol'l Conduct. R. 1.6(a) (1983).

8. Modd I<\lk~uf t'rof'l Cundu("t . R. 1.6 emt. (19t!..1).

9. Model Ru"-~ of I'rof'! Conduct. 1<. 4.4(b) (1983).

10. ABA Comm. on E.thics ond ('rof't r~L-spons;bitity, Formot Op. 05-437 (2005).

I\. NY Ruks of Prof'l Conduct. R. 4.4(b) (2009).

12. NY Rule; of Prof'l Conduct. R. 4.4 cm! (2009).

13. ABA St;"lnding Cumm. on Ethics and I'wf'll{esponsibility, Formal Op. 11 -459 (2011).

14. ld.

15. Id.

16. ABA Standing Comm. on Ethics and Prof"] Responsibility, Formill Op. 11-460 (2011).

17. ABA Comm. on Ethics ilnd Prof'l Responsibility. Formal Op 115-437 (2005).

18. ABA Stonding Comm. on Ethks ond Profl Rcspo11$ibitity, Fomlo] Op 11-460 (2011).

19. Mod('l l<ul~s of I'rofl Conduct. R. 1.6(a) (1983).

20. Model RulL'S or Prof'l Conduct. It 4.4(b) (1983).

21. AIM SI,mding Comm. on Ethics ~nd l'rof'l R,,"'ponsibitity, Formal Op.11 -46()(2011).

22. AtlAComm. l)n Ethic; ilnd I'm!'t Respon-;ibi!ity, Formal Op. 05·437 (2005).

23. NYStlA Comm. Oil Prof') Ethic;, Formal Op. 782 (2004).

24. ABCNY Comm. on Proft and Jud . Ethics, Formal Op. 2003-4 (20m).

25. NY Rules of ['ruf't Conduct. R. 4.4 cm\. (2009).

26. Id.

Eric M_ Hellige is a partner at Pryor Cashman and can be reached al [email protected]. Durre S. Hanif is an associate at Pryor Cashman and can be reached at [email protected].

21

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Home For Attorneys Ethics Opinions

NEW YORK STATE BAR ASSOCIATION Professional Ethics Committee Opinion

Opinion #38 - 12/06/1966 (6-66)

Topic: Conflict of Interest, Representation of Adverse Parties

Digest: Lawyer may not represent both buyer and seller of real estate where there is a clear instance of conflicting interests

Canon: Former Canon 6

QUESTION

Is it ethically proper for a lawyer who represents a party to a real estate transaction to undertake also the representation of an adverse party, assuming such representation would ordinarily involve merely computing the adjustments and preparing the deed, or where title insurance is not used, the preparation also of a title abstract? Would the answer be different if a subdivision were involved in which an access road is required to be built but there is no agreement as to who is to build the road?

OPINION

Canon 6 of the canons of Professional Ethics provides as follows:

"6. Adverse Influences and Conflicting Interests

"It is the duty of a lawyer at the time of retainer to disclose to the client all the circumstances of his relations to the parties, and any interest in or connection with the controversy, which might influence the client in the selection of counsel.

"It is unprofessional to represent conflicting interests, except by express consent of all concerned given after a full disclosure of the facts. Within the meaning of this canon, a lawyer represents conflicting interests when, in behalf of one client, it is his duty to contend for that which duty to another client requires him to oppose.

"The obligation to represent the client with undivided fidelity and not to divulge his secrets or confidences forbids also the subsequent acceptance of retainers or employment from others in matters adversely affecting any interest of the client with respect to which confidence has been reposed.

Dual representation should be practiced sparingly and only when it is clear that neither party will suffer any disadvantage from it. It is difficult to justify, except in unusual and very limited circumstances, and only after complete disclosure and consent, with a clear understanding by both parties of its possible effect on their respective interests. [Legal Ethics by Henry s. Drinker, page 104 (1954), Legal Ethics by Raymond L. Wise, page 141 (1966).] The lawyer who represents conflicting interests acts at his peril and should realize that the thrust of Canon 6 is to discourage acceptance of such representation.

The attorney has the affirmative duty to be certain that the clients have the capability and actually do fully understand the conflicts that may arise and the peculiar position dual representation may cause them to be placed in.

In real estate transactions it is not always true, even in relatively simple ones, that representation of both buyer and seller involves nothing but computations of adjustments and preparation of the deed.

A number of questions arise that require the exercise of legal judgment. Examples are (i) whether the deed should be full covenant and warranty, bargain and sale, with or without covenants, or quiteclaim, (ii) what customs are to be followed in making adjustments, (iii) which points disclosed in the title report are important and which may be disregarded, (iv) what title company to use, considering the fact that a title company reinsuring may perpetuate past errors which another title company would pick up.

The inquiry makes special reference to the necessity of having an access road to the property being transferred. This will involve negotiations in which dual representation is virtually impossible.

In Informal Opinion No. 886-9/28/65 the Committee on Professional Ethics of the American Bar Association passing upon the propriety of dual representation in a real estate development said "we suggest that the attorney for the developer would be ill-advised to in any way represent the buyers."

One authority says, "The prudent lawyer would be wise never to put himself in a position of representing conflicting interests "Legal Ethics by Raymond L. Wise, page 141 (1966).

Related Files Conflict of Interest. Representation of Adverse Parties. (Adobe PDF File)

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DISTRESSED COMMERCIAL REAL ESTATE LOAN WORKOUTS AND REMEDIES – TODAY’S INSIGHTS AND STRATEGIES

by

Richard S. Fries, Esq. Sidley Austin LLP

New York, New York

Richard S. Fries Direct Phone: 212.839.5640 Direct Fax: 212.839.5599 [email protected]

December 5, 2014

Distressed Commercial Real Estate Loan Workouts and Remedies -- Today’s Insights and Strategies©

I. Initial Steps -- Inquiries -- Planning A. Determine Performing Status B. Review Legal Documents

1. Completeness 2. Defects 3. Perfection

C. Periodic Title Updates 1. Confirm Recordation of Mortgage 2. Identify Subordinate Liens, Judgments 3. Subsequent Transfers of Property -- Change in

Ownership Identity -- “New Debtor Syndrome” 4. Violations

D. Evaluate Post Closing Loan Administration 1. Course of Conduct 2. Representations 3. Assurances 4. Memos, E-Mails in File

E. Understanding Lender’s Goals and Capabilities 1. Benefits of Modification (Short Term, Long Term) 2. “First Loss is Smallest Loss” 3. Lender’s Capacity to Own, Manage or Liquidate 4. Evaluate Long Term Market Conditions 5. Explore Asset Sale Prospects

© Copyright 2014 by Richard S. Fries, Esq.


F. Understanding Borrower’s Goals and Capabilities

1. Replacement Member, Equity Investor, Operator, Tenants

2. Management Skills 3. Reputation -- Honesty 4. Capital Infusion -- from Borrower or Equity Source 5. Delay -- Market Improvement 6. Discounted Repayment 7. Guarantors’ Commitment to Transaction or

Business 8. Guarantors’ Financial Wherewithal

G. Understanding the Relevant Market 1. Availability of Financing 2. Availability of Private Equity 3. Value of Collateral and Borrower’s Business

(Including Good Will) 4. Marketability of Collateral 5. Business Market Trends 6. Leasehold Market Trends 7. Debt Service Marketplace -- the Real Economic

Costs of Recasting Debt 8. Borrower’s Sales Prospects

H. Understanding the Collateral 1. Value 2. Cash Flow 3. Condition 4. Deferred Maintenance 5. Environmental Considerations 6. Appraisals (Access to Conduct) 7. Evaluate Project Finances 8. Potential for Commingling or Diversion of Cash

Flow 9. Leases 10. Mezzanine Loan Interests -- Tranche Warfare

I. Ramifications of Borrower as Agent for Lender (No Equity, No Guarantors) 1. No Downside Risk for Borrower 2. Borrower has All Upside of Delay, Assertion of

Defenses, Bankruptcy Filing 3. Is There a Benefit to Borrower’s Continued

Management and Ownership J. Mezzanine Lender’s Rights

1. Inter-Creditor Agreement Governs Use of Remedies 2. No Lien on Real Estate 3. Succeed to Borrower’s Interests -- Control of

Project 4. Replacement Guaranty Requirements 5. Duties and Obligations to First Mortgagee 6. Uniform Commercial Code Foreclosure of

Personalty Collateral (a) Situs of (out-of-court) foreclosure (b) Speed and efficiency (c) Process for asserting defenses

7. Existing “Good Guy” Guaranty (a) Enforceability upon mezzanine loan

foreclosure (b) Triggering event caused by mezzanine

lender or successor in interest (c) Ipso facto rules

8. Impact on Borrower’s Equity of Redemption 9. Mezzanine Lender also Holding a First Mortgage

Lien

II. Defaults and Acceleration A. Material Defaults

1. Maturity 2. Non-Payment of Debt Service 3. Non-Payment of Real Estate Taxes/Escrows 4. Non-Payment of Insurance Premiums

5. Material Breach of Debt Service Coverage Ratio Covenant

6. Loss or Diminution of or Change in Insurance Coverage (e.g., Terrorism Exclusion)

7. Damage to Mortgaged Property 8. Impermissible Subordinate Financing 9. Transfer of Mortgaged Property 10. Violation of Environmental Indemnity 11. Material Adverse Change in Financial Condition

(“MAC Default”) (but see [B][6] below) 12. Fraud

B. De Minimus Defaults 1. Failure to Deliver Financial Statements (Timely, at

All) 2. Breach of Loan-to-Value Covenant 3. Entry of Minor Monetary Judgment 4. Death of Guarantor 5. Erosion of Cash Flow 6. Material Adverse Change in Financial Condition 7. Cross-Defaults under Other Credit Facilities 8. Short Term Capital Requirements

C. Evaluation of Efficacy of Material Adverse Change Covenant in this Economic Cycle 1. Permanence of “MAC” 2. Durational Requirements 3. Implication for Loans that are Otherwise

Performing D. Election to Accelerate E. Notice of Acceleration

1. Clear 2. Overt 3. Unequivocal

F. Mechanics and Effect of Acceleration 1. Imposition of Default Rate of Interest

2. No Obligation to Accept Partial Tender or Borrower’s Cure of its Default

3. Entire Debt is Due -- Acceleration as Maturity G. Return of Subsequent Debt Service Payments H. Course of Conduct Relating to Past Defaults

1. Ramifications of Sudden Shift in Position or Use of Remedies

2. Covenant to Act in Good Faith and Deal Fairly

III. Enforcement of Guaranties A. Promise to Pay the Obligations of Another B. Can be Unconditional or Limited (Partial) C. The Guaranty as Leverage for Borrower’s Commitment to

the Property and to Repayment D. “Honor” isn’t Enough E. Joint and Several Guarantors F. Independent of Obligations of Borrower G. Partial Payment Guaranty -- Make Sure Guaranty Covers

Last, Not First, Obligations H. Construction Completion Guaranty I. Full or Partial Debt Service Guaranty J. Financial (or Other) Covenants Guaranty K. Guaranty “Burn off” if Benchmarks (or Milestones), such

as Leasing, are Met L. Use of “Bad Boy” Springing Guaranties for “Non-

Recourse” Exceptions 1. A “Bad Boy” Guaranty Provides for Personal

Liability against Principals of Borrower upon the Occurrence of Certain Enumerated “Bad Acts”

2. Principal or Affiliate Would Have No Obligation to Repay the Loan (i.e., “Non-Recourse”) Unless There Was Some “Bad” Act

3. This is a Behavior Modification (a “Bad” Act) -- Not a Credit Enhancement

M. Doctrine of Novation N. Ratification of Guaranties -- Implications and Waivers

O. Beware of Conduct, or Course of Conduct, that Releases Guarantors

P. “Carveouts” as a Negotiation Device

IV. Common “Bad Boy” Triggers (“Non-Recourse Exceptions”) A. Fraud or Misrepresentation B. Diversion of Cash Flow -- Misappropriation of Rents or

Revenues C. Environmental Liability D. Interference by Borrower or Guarantor with Legal

