Thursday, June 12, 2008

Legal term of the day: vertical subdivision

Generally speaking, this is when you take a skyscraper and carve it up into separate legal properties so you can have different owners of a building if you wanted. Of course, this is exceptionally complicated (plenty of legal fees!), but the rewards can make it worthwhile.

The John Hancock Center in Chicago has already been legally subdivided into retail, office and condominium portions, but we'll use that as an example since Golub & Company (part of the JV that owns the building) has announced that they are going to sell off the retail portions of the building, consisting of floors 1, 2 and the plaza and floors 94, 95 and 96. I guess they'll keep the office, which is what those guys know best.

As the story says, this is very creative. Other buildings on Boul Mich have the same structure, sometimes for legal reasons but other times also to separate the retail and office portions of a property for property tax purposes. Why? Because if in a net lease a tenant pays its share of taxes based on their square footage of the whole building, the retail guys get a windfall and the office portion gets slammed, meaning you can't charge as much rent as you want. The retail, renting at hundreds of dollars a foot, provides the most value to the building. With a vertical subdivision you can potentially maximize the value of the office portion of the property.

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