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Leases Grow Knotty Over Toxics Issue : Asbestos Problem Sometimes Has Role as a 'Deal Buster'

June 12, 1988|DAVID W. MYERS | Times Staff Writer

When Cushman & Wakefield broker John Knott started leasing commercial real estate just five years ago, it was a relatively simple business.

Negotiations were dominated by economic issues, such as how much the rent would be and how much money the landlord would allocate for tenant-related improvements.

But while basic financial matters remain the core of negotiating today, several items that were barely mentioned just a few years ago now play a crucial role in the multimillion dollar bargaining between prospective tenants and owners of big office buildings and industrial complexes.

Concerns over asbestos, on-site toxics and fire-sprinkler systems are rapidly changing the face of the commercial real estate industry.

And increasingly, they're becoming "deal busters"--brokers' jargon for a stumbling block that simply can't be overcome, even when all the other terms have been ironed out.

One easy measure of the complexity of negotiating today: The length of lease contracts for deals that have been worked out.

"After we're done addressing all these new concerns, our leases are running 30 or 40 pages," said Knott, who specializes in representing tenants working with Cushman & Wakefield's West Los Angeles office. "Five years ago, you could say everything you needed to say in five or 10."

Asbestos seems to be the most vexing problem. Widely used in construction from the 1920s to about 1970, it can cause cancer and other illnesses when disturbed and inhaled.

Assumed Responsibility

The mere presence of asbestos can have a dramatic effect on real estate deals.

When Shuwa Investments Corp. bought the landmark Arco Plaza downtown in 1986 for about $650 million, several brokers say the company got a discount ranging from $30 million to $50 million because it agreed to assume future responsibility for curing the asbestos problem and accepted liability for paying court-awarded damages to plaintiffs who may eventually sue.

Shuwa didn't have to worry about financing its transaction; it paid cash. But some firms are having a tough time finding the huge loans usually needed to complete the purchase of an office complex, because a growing number of financial institutions simply won't lend money on a building with asbestos in it.

Other lenders will only loan money on such projects if the borrower agrees to remove or repair any problems before escrow closes.

One main reason for lenders' fears: "If a lender has to eventually foreclose on the property, it could be considered part of the chain of ownership," said Doug Ring, who heads up the real estate practice for the Los Angeles office of the Shea & Gould law firm.

Potentially Costly

"Anybody who's part of that chain could eventually be responsible for paying part of the awards made to plaintiffs who successfully file suit over an illness linked to the asbestos."

As a result, Ring said, a lender pondering foreclosure on a building with asbestos is stuck in a potentially costly Catch-22 position.

If the bank refuses to foreclose, it won't get its money back; if it does foreclose and takes back title to the building, it injects itself into the chain of ownership and could eventually be found liable for jury awards that could exceed the value of the loan itself.

Meanwhile, some tenants who are shopping for new office space are using the presence of asbestos as leverage to get a potential landlord to make concessions.

In buildings where loose asbestos must be removed or contained, Knott says he has usually been able to get the landlord to pay all the costs. "But that could change if the market tightens and space becomes harder to get," he added.

Seek Reduced Rent

If a landlord won't agree to removal or repair, says Knott, "some tenants will say, 'fine, we're going somewhere else.' "

Others will still take space in a building with asbestos, but at a reduced rent. Knott says buildings with asbestos are renting for about 5% less than comparable buildings without it, even if the asbestos doesn't currently pose a health risk.

Since removal can cost up to $35 a square foot--not much different than rents at many top-notch buildings and even more than rents at others--several building owners have been loath to take out asbestos that doesn't currently pose a health hazard.

Likewise, many don't want to initiate lawsuits against asbestos manufacturers because of the publicity and high attorney fees usually involved.

But such delays may prove costly to building owners in the long run, contends Jeffrey D. Masters, a partner in the real estate litigation department of the Los Angeles-based law firm Cox, Castle & Nicholson.

The chances of being sued by tenants will grow with each passing month, and there's a good chance that the statute of limitations for the owner to sue the manufacturer will run out before the landlord files his action.

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