Remedies E. Material Alteration of Collateral F. Waste (or Mismanagement) G. Filing Bankruptcy (or Soliciting an Involuntary

Bankruptcy) H. Modification of Borrower’s Articles or Organization I. Violation of “SPE” (Special Purpose Entity) or

“Separateness” Covenants J. Difference Between “Actual Losses” and “Entire Debt”

Categories of Recourse

V. Nature of “Bad Boy” Guaranty of a “Non-Recourse” Real Estate Loan A. The “Actual Losses” Bucket (Liability Limited to Lender’s

Actual Damages) 1. Fraud or Misrepresentation 2. Misappropriation of Revenue 3. Misappropriation of Condemnation Awards or

Insurance Proceeds 4. Failure to Turn Over Income or Revenues from the

Property During an Event of Default 5. Acceptance of More than One Month’s Advance

Rent 6. Physical Waste 7. Failure to Pay Real Estate Taxes or Insurance

Premiums 8. Objection to Non-Judicial Foreclosure, if

Applicable

B. “Entire Debt” Bucket (Liability for Entire Indebtedness) 1. Voluntary Bankruptcy 2. Involuntary Bankruptcy Commenced Against

Borrower or Guarantor 3. Prohibited Transfer of the Mortgaged Property 4. Breach of the Special Purpose Entity Covenants 5. Interference with Mortgage Foreclosure Remedy 6. Insolvency -- (?) -- see Cherryland Discussion

(below) C. Bad Boy Guaranties are Enforceable

1. EVERY Reported Decision (Except Two -- see ING v. Park Avenue Hotel and CP III Rincon Towers v. Cohen below) Enforces Them (a) Bank of America, N.A. v. Lightstone

Holdings, LLC, 32 Misc.3d 1244(A), 938 N.Y.S.2d 225 (Sup. Ct. N.Y. Co. 2011)

(b) G3-Purves Street v. Thomas Purves, 101 A.D.3d 37 (2d Dep’t 2012)

(c) USB Commercial Mortgage Trust -- FLI v. Garrison Special Opportunities Fund L.P., 938 N.Y.S.2d 230, 2011 N.Y. Slip Op. 51774 (Sup. Ct. N.Y. Co. 2011)

(d) Wells Fargo Bank, N.A. v. Cherryland Mall Ltd. Partnership, 812 N.W. 2d 799 (Mich.App. 2011)

(e) 51382 Gratiot Avenue Holdings, LLC v. Chesterfield Development Company, LLC, 835 F.Supp. 2d 384 (E.D. Mich. 2011)

(f) Bank of America N.A. v. Freed, 2012 IL App. (1st) 110749 (Ill. App. First Dist. 2012)

(g) Wells Fargo Bank N.A. v. Mitchell’s Park, 2012 WL 4899888 (N.D. Ga. 2012)

(h) Turnberry Residential Ltd. Partner v. Wilmington Trust, 33 Misc.3d 1220 (A) (Sup. Ct. N.Y. Co. 2011), affd, 99 A.D.3d 176, 950 N.Y.S.2d 362 (1st Dept. 2012)

(i) LaSalle Bank v. Pace, 2011 BL 358538 (Sup. Ct. N.Y. Co. 2011) affd, 100 A.D.3d 970, 955 N.Y.S.2d 161 (2d Dept. 2012)

(j) Blue Hills Office Park v. JPMorgan Chase Bank, 477 F. Supp. 2d 366 (D. Mass. 2007)

(k) CSFB 2001-CP-4 Princeton Park Corporate Center v. SB Rental I, 410 N.J. Super. 114, 980 A.2d 1(App. Div. 2009)

(l) Wertheimer Mall, 2008 U.S. Dist LEXIS 64152 (S.D.N.Y. 2008)

(m) 111 Debt Acq. v. 6 Venture, 2009 U.S. Dist. LEXIS 11851 (E.D. Ohio 2009)

(n) Diamond Pt. v. Wells Fargo, 929 A.2d 932 (Md. 2007)

(o) Potomac v. Green, 2099 WL 1537853 (M.D. Ala. 2009)

(p) Federal Deposit Insurance Corp. v. Prince George Corp., 58 F.3d 1041 (4th Cir. 1995)

2. Equity Arguments Against Enforceability (a) The basic objections:

(i) Unfair (ii) Unconscionable (iii) Inequitable (iv) Oppressive (v) Void as against public policy (vi) Frustrates constitutional right to file

for bankruptcy (vii) These arguments are generally not

held successful or persuasive to a court, especially in business context

3. Implication of “Bad Acts” Committed by Third Parties (a) New equity owner can cause personal

liability for former equity owner without any repercussions

(i) “Bad boy” guaranty seems to lose its purpose -- original guarantor did not perform a “bad act”

(ii) Unintended consequences in connection with mezzanine financing

(iii) Mezzanine lender purchasing controlling equity stake can force defaults triggering “bad boy” guaranty -- Put borrower in bankruptcy to

trigger defaults -- Use threat of putting borrower

in bankruptcy or triggering other default in negotiations with first lien lender

-- Party in control of directing borrower’s actions should be responsible for guaranty in order for guaranty to be effective

4. But See (a) Stuyvesant Town decision -- Bank of

America, N.A. v. PSW NYC LLC, 2010 NY Slip Op. 51848(U) [29 Misc. 3d 1216(A)], September 16, 2010 (Supreme Court, New York County, Lowe, J.)

(b) Rule -- mezzanine lender must cure defaults (including full payment upon acceleration or maturity) under first mortgage loan before pursuing remedies

D. Cherryland (Court of App. Michigan) -- Is Non-Recourse Now Rendered an Illusory Concept? 1. Insolvency as “Bad Boy” Guaranty Trigger

(a) The “bad boy” guaranty required borrower to maintain its “SPE status”

(b) “SPE status” required borrower to “remain solvent”

2. Definition of Insolvency (a) Liabilities exceed assets -- or (b) Unable to pay debts as they come due (c) “Every” distressed real estate owner “is”

insolvent (fair market value is less than indebtedness)

(d) Makes every defaulted loan potentially fully recourse without regard to actions of the borrower

(e) Consequences of Cherryland are dramatic (i) The decision makes non-recourse

loans into recourse loans -- this was not the intention in the CMBS market

(ii) Creates full guarantor liability without a “bad act,” based solely on value or market forces outside borrower’s control

(iii) Cherryland injects uncertainty into a market where “bad boy” recourse was the standard operating procedure

(iv) Future of nonrecourse CMBS financings jeopardized

(v) $700 billion loans already outstanding which would be susceptible to recourse claims upon default for insolvency

(vi) $500 billion in defaulted loans that have been foreclosed or even taken in lieu of foreclosure but statute of limitations for suit on nonrecourse guaranty have not expired

(vii) Fiduciary obligation of special servicers (who are bound to obtain maximum recovery under CMBS pooling and servicing agreements) -- contractually required to pursue guarantors of insolvent SPE borrowers

(viii) Avalanche of potential litigation (ix) Adverse accounting implications for

sponsors, borrowers and guarantors due to recourse versus nonrecourse nature and treatment of commercial mortgage debt on financial statements

(x) Chill and destabilize rebirth of CMBS

3. Chesterfield -- Federal Court in Michigan, December 2011 -- same outcome

4. Michigan Non-Recourse Mortgage Loan Act, (Chapter 445 of Act 67 of 2012, effective March 29, 2012)

E. ING v. Park Avenue Hotel (610 Lexington Avenue), 26 Misc. 3d 1226(A), 907 N.Y.S.2d 437, Sup. Ct. N.Y. Co. (2010) 1. “Bad boy” Guaranty Provided (i) Borrower May

Not Incur Secured or Unsecured Indebtedness, Except as Provided in Loan Agreement; and (ii) Borrower has 20-Day “Safe Harbor” to Cure Certain Defaults

2. Borrower was 19 Days Late on a $300M Real Estate Tax Installment Payment

3. Borrower Cured Tax Arrears on Day 20 4. Lender Sued Guarantor for Entire Indebtedness

under Bad Boy Guaranty; Debt was $145MM; Fair Market Value was $55MM -- Deficiency was $90MM

5. Court Held “Bad Boy” Guaranty WAS AN “Unenforceable Penalty” (a) Immediate liability for the entire debt is not

a reasonable measure of any probable loss associated with the delinquent payment of $300,000 in real estate taxes when compared to a $90 million deficiency

(b) The Court’s analysis: (i) A commercial agreement should not

be interpreted in a commercially unreasonable manner or contrary to the reasonable expectations of the parties

(ii) Immediate liability for the entire debt is not a reasonable measure of any probable loss associated with delinquent payment of a relatively small amount of taxes

(iii) “Such an unlikely outcome could not have been intended by the parties, sophisticated commercial borrowers and lenders aided by competent counsel at the time of the drafting, and is impermissible under New York law.”

6. Post-Script -- Borrower “Purchased” the Loan at a Discount (of $75MM)

F. CP III Rincon Towers v. Cohen, 10 Civ. 4638 (S.D.N.Y. April 7, 2014) 1. Bad boy guaranty provided full recourse for

“unpermitted indebtedness” and voluntary liens, in addition to customary full-recourses events such as bankruptcy, fraud, impermissible transfers, etc.

2. Mechanic’s liens were filed; they became judgments

3. After foreclosure auction, there was a $40 million deficiency

4. Lender sought full recourse against the guarantor 5. The Court held that mechanic’s liens are not

“voluntary” liens (a) The borrower disputed the liens (b) A mechanic’s lien is “inherently

involuntary”

6. Mechanic’s liens do not trigger full recourse under the “transfer” provision -- to do so would render the prohibition on “voluntary” transfers superfluous

7. Implications (a) Mechanic’s liens and judgments will not

trigger full recourse (b) The penalty -- full recourse for a deficiency

-- is disproportionate to the wrong-doing

VI. Considerations in Dealing with Borrowers -- How Far to Go -- Lender Liability Risks A. Preliminary Considerations

1. Review Credit File -- Internal Memoranda 2. Review Loan Administration/History 3. Availability of Loan Officers as Witnesses 4. Attorney-Client Privilege 5. Admissions Against Interest 6. Pre-Workout Agreements

B. Right to Protect and Preserve Collateral 1. Request for and Review of Financial Statements 2. Review of Books and Records 3. Understanding Borrower’s Operations, Business 4. Insurance Coverage 5. Protective Advances 6. Real Estate Taxes 7. Insurance 8. Essential Repairs 9. Appraisal of Property 10. Right to Inspect Collateral 11. Right to Approve Budgets (as Part of Restructure) 12. Right to Receive Release Prices for Existing or New

Collateral C. Covenant of Good Faith and Fair Dealing and Certain

Borrower Defenses Relating Thereto 1. Inherent in All Contracts and Negotiations 2. Duty to Act Consistently

3. Cannot Convey False Sense of Security 4. Cannot Reverse Established Course of Dealing 5. Misrepresentation by Loan Officers 6. Agreement to Waive or Not to Enforce Rights --

Forbearance -- Estoppel 7. Detrimental Reliance by Borrower 8. Oral Negotiations 9. Overreaching, Duress, Bad Faith, Unequal

Bargaining Position 10. Economic Duress (Pledge of Collateral for Default

Cure, New Loan) D. Imposition of Fiduciary Duty on Lender

1. Fiduciary Duty Generally Does Not Exist 2. Relationship is Lender-Borrower, Creditor-Debtor 3. Criteria for Fiduciary Relationship

(a) Long-standing relationship of trust (b) Reasonable reliance on lender to protect

interests (c) Lender offers business advice (d) Lender participates in management of

borrower’s business (e) Lender takes ownership interest (rather than

security interest) (f) Lender assumes position resembling that of

controlling shareholder (g) Lender obtains powers over borrower

through pledge of voting stock as collateral or through restrictions contained in loan agreement

4. Duty to Regulate and Monitor Extension of Credit (a) Borrower’s ability to service debt and repay (b) Borrower’s suitability and sophistication (c) Suitability of the credit product

