Attorney Anton Natsis

Everything old is new again. The phrase certainly applies to rent arbitrations, if one were to accept the theory put forth by Anton Natsis. The partner at Allen Matkins Leck Gamble Mallory & Natsis LLP scored a major arbitration win with the recent decision that Sony Pictures Entertainment was to pony up $56 million to landlord Transpacific Development Co. over the next five years for the privilege of staying at Sony Pictures Plaza. The call, involving some 300,000 sf in the Culver City, CA asset, is being touted as the largest rent arbitration ever decided on the West Coast. While rent arbitration is certainly not a recent phenomenon, it’s a trend whose time has come, the Century City, CA-based Natsis offers, and if you’re an owner–and especially if your spaces are filled with multi-location national tenants, arbitration might be a skill set worth looking into. Here’s what he had to say:

GlobeSt.com: Why don’t we hear more about rent arbitrations?

Natsis: Historically those that have occurred were between governmental entities and their ground lessees. A county, let’s say, almost always wants to arbitrate just so they can’t be second-guessed. Such arbitrations have been going on for 20 years, but they’re not high-profile and they’re not intensive in terms of strategy. Now, markets are getting a lot tighter in terms of alternatives for tenants, and landlords are getting a lot more bullish on rental rates.

There isn’t as much opportunity to develop anymore so there aren’t as many places for a tenant to go. And tenants probably spent a significant amount of money, that the landlord didn’t give, to build out your space. Also, because all of these assets are changing hands, either in one-off or portfolio configurations, and landlords and their lenders have underwritten high rental rates and the landlord is not going to settle for less than that, they’re happy to go to arbitration if they need to in order to push the rate.

GlobeSt.com: So the upshot is that we’ll be seeing a lot more?

Natsis: Yeah. Let’s say you have a 500,000-sf building and a couple of tenants who are renewing. Let’s say there’s also some vacant space and one large tenant who’s leaving. The renewal guys are trying to strike deals and you think you’d like to lease that vacant space for $6 a foot, or $72 a year, gross with a base year. You can’t afford to make a $5 deal or a $4.50 deal with those renewing tenants, but that’s what the tenant wants to pay, so you’re going to arbitrate. You need that $6 because you bought the building at such an outrageous price that it’s like a four cap on current NOI–but if you push the rate to $6 you’ll have a 10 cap. A lot of these portfolio and even one-off acquisitions have property-level debt maybe at 70% value, plus mezz debt where you levered up another 20% and your ownership interest. You have to push NOI and rental rates.

When you’re trying to get a $6 rent, there are always a couple of guys happy to offer $3.75, but they don’t have a lot of space, fortunately. I did my first two $5 deals about two months ago. Now I’m working on several above-$5 deals and the market is going to $6. A couple of my institutional-landlord clients are saying $10 in 2010.

GlobeSt.com: Is there an ultimate loser or winner–landlord or tenant?

Natsis: It’s a win/win. The landlords are going to make their money and the tenants who are paying the freight are probably in businesses that are making money. It’s just a slight redistribution of wealth.

GlobeSt.com: Is the capability built into every lease?

Natsis: Almost any office lease of any size has the right for the tenant to arbitrate.

GlobeSt.com: How long have you seen it as a staple in private-sector leases?Natsis: At least since the early ’80s.

GlobeSt.com: So it’s a sleeping dog.

Natsis: That’s the whole thing. Between 1983 and 2000, I worked on maybe 50 disputes, and maybe five or six headed to arbitration and maybe three actually got arbitrated. Since 2000 I’ve worked on 500 disputes. One hundred have headed to arbitration and 20 are actually going to arbitration. I’ve had five arbitrations this year and three or four go right down to the eve of arbitration and then go away. I’ve won every one I’ve done in this decade, by the way. Fifteen in a row.

GlobeSt.com: How do they go away?

Natsis: Somebody realizes the other guy has an upper hand. That’s always the other side of the table–the tenant. In the office-building market, 80% of the time I am the landlord’s guy.

GlobeSt.com: Does the tenant ever get the upper hand?

Natsis: The tenant’s upper hand is to say they’ll leave if the landlord doesn’t strike a deal. But, as one of my clients said to a 100,000-sf tenant one time, they’d drive the moving truck. That was the end of the tenant’s leverage.

GlobeSt.com: The pendulum is at work, I assume. Or will arbitration, like divorces, just keep growing?

Natsis: The pendulum will start swinging when there are enough transactions that can be cited that support the rates the landlords are pushing for. But when the landlords start proving that $6 rates are applicable, they’re going to start asking for $7. At some point they’ll stop asking.

GlobeSt.com: Is there a trick to avoiding arbitration?

Natsis: Sometimes a tenant may guarantee NOI for 10 years and pay something closer to the landlord’s rate, if in the second five years the landlord could give them some TI allowance. But I haven’t seen a lot of that. Also, a lot of tenants who push arbitration don’t understand it so they don’t think they can lose. They don’t understand how the appraisal process works. Or they work for a large institutional tenant–like an aerospace company or a bank–where there’s no incentive to agree to a rate that doesn’t sound. They’d rather lose because no one will get mad at that.

GlobeSt.com: Tell me about ground leases. How are they different?

Natsis: They’re not renewals. Those are 99-year ground leases and in year 25 or 30–and every 10 years after that–you reset your base rent to market. A lot of those ground leases were signed in the ’70s. Guess what? It’s time for reset. So I have five of those.

There are two primary differences between the types. One is that you’re evaluating the value of land rather than office space and two is that the convention in the office industry is to do baseball arbitration. That forces a lot of compromises because you see each others numbers. The tenant won’t pick a terribly low number and the landlord won’t pick a terribly high number. In ground leases there’s none of that. So, if you each pick a terrifically aberrant number, it’s worth arbitrating.

GlobeSt.com: I imagine it gives the negotiation a somewhat different tone.

Natsis: You get to use the OJ approach; I don’t have to prove my number. I only have to beat the heck out of your number.