Georg Jensen, Inc. v 130 Prince Assoc., LLC

[*1] Georg Jensen, Inc. v 130 Prince Assoc., LLC 2009 NY Slip Op 51483(U) [24 Misc 3d 1217(A)] Decided on June 4, 2009 Supreme Court, New York County Tolub, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on June 4, 2009
Supreme Court, New York County

Georg Jensen, Inc., Plaintiff,

against

130 Prince Associates, LLC, Defendant.



102554/09



Attorneys for Plaintiff

GREENBERG TRAURIG, LLP

Met Life Building

James W. Perkins, Esq

200 Park Avenue

New York, New York 10166

Attorneys for Defendant

STEMPEL BENNETT CLAMAN & HOCHBERG, P . C .

Richard L. Claman, Esq.

675 Third Avenue

New York, New York 10017

(212) 681-6500

Walter B. Tolub, J.

By decision of this court, rendered on March 27, 2009, the court conducted a hearing to determine whether the basic annual rent for the renewal term of the lease between the plaintiff, Georg Jensen, Inc., and the defendant, 130 Prince Associates, LLC, was determined by "an independent M.A.I. appraiser" as required by paragraph 82(d) of the Lease.

Plaintiff contends that the appraiser was biased, that the appraisal was not rendered in accordance with M.A.I. standards, and that it had no rational basis. Testifying were Michael Pecorino, defendant landlord's appraiser, Philip Waterman, the landlord's representative, and James Crespo the tenant's representative. Additionally, plaintiff presented Robert Von [*2]Ancken, an appraiser, for the purpose of demonstrating that Mr. Pecorino's appraisal was so flawed that it was either motivated by bias or was not rational or in accord with M.A.I. standards. The Von Ancken appraisal is also relevant as plaintiff argues that Mr. Pecorino knew or should have known about the first Von Ancken appraisal and that he failed to consider comparables Mr. Von Ancken utilized in June of 2008.

FACTS

1. Georg Jensen is a jewelry retailer (Crespo, T 242:13).

2. By written lease agreement dated as of November 11, 2003 (the "Lease"), 130 Prince, LLC, as predecessor-landlord, leased to Georg Jensen store space on portions of the ground floor and lower levels (as more particularly described in the Lease, the "Premises") in the building known as 130 Prince Street, a/k/a 125 Wooster Street, New York, New York (the "Building")(Exhibit 1).

3. The Lease provides for a five year term expiring on January 31, 2009, with one five year renewal option (Id. at 1; ¶82).

4. Landlord acquired the Building on or about June 27, 2007 (Waterman, T 157:6-8).

5. Philip Waterman, III is managing member of the Landlord and a principal of Waterman Properties, LLC ("Waterman Management")(Waterman, T 156:21-157:19).

6. In 2007, Waterman Management had three employees and outsourced various management functions of the Building to CB Richard Ellis ("CBRE") as agent (Waterman, T 192:7-193:13).

7. On a number of occasions in 2007, CBRE "as Agent for" Landlord wrote to Georg Jensen on behalf of the Landlord, in one instance instructing Jensen to provide "a current certificate of insurance as required by your lease agreement" naming CBRE as an additional insured (Exhibits 12 and 13).

8. By written "Notice to Tenants" dated August 21, 2007, Waterman Properties notified Georg Jensen that they had "retained CB Richard Ellis to provide property management and accounting services" (Exhibit 14).

9. CBRE's relationship with Landlord and Waterman Management regarding the Building ended in or about the Fall of 2008 (Waterman, T 194:5-9).

10. During 2007 and into the Fall of 2008, CBRE acted as property manager for the Building (Exhibits 12-14, Crespo, T 230:13-231:13; Waterman, T 192:6-193:13; 194:5-9).

11. The Lease renewal provision states, in relevant part, as follows:

Tenant may extend this Lease for a period of five years on the following terms and conditions: [*3]

[a]Tenant shall give Landlord written notice. . . of its election to renew the Lease no less than nine (9) months prior to the expiration of the initial Lease term. The notice of election must be timely sent and once sent by Tenant may not be revoked unilaterally.