E. Lender’s Control over Business Affairs of Borrower 1. Instrumentality or Alter Ego Doctrine

(a) Lender responsible for debts/obligations of borrower

(b) Difficult to prove (c) Must show lender assumed “actual

participatory total control” 2. Partnership -- Joint Venture

(a) Share in profits/losses (b) Equity kickers (but not if interest on loan) (c) Maintain control of underlying project

3. Assumption of Duty (a) Mismanagement, negligence (b) Daily Operations -- directives or

recommendations from lender (c) Duty to act with reasonable care

4. Fraud -- Standards (a) Misrepresentation (b) Falsity (c) Knowledge of falsity (d) Borrower’s reliance (e) Damages

F. Impermissible Interference with Borrower’s Business Affairs 1. Offering Business Advice 2. Participating in Management of Borrower’s

Business 3. Taking Ownership Interest (i.e., Share in

Profits/Losses) Rather than Security Interest 4. Assuming Position Resembling that of Controlling

Shareholder (a) Compelling borrower to execute contracts (b) Hiring contractors (c) Renegotiating existing contracts (d) Requiring approval for payments of

operations

G. Tortious Interference 1. Dealing with Borrower’s Corporate Governance 2. Usurping Management Responsibility and Control

(a) Requiring officers to take salary reductions (b) Requiring borrower to replace management

company, accountant (c) Requiring approval for payments for

operations 3. Controlling Elections of Officers and Directors 4. Dealing with Third Party Contractors

(a) Business or contractual relationship 5. Interference with Valid Contract or “Prospective

Contractual Advantage” (a) Defense of “justification” (b) Malice required for interference with

prospective contractual advantage H. Credit Crisis Implications and Defenses – And Beyond

1. Good Faith Steps to Refinance or Perform 2. Impossibility of Performance 3. Contracting Tenancies 4. Densification

I. Suitability of Participants as Lenders 1. Major Decisions 2. Voting and Control 3. “Veto Power” and the Doctrine of Reasonableness

VII. Judicial Foreclosure A. Real Estate Loan Documentation -- Default and Remedy-

Related Provisions 1. Typical Provisions of the Commercial Mortgage

(a) Property related (i) Description of collateral (ii) Insurance (iii) Protective advances as part of debt (iv) Real estate taxes; tax escrow

(v) Borrower to maintain and preserve premises

(vi) Mortgagee’s right to inspect/ appraise

(b) Debt related (i) Borrower to pay the debt

(incorporates note) (ii) Default rate interest (iii) Late charges (iv) Attorneys’ fees (v) Prepayment prohibition v.

prepayment premium (usually in the note)

(c) Remedy related (i) Events of default

-- Non-payment of debt -- Insurance -- casualty, terrorism

issues/ requirements -- Real estate taxes -- Damage to property -- Failure to maintain property -- Subordinate financing -- Transfer of property -- Environmental violation -- Non-delivery of financial

statements -- Monetary judgment -- Material adverse change in

financial condition (ii) Right to accelerate (iii) Right to foreclose (iv) Entire debt secured by mortgage (v) Receivership -- without notice (vi) Assignment of leases and rents

(additional collateral) (vii) Due on sale

(viii) Foreclosure sale in one parcel (d) Lender protections

(i) Borrower to furnish financial statements

(ii) Non-waiver of lender’s rights (iii) Usury savings clause/limitation on

interest (iv) No further encumbrances:

prohibition on subordinate financing (v) No oral modification

B. Counsel’s Considerations Prior to Commencement of Foreclosure 1. Audit Mortgage Loan Documents 2. Perfection of Lien 3. Collateral Assignments 4. Credit File -- Internal Memoranda 5. Loan Administration/History 6. Course of Conduct Determinations 7. Admissions Against Interest 8. Understand Underlying Transaction/Collateral 9. Ascertain Lender’s Goals, Objectives, Priorities and

Capabilities 10. Determine Borrower’s Objectives, Capabilities and

Resources 11. Availability of Loan Officers, Witnesses 12. Guarantors/Subordinate Lienors/Tenants --

Necessary Parties Defendant 13. Environmental Reports 14. Evaluate the Market

C. Review of Multi-Creditor Relationships 1. Participation Agreements 2. Syndication Agreements -- Agent Obligations 3. Agent’s Duty of Care and Fiduciary

Responsibilities to Syndicate Members

4. Special Servicers (a) Requirement for “default” (b) Restrictions on loan modifications (c) Remedies (d) Risks (e) “Servicer Paralysis”

5. Mezzanine Loans -- Intercreditor Agreements D. Starting the Foreclosure

1. Review Loan Documents (a) Recourse (b) Non-Recourse (c) Recourse carve-outs (d) Springing guaranties (e) Execution, perfection, modification

2. Order Foreclosure Search -- Update Prior to Filing 3. Determine the Parties to the Lawsuit

(a) Maker (b) Mortgagor (c) Guarantor (d) Subordinate lienholders (e) Subsequent owner (“new debtor syndrome”) (f) Judgment holders (g) Tenants (h) Municipality

4. Election Not to Foreclose Anchor or Market Tenants or Distant Judgment Creditors

5. Non-Disturbance Agreements E. Summons and Verified Complaint

1. Parties (Name All Defendants, John Doe Defendants)

2. Necessary Parties v. Permissible Parties 3. Describe Mortgage History 4. Describe Collateral being Foreclosed with

Particularity 5. Causes of Action for Foreclosure

6. Ask for Receiver 7. Ask for Deficiency Judgment 8. Separate Cause of Action on Guaranties 9. Update the Foreclosure Search

F. The Notice of Pendency (in General) 1. Unique Real Property Device 2. Available in All Actions Affecting Title to or Use,

Possession or Enjoyment of Real Property 3. Effective for Three Years -- Can be Renewed (in

New York) 4. Grounds for Cancellation 5. Improper Use -- Slander of Title

G. Effect of Filing of Notice of Pendency 1. Notice to Subsequent Encumbrancers/Lienors 2. “Bound as if a Party” to the Foreclosure 3. Impact on Marketing Efforts 4. Third Party Approach to Lender 5. Sale of the Loan 6. Title Insurance 7. “New Debtor”

H. Election of Remedies 1. New York Law

(a) Requires an election (i) Either foreclose the mortgage or sue

the guarantor (ii) Cannot do both simultaneously

(b) If “elect” to sue the guarantor cannot start the foreclosure until the action on the guaranty is complete (i) Execution on judgment must be

returned “unsatisfied” (ii) This is the consequence of the

election of remedies doctrine

(c) If “elect” to foreclose, guarantor is named in the foreclosure action for a deficiency (Phase II -- after foreclosure sale, guarantor liable for amount by which debt exceeds purchase price or value of property)

2. Hot Tip -- “Unless the Court Orders Otherwise” -- RPAPL 1301(3) -- “Without Leave of Court” (a) Where it is known there will be a deficiency,

ask the court for permission to sue the guarantor for the deficiency simultaneously with the foreclosure

(b) Example: (i) At origination -- $80MM loan;

$100MM fair market value (ii) At foreclosure -- $80MM loan;

$50MM fair market value (iii) $10MM partial guaranty (iv) There will be a $30MM deficiency;

ask the court for permission to sue guarantor for $10MM

3. Cases Support this Practice -- see Investors Warranty of America v. Maclara, Index No. 1958/10, Sup. Ct. Nassau Co. February 18, 2010

4. Common Approach (a) Invariably the lender will elect to foreclose

its collateral first and name the guarantor for the deficiency

(b) The loan is underwritten on the strength of the (income--producing) collateral

(c) Receivership in foreclosure protects the lender against a diversion of cash flow

(d) Real Estate Tax Delinquency, Insurance, and Threats to Security and Priority of the Mortgage -- Catastrophic Loss -- Crisis Management

I. Summary Compendium of Foreclosure Defenses and Lender Liability Theories of Recovery 1. Classic Lender Liability

(a) Oral modification (b) Waiver and estoppel (c) On-going negotiations (d) Agreement not to enforce rights (e) Unconscionability, duress, overreaching,

unequal bargaining position (f) Fraud (g) Actions taken in bad faith (h) Standards of good faith and fair dealing (i) Detrimental reliance (j) Course of conduct, reversal of established

course (k) Tortious interference with contract (l) Tortious interference with prospective

contractual advantage (m) Joint venturer or partner -- mezzanine loans

in particular (n) Breach of fiduciary duties (o) Excessive lending (duty to curtail, moderate

or investigate borrower’s financial condition)

(p) Misrepresentation or misleading statements by loan officers

(q) Lender’s duty to act consistently and not to give a false sense of security

(r) Impermissible interference with borrower’s business affairs

(s) Lender as borrower and mezzanine lender -- fiduciary duties, conflict of interest

(t) Clogging the equity of redemption 2. “New Lender Liability”

(a) Proof of ownership of note (b) Standing to Sue (c) “Robo Signing” affidavits (d) “Robo Verifying”

(e) Cutting corners in foreclosure process -- fraud

(f) Affiant’s lack of personal knowledge (g) Defective foreclosures (h) Loan participant suitability (i) Chain of title defenses -- Ibanez (j) Impossibility of performance (k) Force majeure (l) Doctrine of “deepening insolvency” --

fraudulent expansion of corporate life (m) “Loan to own” activities

J. Class Action “Hot Themes” 1. Predatory Lending 2. Sub-Prime Considerations 3. Rate Re-Set 4. Anti-Flipping 5. Fax Charges -- “Junk Fees” 6. Unauthorized Practice of Law (Charging a Fee for

Preparation of Documents by Non-Lawyer) K. Second Mortgagee’s Rights

1. Participate in Foreclosure (“Piggy-back”) 2. Distributions out of Proceeds 3. Right to Cure First Mortgage Defaults

(a) Need subordination agreement (b) Avoid imposition of default rate interest on

first mortgage (erosion of equity) (c) Default under second mortgage

4. Acceleration of Second Mortgage 5. Separate Foreclosure Action on Second Mortgage 6. Foreclosure Strategies as Holder of First and

Second Mortgages (a) Foreclose subordinate, “subject to” first

mortgage (b) Foreclose first only -- wipes out second (c) Separate causes of action on each mortgage

(d) Valuation of property 7. Notice of Default to First Mortgagee Not Necessary 8. Consent of First Mortgagee to Subsequent Second

Mortgage L. Lender’s Exercise of Assignment of Rents

1. Revocation of Borrower’s License to Collect 2. Demand for Turnover of Rent 3. Notice to Tenants 4. Mortgagee-in-Possession 5. Perfection of Security Interest in Rent/Cash

Collateral/Standards 6. Lock Box Arrangement -- Joint Notice to Tenants

M. Interim Revenue Agreements in Lieu of Receivership 1. Cash Flow Mortgage 2. Approved Budget 3. Approved Expenditures 4. Extraordinary Expenditures/Reserve 5. Lender’s Control of Decisions 6. Lock Box 7. License to Collect Revenue; Termination of License

N. Receivership 1. Procedures, Effectiveness and Strategy in Seeking

Appointment 2. New Rules in New York Receiverships

(a) 22 NYCRR Section 36 (i) Receiver cannot be related to the

appointing judge (ii) The court makes/approves all

appointments -- managing agent; receiver’s counsel

(iii) Limits number of receivership appointments

3. Perfection of Security Interest/Cash Collateral 4. Managing Agent, Commissions, Collection of Rent 5. Preservation of Security

6. Assignment of Rents, Defenses to Exercise 7. Consensual Receivership 8. Designation of Property Manager 9. Receiver as Officer of the Court 10. Receiver’s Right to Make Necessary Repairs 11. Shortfall in Receiver’s Account 12. Receiver’s Discharge 13. Alternative of Coordinated Collection Efforts

O. Judgment of Foreclosure and Sale 1. Establishes Liability for the Debt 2. Directs Sale of Mortgaged Property 3. Affidavit of Regularity in Support 4. Delete John Doe Defendants 5. Referee Sells the Mortgaged Property 6. Sale is Subject to Certain Encumbrances 7. Provides for Distribution of Proceeds 8. Plaintiff May Credit Bid 9. Liability for Deficiency Judgment is Established 10. Directs Purchaser be Put in Possession 11. Right of Redemption

