#2 Negotiating Leases during the Downturn: Creating Value and Avoiding Cost

1. #2 Negotiating Leases during the Downturn: Creating Value and Avoiding Cost Moderator: Ken Ashley, CCIM, MCR, SIOR Cushman & Wakefield Speakers: Kitty O’Connell Henry Munsch Hardt Kopf & Harr, P.C. Trex Morris Ernst & Young October 13, 2009

2. About the Panel Members Ken Ashley, CCIM, MCR, SIOR Senior Director Cushman & Wakefield Atlanta, GA (404) 853-5325 ken.ashley@cushwake.com www.cushmanwakefield.com Kitty O’Connell Henry Shareholder Munsch Hardt Kopf & Harr, P.C. Dallas, TX (214) 855-7506 khenry@munsch.com www.munsch.com Trex Morris Americas Director, Real Estate Services Ernst & Young Atlanta, GA (404) 817-5482 Trex.morris@ey.com www.ey.com 2 Negotiating Leases During the Downturn: Creating Value & Avoiding Cost

3. Overview NewsFlash 3 Negotiating Leases During the Downturn: Creating Value & Avoiding Cost

4. Overview NewsFlash 4 Negotiating Leases During the Downturn

5. Overview Negotiating Leases During the Downturn: Creating Value & Avoiding Cost

6. The “marriage” of tenant and landlord Tenant Flexibility OPEX Self-Help Lease / SNDA Exculpation Letter of Intent / Deal Funding Parties to Lease I love you. You are my one and only…but please sign this document. Wedding First Date Engagement Pre-nup Issues Budget Hobbies Negotiating Leases During the Downturn: Creating Value & Avoiding Cost

7. FIRST DATEParties to Lease Is she creditworthy? Is he married? Parties must be clearly defined. Negotiating Leases During the Downturn: Creating Value & Avoiding Cost

8. FIRST DATEParties to Lease Who is the Landlord? A multi-billion dollar pension fund… Or a single-asset subsidiary of one? Creditworthiness is key. Can the Landlord fulfill its promises to pay? Due Diligence. Do your due diligence before you sign… and maybe even afterwards 8 Negotiating Leases During the Downturn: Creating Value & Avoiding Cost

9. ENGAGEMENTLetter of Intent / Deal Funding Promises, promises Landlords “woo” the Tenants throughout the LOI process. Will you be my Tenant? Negotiating Leases During the Downturn: Creating Value & Avoiding Cost

10. ENGAGEMENTLetter of Intent / Deal Funding • Now is the time to ask – list the critical information you need from the Landlord (and/or its Lender) • Insure that Landlord can do what it promises with regard to commissions, allowances, etc. • Explore confirmation from Lender; parent guaranty; Letter of Credit; escrow account; self-help 10 Negotiating Leases During the Downturn: Creating Value & Avoiding Cost

11. PRE-NUPExculpation Exculpation I love you. You are my one and only…but please sign this document. • Landlords’ liability generally capped at its “equity in the property.” • Equity…? What equity?! • How can Tenant recover for Landlord default? • Guaranty; Letter of Credit; negotiated cap on liability; self-help Negotiating Leases During the Downturn: Creating Value & Avoiding Cost

12. WEDDINGLease / SNDA Speak now or forever hold your peace. • If you want an SNDA, you need to get it now - to wait until later may mean never! • Landlord may not be able to guaranty an SNDA from current lenders - should at least make commercially reasonable efforts • Future subordinations should be conditioned on SNDA. • Negotiate and attach the SNDA to your lease - don't let it amend your lease. CommitmentSTRAIGHT AHEAD (or else!) Negotiating Leases During the Downturn: Creating Value & Avoiding Cost

13. WEDDINGLease / SNDA Potential SNDA "Gotchas" Lender not liable for Landlord default. No recognition of Tenant’s rights under the lease. Excessive cure periods for Lender. No obligation to complete tenant improvements. No obligation to pay commissions or allowances. No rebuilding obligation after casualty or condemnation. Not liable for security deposit. Get Landlord’s signature! 13 Negotiating Leases During the Downturn: Creating Value & Avoiding Cost

14. SELF-HELPIssues Relationship Issues As in all relationships, sometimes a promise is broken. What if Landlord doesn’t do what the lease promises? Consider a “zombie” building – no janitorial, maintenance, repair. Steps to self-help: Written notice to landlord - and lender?! Check the lease and SNDA and comply. Services vs. repairs; Structural vs. non-structural. Beware of potential liability for shoddy self help work. Offset... Can you? When? How much? 14 Negotiating Leases During the Downturn: Creating Value & Avoiding Cost

15. BUDGET Operating Expenses OPEX 33% • In 2009, many Tenants received Opex of as much as 20%-25% or more • Landlord wants to shift risk of unexpected costs or price increases to Tenant through operating cost pass-throughs • What is an operating cost? More importantly, what is it not? • Cap on "controllable" operating costs; but what's controllable? • Understand the cap - is it cumulative and compounded? Operating Expenses typically account for one-third of Occupancy Costs. 15 Negotiating Leases During the Downturn: Creating Value & Avoiding Cost

16. BUDGET Operating Expenses OPEX 33% • For Base Year concept, make sure Land-lord fully “grosses-up” cost in Base Year • Don’t let Landlord profit on operating expenses. • All expenses should be actual and reasonable. • Recalculate proportionate share if building size increases Operating Expenses typically account for one-third of Occupancy Costs. 16 Negotiating Leases During the Downturn: Creating Value & Avoiding Cost

17. BUDGET Operating Expenses OPEX 33% • Reconciliations • When will Landlord deliver annual statement? Need a drop dead date. • Require audit right; make sure timing works... what if Landlord never delivers its statement? Operating Expenses typically account for one-third of Occupancy Costs. 17 Negotiating Leases During the Downturn: Creating Value & Avoiding Cost

18. HOBBIESTenant Flexibility • To whom can a tenant assign or sublet? Must the landlord consent? • Third parties: • Landlord should be reasonable in granting consent • Beware of "prohibited" transferees - they are often a tenant's best candidates! • Permitted transfers – what flexibility does tenant need for its overall business plan? • Affiliate (parent, subsidiary, entity under common control) • Successor by merger • Asset Purchaser • Net worth issues - when do you measure? • Ancillary rights – make sure you don't affect renewals, ROFRs, etc. 18 Negotiating Leases During the Downturn: Creating Value & Avoiding Cost

19. MARRIAGEAnd They Lived Happily Ever After… 19 Negotiating Leases During the Downturn: Creating Value & Avoiding Cost