***

[c]All the terms and provisions of the Lease shall be applicable to the renewal period except that . . . the basic annual rent shall be the Fair Market Value of the demised premises as defined in paragraph [d] below determined as of the commencement date of the renewal term. The basic annual rental rate for each succeeding year of the renewal term shall be increased by [x] four [4%] percent per year, [y] the Tax Escalation Rider, except that the Tax Base shall be the Base Tax Year July 1, 2009 to June 30, 2010, and [z] Operating Expense Escalation, except the Base Year shall be 2009.

[d]Fair Market value shall mean the current market rent for similar space within the general geographical area in which the building is located, assuming standard escalations with current base years, and all other relevant factors as determined by an independent M.A.I. Appraiser chosen by Landlord, whose fee shall be borne equally by Landlord and Tenant.

(Exhibit 1 at ¶82 [emphasis added]).

12. On or about April 10, 2008, Mr. Waterman met with James Crespo and plaintiff's president, Ulrich Garde Du. Over breakfast they discussed Georg Jensen's desire to renew the Lease (Crespo, T 221:23-223:9).

13. By letter dated April 11, 2008, Georg Jensen notified Landlord of its intentions to exercise its option to renew the Lease for an additional five year term (Exhibit 2).

14. After exercising the renewal option, Georg Jensen engaged Robert Von Ancken, MAI, CRE, FRICS of Grubb & Ellis Consulting Services ("Grubb Ellis") to assist it in the anticipated process of determining the "Fair Market Value" of the Premises for the renewal term's rent (Crespo, T 223:26-224:12; Von Ancken, T 268:16-21, 278:6-8, 289:25-290:9, 368:14-369:19; Exhibit 3B).

15. Mr. Von Ancken rendered a written report dated June 18, 2008 (Von Ancken, T291:8-18; Exhibit 3B, the "Von Ancken Appraisal").

16. The Von Ancken appraisal concluded that the fair market rental value of the Premises as of February 1, 2009 is $300 per [*4]square foot (Exhibit 3; Von Ancken, T 291:11-18).

17. By letter dated June 30, 2008, Georg Jensen provided Landlord with a copy of the Von Ancken Appraisal (Exhibit 3A; Crespo, T 224:13-26; Waterman, T 159:11-23).

18. By written report dated January 30, 2009 (the "January 30 Update), Mr. Von Ancken of Grubb & Ellis updated its June 18, 2008 appraisal of the Fair Market Rental Value of the Premises under Article 82 of the Lease (Exhibit 3D).

19. In the January 30 Update, Grubb & Ellis stated its conclusion that the Fair Market Rental Value of the Premises as of February 1, 2009, as determined under Article 82 of the Lease is $240 per square foot (Exhibit 3D; Von Ancken, T 326:10-14).

20. On or about October 16, 2008, Mr Crespo and Mr. Waterman had a telephone conversation during which Mr. Crespo requested that the Landlord send a letter of rental determination (Crespo, T 225:19-226:21; waterman, T 164:15-165:22).

21. By letter dated October 17, 2008, Landlord advised Tenant that "Fair Market Rent for your Premises has been established as $630.00" for the first year of the renewal term, or $945,000 per annum (Exhibit 11; Waterman Aff. ¶29; Exhibit 4).

22. The $630 per square foot figure represented Mr. Waterman's personal opinion of Fair Market Value (Waterman, T 163-64; 212-13 ["it's just my reading of the market."]; Exhibit 11; Waterman Aff. ¶29).

23. Mr. Waterman did not use the Von Ancken appraisal in establishing the renewal term rent because he viewed the report as "irrelevant" (Waterman, T 164:4-8. 168:20-24).

24. By letter dated October 22, 2008, Georg Jensen responded to Landlord's October 17, 2008 letter notifying Landlord, among other things, that it rejected the purported setting of the rent at $945,000 per annum because [a] "it is not based upon an independent [M.A.I. appraiser] as required by the Lease", and [b] "it is wholly inconsistent with the Fair Market Value for the Premises" (Exhibit 5; Crespo, T 226:26-227:19; Waterman, T 165:23-166:9).