P. Auction and Sale 1. Notice of Sale

(a) Publication (b) Service on Parties

2. Terms of Sale 3. Memorandum of Sale -- Binding Contract 4. Auction at the Courthouse 5. Closing -- Referee’s Deed 6. Effectiveness of Referee’s Deed

Q. Assignment of Bid 1. Prior to Closing 2. Tax Advantages 3. Non-Ownership Advantages 4. Disadvantages -- Ownership “Limbo”

5. Continuance of Receivership R. Deficiency Judgment Proceedings

1. Recourse to Maker/Guarantor -- Recourse Events 2. Determine scope of recourse

(a) Full liability (b) Partial liability (c) Construction completion guaranty -- but

note, full payment out of collateral (d) Covenant violations (e) “Actual losses” (f) Bad acts

3. Guarantors 4. Fix Liability in Foreclosure Action 5. Calculation of deficiency

(a) Equal to amount of indebtedness less the greater of (i) successful bid in foreclosure or (ii) fair market value of the mortgaged property (generally based on appraisal)

(b) Contemporaneous (at time of auction) appraisal of mortgaged property (needed to determine deficiency)

(c) Consent judgment of foreclosure -- consent to deficiency calculation and to method for determining fair market value

6. Short Statute of Limitations

VIII. Workout and Restructuring Strategies, Techniques and Objectives A. Pre-Workout Agreement/Standstill Agreement

1. “Ticket for Admission” to Workout Discussions 2. Preserves Status Quo 3. Sets Ground Rules for Discussions 4. Either Party can Terminate Discussions at any Time 5. Protects Lender against Waiver, Oral Modification

Arguments 6. No Oral Agreements can be Made

7. Lender’s Goal: Obtain Borrower’s Acknowledgement of Debt and Waiver of Defenses (Difficult to Accomplish in a Pre-Workout Agreement)

8. Loan Documents in Force 9. Without Prejudice to Rights and Remedies 10. Overreaching Admissions

(a) Fundamental fairness v. “ticket for admission”

(b) Duress (c) Validity

B. Background Considerations 1. Identify All Necessary Parties, Sources of Funding,

Credit Enhancements 2. Intercreditor Rights and Restrictions 3. Identify, Negotiate and Resolve All Material

Business Points Early to Avoid Borrower’s Disguised Delay Tactics

4. Engagement of Financial Consultants or Turnaround Specialists

5. Beware Oral Modification or Waiver During Negotiations

6. Prepare and Execute Detailed Term Sheet (Subject to Credit Approval)

7. Issue a Loan Commitment, if Appropriate 8. Need a Formal Instrument of Modification 9. Need for Requisite Corporate or Partnership

Authority 10. Ratification of Loan Documents, Guaranties 11. Consolidation of Debt and Mortgage (if New

Advance) 12. Obtain Subordination Agreements (or Discharge of

Liens) 13. Title Insurance -- Payment of Taxes

C. To Avoid: 1. Unrealistic Optimism about Borrower, Borrower’s

Business, the Property or the Market Place 2. Needlessly Complex Strategies or Restructure

Models 3. Strategies that Ignore Essential Parties 4. Strategies or Models where Lender has All

Downside and Borrower has All Upside D. Opportunity for Enhancements

1. Concessions or Contributions from Other Lenders 2. Concessions or Contributions from Private Equity 3. Additional Collateral (Shares of Stock, Partnership

Interests, Business Assets, Homes, Reserve Accounts, Confessions of Judgment)

4. Beware Pledge of Assets by Non-Obligors (Consideration, Fraudulent Conveyance Issues)

5. New or Additional Guaranties -- Increasing Scope of Guaranteed Obligations

6. Cure Legal or Document Deficiencies 7. Obtain Additional Loan Covenants or Monitoring

Rights 8. Control of Project Revenue -- Cash Collateral --

Cash Management Agreement -- Lock Box 9. Obtain Waiver and Release of Defenses and

Counterclaims 10. Ratification of Indebtedness 11. Formal Extension of Matured Obligations 12. Preserve or Improve Underlying Collateral (Capital

Expenditures) E. Lender’s Strategy -- Use of Workout to Fix Loan,

Collateral and Perfection Defects 1. Offer Concessions/Forbearance in Effort to Fix

Collateral or Perfection Defects (Illustration -- Internal Audit Discloses U.C.C. Financing Statements Never Filed)

2. Obtain Acknowledgement of Debt/Waiver of Defenses

3. Obtain Remedies -- Certainty, Finality, Predictability -- Finishes the Process

F. Additional Collateral/Guaranties 1. As Consideration for Business Concessions by

Lender 2. Additional Collateral and/or Guaranties Protect

Lender Against Downside, Further Business Erosion and Insolvency

3. Expansion of Existing Limited Guaranties; Guaranty of Tranches of Debt

4. Types: (a) Partnership or membership interests (b) Additional mortgages (c) Other project interests (d) Home mortgage (e) Cash collateral (f) Letter of credit (g) Guaranties (h) Confessions of judgment

IX. Alternative Restructure Models -- One Lender or Multi-Lender Transactions A. For Multi-Creditor Transactions:

1. Agency, Master Servicer, Special Servicer Considerations

2. Default or Performing Loans 3. Participant Suitability 4. Major Decisions and Consent Rights

(a) Market standard (b) Conflicts (c) Enforcement of remedies

5. Participant as “Squeaky Wheel” in Loan Restructurings (a) Unanimous consent for certain major

decisions (including loan extension and deferral of principal payments)

(b) Impact on other participants

(c) Agent’s responsibilities, alternatives and strategies

6. Open Business Discussion among Creditors 7. Awareness of Concessions, Contributions and

Business Requirements by Other Creditors 8. Pari Passu Relationships 9. Treatment of Claw Back (Excess Cash Flow),

Deferral Notes and Debt Forgiveness 10. Beware: Tortious Interference with Contract 11. Guaranty Dilution

B. Reinstatement of Loan -- Cure Short Term Default 1. Justification for Default 2. Borrower’s Open and Honest Reaction to Market

Forces -- Catastrophic Loss, Product Change, Deferred Maintenance Obligations, Business Contraction

3. Technicality -- Withdraw Acceleration (No Obligation to Do So)

C. Discounted Repayment Agreement -- as an Exit Strategy 1. Tied to Market Conditions, Lender’s Business

Objectives, Target Market 2. Example -- $50MM Debt -- Accept $45MM in Six

Months or $40MM Immediately 3. Include Remedies -- Discount Debt as an Incentive

to Sell or Refinance Coupled with Consent Judgment of Foreclosure -- Ensure Finality

4. In Non-Recourse Loan, Discount Needs to Give Borrower Incentive to Pay the Discount -- Possible Equity Recapture by Borrower

5. In Recourse Loan -- Discount in Exchange for Release of Note and Guaranty

6. Never Release Note or Guaranty Until Payment or Consensual Asset Liquidation has Occurred

D. Short Term Forbearance Agreement 1. Six Months to Cure Identified Business Problem --

Suspension or Reduction of Debt Service Payments 2. Waiver of Covenant Defaults

3. Waiver of Defenses, Acknowledgement of Debt, Release of Claims

4. Remedies (a) Nature and extent (b) Overreaching (c) Duress (d) Reaction of the courts

E. Longer Forbearance (i.e., One to Two Years) Tied to 1. Shortening Maturity 2. Economic Concessions 3. Discounted Repayment Built into Restructure 4. Remedies Included in Forbearance Agreement

(a) Consent judgment of foreclosure (b) Confession of judgment (c) Waiver of bankruptcy stay

5. Additional Collateral Included in Forbearance Agreement

6. Increasing Number of Guarantors or Scope of Guaranty

7. Amplification of “Good Guy” Guaranty 8. Accrual of Default Rate or Interest Shortfall, with

Waiver upon Performance F. Substantive Loan Restructure

1. Restructure Loan to Conform to Market (Lower Interest Rates, Change or Eliminate Amortization, Less Burdensome Financial Covenants)

2. Reduce Interest Rate or Principal Debt if Borrower Infuses Cash, Stabilizes Business, Brings in Beneficial Business Partner or Adds Collateral

3. Principal Debt Repayment Plan with Contractual Incentives (e.g., $10MM Loan -- Recast at $9MM; Pay $2MM, Forgive $1MM)

4. Pari Passu with Other Creditors 5. The Claw Back (Cash Flow) Component

(a) Stabilizes business (b) Reduces debt loan

(c) Keeps component of debt alive as leverage, with realistic expectation of payments out of on-going business operations

(d) Tied realistically to borrower’s ability to perform and economic viability

6. Incorporate Remedies (a) Consent judgment of foreclosure (b) Consent to asset turnover (c) Waiver of bankruptcy stay (d) Liquidation (e) Guarantor’s confession of judgment

G. Note A/Note B/Note C as Workout Device 1. Note A as the “Performing” Note

(a) Market interest rate (b) Pay rate/note rate/accrual

2. Note B as the “Claw-Back” Note (a) Cash flow (b) Lock box (c) Reporting requirements

3. Note C as the “Deferral” Note -- Parties’ Intention is Ultimate (Not Immediate) Forgiveness

4. Discount or Forgiveness Only after Primary Debt Repaid

5. Note A at Market Value, Interest Rate and Business Capabilities

6. Note B Tied to Cash Flow Formulas, Business Improvement

7. Sharing Arrangements with Other Creditors 8. Note B Guaranteed 9. Note C as Leverage to Maximize Loan Restructure

Performance 10. Notes B and C Come Due upon Default 11. Note A/B Structure in Lieu of Forbearance 12. Claw-Back Tantamount to Cash Flow Mortgage

X. Deed in Lieu -- Consent Judgment of Foreclosure -- Consensual Turnover or Liquidation of Assets A. Implications and Benefits of Deed-in-Lieu

1. Business Decision to Take Back or Market the Collateral

2. Predictability 3. Speed 4. Finality 5. Deed or Consensual Liquidation -- Faster than

Court Remedies 6. Need Consent Judgment to Wipe Out Subordinate

Liens on Real Estate 7. Lender Should Strive to Make the Remedy Part of

the Workout 8. Ramification of Consent Judgment of Foreclosure

in Escrow 9. Benefits of Entry of Judgment of Foreclosure with

Stay of Execution B. Non-Delivery of Deed in Lieu of Foreclosure as “Bad Boy”

Act 1. In Some States (e.g., New York -- RPL Section

320) a Deed in Lieu of Foreclosure in Escrow is Considered “Additional Collateral Security in the Nature of a Mortgage.”

2. Rather than Hold the Deed in Escrow, the Lender Should Require Borrower, upon the Occurrence of a Default, to Execute and Deliver the Deed to Lender or its Designee or Nominee.

3. Failure to Perform this Covenant Constitutes a “Bad Boy” Act Triggering Full Recourse Under the Guaranty.

4. If There Was No Creditworthy Guarantor at Loan Origination, a New Guaranty from a Creditworthy Party Could be Executed and Delivered as Part of the Restructure.

5. The New Guaranty Could Provide for Full and Unconditional Recourse upon Borrower’s Failure to Deliver the Deed in Lieu of Foreclosure, As and When Required.

