Experts skeptical of mix-up by Rouse

Developer faces losing Columbia headquarters

October 03, 2003|By TaNoah Morgan | TaNoah Morgan,SUN STAFF

Commercial real estate experts were skeptical yesterday that the Rouse Co. had a mix-up in renewing the lease for its headquarters that could force the company to move from Columbia, the town it founded in 1967.

"It's not like [Rouse] ... to have an oversight," said Randall M. Griffin, president of Corporate Office Properties Trust, a real estate investment trust that competes with Rouse for ownership of top-flight office space in the region. "If it's an oversight, it's unfortunate, and if they want to stay there, clearly it's going to cost them some money."

If Rouse is able to remain in its lakefront headquarters of nearly 30 years, it could end up paying a market rate for the real estate - perhaps as much as eight times what it would have cost had the company renewed on time, Griffin said.

The landlord, American Real Estate Holdings, says it intends to find a new tenant, but Rouse is fighting the move in court. Rouse notified American that it wanted to extend the lease but the notice was three months after the deadline for notification. The renewal rate would have been $320,000 as negotiated in 1974.

Rouse has consistently declined to comment on the issue of its lease.

David Tripp, Rouse's vice president of investor relations and corporate communications, declined to elaborate on the situation, explaining that the matter was "in litigation." Representatives from American Real Estate Holdings also declined to comment.

Columbia residents have wondered about Rouse's desire to remain in its longtime location, especially after the company sold its majority stake in the village centers and other retail property in Columbia to Kimco Realty in February last year.

Rouse developed Columbia in 1967 as one of the nation's first planned communities, and created a new style of urban retail development that was hailed nationwide.

The dispute has wound up in Baltimore County Circuit Court. According to court documents, the apparent failure to renew the lease was described as a legitimate oversight.

The company has leased the building since 1974 when it was built at Rouse's request. To save money, the company arranged a sale-leaseback agreement with a predecessor of American Real Estate Holdings, the real estate investment trust that now owns the building.

As part of the agreement, Rouse sold the land to the owner, which built the headquarters Rouse wanted - a 151,000-square-foot building designed to Rouse's specifications by architect Frank O. Gehry.

The agreement bound Rouse to a 30-year lease at a rate that would cover all the owner's capital costs with interest. Rouse paid for all improvements, real estate taxes and other fees.

At the end of the 30 years, the agreement allowed Rouse to extend the lease for three 10-year periods at a rate of $320,000 per year, but the company was required to renew no later than 15 months before the contract expired - or Dec. 31, 2002.

Both lease figures - what the company has paid for 30 years and its renewal rate - are well below market value. At a market rate of $18 per square foot, the company would be paying $2.73 million annually to do business there.

"Its highly unusual that a tenant that size would not be nailing down your renewal," said E. Hayes Merkert, senior vice president of Manekin LLC. "That's going to be a tough building to fill. I can't imagine that they can't work something out. Having a tenant of that size would be nearly impossible to replace."

The company, which posted $1.2 billion in revenue last year, has 3,453 employees nationwide, according to its Web site. About 530 of them work at its headquarters. The company's stock rose 68 cents to close at $42.58 on the New York Stock Exchange yesterday.

Richard W. Story, executive director of the Howard County Economic Development Authority, said his agency is working to make sure the company stays in the area.

"I'm not even considering [their moving] an option," Story said. "There are lots of conversations going on with Rouse and about Rouse. I'm being careful that no option is unexplored."

Aris Melissaratos, head of the Maryland Department of Business and Economic Development, also remains hopeful of a positive outcome.

"He sees this as an issue between Rouse and their landlord," spokeswoman Tori Leonard said. "He believes that not only would Rouse not leave Maryland, but they wouldn't leave Columbia."

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