25. At some point after October 22, 2008, Mr. Waterman contacted Mr. Pecorino of CBRE concerning the Georg Jensen renewal rent determination (Waterman, T 166:19-22; Pecorino, T 38:16-39:9)[FN1].

26. Mr. Waterman knew Mr. Pecorino from an arbitration matter for which Reckson Associates had hired Mr. Pecorino as an arbitrator when Mr. Waterman worked at Reckson Associates (Waterman, T, 181:19-182:5; Pecorino, T 30:5-22).

27. By telephone, Mr. Waterman asked Mr. Pecorino to come [*5]to his office, but he did not tell Mr. Pecorino the purpose of the meeting. Mr. Pecorino agreed and subsequently attended a meeting of less than 30 minutes duration in Mr. Waterman's office (Pecorino, T 38:16-40:7).

28. Mr. Pecorino understood the engagement to be for an oral appraisal and he never discussed with Mr. Waterman rendering a written appraisal (Pecorino, T 42:18-22).

29. Mr. Pecorino understood that the Uniform Standards of Appraisal Practice ("USAP") requirements are the same for an oral appraisal as for a written one (Pecorino, T 32:18, 46:20-23, 47:13-16).

30. At the meeting, Mr. Waterman gave Mr. Pecorino copies of [a] the Lease and [b] a lease between Landlord and Cole Haan Company Store Inc. ("Cole Haan")[FN2] dated September 9, 2008 (the "Cole Haan Lease", Exhibit 16); (Waterman, T 168:12-19; Pecorino, T 40:18-41:25).

31. Mr. Waterman provided Mr. Pecorino with a copy of the Cole Haan lease and told him that Landlord would need a rental determination. He also explained the terms of the Cole Haan lease (Pecorino, T 40:18-41:6).

32. Mr. Waterman did not give Mr. Pecorino the lease for the other retail tenants in the building (Waterman, T 169:10-18).

33. Mr. Waterman did not give Mr. Pecorino the Von Ancken Appraisal (Pecorino, T 37:24-38:4; 65:14-17; 68:22-25; Waterman, T 168:12-22).

34. Landlord and CBRE entered into a verbal agreement for the appraisal work and did not enter into any written retainer agreement (Pecorino, T 39:10-14).

35. Mr. Pecorino understood that applicable appraisal standards require there to be no conflict of interest when he renders an appraisal opinion (Pecorino, T 48:26-49:4).

36. Mr. Pecorino did not ask Mr. Waterman about any relationships that might trigger a conflict of interest (Pecorino, T 48:14-17).

37. Pecorino and CBRE did not perform any search for potential conflicts of interest that might arise from CBRE's engagement by Landlord (Pecorino, T 488-49, 118:19-20 ["we don't have any internal mechanism for conflict"]).

38. Mr. Pecorino testified he was unaware that CBRE had acted as Landlord's agent in 2007 [and 2008] (Pecorino, T 48:18-20).

39. As of December 4, 2008, Mr. Pecorino's role at CBRE was regional personnel management, administration and business generation, reporting to corporate offices; however, his duties [*6]did not include any direct responsibility for performing appraisals(Pecorino, T 116:6-16).

40. Mr. Pecorino was not able to identify how many appraisals he personally performed in 2008, other than testifying it was more than one; and he could not state whether he performed more than four (Pecorino, T 143:22-145:3).

41. The only retail store space in SoHo that Mr. Pecorino appraised in 2008 was of the Georg Jensen Premises (Pecorino, T 144:18-23).

42. Mr. Pecorino could not recall whether he appraised any retail store space in SoHo in 2007 (Pecorino, T 144:24-26).

43. Mr. Pecorino would not identify any appraisal of retail store space in SoHo that he supervised in 2008 (Pecorino, T 145:10-20).