XI. Lender’s Sale of the Distressed Loan to a Third Party A. Speed, Certainty, Finality, Elimination of Further Risk of

Loss 1. “First Loss is Best Loss” 2. Lender’s Capital Requirements

B. Target Market Considerations -- “Leave” Relationships C. The Third Party Purchaser Bargains for Long Term Upside

Value D. Public Relations upon Enforcement, Lender Liability

Considerations E. Ready Marketplace -- Purchasers of Distressed Debt

1. Exclusivity 2. Due Diligence 3. Seller Financing the Loan Purchase

F. Lender Liability Considerations -- Tortious Interference with Prospective Contractual Advantage

G. Split of Loan into Tranches and Sale of Parts 1. Different Markets 2. “Higher Risk -- Higher Rate” 3. “Loan to Own”

H. Proof of Original Note I. Loan Purchaser’s Due Diligence

1. Underlying Loan Documents -- Signatures 2. Priority of Lien 3. Scope of Guaranty 4. Title Insurance 5. Property Analysis 6. Enforcement of Underlying Loan Documents

(a) Status of loan (b) Nature and quality of default

(c) Communications with borrower -- lender liability

(d) Internal memos and communications -- admissions against interest

(e) Foreclosure timeline and “judicial sympathy”

(f) Leverage of guaranty -- “release of guaranty in exchange for deed”

XII. The “Hope Certificate”A. Applicable to Discounted Repayment or Sale of Debt

Workout Models B. Prevents Borrower’s Quick or Premeditated Flip of Assets

at a Profit C. Protects Lender in Soon-to-be-Rising or Uncertain Market D. The “Soft Note” Model

1. Lender Retains a Portion of the Debt2. No Debt Service Payments3. Note Collateralized by Second Mortgage or Lien

Without Foreclosure Remedies4. Intercreditor Agreement -- New First Mortgagee

Consents to the “Soft Second” Lien5. Upon Quick Sale or Refinance, Lender Receives

Additional PaymentE. The Burn Away

1. The “Hope Certificate” Burns Away AfterNegotiated Short Period (i.e., Six Months to OneYear) or in Stages

2. Prevents Premeditated Flip at a ProfitF. Tool to Accomplish the Loan Sale

JOINT VENTURES

by

Meredith J. Kane, Esq. Paul Weiss Rifkind Wharton & Garrison LLP

New York, New York

and

Gerald W. Blume, Esq. Rockefeller Group Development Corporation

New York, New York

11/20/2014

1

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

Meredith J. Kane, Partner, Paul Weiss

Rifkind Wharton & Garrison LLP

Gerald W. Blume, Senior VP and General

Counsel, Rockefeller Group Development

Corporation

Joint Ventures

Types of Joint Ventures

Equity Financing Joint Ventures

• JVs for Development

• JVs for Recapitalization of Maturing Debt

• JVs for Acquisition Financing for Operating Property

Strategic Joint Ventures

• JV between landowner and developer

• JV between not-for-profit sponsor and for-profit developer

• JV between equal parties/pro rata investors

CONFIDENTIAL Page 2

11/20/2014

2

Equity Joint Ventures in the Capital Structure

Typical Capital Structure in Operating Property

• Senior Debt – Mortgage and Mezzanine (loan to value) – 60-75%

• JV Equity Requirement – 25-40%

Financial Member Equity Share - 70-90% of cash requirements

Sponsor /Operating Member Equity Share – 10-30% of cash requirements, guaranties, existing

equity on recap

Typical Capital Structure in Development Project

• Senior Debt – Mortgage and Mezzanine (loan to cost)– 65-85%

• JV Equity Requirement – 15-35%

Financial Member Equity Share –75-100% of cash requirement

Sponsor/Operating Member Equity Share– <10% of cash requirement; land, entitlements,

development fees, soft costs, guaranties

CONFIDENTIAL Page 3

Structuring the Right Deal

• A Joint Venture is a Marriage

• The JV Agreement is both the Pre-Nup and the Pre-negotiated Divorce

• Keys to Success Are:

– Choosing the Right Partner

– Alignment of Interests Throughout the Life of the Membership

– Allowing Each to Have a Voice in Management and Controls Commensurate

with the Interests of Each and with Business Operating Efficiency of JV

– Transparency in Financial Matters

– Fiduciary Responsibility to the Partner – Putting the Interests of the Company

Before the Interests of the Individual Partner

– Process for Dispute Resolution

– Commitment to Mutual Success

CONFIDENTIAL Page 4

11/20/2014

3

Choosing the Right Partner

• Choosing a Financial Partner: Issues for Consideration

– Investor Return Thresholds

• IRR Driven

• Total Return Driven

– Investment Time Horizons

• Exit/Liquidation Date on Fund

• “Patient” Capital of Insurance Companies, High Net Worth Private Investors

– Risk Tolerance and Investment Parameters

• High Risk, High Yield

• Conservative Risks and Rewards

– Asset Class Allocation

• Development

• Operating Property Asset Classes – Core, Core Plus, Retail, Industrial, Multifamily

• Choosing a Sponsor Partner: Issues for Consideration

– Available skills and staffing; Competing projects and exclusivity

CONFIDENTIAL Page 5

Characteristics of Equity JVs - Organization

• Types of Organization

– LLCs – Delaware or Local Law

– Each “Borrower Entity” Structured as a Single-Member Entity with SPE

Manager

– “Real” JV usually up one level from property (or two, if mortgage and

mezzanine debt)

– LPs – characteristic JV format of funds

• Management Structure of Equity JVs

– Operating Member as Managing Member

– Financial Member as Co-Managing Member or Non-Managing Member with

Major Decision Rights

– In Partnerships, Operating Partner as General Partner

– Financial Partner as Co-General Partner or Special Limited Partner

– Executive Committee Role

CONFIDENTIAL Page 6

11/20/2014

4

Characteristics of Equity JVs – Capital Contributions

• Initial Capital Contributions

– Cash

– Land or In-Kind contributions – Valuation, Built-In Gain

– Conditions to Equity Pay-In

• Additional Capital Contributions

– Mandatory Additional Capital – limited purposes, capped amounts

– Permissive Additional Capital – who calls, for what purposes?

– No third-party beneficiary of overcall obligations

• Guaranty Capital Contributions – for Loan Guaranty Liability

– Environmental

– Recourse-Carve-Out “Bad Boy”

– Completion and Cost Overrun

– Parent Company Obligation to Fund Guaranty Capital Contributions

CONFIDENTIAL Page 7

Characteristics of Equity JVs – Capital Contributions cont’d

• Failure to Make Additional Capital Contributions

– Punitive Remedies should be only if Mandatory Capital (including mutually

agreed capital calls)

– Loan to Defaulting Member

– Dilution of Defaulting Member Percentage Interest with Penalty Formula:

Contribution Interests vs. Distribution Interests

– Loss of Voting Rights after Default

– Loss of Voting Rights if dilution below Specified Percentage Interest

• Removal of Management Role after Dilution Below Specified Percentage

Interest

– Lender and Other Consent Considerations in Replacing Managing Member

– Substitution of Loan Guarantor or Back-Up Indemnity to Removed Guarantor

• If Default In Permissive Capital, Remedy Should Be Priority Loan To

Membership

CONFIDENTIAL Page 8

11/20/2014

5

Characteristics of Equity JVs – Distribution Waterfall

• First, Priority Loans or Default Capital Repaid with Interest - Repayment

from JV or from Defaulting Member

• Second, Additional Capital (“New Money”) with Preferred Return Paid

• Third, Initial Capital with Preferred Return Paid, Until First Hurdle Rate

• Fourth, Subordinated Fees, Excess Land Value, Development Cost

Overruns or Other Subordinated Additional Capital Contributions Repaid,

With or Without Return

• Fifth, Initial Promote Structure of Operating Member Paid After Initial

Hurdle Return on Investor Capital – e.g., 15% after a 15% IRR

• Sixth, Additional Promote Structure of Operating/Developer Member Paid

After Subsequent Hurdle Returns on Investor Capital

• Seventh, Residual Percentages

CONFIDENTIAL Page 9

Characteristics of Equity JVs – Responsibilities

• Responsibilities of Managing/Operating Member

– Prepare Budgets and Business Plan

– Arrange Financing

– Contract for Services on Behalf of Venture

– Originate Transactions for Venture – Additional Acquisitions, Sales

• Affiliate Contracts –

– Fair and arms’-length terms

– Approval and Enforcement Rights in Non-Affiliated Member

• Accounting, Books and Records, Tax Matters

CONFIDENTIAL Page 10

11/20/2014

6

Characteristics of Equity JVs – Decision-Making

• Unanimous Consent for “Organic” Decisions

– Merger, Dissolution, Amendment of Structure, Tax Treatment, Additional

Members

– Bankruptcy – Control Must Be in Hands of Non-Recourse Carve-Out Guarantors

• Supermajority/Non-Managing Member Consent for “Major Decisions”

– Capital and Operating Budgets, Business Plans

– Major Leases

– Financings, Recapitalizations

– Sales of Property or Major Interests

– Development Project: Key Development Decisions – Program, Architect, CM,

Financing, Sales/Leasing Program, Budget and Amendments

– Capital Calls

• Managing Member Day-to-Day Operational Controls


Characteristics of Equity JVs – Guaranties

• Guaranties to Lender – Which Member Gives?

– Guaranties which are JV risks

• Environmental

• Other Property-Related

• Principal, Financial Guaranties

– Guaranties which are Risks of One Member

• Development Guaranties – Completion and Cost Overrun

• Non-Recourse Carve-Out “Bad Boy” Guaranties

• Contribution and Indemnity Between Members Where One Gives

Guaranties to Lender

• Guaranties from One Member to Another

– Development – Completion and Cost Overrun Guaranties

• Structure and Recovery of Cost Overrun Capital – Alignment of Interests

– Guaranteed Investment Return


11/20/2014

7

Characteristics of Equity JVs – Resolving Deadlocks

• Buy-Sell

– Triggering cause or no cause

– Lockout period – stabilization, completion of project

– Lender concerns

– “Leveling the Playing Field” Between Operating and Financial Member with

Extended Exercise and Closing Time Frames, etc.

• Single Member Override on Specified Decisions

• Forced Sale of Asset

• Does Arbitration or Third-Party Decision Ever Make Sense?


Characteristics of Equity JVs – Exit Strategies

• Sales of Interests to Third Parties with ROFR In Non-Transferring Member

– Permitted Transfers

– Sales of Upper Tier Interests in Member Entities

• Forced Sale of Property with ROFO In Non-Selling Member

• Drag Along and Tag Along on Interest Sales

• Valuation Effects on Interests Being Sold – Sale of Interest vs. Sale of

Project

• Put Rights

• Lock-Out Period – Stabilization, Completion of Project

• Lender Issues


11/20/2014

8

Characteristics of Equity JVs – Fees

• Development Fees

• Property Management and Leasing Fees

• Asset Management Fees

• Partnership Management Fees

• Expense Reimbursement

• Other Service Fees – Acquisitions, Debt Placement, Construction

• Fee Subordination to Loans, Preferred Returns

• Fee Sharing Among Members


Strategic Joint Ventures

• JV between a Not-for-Profit Institution Selling Underutilized Land to

Developer in Return for Cash and New Facility as Part of Larger

Development

– Not-for-profits own valuable land in desirable locations, often lack capital for

required capital improvements

– Seek to unlock land value with JV transaction with developer to develop new

facility for NFP in tandem with on-site commercial development

• Structuring the Transaction

– Recognition of Division of Expertise and Responsibility

– Harmonizing the Divergent Interests and Risk Tolerances of the Members

– Clear Cost Allocations, Financial Accountability and Transparency

– Taking Advantage of NFP Tax Exemptions

– Completion Guaranties and Security


11/20/2014

9

Page 17 NYSBA – December, 2014

Joint Ventures

Meredith J. Kane

Partner, Paul Weiss Rifkind Wharton &

Garrison LLP

[email protected]

Gerald W. Blume

Senior VP and General Counsel,

Rockefeller Group Development Corp.

