Issues Include Permitting, Privacy and Environmental Clauses
By Christopher R. Vaccaro
Special to Banker & Tradesman

With its abundance of educational and healthcare institutions engaged in innovative research and development programs, Massachusetts is experiencing much real estate activity associated with life sciences. Landlords and tenants should consider several issues before making financial commitments to life science projects.

Permitting is a threshold issue for laboratory uses. Life science tenants should not sign leases without assurances that necessary governmental permits are obtainable. Tenants that fail to secure permits are not excused from lease obligations. The Massachusetts Biotechnology Council (MassBio) has laid groundwork in this area. It ranks Massachusetts municipalities based on the availability of lab sites. Communities earn “gold” ratings if they have sites pre-permitted for biotech uses, or buildings where biotech activities are under way. Communities can earn “platinum” ratings if they have shovel-ready permitted sites that have completed review under the Massachusetts Environmental Policy Act. The list of gold and platinum rated communities is easily accessible at MassBio’s website.

Planning for Growth

Life science firms should anticipate future growth. Flexible short-term licenses in shared laboratories can work for startups, but as firms develop marketable products and attract Series A funding, they will graduate into fixed-term leases of specially designed facilities. Life science firms must identify landlords with financial resources to build out space properly, and avoid long-term commitments to spaces they expect to outgrow.

Tenants should have lawyers review leases in advance, to avoid unpleasant surprises. A Massachusetts medical device manufacturer encountered such unpleasantry in SpineFrontier Inc. v. Cummings Properties LLC.

The tenant originally signed a one-year lease for 331 square feet. The lease automatically renewed for five years unless the tenant notified the landlord otherwise by constable, certified mail or courier service. The parties later amended the lease to expand the tenant’s premises and extend the lease term. Before the scheduled expiration, the tenant emailed its landlord a nonrenewal notice. The landlord claimed that the emailed notice was inadequate and the lease renewed for five years. It demanded $1.7 million in accelerated rent. The Massachusetts courts ruled that the emailed notice and the parties’ other communications were sufficient to terminate the lease, thus rescuing the tenant from disaster.

Most landlords offer standard lease forms that prohibit tenants from assigning the lease or subletting space. This is unworkable for life science tenants whose business plans involve sales of their businesses to pharmaceutical companies or collaboration with other firms and scientists. Landlords and tenants of laboratory space need to modify assignment and sublease clauses to accommodate such business plans.

Environmental Issues

Landlords usually reserve rights to enter the leased premises for numerous reasons, including inspections and repairs, and showing properties to lenders and investors. However, widespread access rights are inappropriate where tenants develop intellectual property or conduct laboratory activities involving hazardous materials. Tenants need to make sure that “clean rooms” and other areas are off-limits to landlords.

Environmental issues are of particular concern in “wet labs” where tenants handle biological or radioactive materials or chemical solvents. According to Kevin Malloy, a principal at Avison Young who specializes in life science real estate transactions, “Landlords look to push all risks involving hazardous materials to tenants. They are also concerned about tenant operations impacting property insurance levels. Local fire chiefs have an active role in shaping building hazmat policy especially in urban environments. They often require thorough code review and hazmat storage and use permits from tenants.”

The condition of the premises at lease expirations is critical. Landlords cannot afford to remove vacant space from the rental market while cleaning up after prior tenants. In Prospect Hill Acquisition, LLC v. Tyco Electronics Corp., the lease required the tenant to remove “all equipment, ducts, fixtures, materials or other property that are or might be contaminated” when the lease expired. The landlord refused to accept the premises at lease expiration, because cyanide was found in the concrete floor. The landlord required that the tenant remove the contaminated flooring, while charging the tenant triple rent as a holdover tenant

A federal appeals court ruled that the phrase “equipment, ducts, fixtures, materials or other property” in the lease referred to moveable objects, not the concrete floor, and the lease did not obligate the tenant to remove it.

Commercial real estate experts learned during the COVID pandemic that the office and restaurant leasing markets are less stable than hoped, and demand for laboratory space presents opportunities. When exploring these opportunities, all participants should educate themselves on special issues affecting the life science industry.

Download the article as seen in Banker & Tradesman on February 28, 2022. Learn more about Christopher R. Vaccaro.

