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Brobeck, Phleger & Harrison spent its final days attempting to adhere to an unusual lease agreementthat allowed it to dump thousands of square feet of prime San Francisco office space but imposed a rigid set of financial conditions that proved impossible to meet. In early January, the firm renegotiated its lease agreement in the marquee One Market complex with its longtime landlord Equity Office Properties-One Market. And it’s obvious from the lease agreement that the landlord was extremely worried about Brobeck’s ability to pay the rent. EOP-One Market extracted a promise that the firm would make at least $90 million in net income, though the firm netted only $68 million in 2002. It demanded the names and addresses of the firm’s partners as far back as 1983 — presumably to tap them to cover some of the costs if Brobeck defaulted. The firm was forbidden from paying out capital to departing partners and had to keep a minimum of $19 million in its capital accounts. Perhaps most difficult of all for the firm, the landlord said Brobeck would be in default if partners who accounted for more than 5 percent of gross revenue departed before July. The firm had to promise that, after July, no partner or group representing 10 percent of its revenues would leave through Jan. 31, 2005. Those covenants may have been an unobtainable goal for a firm that had lost some 60 partners in the previous year. The terms — part of the court record in a suit EOP-One Market filed Feb. 11 against Brobeck — appear to be the same as those being demanded of the firm by its bankers at Citibank. It’s not clear if the landlord wrote its lease in conjunction with the bank, but a former Brobeck partner familiar with the agreement said some of the terms were very similar. Such terms “are extremely unusual in the context of normal lease negotiations,” said Mark Hennigh, a real estate partner at Greene Radovsky Maloney & Share who has read the court documents. “It comes up when you’re dealing with a distressed tenant.” Whether Brobeck’s landlord helped speed its demise is a matter the firm’s former attorneys and its dissolution team aren’t talking about. But the lease agreements may paint one of the clearest pictures yet of the firm’s dizzying rise in the late 1990s and its even faster fall in the past few months. TOUGH TERMS By the time of its collapse on Jan. 30, Brobeck — once the highest-grossing legal player in the Bay Area — was forced to agree to what must have seemed like humiliating terms. The firm surrendered all but 17 parking spots in One Market’s garages — and those had to be made available for valet parking if the landlord needed them. Brobeck even had to give EOP-One Market whatever furniture, fixtures and equipment was in the space it was trying to unload. Those terms were minor, of course, when compared to the financial commitments the firm had to make. Brobeck was asked to secure a $2.2 million letter of credit to replace letters the firm had with Citibank. That was an ominous sign, suggesting the firm wasn’t able to get them from Citibank, Hennigh said. Brobeck was also on the hook for a $3 million cash security deposit and would have been forced to start paying $250,000 a month toward the bill had it not dissolved. Partners signed the amended lease on Jan. 2, and it may have seemed possible at that point for the firm to avoid default. It was in negotiations with Philadelphia’s Morgan, Lewis & Bockius for a possible merger, and under the lease terms, the combined firm would not have faced such stringent financial requirements. But Brobeck’s partnership was still in flux, and, on Jan. 29, Steven Zager — head of the firm’s litigation group — exited for Akin, Gump, Strauss, Hauer & Feld. He ended up taking several lawyers with him. It’s likely Zager and his group represented more than 5 percent of the firm’s income in the previous year and his departure may have triggered default on the lease. Within hours, Morgan, Lewis broke off merger talks and the firm announced it would dissolve. RAPID EXPANSION With the dissolution, EOP-One Market lost a tenant that had been expanding at a frenzied rate for nearly seven years. Brobeck signed its lease in 1996 for 147,245 square feet on seven floors. It steadily grabbed thousands of square feet more as it hired additional lawyers to cope with the technology boom. At its height in July 2001, Brobeck had as much as 228,000 square feet in One Market and paid about $800,000 a month in rent, according to the court documents. That translates into about $9.5 million a year. As 2003 dawned, partners were desperate to unload some of the space. The tech economy had tanked, lawyers and staff had been let go and Brobeck wanted to shed 66,000 square feet. The negotiations with EOP-One Market appear to have been fairly tense. In the late 1990s, Brobeck often added space without paying a dime in additional security deposits. And the landlord forked over space without documenting every detail. This time, however, each term in the lease was spelled out in excruciating detail. Where it had once allowed the firm to skate by without a deposit, EOP-One Market now demanded audited bank statements from the firm. EOP-One Market may have been making a strategic move to give it a better position to take control of the space should Brobeck fall into bankruptcy. “You want to be able to terminate the lease so you can control the property,” said Hennigh. “It starts the ball rolling in collection efforts. . . . If there were to be a bankruptcy, everything would have stopped.” EOP-One Market is still trying to get some of the back rent it says the firm owes. The landlord filed an unlawful detainer action in San Francisco Superior Court. The case is EOP-One Market LLC v. Brobeck, Phleger& Harrison, 03-605249. EOP is seeking $682,285 in back rent and threatens to charge the firm at least $20,540 for each day it remains in the offices past March 1. An EOP spokeswoman said the company had a confidential agreement with Brobeck and couldn’t comment on the dispute except to say they were working together on a resolution. George Cumming Jr., a former Brobeck partner now at Morgan, Lewis & Bockius, filed a request last week asking for time to respond. His filing said EOP and Morgan, Lewis were in talks over leasing the Brobeck space. The document also said a skeleton Brobeck staff at One Market that remains would be moving elsewhere. Cumming did not return a call for comment. It’s not clear how much personal liability for the lease partners face, though the agreement clearly states that they could be liable for up to $2.5 million. How much a partner owes is based upon how much equity they held in the firm. Only death or retirement could release a partner from liability. Dick Robinson, a broker with the property management firm Cushman & Wakefield, said Brobeck’s experience during its final days may become a more common one for Bay Area law firms. Landlords are going to be asking for more guarantees to prevent default. The terms, Robinson said, “sound to me like a smart move on the landlord’s side to cover themselves in a situation that up until now no one paid attention to.” Related item: Lease Agreement

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