[email protected]

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP Page 18

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FACULTY BIOGRAPHIES

Andrea D. Ascher MTA Deputy General Counsel, Real Estate

(212) 878-7255; [email protected]

Andrea D. Ascher was recently appointed MTA Deputy General Counsel to head the real estate legal group at the Metropolitan Transportation Authority and its agencies, including Metro North, LIRR, NYC Transit, Buses & Terminals, Bridges and Tunnels and MTA Capital Corporation. Prior to joining the MTA, Ms. Ascher was formerly with Schoeman Updike Kaufman Stern & Ascher LLP, a certified woman-owned firm (Partner,. 2010 to 2014), Proskauer Rose LLP (Partner, 2007 to 2010) and Cadwalader Wickersham & Taft LLP (Counsel, 1998 to 2007). She began her career in 1977 at Trubin, Sillcocks, Edelman & Knapp, a law firm, founded by Senator Jacob Javits and former NYS Assistant Attorney General John Trubin, which firm, with a commercial real estate law department of over 40 attorneys and paralegals, was special real estate counsel to Citicorp at the time. Ms. Ascher, while in the private sector, had a multi-faceted national transactional real estate law practice focusing on real estate lending and finance, including syndicated and securitized financings, debt restructures and workouts, acquisitions, dispositions and development, construction related and lien law issues, project and property management agreements and commercial leasing, regularly representing institutional lenders and borrowers, owners, and commercial landlords and tenants, involving all types of commercial properties including office buildings, shopping center, hotel, multi-use and multi-family properties. She worked on the construction loan financings of many of our iconic properties, including the South Street Seaport and the Blumberg building. A recognized leader in her field, Ms. Ascher was named to Who’s Who of American Women (14th edition; 1985-86)), was elected to the American College of Real Estate Lawyers in 1993, is a fellow member of the American College of Mortgage Attorneys, has been listed as a New York SuperLawyer annually since its inception in 2006 and has a Martindale-Hubbell Peer Review Rating of AV Preeminent (5.0 out of 5). She served as Chair of the New York City Bar Association, Real Property Law Committee from 2011 to 2014, and as Co-chair of the New York State Bar Association, Committee on Financing and Liens. Apart from her numerous industry organization memberships, Ms. Ascher is also a frequent lecturer and speaker in her field. She is a graduate of Emory University School of Law and Cornell University, and remains actively involved in her alma maters, having served on the Dean’s Advisory Board of her law school and the Dean’s Advisory Council of her undergraduate college. Ms. Ascher and her husband, Paul Ascher, a well-regarded criminal defense attorney, live in the Town of New Castle, New York, and have two sons, Zachary (Cornell ’13) and Michael (Cornell ’16).


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Luise A. Barrack is the Managing Member ofRosenberg & Estis, P.C. She co-heads thefirm's Litigation Department, imparting her trialand appellate experience to the firm. She is astaunch advocate for her clients, many ofwhom she has represented for almost 30years. Her no-nonsense approach has helpedmake Rosenberg & Estis, P.C. the tough andhighly respected law firm it is today.

Ms. Barrack's practice focuses on complexcommercial litigation at the trial and appellatelevels. She has substantial expertise in allfacets of real estate litigation, and is anexperienced practitioner in the CommercialDivision of the New York State SupremeCourt. Her real estate practice concentrateson representing developers, commercialowners, hoteliers, not for profit corporationsand educational institutions. Ms. Barrack isalso one of New York City's leading Loft Lawexperts, handling legalization, valuation of loftfixtures, and the costs of code compliance.

Matters handled by Ms. Barrack include:defeating a claim that a developer wasrequired to conduct an environmental studyprior to filing an administrative proceeding forpermission not to renew rent stabilizedtenants' leases in order to demolish a CentralPark South building; reaching a multimilliondollar deal and property exchange withColumbia University; representing New YorkLaw School in recovering a site essential tobuilding its new urban campus; and defeatinga party claiming an option to purchase aninterest in a High Line building containing achic and extremely high profile nightclub.

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Ms. Barrack also represents owners anddevelopers in construction litigation,developments, demolitions and assemblages,and disputes including succession rights, non-primary residence, and owner occupancy. Inaddition, she is seasoned in cooperative,condominium, and shareholder disputes. Inone such matter, Ms. Barrack obtained ajudgment for maintenance withheld by a realestate attorney shareholder for his ParkAvenue co-op and an order requiring him topay the bulk of the attorneys' fees he causedhis co-op to incur.

Year Joined Firm

1984

Areas of Practice

Litigation (Commercial)

Litigation (Real Estate)

Landlord Tenant Law

Loft Law

Bar Admissions

New York, 1981

U.S. District Court Eastern District of NewYork, 1981

U.S. District Court Southern District of NewYork, 1981

Education

New York Law SchoolJ.D. - 1980Honors: Member, Moot CourtAssociation, 1978-1979

Law Review: New York Law School LawReview, Member, 1978 - 1979Law Review: New York Law School LawReview, Research Editor, 1979 - 1980

State University of New York at StonyBrook

B.A. (Cum Laude) - 1977

Representative Cases

Matter of 220 CPS "Save Our Homes"Assn. v. New York State Div. of Hous. &Community Renewal, 60 A.D.3d 593, 877N.Y.S.2d 21 (2009)

Classes/Seminars

R&E's 2013 In-house Lecture Series:Attorney Client Relations 101 (Ethics), May1, 2013

PLI - Catastrophe and the Law: WhatLawyers Need to Know to Advise Clients toPrepare and Respond to Disasters 2013(Real Estate Litigation, Property Law andLandlord-Tenant Law), April 4, 2013

2nd Annual 2013 Real Estate WeeklyWomen's Forum - Women Who Rule: CEOand Founder's Round Table, February 27,2013

NYSBA 2012 Advanced Real EstateTransactions - Careful What You Say:Ethics in Real Estate, December 6, 2012

IMN-2nd Annual Real Estate GeneralCounsel's Forum (What is on yourChecklist? Property Acquisitions & DueDiligence), September 10-11, 2012

SL Green - Residential Rent Law Seminar,April 20, 2012

Commercial Summary Proceedings -

Landlord Representation for the Civil Courtin the County of Kings, March 2, 2012

Current Real Estate Leasing Issues(Including Ethics and Civility), New YorkState Bar Association, Real Property LawSection – Annual Meeting, January 26,2012

CLE - “Hot Topics Affecting Cooperatives &Condominiums- Cases & MarketplaceDevelopments in the Last Six Months”,October 2014

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Selected for inclusion in New York SuperLawyers, 2006 - 2014

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Honored by Real Estate New York as a"Woman of Influence" in its November2008 Edition

Joseph Solomon Scholar, University ofBologna School of Law, Italy

Honored by Real Estate Weekly as anIndustry Leader, August 2010 Edition

Selected for inclusion in New York SuperLawyers Top Women Attorneys in the NewYork Metro Area, 2012 - 2014

Honored by Real Estate Forum as a"Woman of Influence" in its July/August2011 - 2014 Edition

Professional Associations andMemberships

New York City Bar Association, Member,Committee on the Judiciary, Class of 2010-2013

New York City Bar Association, Member,

Committee on Cooperative andCondominium Law Committee, 2013-2015

Member of the Irvington Village ZoningBoard, 2014-2018

Pro Bono Activities

YMCA Development Committee,Leadership Council

Rosenberg & Estis, P.C. is located in New York City. Our attorneys practice in Manhattan, the Bronx, Queens,

Brooklyn, Staten Island, Long Island, Westchester County, Nassau County, Suffolk County and the Tri-State

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Gerald W. Blume is Senior Vice President and General Counsel, Rockefeller Group Development Corporation. His practice includes all aspects of ownership and development of commercial office and industrial properties and mixed use properties around the country. He has been with the company since 1990. He has been involved with the development of Flushing Commons since the project’s inception in 1995. Among his other transactions, he has been involved in the acquisition and development of The Green at Florham Park, a large multi-use project in Florham Park, New Jersey that is home to the New York Jets and the North American

headquarters of BASF Corporation; the operation of over 2 million square feet of first class office space in midtown Manhattan, and the acquisition, financing and operation of office properties in Washington DC, San Francisco, LA and Boston on behalf of an institutional fund. Prior to joining The Rockefeller Group, Mr. Blume was an Associate at the New York City law firm of Willkie Farr Gallagher. Mr. Blume holds a BA degree from the University of Connecticut and a JD degree from Columbia Law School.

Nancy Ann Connery, PartnerNancy Connery’s area of concentration is real estate law. Shehas a general real estate practice and has represented individuals, public and privatecompanies, utilities, and not-for-profit entities in a variety of real estate matters,including:

Leasing and Other Space Transactions: Ms Connery has negotiated office, loft,retail, and industrial space leases, garage leases, ground leases, easements, andlicenses.

Purchases and Sales: As part of her commercial practice Ms. Connery also hasrepresented clients in the purchase and sale of office buildings, loft buildings,industrial buildings, and other commercial space; negotiated tenant buyouts inconnection with such acquisitions; and overseen the real estate aspects of government-granted economic benefits. Ms. Connery also represents her private and corporateclients in the purchase and sale of residential real estate, including cooperativeapartments, condominiums, and houses.

Lending: She has represented both lenders and borrowers in residential andcommercial mortgage loans.

Cooperatives and Condominiums: Ms Connery’s practice includes conversions ofbuildings to cooperatives, and the general representation of both cooperatives andcondominiums.

General: Ms. Connery’s real estate practice involves her in a variety of real estaterelated matters, including brokerage issues, construction issues, trespass claims,partition litigation, and other matters.

Before practicing law, Ms. Connery taught high school biology, chemistry andphysics.

Professional Recognition:

Member, American College of Real Estate LawyersNew York SuperLawyers, 2008-2014

Professional Activities:

New York State Bar Association

Member, Executive Committee of Real Estate SectionMember, Cooperative and Condominium Law Committee, and CommercialLeasing CommitteeMs. Connery has participated in the drafting of a model form of mortgageopinion, model contract of sale for cooperative apartment, model form ofsublease and overlandlord consent, model form of office lease, model form of

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Practice Groups:Corporate Transactions; Real Estate;Private Practice

Honors and Awards:Fellow, American College of RealEstate Lawyers; New YorkSuperlawyers (2008-2014); FormerChair, New York City Bar AssociationReal Property Law Committee; FormerChair, New York City Committee onCooperatives and Condominiums

Education:B.A., Douglas College, 1968;M.A., UCLA, 1971;J.D., Rutgers University, 1978, withhonors; American JurisprudenceAward in Constitutional Law

Admissions:New YorkU.S. District Court, Southern Districtof New York

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contract of sale for a commercial office building, and a model form of groundlease. She also chaired a Task Force that evaluated proposed cooperativedisclosure legislation

The Association of the Bar of the City of New York

Former Chair, Committee on Real Property LawFormer Chair, Committee on Cooperative and Condominium LawMember

National Association of Women Lawyers

Member

American Bar Association

Chair - Assignment and Subletting Committee, Leasing GroupMember, Leasing Group

Publications and Speaking Engagements:

"Tips for Negotiating the Small Office Space Lease," The Practical Real EstateLawyer's Manual On Commercial Leasing in Troubled Times (ALI ABA 2009)."Tenant Buyouts," NYSBA N.Y. Real Property Law Journal, Winter 2008,Vol. 36, No. 1.Chapter Author, "Negotiating and Drafting Office Leases" (Law JournalSeminars-Press)."Courtesy, Professionalism and Ethics: E-mail, the Internet and Computers," Fall 2002 New York Real Property Law Journal (New York State BarAssociation)."Evicting Defaulting Sponsors and Investors and Terminating Their Interests,"Metes and Bounds (publication of Real Property Law Committee of the TheAssociation of the Bar of the City of New York).Chapter Author, Practicing Law Institute Handbook series (chapters on securitydeposits, bankruptcy boilerplate leasing concepts; subleases; letters of credit,leasehold mortgage financing, and construction issues).Speaker, programs on commercial leasing and other aspects of real estate lawsponsored by the Practicing Law Institute, ALI-ABA, the New York State BarAssociation, and the Association of the Bar of the City of New York. Topicsshe has covered include compliance with laws, construction issues, bankruptcy,security, letters of credit, the Americans with Disabilities Act, ground leases,and assignment and subleasing. She has also participated in panels onresidential transactions and lending transactions.

