Page 447 - WhyAsInY

WitHout reCourse: Harvey, tHe real estate laWyer
Thus, there were at least ten parties with whom we would have to nego- tiate, almost all of whom would be involved in the negotiations of the terms of, and have to approve, the document that formed the heart of the transaction, the ground lease (among hundreds of other documents).
And now—believe it or not—for the complicated part: At the heart of the ground lease was the rent provision that, when finally completed, covered more than 50 pages of the document! For those of you who are still awake and truly loyal members of the family, a gross simplification of the rent provision is set forth in the next footnote (which I’ve included because it makes me nostalgic and because I want to illustrate the rent provision’s complexity, but which, because I’m a nice guy, I hereby per- mit you to skip—unless you are brimming over with curiosity).8
The meaning and the methods of calculating each of the terms of the rent provision were heavily negotiated over a period of months, and the negotiating task fell to me, as did the negotiation of the remaining 250-plus pages of the ground lease. It was the headiest experience of my
8. During the projected three-year construction period, rent, which ultimately went to the City, would be equal only to the real estate taxes applicable to the land that would have been payable to the City during that time. (No taxes were actually payable because the owner of the land would be the UDC, a governmental entity.) That was simple, but now we enter the operating period. During that period, which commenced when the hotel was opened to the public and covered the remainder of the lease term, the hotel owner would still pay an amount equal to the real estate taxes that would have been paid on the unimproved land but no real estate taxes on the hotel itself. Instead, it would also pay an ostensible annual rent, called the “Base Rent,” which would be equal to 7 percent of the hotel’s gross operating revenues and any other operating revenues of the project (such as rent from store tenants). But, I say “ostensible” because the Base Rent would be payable on a current basis only to the extent of one-third of any “net cash flow” from operations (thus, there would be no default if the project didn’t make money), or if the hotel owner ever achieved a specified “internal rate of return” (you can look this one up) on its capital investment, then it would have to use one-half of its net cash flow to pay the Base Rent. If the portion of net cash flow that was payable was insufficient to pay the Base Rent in full, any unpaid Base Rent would be deferred, with interest, until there was suffi- cient net cash flow to pay it. To attract lenders to the project, not only would “net cash flow” be calculated as it usually is—by subtracting gross operating expenses from gross operating revenues—but there would also be subtracted an amount equal to the debt service to be paid to the lenders on the original “permanent” loans and any loans that refinanced them. Thus, until a mortgage default, the lenders would not have to concern themselves with a default in the pay- ment of the Base Rent.
• 429 •