1017-00009 · Aurelius Global Media Group · Diligence

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MEMORANDUM

ATTORNEY WORK PRODUCT — PRIVILEGED & CONFIDENTIAL

June 22, 2023

TO: Douglas Fairchild, Partner, Real Estate, Calderwood & Harkness LLP

FROM: Rafael Dominguez, Lead Associate, Real Estate, Calderwood & Harkness LLP

RE: Landlord Financial Diligence — Building-Level Financial Statements and Operating Expense History, 787 Seventh Avenue, New York, NY 10019 (Greystone Tower)

MATTER: Aurelius Global Media Group PLC — Headquarters Lease

MATTER NUMBER: 1017-00009

CLIENT: Aurelius Global Media Group PLC / Aurelius Media Holdings Inc.

This memorandum is prepared as attorney work product in connection with the representation of Aurelius Global Media Group PLC and its wholly owned subsidiary, Aurelius Media Holdings Inc. It is protected by the attorney work product doctrine and the attorney-client privilege and is intended solely for the use of Calderwood & Harkness LLP attorneys and the client. No portion of this memorandum may be disclosed to third parties without the prior written consent of the undersigned.

I. Purpose and Scope

The purpose of this memorandum is to summarize the results of our review of building-level financial statements and operating expense history provided by Greystone Metropolitan Realty LLC ("Greystone" or "Landlord") for the commercial office building located at 787 Seventh Avenue, New York, NY 10019, commonly known as "Greystone Tower" (the "Building"). This review has been undertaken in connection with the proposed Agreement of Lease (the "Lease") between Greystone, as Landlord, and Aurelius Media Holdings Inc. ("Aurelius" or "Tenant"), as Tenant, pursuant to which Aurelius would occupy approximately 185,000 rentable square feet ("RSF") across multiple floors of the Building as its new North American headquarters.

The documents and data analyzed in this memorandum were provided by Landlord's outside counsel, Pemberton Locke & Strauss LLP (contact partner: Diane Ashford), in response to the formal due diligence request letter that we transmitted on behalf of Aurelius on May 12, 2023. The documents were received in three tranches between May 22 and June 9, 2023, and were uploaded to the Calderwood & Harkness document management system under Matter No. 1017-00009. We have reviewed each document in detail and have cross-referenced the financial data provided against publicly available records, including New York City Department of Finance assessment data and tax levy information, to verify the accuracy and completeness of the Landlord's disclosures.

The scope of this memorandum encompasses the following areas of analysis:

1. Historical Operating Expenses. A review of total building operating expenses for calendar years 2019 through 2022 (audited) and the projected 2023 budget (unaudited), with particular attention to the distinction between controllable and uncontrollable expense categories as those terms are defined in the proposed Lease.

2. Real Estate Tax Escalation Trends. An analysis of the Building's real estate tax history over the applicable review period, including assessed valuations, applicable tax rates, and year-over-year increases, together with a projection of Aurelius's proportionate share of future tax escalations.

3. Base Year (Calendar Year 2023) Implications. An assessment of the financial implications of the negotiated base year — calendar year 2023 — for purposes of calculating operating expense and real estate tax escalation charges payable by Aurelius under the Lease.

4. Financial Exposure Assessment. A calculation of Aurelius's estimated financial exposure to escalation charges under the Lease, based on the Tenant's Proportionate Share of 12.76%, which is calculated as 185,000 RSF divided by 1,450,000 RSF of total building rentable area.

5. Lease Provision Implications. An evaluation of how the building-level financial data interacts with key negotiated provisions of the proposed Lease, including the 5% cumulative annual cap on controllable operating expenses, the gross-up provision, the capital expenditure amortization methodology, and the tenant audit right.

This memorandum does not address the creditworthiness of Greystone or its parent fund at the entity level, nor does it constitute a formal financial audit of Greystone's books and records. Rather, it is intended to provide the deal team and the client with a practical assessment of the building's financial performance and the likely cost implications for Aurelius under the proposed Lease.

II. Building Overview

Set forth below is a summary of the key building and ownership information relevant to this diligence review:

Ownership Structure. Greystone Metropolitan Realty LLC is the operating entity and title holder for 787 Seventh Avenue. Greystone is wholly owned by Greystone Capital Partners Fund VI LP (the "Fund"), a closed-end real estate private equity fund managed by Greystone Capital Advisors LLC, a registered investment adviser. The Fund's general partner is Greystone Capital GP VI LLC. The Fund's manager and Chief Executive Officer is Harrison Drexel. We understand from publicly available information and from representations made by Landlord's counsel during the diligence process that the Fund has a targeted investment horizon of ten to twelve years from its final close, which occurred in 2017, and that the Fund is not currently in a disposition phase with respect to the Building. This is relevant to the extent it provides assurance regarding the Landlord's long-term holding intent and willingness to invest in building operations over the Lease term.