EDUCATIONAL:Faculty Member, Real Estate Institute, New York University (1987-1990)

RICHARD S. FRIES Partner

New York

+1.212.839.5640 +1.212.839.5599 Fax [email protected]

PRACTICES • Global Finance • Real Estate

AREAS OF FOCUS • Real Estate Litigation • Acquisition and Disposition • Construction and Real Estate Development • Corporate and Institutional Real Estate • Debt Financing • Financial Institutions Litigation • Private Equity and Joint Ventures • Real Estate Workouts and Restructurings

ADMISSIONS & CERTIFICATIONS • U.S. Supreme Court, 1981 • U.S. Court of Federal Claims, 1981 • U.S. Court of Appeals, 2nd Circuit, 1980 • U.S. District Court, E.D. of New York, 1978 • U.S. District Court, S.D. of New York, 1978 • New York, 1978

EDUCATION • New York University School of Law (J.D., 1977) • Brooklyn College (B.A., 1974)

RICHARD FRIES is well-known throughout the New York and national legal, real estate and finance communities. According to Chambers USA, “true master negotiator” Richard Fries is a “superstar” who is regarded as “one of the premier real estate litigators in the City.” Chambers notes that he is “extremely well respected for his collaborative approach and expertise in complex workout and restructuring matters.” This year, Who's Who Legal acknowledged Richard as one of the ten "Most Highly Regarded" real estate lawyers in the Americas.

As a member of the Real Estate team, Richard focuses his practice on a wide array of complex real estate financing transactions, in which he represents national and global institutional lenders, investment banks and private equity firms.

Richard has been involved in the financing, foreclosure and restructuring of permanent, construction, acquisition and mezzanine loans of all types, including agented and syndicated facilities, secured by office buildings, land development projects, healthcare complexes, hotels, mixed-use projects, apartment buildings, shopping centers, franchise operations and automobile dealerships, among other real estate and business assets.

Richard is particularly distinguished for his work in high-profile distressed commercial loan workouts and restructurings, mortgage foreclosure, distressed portfolio and asset sales, creditors’ rights and insolvency. He has developed a unique market-leading practice using litigation tools to restructure real estate loans, projects and businesses. His experience and reputation in loan workouts has been acknowledged by Chambers as “legendary.”

He also has extensive experience representing private equity investors, property owners and developers in real estate joint ventures, commercial real estate litigation, construction, hospitality and partnership disputes, asset disposition, loan portfolio sales and project development.

Richard also represents national lending institutions in the purchase and sale of performing and underperforming loan portfolios, real estate assets and participation interests in loans, and the

implementation of national standard loan and workout programs and documentation for real estate, commercial and private banking loan products.

Richard has been highly recognized by Chambers USA as one of the country’s leading real estate lawyers. He has been ranked by Chambers in “Band 1” in Real Estate Nationwide for 2013 (the year such rankings began) and 2014 and in “Band 1” for Real Estate Finance in New York each year from 2009 through 2014. He has also been recognized as a Leading Lawyer in Legal 500 for Real Estate and was named by Best Lawyers as its Real Estate Litigation Lawyer of the Year in New York City in 2013.

Awards & Honors

• Chambers USA, Real Estate Finance, New York, Band 1 (2009-2014)

• Chambers USA, Real Estate, Nationwide, Band 1 (2013-2014)

• Legal 500, Real Estate (2007, 2009, 2011, 2013)

• Best Lawyers, New York City Litigation - Real Estate Lawyer of the Year (2013)

• Best Lawyers, Real Estate (2008, 2010-2015)

• International Who’s Who of Real Estate Lawyers (2010-2014)

• Who’s Who Legal, Real Estate (2010-2014)

• Law360, Real Estate MVP (2011)

• NY Super Lawyers, Top 100 list (2011-2014)

• NY Super Lawyers, Real Estate (2006-2014)

• Guide to the World’s Leading Real Estate Lawyers (2008, 2010, 2012)

• Real Estate Weekly’s “All Stars in Real Estate” (2008)

EXPERIENCE

Recent Representative Transactions Include:

• Representation of several financial institutions in the origination and syndication of numerous acquisition, construction and development loans secured by existing real estate projects and new development sites located throughout the New York metropolitan area.

• Representation of a group of European financial institutions in the recapitalization and restructuring of a real estate loan secured by a high-profile office building located in San Francisco.

• Representation of a private equity investor in the recapitalization of more than $2 billion of distressed multi-site development projects located in Southern and Central California (each consisting of several thousand residential land development lots), as well as hotels and apartment complexes located nationwide.

• Representation of several financial institutions in distressed real estate loan workouts, mortgage foreclosures, restructures and insolvency proceedings involving several hotels and related hospitality assets located throughout the country.

• Representation of a lender syndicate, as senior lender, in the foreclosure, workout and ultimate disposition of a multi-tiered, multi-lender loan secured by The Ritz Carlton Club and The Residences at Kapalua Bay, Maui, Hawaii, a development consisting of hundreds of condominium units and fractional time shares managed, operated and controlled by Ritz Carlton.

• Representation of a financial institution in the workout, through a future transfer (secured by springing guaranties) of title in lieu of foreclosure, of a first mortgage loan on the Verizon Building, a vacant 800,000 square foot property located in lower Manhattan.

• Representation of a global financial institution in the sale, disposition and liquidation, over the past several years, of several portfolios of commercial real estate loans and hundreds of individual loans, each secured by real estate assets located throughout the country.

• Representation of private equity firms in the acquisition of distressed real estate loans and the subsequent enforcement of remedies to facilitate the transfer of ownership of the loans into ownership of the underlying assets.

*Includes matters handled prior to joining Sidley.

PUBLICATIONS

• Author, “Commercial Division’s Rocket Docket,” New York Law Journal (August 18, 2014)

• Co-author, “Distressed Real Estate Loan Dispute Resolution in 2012: Latest Developments, Trends and Strategies,” Inside the Minds: Real Estate Dispute Resolution (April 2012)

• Co-author, “Residential Mortgage Foreclosure: It’s A Whole New Ballgame,” New York Law Journal (March 14, 2011)

• Co-author, “A Primer on Today’s Commercial Loan Forbearance Agreement,” New York Law Journal (March 15, 2010)

• Preparation of Practice Commentaries on New York’s Non-Judicial Foreclosure Statute Matthew Bender (May 2005)

• Non-Judicial Foreclosure Legislation in New York (enacted July 7, 1998)

• “Legal Counsel” (formerly known as “It’s The Law”), Real Estate Forum, monthly, and then quarterly, column (1982-2000)

MEMBERSHIPS & ACTIVITIES

• American College of Real Estate Lawyers

• New York State Bar Association (Executive Committee, Real Property Law Section, Co-chair of its Finance Committee and Former Co-chair of its Workouts and Bankruptcy Committee; Past Delegate to the House of Delegates)

http://www.sidley.com/Commercial-Divisions-Rocket-Docket-Provides-for-Accelerated-Adjudication-08-18-2014/

• New York Bankers Association

• New York City Bar Association

• American Bar Association

EVENTS

• “Lending Workshop: Today’s New Issues in Structuring and Negotiating Loan Documents,” Mortgage Bankers Association of New York, Inc. (October 2014)

• “Distressed Loans and Lender Remedies - Latest Trends and Insights,” Negotiating the Sophisticated Real Estate Deal, Practising Law Institute (June 2014)

• “Advanced Issues in Loan Enforcement,” 2014 Commercial Real Estate Financing Seminar, Practising Law Institute (February 2014)

• “Distressed Commercial Real Estate Loan Workouts and Remedies - Latest Trends and Insights,” Negotiating Real Estate Deals 2013, Practising Law Institute (June 2013)

• Presenter and co-chair, New York State Bar Association Annual Meeting for the Real Property Law Section’s Finance Committee’s Program (January 2013)

• “Distressed Commercial Real Estate Loan Workouts and Remedies - Today’s Issues,” New York State Bar Association’s Advanced Topics in Real Estate Program (December 2012)

• CLE presentation: “Loan Workouts,” First American Title Insurance Company Program (November 2012)

• “Distressed Loan Workouts and Lender Remedies,” PLI’s Negotiating Real Estate Deals 2012 program (June 2012)

• “Latest Developments in the Enforcement of Guaranties,” New York Real Property Law Section’s Financing and Workouts Committees’ Joint Program, New York State Bar Association’s Annual Meeting (January 2012)

• “Distressed Real Estate Loan Workouts and Remedies,” New York State Bar Association Advanced Real Estate Program (December 2011)

• “The Landscape of Loan Workouts Updated - Out of the Woods or a Bridge to Nowhere?,” 2011 ICSC U.S. Shopping Center Law Conference (October 2011)

• “Distressed Loan Workouts and Lender Remedies,” Practising Law Institute’s Negotiating Real Estate Deals 2011 Program (June 2011)

• “Legal Experts Perspective on Restructuring and Distressed Debt,” The Stoler Report Broadcast (February 2011)

• “Advanced Real Estate Workouts and Restructurings,” New York State Bar Association Annual Meeting (January 2011)

• “Distressed and Troubled Real Estate Loans,” New York State Bar Association Advanced Real Estate Practice Program (December 2010)

• “Minefields, Sheer Cliffs and Rough Roads: The Landscape of Loan Workouts in 2010,” ICSC’s 40th Annual U.S. Shopping Center Law Conference (November 2010)

• “Distressed Loans - The Lender’s Remedies,” PLI Commercial Real Estate Program (April 2010)

• “Troubled Mortgage and Mezzanine Loans and Workouts - After Acceleration,” PLI Commercial Real Estate Financing Program (March 2010)

• “Cutting Edge Real Estate Workout Strategies,” New York State Bar Association Real Property Law Section Annual Meeting (January 2010)

• “Distressed Loan Workouts, Mortgage Foreclosure and Remedies,” New York State Bar Association Advanced Real Estate Practice (December 2009)

• “Commercial Real Estate Loan Workouts - Strategies After Default in the Current Economy,” American College of Real Estate Lawyers (October 2009)

• “Basics of Commercial Foreclosure and Beyond in Today’s Market,” New York Bar City Bar Association (October 2009)

• “Distressed Loans, Workouts and Mortgage Foreclosure Strategies and Remedies after Default,” First American Title Insurance Company of New York, CLE program (July 2009)

• “New World of Loan Restructuring,” Real Estate Finance Committee of the Real Estate Board of New York (June 2009)

• “Hot Topics in Workouts, Restructuring and Remedies,” Mortgage Bankers Association of New York (May 2009)

• “Commercial Real Estate Financing 2009: How the World Changed,” Practising Law Institute (February 2009)

• “Commercial Real Estate Financing - Judicial and Non-Judicial Foreclosure and Distressed Loan Workouts,” Practising Law Institute (numerous occasions)

• “Distressed Loans, Workouts and Mortgage Foreclosure - Strategies and Remedies After Default,” Ninth Annual Commercial Real Estate Institute, Practising Law Institute (November 2007)

• “Strategies and Remedies for Breaches of Real Estate Contracts and Loan Documents,” Practising Law Institute (several occasions)

• “Advanced Real Estate Practice - Foreclosures and Distressed Loan Workouts,” New York State Bar Association (November 2007 and December 2008)

• “Distressed Loans, Workouts, and Mortgage Foreclosure - Strategies and Remedies after Default,” First American Title Insurance Company Seminar (May 2007; July 2009)

• “Current Loan Enforcement Issues,” New York State Bar Association Real Property Law Section Annual Meeting (January 2005)

• “Distressed Loan Workouts,” Citibank-Chicago Title Program (August 2003)

• Chair and lecturer, various New York state, New York City and Westchester County Bar Association Continuing Legal Education Programs

• “Distressed Loan Workouts,” First American Title Insurance Company Seminar (2003)

• Programs and numerous client presentations, seminars and training sessions on mortgage foreclosure, real estate, workouts, bankruptcy and asset-based finance (various dates)

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP WWW.PAULWEISS.COM 1

MEREDITH J. KANE Partner Tel: 212-373-3065 Fax: 212-492-0065 [email protected]

New York 1285 Avenue of the Americas New York, NY 10019-6064

PRACTICES

Real Estate

A partner in the Real Estate Department and a member of the firm’s

Management Committee, Meredith J. Kane regularly represents developers,

equity investors, institutional and entrepreneurial owners and government

agencies in all aspects of development, finance, acquisitions and sales, equity

joint ventures, restructuring, leasing and securitization of real estate.