GE’s Legacy Shapes Future of Pittsfield Property
By Christopher R. Vaccaro
Special to Banker & Tradesman

Massachusetts law defines “gateway municipalities” as cities and towns with populations between 35,000 and 250,000, where median household incomes and rates of residents with bachelor’s degrees are below the state average. Commonly called “Gateway Cities,” these communities often face economic challenges because of lost manufacturing jobs, but they also offer the advantage of lower real estate costs than tonier communities.

Pittsfield is a one such community nestled in the scenic Berkshires of western Massachusetts. Hiking, camping and skiing are available for outdoor recreation. Pittsfield also offers theater productions at the Barrington Stage and Colonial Theater, and the city is near the Jacob’s Pillow dance festival in Becket, the Tanglewood Music Center in Lenox and the Williamstown Theatre festival.

According to Pittsfield’s business development manager Michael Coakley, “Employers and employees alike have found that Pittsfield, the economic hub of the Berkshires, is a great place to live, work and raise a family with year-round outdoor recreational activities, world-class cultural attractions and easy access to Boston and New York City. Pittsfield’s manufacturers and innovative companies thrive with lower costs of living and doing business, than in the more urban areas.”

A Toxic Legacy Remediated

Despite these desirable attributes, Pittsfield suffered economically and environmentally from its status as a company town for General Electric Co. GE curtailed its manufacturing activities in Pittsfield, but not before discharging toxic PCBs from its transformer plant into the Housatonic River and the surrounding area for decades.

In 1999, the Environmental Protection Agency pressured GE to accept a consent decree, later approved by the U.S. District Court in Massachusetts. Under this consent decree, GE committed to remediating groundwater and soil contamination at its plant site and elsewhere, removing contaminated sediments from nearby wetlands, capping toxic landfills, installing groundwater monitoring systems and cleaning up the Housatonic River downstream from its plant. The commonwealth of Massachusetts, state of Connecticut and city of Pittsfield were also parties to the consent decree. More than two decades later, GE is still remediating PCB contamination caused by its activities.

The consent decree also required GE to provide financial support to the city and the Pittsfield Economic Development Authority (PEDA), a corporate body authorized by the Massachusetts legislature to acquire GE’s properties and prepare them for redevelopment and reuse. GE entered into a Definitive Economic Development Agreement with PEDA and the city, under which GE remediated contamination and demolished buildings on 52 acres of its plant site near Pittsfield’s center, then transferred that property to PEDA. GE also agreed to make a $15.3 million redevelopment fund available to PEDA for reconstruction and economic incentive packages for owner-occupants, and a $10 million gift to the city.

Six Shovel-Ready Lots Available

PEDA used the 52 acres and GE funding to create the William Stanley Business Park (WSBP) as a commercial development zoned for industrial and manufacturing uses. The site has freight rail access, with rail lines running north, south, east, and west. Current WSBP occupants include the Berkshire Innovation Center (BIC), Electro Magnetic Applications, MountainOne Financial and Eversource. The BIC offers research and development facilities for manufacturers.

Electro Magnetic Applications is a Denver-based technology company operating a laboratory that tests the resilience of machinery and materials to be used in the highradiation and super-chilled environment of outer space. MountainOne Financial offers banking, insurance and investment services throughout Massachusetts. Eversource operates a solar array that generates 1.8 megawatts of electricity on an 8-acre site.

The WSBP has six construction-ready lots ranging in size from one to 16 acres. The larger lots are subdividable. State and local economic incentives are available through PEDA.

The Massachusetts Biotechnology Council awarded Pittsfield a “Gold” BioReady rating, which is reserved for cities and towns that offer biotech firms adequate water and sewer service, receptive zoning laws and city officials, and available sites pre-permitted for biotech uses. The WSBP’s zoning laws and available sites make it an excellent location for biotech businesses.

Pittsfield also created a “Red Carpet Team” comprised of state and local officials from the city, PEDA, the Pittsfield Economic Revitalization Corp., MassDevelopment, the Massachusetts Office of Business Development and MassHire. This team meets with businesses interested in locating or expanding in Pittsfield, to explain available tax and financial incentive programs. The Red Carpet Team successfully attracted e-commerce retailer Wayfair, which is expected to employ 300 people at a call center in Pittsfield.

Given Pittsfield’s cultural and recreational amenities, and its determination to attract laboratory, technology, and manufacturing businesses, it is worthy of serious consideration as a location for both start-up and established players in those industries.