Portfolio Context. Greystone Capital Advisors LLC manages a diversified institutional real estate portfolio encompassing approximately $8.6 billion in aggregate value across 22 institutional-quality Class A commercial office properties located in New York, Boston, and Washington, D.C. The scale and composition of this portfolio are consistent with the profile of a well-capitalized, experienced institutional landlord, and provide comfort regarding Greystone's financial capacity and professional management infrastructure. The portfolio's geographic concentration in major gateway office markets suggests a depth of operational expertise in high-cost, heavily regulated urban environments, which is relevant to the quality and reasonableness of the Building's operating expense structure.

Existing Mortgage. Based on publicly recorded documents and information confirmed by Landlord's counsel, Atlas Continental Bank, N.A. holds a first mortgage lien on the Building, recorded on January 15, 2019, with an outstanding principal balance of approximately $620 million. The mortgage is understood to be performing, and Landlord's counsel has represented that there are no defaults or events of default currently outstanding under the loan documents. The existence of this mortgage is relevant to the extent the Lease will include a subordination, non-disturbance, and attornment agreement ("SNDA") from Atlas Continental Bank, N.A., which is being negotiated separately and is addressed in a separate memorandum.

III. Documents Reviewed

The following documents were provided by Landlord's counsel, Pemberton Locke & Strauss LLP, in response to our due diligence request, and form the basis of the analysis set forth in this memorandum:

1. Building-Level Operating Statements — Calendar Years 2019, 2020, 2021, and 2022 (Audited). These statements were prepared by Greystone's property accounting department under the supervision of the VP, Asset Management, Brendan T. Kozlowski. Each statement bears an audit certification from Severin Beck CPAs LLP, the Building's independent auditor. The statements are presented in a standard format with line-item detail for each major operating expense category, including management fees, payroll and benefits (building staff), cleaning and janitorial services, utilities (common area), repairs and maintenance, elevator maintenance, HVAC operations, lobby and common area upkeep, security, insurance premiums, management and administrative fees, and building-wide capital reserve contributions.

2. Preliminary (Unaudited) Operating Statement — January through April 2023, with Projected Full-Year 2023 Budget. This document was provided in unaudited form and reflects actual operating expenses for the first four months of calendar year 2023, together with Greystone's projected budget for the full calendar year 2023. The 2023 budget is of particular significance because calendar year 2023 serves as the Base Year under the proposed Lease for purposes of calculating operating expense and real estate tax escalation charges.

3. Real Estate Tax Bills and Assessment Notices — Tax Years 2019/20, 2020/21, 2021/22, 2022/23, and Tentative Assessment for 2023/24. These documents were obtained from the New York City Department of Finance and were provided by Landlord's counsel in their original form. We have independently verified the assessed values and tax levies against the NYC Department of Finance's online property assessment database (ACRIS and the Notice of Property Value records) and have confirmed the accuracy of the figures provided.

4. Building Insurance Premium Schedules — 2020 through 2023. These schedules set forth the annual premiums paid by Greystone for building-wide property insurance, general liability insurance, umbrella/excess liability coverage, and ancillary coverages (including terrorism risk insurance). Premium amounts, carrier names, and policy periods are detailed in the schedules.

5. Capital Expenditure Summary — 2019 through 2022. This summary provides a year-by-year accounting of major capital expenditures undertaken at the Building, including the nature of each project, the total cost, the amortization period applied, and the portion, if any, that is or may be passed through to tenants as an operating expense under the applicable lease provisions.

6. Building Occupancy Reports and Rent Roll Summary (Redacted) — As of Q1 2023. The rent roll summary was provided in redacted form, with tenant names partially obscured and specific rental rates redacted, but with sufficient detail to assess building occupancy levels, weighted average remaining lease terms, and the identity of major tenants occupying significant portions of the Building. This level of redaction is customary for institutional landlords and was accepted pursuant to the terms of the confidentiality undertaking executed by our firm on behalf of Aurelius.

Note Regarding Scope of Disclosure. Greystone declined to provide full audited fund-level financial statements of Greystone Capital Partners Fund VI LP, citing limited partner confidentiality restrictions under the Fund's limited partnership agreement. This refusal is customary for institutional landlord entities structured as private equity funds and is not unusual in our experience in comparable transactions. We do not view this limitation as a material impediment to the diligence review, given the availability of building-level audited financial statements and the institutional profile of the Landlord. All documents were received and are maintained subject to a mutual confidentiality undertaking executed between Calderwood & Harkness LLP (on behalf of Aurelius) and Pemberton Locke & Strauss LLP (on behalf of Greystone) dated May 18, 2023.