EXPERIENCE

Ms. Kane’s experience includes all aspects of the finance and development of complex

public/private joint venture projects including:

the long-term lease acquisition of New York’s World Trade Center complex;

the development of MTA’s 26-acre Hudson Yards on Manhattan’s far west side

for over six million square feet of office space and 5000 residential units; and of

Atlantic Yards in Brooklyn for a sports arena and up to 16 residential and

commercial buildings;

the representation of the Stuyvesant Town/Peter Cooper Village Tenants

Association in the ownership and debt restructuring of the 11,000-unit residential

complex;

the transaction between the City of New York and Cornell University and

Technion–Israel Institute of Technology to develop a world-class

Engineering and Applied Sciences graduate school in New York City;

the representation of Time Warner, Inc. in its program to relocate up to four

million square feet of corporate office space in the New York area;

the retail redevelopment and historic restoration of Grand Central Terminal;

the development and securitized financing of Brooklyn Renaissance Plaza and

the Marriott at the Brooklyn Bridge, a 1.2 million square foot office and hotel

complex in downtown Brooklyn;

EDUCATION

J.D., Harvard Law School,

1982

cum laude

B.A., Yale College, 1976

magna cum laude

RECOGNITIONS

Woman of the Year –

WX New York - Women

Executives in Real Estate

Euromoney Legal Media

Group – “Best in Real Estate”

Americas Women in Business

Law Awards

Real Estate Weekly

“Top 50 Women in Real

Estate” and “25 Current

Leaders in the Industry”

Grid “Top 10 American

Women in Real Estate

Development”

Chambers USA

Who’s Who Legal USA

The Legal 500

The Best Lawyers in America

Member, American College of

Real Estate Lawyers



the development and financing of Avalon Chrystie Place, a 5-building, 720-unit

housing, retail and community facility development in Manhattan’s Cooper Square

area;

the development and financing of the 76-story Trump World Tower luxury

condominium;

the development and financing of over 5 million square feet of major mixed-

use retail and residential projects in Flushing, Queens;

the development of multiple new facilities for City University of New York,

including a new headquarters, new building for Silberman School of Social Work at

Hunter College, and new academic facilities for CUNY senior colleges;

the acquisition and development of multiple new facilities for North Shore

Long Island Jewish Medical System, including medical offices, hospital facilities,

and administrative headquarters;

the development and financing of major proposed new and expanded cultural venues,

including the Park Avenue Armory, New York City Opera, New York Public

Library, Brooklyn Academy of Music, Poets House, and Little Shubert

Theatre;

the redevelopment of nine historic theaters in the 42nd Street Development

Project;

the development and financing of a new arena for the Miami Heat basketball team;

and

the development and financing of numerous office, residential and mixed-use

complexes.

She has represented Avalon Bay Communities, The Lefrak Organization, Vornado

Realty Trust, Time Warner, Inc., Muss Development Company, Daewoo

Corporation, the Metropolitan Transportation Authority, Rockefeller Group

Development Corporation, Carnival Corporation, City University of New York, and

others in major real property acquisitions, sales, financings and developments.

Ms. Kane has received numerous honors and awards for her work. She was honored as the

2009 Woman of the Year by WX - New York Women Executives in Real Estate, and was named

one of the Top 50 Women in Real Estate and one of 25 Current Leaders in the Industry by Real

Estate Weekly and The Association of Real Estate Women. Euromoney Legal Media Group

named her Best in Real Estate at the 2012 inaugural Americas Women in Business Law Awards

and Grid Magazine named her one of the top 10 American women in real estate development.

She is cited as one of the leading real estate lawyers in the United States in Chambers USA

2014, sources describe her as a “fantastic lawyer” who is “immensely valuable” during

negotiations. She is recognized for advising New York City Economic Development

Corporation on the $2 billion development of an applied sciences and engineering graduate


campus. Sources particularly highlight her "deep understanding of transactional matters with

a focus on tax issues.” Ms. Kane is also recognized in Who’s Who Legal USA, The Legal

500, The Best Lawyers in America and numerous other peer-review publications. She is a

member of the American College of Real Estate Lawyers.

Ms. Kane served as a commissioner of the New York City Landmarks Preservation Commission

from 1995 to 2004. She was a member of the World Trade Center Memorial Center Advisory

Committee. She was a lead official from 1985-87 of the New York City Department of Housing

Preservation and Development in charge of the planning and development of 8,000 new

housing units, and a City Planning official for the City of New Haven from 1977-79 in charge of

mixed-use retail and commercial districts. She is a regular speaker at professional forums on

real estate development and finance. She serves on the Executive Committee of the Avenue of

the Americas Association (Chair, 1999-2007), and is a member of the Real Estate Board of New

York, WX-Women Executives in Real Estate, the New York Women’s Forum, the ULI-Urban

Land Institute, the Forum for Urban Design and the Association of the Bar of the City of New

York (former Chair, Economic Development Subcommittee). She serves on the boards of

several civic and not-for-profit organizations.

HOWARD J. LEVINE

Partner, Roberts & Holland LLP

Washington, DC and New York, NY

Ph: 202-293-3408; Fax: 202-293-0479

E-Mail Address: [email protected]

Website: “robertsandholland.com”

Howard J. Levine is a partner in Roberts & Holland LLP in Washington, D.C. and New York,

N.Y., which is the largest law firm in the United States that is devoted exclusively to tax and tax

related matters. He is a former Assistant Branch Chief, Litigation Division, Office of Chief

Counsel, Internal Revenue Service (1972-1976). Mr. Levine served as an Adjunct Professor at

Georgetown University Law School (LLM Tax) and George Washington University Law School

(LLM Tax). He is a Contributing Editor of The Journal of Real Estate Taxation, a Member of the

Advisory Board of BNA Tax Management, and a past member of the advisory board of the CCH

Journal of Global Transactions. Mr. Levine is an author of over 100 articles and publications

including BNA Tax Management Portfolio #567-5th, Tax Free Exchanges Under Section 1031

and (co-author of) BNA Tax Management Portfolio #936, Limitation on Benefits of US Income

Tax Treaties. A frequent speaker at numerous Tax Institutes around the country, Mr. Levine is a

member of the American Bar Association Tax Section (Former Chairman, Committee on Sales,

Exchanges and Basis; Former Subcommittee Chair on Like Kind Exchanges; Former

Subcommittee co-chair on U.S. Activities of Foreigners and Tax Treaties), the New York Bar,

and the District of Columbia Bar.

Mr. Levine received a B.A. from Hunter College, his J.D. cum laude from SUNY at Buffalo, and

LL.M. (Taxation) from Georgetown.


{00327477-1}

NYSBA Fall 2014 ProgramAdvanced Real Estate

Current Tax Issues Affecting Real EstateHoward J. Levine

Joseph Lipari

Joseph Lipari received his A.B. degree from Columbia University in 1975 and his J.D. from Boston University, magna cum laude, in 1978. He joined Roberts & Holland in 1978 and became a member of the firm in 1987. For more than 35 years, he has counseled U.S. and foreign clients on complex business transactions, including the purchase and sale of businesses and structuring their investments. He has represented developers of hotels, shopping centers and assisted living facilities, as well as institutional real estate investors, in a wide variety of real estate transactions, from the formation and restructuring of partnerships for the acquisition, development and operation of real property, to UPREIT transactions, sales, tax-free exchanges, co-op and condominium developments, and workouts and foreclosures, including mortgage restructurings, property exchanges, short sales of real property and other forms of debt relief.

He is a member of the American and New York State Bar Associations. He is a member of the Economic Affairs Committee of the International Council of Shopping Centers

Benjamin Weinstock is co-chair of the Real Estate Department

of Ruskin Moscou Faltischek, P.C. in Uniondale, New York, where

he concentrates on transactional real estate matters. Mr.

Weinstock received his law degree (cum laude) in 1978 from

Brooklyn Law School. In 2001, Governor Pataki appointed him to

the New York State Real Estate Board, where he served as

Secretary through 2009. Mr. Weinstock is an Adjunct Professor of

Law at Brooklyn Law School and a founding member of the Institute of Real Estate at

Hofstra University. He is a Fellow of the American College of Real Estate Lawyers,

has been included in New York Magazine’s Best Lawyers in New York since 2009 and

in Super Lawyers since 2007. Mr. Weinstock is a frequent lecturer for continuing legal

education programs sponsored by the New York State Bar Association and several

other CLE providers. He is the author of the chapter on Lease Guaranties in the New

York State Bar Association's desk book on Commercial Leasing and has published

numerous legal articles. Mr. Weinstock also serves as Deputy Mayor of the Village of

Cedarhurst and is the immediate past Chairman of the Real Property Law Section of

the NY State Bar Association.

DIRECTIONS CONTACT

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Lawrence J. WolkMember

New York, New York

212-551-1270

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Lawrence J. Wolk joined Rosenberg & Estis,P.C. in 2014 as a Member of its TransactionalGroup. He is experienced in complexcommercial real estate transactions, mortgagefinancing and public/private transactions.

Prior to joining Rosenberg & Estis, Mr. Wolkwas a Partner and Counsel with Holland &Knight LLP for 18 years. His responsibilitiesincluded representing national life insurancecompanies and banks in numerous singleasset and multi-state, multi-asset mortgageand acquisition transactions. Mr. Wolk alsooversaw numerous commercial acquisitions,dispositions and mortgage financings forclients headquartered outside of the UnitedStates and served as outside Real EstateCounsel to a number of State of New Yorkagencies. He also frequently provided adviceas local New York counsel on multi-statemortgage financing transactions.

Earlier, Mr. Wolk served as Assistant GeneralCounsel for real estate and asset dispositionat the Resolution Trust Corporation (RTC) andthe Federal Deposit Insurance Corporation,where he had senior agency legal andmanagement responsibility for the real estate,affordable housing, environmental, andworkout sections of the RTC’s legal division.He implemented and closed multi-asset salesprograms disposing of billions of dollars of realestate and real estate loan assets.

Prior to his service with the RTC, Mr. Wolkwas in private practice in the New York area,focusing on complex real estate mortgagefinancing and lease transactions.

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The notable transactions in which Mr. Wolkhas played a leading role include the $735million financing of the World Financial Centerat Battery Park City; the sale of 350 ParkAvenue and the acquisition of 270 ParkAvenue; the acquisition of 1,200 cellulartowers comprising Motorola’s North Americancellular tower portfolio; the sale of the IndianPoint and Fitzpatrick nuclear power plants; theground leasing of nine (9) residential towers inSouthtown, Roosevelt Island; and Phase 1 ofthe Moynihan Station development project. Heis a frequent lecturer on real estate law topicsat CLE presentations.

Year Joined Firm

2014

Areas of Practice

Transactional Law

Real Estate Financing

Real Estate Development

Real Estate Leasing

Bar Admissions

District of Columbia, 1995

New York, 1975

Education

New York University School of LawJ.D. - 1974Law Review: New York UniversityReview of Law & Social Change, Editor

Johns Hopkins University, Baltimore,Maryland

B.A. - 1971

Published Works

Following the meeting of the G-7 FinanceMinisters and Central Bank Governors,Treasury Secretary Henry M. Paulson Jr.outlined broad principles, Holland & KnightAlert, October, 2008

Honors and Awards

Selected for inclusion in The Best Lawyersin America, 2007 - 2014

Selected for inclusion in InternationalWho’s Who of Real Estate Lawyers, 2013 -Present

Selected for inclusion in Who’s Who Legal,2011 - 2013

Selected for inclusion in New York SuperLawyers, 2009 - 2014

Professional Associations andMemberships

American College of Mortgage Attorneys,New York State Chair

American College of Real Estate Lawyers,Member

District of Columbia Bar Association,Member

New York State Bar Association, RealProperty Section, Co-Chair, CLECommittee, Member, Executive Committee

Rosenberg & Estis, P.C. is located in New York City. Our attorneys practice in Manhattan, the Bronx, Queens,

Brooklyn, Staten Island, Long Island, Westchester County, Nassau County, Suffolk County and the Tri-State

Area. We have appeared in connection with litigation, transactions and leasing throughout the country.

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HOT TOPICS IN LEASING by Nancy Connery, Esq. Schoeman ...

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