Download the article as seen in Banker & Tradesman on January 31, 2022. Learn more about Christopher R. Vaccaro.

Benchmark with Checkered Past Shelved After Four Decades
By Christopher R. Vaccaro
Special to Banker & Tradesman

The London Interbank Offered Rate (LIBOR) was a widely accepted benchmark interest rate among financial institutions for over 40 years. Trillions of dollars in loans and other financial products were tied to LIBOR pricing. But LIBOR became tainted by scandal, and its time in the U.S. is coming to an end.

LIBOR is not a single interest rate, but 35 different interest rates determined by the Intercontinental Exchange (ICE) on a daily basis for the U.S. dollar, the British pound, the euro, the Japanese yen and the Swiss franc, on loans with maturities of one day, one week, one month, two months, three months, six months and one year.

On a daily basis, ICE asks a panel of major global banks, such as Bank of America, Barclays, Citibank, JPMorgan Chase, Citibank, UBS and Deutsche Bank, to quote what interest rates they are willing to pay on loans at the stated maturities. ICE then discards the highest and lowest quotes, producing trimmed averages as LIBOR for each currency and maturity. This method of determining LIBOR is based on what major banks say they are willing to pay for short-term loans, not on what they are actually paying for such loans.

Although interest rates tied to LIBOR can be competitively priced, LIBOR is subject to constant change, making some borrowers and investors uncomfortable. Many borrowers and investors prefer fixed interest rates, which allow predictable debt services costs for borrowers, and predictable returns for investors.

In contrast, some borrowers and investors prefer floating rates, such as LIBOR, which allow borrowers to benefit from rate decreases, and investors to benefit from rate increases. In response, banks market profitable interest rate swaps as financial products. Swaps enable borrowers and investors to trade fixed rates for floating rates, and vice versa, to mitigate undesired risks.

An Invitation for Mischief

The method of determining LIBOR, and LIBOR’s popularity in interest rate swaps, gave rise to considerable mischief that surfaced in the wake of the 2008 recession. An analysis by The Wall Street Journal indicated that some banks on the LIBOR panel quoted lowball rates that did not reflect increased loan defaults during the recession, and were out of line with rates quoted by other banks on the panel.

Also, financial institutions on the panel were parties to interest rate contracts tied to LIBOR, giving them incentives to make daily LIBOR quotes that manipulated LIBOR to increase the value of their contracts. A complicated scheme involving these activities was revealed in 2012. Subsequent investigations discovered collusion among multiple banks to manipulate LIBOR over many years. The investigations resulted in over $9 billion in fines against banks, and criminal charges against traders and brokers.

Responding to this misconduct, in 2014 the Federal Reserve convened the Alternative Reference Rates Committee (ARRC), a group of private-market participants, to manage a transition from U.S. Dollar (USD) LIBOR to a more reliable benchmark rate. In 2017, the ARRC identified the Secured Overnight Financing Rate (SOFR) as a desirable replacement benchmark rate. Since then, use of LIBOR has declined.

The Federal Reserve Bank of New York’s website publishes SOFR on a daily basis. Unlike LIBOR, SOFR is based on an average of interest rates that banks actually pay for overnight loans secured by Treasury securities. The methodology for determining SOFR is complicated and requires challenging data collection and mathematical formulas, but regulators and financial institutions seem confident that SOFR will not be prone to the same manipulation as LIBOR.

The Inevitable Ending

LIBOR’s phase-out became inevitable on Nov. 30, 2020, when the Federal Reserve’s Board of Governors, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. issued an interagency statement encouraging banks to move away from USD LIBOR as soon as practicable.

ICE will cease publishing the one-week and two-month USD LIBOR rates on Dec. 31, 2021, and the remaining USD LIBOR rates on June 30, 2023. USD LIBOR will remain in limited use until June 30, 2023, so existing USD LIBOR contracts can mature before LIBOR experiences disruptions. The interagency statement warns that financial institutions that fail to prepare for the end of USD LIBOR could undermine their financial stability. The statement strongly discourages financial institutions from entering into contracts based on USD LIBOR after Dec. 31, 2021.

Given LIBOR’s checkered past, few people will grieve as it disappears over the next several months. It remains to be seen whether SOFR will gain acceptance as a replacement to LIBOR, and whether it will prove to be safe from manipulation.

Download the article as seen in Banker & Tradesman on December 27, 2021. Learn more about Christopher R. Vaccaro.