ABCD Lease: A Major Step Forward

Editor: Please tell us about your practice. How has it evolved over the course of your career?

Sernau: I have been a real estate lawyer in New York City for about 20 years. My practice covers both residential and commercial projects. Real estate in New York tends to be cyclical, and over the years I have worked in whatever area is in vogue. In the late 1980s, speculative commercial office development - where developers built office buildings without having lined up tenants - was hot. Lenders were heavily involved in that market, evidently willing to finance construction without tenants being signed up. When the market collapsed in the early 1990s, I became a lawyer for the Resolution Trust Company and worked on the sale of assets and loans. At that time I went to Buenos Aires for a year to represent Yacimientos Petroliferos Fiscales (YPF), an Argentine national oil company. This was the era of privatization, and my work involved the disposition of assets for YPF. When I returned to New York, the real estate market was beginning to recover. In the late 1990s I handled a considerable volume of commercial leasing and development work. Commercial development in midtown Manhattan really diminished around the turn of the century, and since then I have been spending more time on residential development and commercial leasing.

Editor: What types of clients have you represented?

Sernau: My practice is focused on bricks and mortar. I will typically represent real estate companies, which means the borrower as opposed to the lender, the people who are constructing the building and negotiating with the tenants. I work on the entire real estate process, including joint venture formation, acquisitions, development, construction and permanent financing, dispositions and leasing.

Editor: Speaking of which, how has real estate financing evolved over the last 20 years?

Sernau: In the late 1980s real estate financing was all high leveraged debt financing. Banks would lend on a non-recourse basis and secure the loan solely with the property, with or without tenants. When that market collapsed, there was, consequently, little debt financing available for real estate development or investment. With a scarcity of cash, people with equity to invest ruled the day. Today we have returned to the point where lenders are chasing real estate, although financing for speculative projects is really not part of the current picture.

Editor: Can you tell us about the origins of the ABCD Lease system you have developed?

Sernau: About five years ago it dawned on me that commercial leasing, while certainly complicated, is relatively rote in the way it plays out. It is not unusual for a single-floor, ten-year office lease of, say, 20,000 square feet to run to 100 pages. But, the ways in which a particular clause can be drafted are nevertheless finite. Someone with experience in this area comes to realize that the positions one takes in negotiating these deals are repetitious. We always seem to be negotiating the same points on each deal.

It occurred to me that it was possible to create a template that included all of the alternative provisions available. I do not mean by this that the system is a repository of different clauses. When you add a renewal provision to a lease, for example, it ripples through the entire document and impacts the arrangement in literally dozens of places. In order to make a unified document, that renewal provision must be aligned with every other provision that might conceivably be affected by the possibility of lease renewal. The challenge, then, was to automate the process of aligning the various lease provisions.

In addition, I thought that it would be a great step forward if the information contained in the final lease document could be made immediately available to all of the other systems affected by the lease. If one could simply click onto the various terms specified in the lease and have the information flow to the organization's accounting and billing functions, to the department in charge of the premises' HVAC system, to the people dealing with the signage of the building, and so on, the improvement in efficiency would be simply tremendous. In a nutshell, that is what the ABCD Lease system seeks to accomplish.

Editor: How would a general counsel in a small corporation - say, a legal department of one - go about selecting the right provisions out of hundreds for his particular lease?

Sernau: What I do as a lawyer is interview the client to determine what it is he or she wants and then, based on his or her answers, draft a lease. The ABCD Lease system anticipates a similar process but collapses the time necessary to ask the questions, assess the answers and draft the lease. While ABCD Lease gives the user a broad range of choices as to what to include in the lease, the system cannot answer the questions for the user. There is simply no substitute for the judgment and experience of a leasing expert who has his or her pulse on the market.

When I first developed ABCD Lease, I asked some people involved in the leasing process to answer the questions themselves, thinking that I could remove lawyers from the leasing process (and allowing leasing agents to generate lease documents on their own). The initial response was interesting. Many leasing agents did not know how to answer the questions. That made me realize how important a function lawyers serve in this area. There is no substitute for experience and the judgment that derives from it. The system is not meant to, and does not, replace the need for recourse to sophisticated counsel. ABCD Lease will not answer the questions for the individual lawyer who does not really have leasing experience.