44. Mr. Pecorino had no opinion of average rental values for SoHo for the fourth quarter of 2008 (Pecorino, T 61:8-62:2).

45. Over 60 to 70% of Mr. Pecorino's appraisal work related to properties outside of New York City (Pecorino, T 145:21-25).

46. On or before December 4, 2008, Mr. Pecorino rendered an oral appraisal to Mr. Waterman by telephone (Pecorino, T 32:23-34:7).

47. The telephone conversation during which Mr. Pecorino rendered the oral appraisal report to Mr. Waterman lasted approximately 10 minutes (Waterman, T 172:23-173:13).

48. Mr. Pecorino described the substance of his oral appraisal as follows:

I explained to Mr. Waterman what I did to come up with my rental determination of fair market rent, which was I researched comparable, I went into the area, looked around, I looked at the comparable. I looked at the subject property. And based on my judgment that this was the rent, a reasonable rent.

(Pecorino, T 34:25-35:10).

49. No other discussion occurred during the telephone report (Pecorino, T 35:8-11).

50. In his oral appraisal to Mr. Waterman, Mr. Pecorino did not identify any comparable properties relied upon in reaching his conclusion on value (Pecorino, T 35:8-11).

51. At the hearing, Mr. Pecorino produced a written summary appraisal report dated January 5, 2009 (the "January 5, 2009 Report")(Pecorino, T 46:16-23).

52. Although addressed to the Landlord, Mr. Pecorino testified that he did not share the January 5, 2009 Report with anyone but that he maintained it in his file (Pecorino, T 46:16-47:4).

53. One or two days after Mr. Pecorino rendered the oral appraisal report, Mr. Waterman telephoned Mr. Pecorino and requested a letter reflecting his opinion of value (Pecorino, T 38:12-15). [*7]

54. Mr. Pecorino complied and delivered to Landlord a letter dated December 4, 2008 (the "Pecorino Letter" Exhibit 6B) stating "[i]t is our opinion that the fair market rent for the subject space which consists of 1,450sf of basement space to be $885,000 on an annual basis with taxes and operating expenses over base years a[s] described in section 82[c] y and z."

55. By cover letter also dated December 4, 2008, Mr. Waterman forwarded the Pecorino Letter to Georg Jensen (Exhibit 6A).

56. The Pecorino Letter does not identify any comparable properties relied upon in reaching his conclusion of value (Exhibit 6B).

57. The Pecorino Letter does not identify any adjustments Mr. Pecorino made to any comparable properties relied upon in reaching his conclusion of value (Pecorino, T 52:13-14; Exhibit 6B).

58. The Pecorino Letter does not identify any assumptions that were made in rendering the opinion of value (Exhibit 6B).

59. The Pecorino Letter does not provide any breakdown of values Mr. Pecorino testified he assigned to the ground floor or basement space (Pecorino, T 52:6-16).

60. Although Mr. Pecorino's oral appraisal and the Pecorino Letter do not identify his comparables, the written report dated January 5, 2009, contained in Mr. Pecorino's file (Pecorino, T 46:16-23, 36:8-26), references six Broadway properties.

61. Mr. Pecorino's "report" prepared subsequent to his letter was never shared with anyone (Pecorino, T 46:25-26).

62. The "report" lists as comparables 520 Broadway, Eastern Mountain Sports, 691-593 Broadway, Victoria's Secret, 488-492 Broadway, BeBe and 550 Broadway, HSBC, 555 Broadway Hugo Boss, 532 Broadway AT & T and of course 130 Prince Street the Cole Haan Nike Lease (T 36:8-23).

63. Mr. Pecorino did not consider any of the leases in the immediate area other than the Cole Haan Lease (T 63:21).

64. Mr. Pecorino claims he did not have a copy of the Von Ancken Appraisal (Exhibit 3B) when he made his appraisal and did not consider the lease at 125 Greene Street, 110 Greene Street or 120 Wooster Street, which are all adjacent or nearby the subject premises and were contained in the Von Ancken Appraisal.