When I first introduced the system here at Proskauer, there was some skepticism. Some of the younger attorneys were fearful that it might prevent them from developing the substantive expertise and knowledge that a good real estate lawyer must have to be successful. Very quickly they came to realize, however, that the system permits us to focus on the lawyering part of the process and not on the production of paper. The younger attorneys still have to learn how to answer the questions. Very quickly the reaction became all positive.

Editor: And the market? Real estate practitioners? Real estate enterprises?

Sernau: The system is directed at leasing experts - real estate professionals, including lawyers - who have the ability to answer the questions underlying the lease. Once these people use the system, almost invariably they have no desire to return to the way in which they drafted leases in the past.

The real efficiencies will begin to show once everyone starts using the system. There is, for example, a New York form of lease that everyone marks up as the first step in the drafting process. This is the next generation: a system that permits the real estate professional to say what he wishes ab initio and instantaneously.

Editor: And the service is updated on an ongoing basis? If a practitioner subscribes, he is buying access to a continually revised set of commercial lease provisions?

Sernau: Let me give one simple example. In the past the principal questions concerning the office directory in place in the lobby revolved around how many names the tenant was entitled to show. Then, landlords started to install computerized directories, so leases needed to reflect that the landlord had the right to install and maintain a computerized directory rather than a physical directory. Today, because of security concerns, many landlords wish to remove directories altogether. This evolution of one simple concept entailed three new questions for the system. Selection of one of them will incorporate appropriate language into the lease. We change ABCD Lease frequently to reflect new nuances that appear in the market all the time.

Let me add that the system can be used for a variety of documents - brokerage agreements, lease abstracts, and the like - in addition to leases. We have been talking about leases, but ABCD Lease will generate any report that derives from the set of data that underlies the lease.

Editor: What about user overload? The service sounds a little overwhelming.

Sernau: We are working to make the system as user-friendly as possible. For example, a landlord making decisions on standard lease provisions can create a profile that, in effect, pre-answers many of the basic questions and leaves open only those questions which relate to individual tenants.

Editor: How does the user avoid internal inconsistencies?

Sernau: To me that is one of the most important aspects of the system. If you make a change to one provision, every other provision in the document that is affected is automatically aligned with the change. This means that I do not have to worry about whether the associates doing the initial drafting of the lease have followed through with all the appropriate cross references. I am free to concentrate on the real issues raised by the lease.

Editor: The program is to be marketed by ABCD Systems Corporation. What is the connection between this enterprise and Proskauer?

Sernau: Proskauer has a minority equity stake in ABCD Systems Corporation. Other investors will own the rest. This is not a Proskauer product. We want other law firms to utilize this service. I should mention that we are not alone in our focus on the inefficiencies in the way the real estate market conducts its business. An organization called OSCRE (Open Standards Consortium for Real Estate) that is funded by Cisco Systems and other techonology companies has expressed its surprise at the current state of affairs. We believe that the ABCD Lease system is a major step forward in addressing this.

Editor: Would you tell us about the award you received for the best use of technology in real estate law in 2004 from Realcomm, the real estate technology trade association?

Sernau: Realcomm is a trade organization for people involved with technology in the real estate industry. When I first began to think about this issue I attended Realcomm to learn as much as I could about what was commercially available in the way of technology for the real estate industry. As I began to develop a system that would automate the process of selecting lease provisions, Realcomm was very supportive. That served to validate what I was doing. The award I have received lends a great deal of credibility to this undertaking.

Editor: What is next? Where do you think the ABCD Lease system is going to go over the next few years?

Sernau: This project is still in an evolutionary phase. I am a lawyer, not a programmer, so there are still features that need to be implanted in it. The initial investment period entails entering into a joint venture with a software company - which has been identified - in order to develop a marketable system that can be delivered and supported over the Internet. There is work to be done. The challenge here is not the technology. What we are doing is taking a particular content - a content with which we have great familiarity from years of experience - and adapting it to what is available technologically. The results are spectacular - doing in a few moments what used to take days, even weeks. The challenge is whether others will see in it what we have found to be a giant step forward in efficiency. The prospects are very exciting.

Published April 1, 2006.