DiscussionIn the absence of specific methods or procedures to be utilized, appraisers are given wide latitude in arriving at their determinations (Olympia & York 2 Broadway Co. v. Produce Exchange Realty Trust, 93 AD2d 465 [1st Dept 1983]). As the Court stated in Pearlbinder v. Jakubovitz, 239 AD2d 294 [1st Dept 1997],[*8]

[A]ppraisal is not an exact science and . . . the determination of an appraiser is to be upheld as long as the appraiser proceeds in good faith and without bias or fraud. Olympia & York 2 Broadway Co. v. Produce Exchange Realty Trust, 93 AD2d 456, 468; Winter Management Corp. v. Barton Mark Pearlbinder, 179 AD2d 518, 579). Appraisers have broad discretion as to their methods and so as to their sources of information (Rice v. Ritz Associates, 88 AD2d 513, 514, aff'd 58 NY2d 293).

(Pearlbinder v. Jakubovitz, 239 AD2d 294 [1st Dept 1997]).

However, the appearance of bias, impropriety or partiality may be sufficient to vacate a finding (see Matter of the Arbitration between Excelsior 57th Corp v. Kern et al., 218 AD2d 528 [1st Dept 1995]).

Although plaintiff makes much of CBRE's prior relationship with the defendant (Finding ¶¶7-10), these activities were not of such a magnitude or current in point of time, in and of themselves, to mandate the conclusion of impropriety.

That having been said, this court is of the opinion that the Pecorino appraisal itself is so severely flawed that it evinces bias. Mr. Pecorino set out to reach a rental figure in line with Mr. Waterman's "reading of the market" and the Cole Haan lease.

The court arrives at this conclusion based on the following:

1. The court finds it inconceivable that Mr. Pecorino was not provided a copy of the Grubb & Ellis (Von Ancken) report submitted in June of 2008. The only explanation for this was to obviate the necessity of Mr. Pecorino having to consider and distinguish these contemporaneous leases which were more proximate in distance to the subject Building.

2. Mr. Pecorino's "report" was not "written", by his own account, until one month after his oral report to Mr. Waterman.

3. The comparable leases, Eastern Mountain Sports, Victoria's Secret, AT & T, Hugo Boss are all on Broadway, four blocks distance from the subject premises and on the busiest of thoroughfares. Moreover, the lessees are, in the words of Mr. Pecorino's affidavit, "all national and global retailers". The court is of the opinion that these "comparable leases" are simply, not at all comparable.

4. Finally, and perhaps most importantly, Mr. Pecorino failed to articulate the methodology he employed in arriving at his appraisal. The court pressed Mr. Pecorino in an attempt to understand the methodology he employed to arrive at the figures he arrived at (T 74:14-79:22). His answers were evasive to the point that this court concluded that he simply was not telling the truth.

Although this court is unable to ascertain what motivated Mr. Pecorino to provide the appraisal he did, the court finds that it was so flawed in its methodology as to render it [*9]worthless. Moreover, the court can only conclude that Mr. Pecorino's appraisal was not rendered in good faith, was biased, and motivated by his desire to confirm Mr. Waterman's "reading of the market". Accordingly it violates paragraph 82[d] of the Lease.

The court notes that it is in no position to render a judgment as to what the "correct" rent should be, however the court is in a position to grant plaintiff's motion (1) to dismiss the summary proceeding because it was predicated on Mr. Pecorino's biased appraisal, and (2) to declare that the Pecorino appraisal is not in accordance with section 82[d] of the Lease.

The defendant's cross-motion to dismiss this proceeding is denied.

The parties are free to make such applications as they deem appropriate for this court's consideration.

Settle Order.

Dated:

HON. WALTER B. TOLUB, J.S.C. Footnotes

Footnote 1:Messrs. Pecorino and Waterman testified that this initial contact was in late October or early November 2008, but no corroborating documentary evidence was introduced at the hearing.

Footnote 2:The Cole Haan Lease was sometimes referred to in the hearing as the "Nike Lease" because Cole Haan is a wholly-owned subsidiary of Nike Inc.