IV. Historical Operating Expense Analysis

A. Total Operating Expenses — Summary Table

The following table summarizes total building operating expenses (excluding real estate taxes) for calendar years 2019 through 2022 (audited) and the projected 2023 budget (unaudited):

The general trend in total building operating expenses reflects a pattern consistent with the broader commercial office market in Manhattan during this period. Calendar year 2019 represents a normalized pre-pandemic operating year, with total expenses of approximately $34.5 million, or $23.80 per RSF. Calendar year 2020 reflects a meaningful decline of approximately 7.6%, attributable to pandemic-related reductions in variable operating costs. Specifically, during the period from approximately March 2020 through the end of that calendar year, Greystone reduced staffing for certain building services (including cleaning frequency, security shifts, and lobby attendant hours) in response to significantly reduced building occupancy and foot traffic associated with government-mandated office closures and the transition to remote work.

Calendar year 2021 saw a return toward pre-pandemic levels, with total operating expenses of approximately $34.0 million, representing a 6.7% increase over 2020 but still modestly below the 2019 baseline. This is consistent with the gradual reopening of office buildings in Midtown Manhattan throughout 2021 and the partial restoration of full building services.

Calendar year 2022 reflects a more significant year-over-year increase of approximately 8.7%, bringing total operating expenses to approximately $37.0 million, or $25.50 per RSF. This increase is attributable to several factors, including: (i) the full restoration of pre-pandemic building service levels (cleaning, security, lobby staffing); (ii) inflationary pressures on wages and materials costs, particularly in the building services and maintenance labor sectors; (iii) increased utility rates for common area electricity and natural gas; and (iv) elevated insurance premiums, as discussed in further detail in Section VIII below.

The 2023 projected budget of approximately $38.3 million, or $26.40 per RSF, represents a more moderate 3.5% increase over 2022. This moderation suggests that the post-pandemic "catch-up" in operating costs has largely stabilized and that Greystone anticipates a return to more normalized annual increases going forward. The 2023 projected figure is of particular importance because it will establish the Base Year operating expense figure against which Aurelius's escalation charges will be calculated.

It is worth noting that the 2022 and 2023 figures on a per-RSF basis ($25.50 and $26.40, respectively) are generally consistent with comparable Class A office buildings in the Midtown West submarket of Manhattan, where operating expenses (excluding real estate taxes) typically range from $24.00 to $28.00 per RSF, based on market data from CBRE, Cushman & Wakefield, and Northgate Management Consulting published benchmarks.

B. Controllable vs. Uncontrollable Operating Expenses

The proposed Lease distinguishes between "Controllable Operating Expenses" and "Uncontrollable Operating Expenses" for purposes of determining the applicability of the negotiated annual escalation cap. This distinction is critical to Aurelius's financial exposure and is analyzed below.

Controllable Operating Expenses. Under the proposed Lease, Controllable Operating Expenses are defined as those operating costs that are within the Landlord's reasonable discretion and management control. These include, without limitation, management fees, building staff payroll and benefits, cleaning and janitorial services, repairs and maintenance, security services, administrative costs, and supplies. The following table summarizes the controllable expense component of total building operating expenses for the review period:

The historical trend in controllable operating expenses mirrors the overall operating expense trend discussed above: a pandemic-related dip in 2020, a partial recovery in 2021, and a more significant increase in 2022 as building services were fully restored and inflationary pressures took hold. The 2022 increase of 7.9% over 2021 is the most notable single-year jump, and it reflects the "catch-up" effect of restoring deferred maintenance, rehiring building staff, and absorbing wage increases that were delayed during the pandemic.

The negotiated 5% cumulative annual cap on Controllable Operating Expenses is a meaningful tenant protection for Aurelius. Under this provision, annual increases in controllable operating expenses that are passed through to the Tenant are capped at 5% per year on a cumulative, compounding basis measured from the Base Year. This means that even if actual controllable expenses increase by more than 5% in a given year, Aurelius's escalation obligation is limited to the capped amount. The cumulative nature of the cap means that unused cap room from a year with below-5% increases carries forward, providing the Landlord with some flexibility in subsequent years.

To assess the adequacy of this protection, we compared the historical controllable expense increases against the 5% cumulative annual cap:

• 2020 vs. 2019: Controllable expenses decreased by 7.6%, creating significant cumulative cap room.

• 2021 vs. 2020: Controllable expenses increased by 6.1%, which exceeds the single-year 5% threshold but would be well within a cumulative cap calculation that accounts for the prior-year decrease.

• 2022 vs. 2021: Controllable expenses increased by 7.9%, which again exceeds a single-year 5% threshold. However, on a cumulative basis from a 2019 baseline, the three-year compound annual growth rate is approximately 1.9%, well within the 5% cumulative annual cap.

• 2023 (Projected) vs. 2022: The projected 3.1% increase is within the single-year cap.

Assessment. Based on the historical data, the 5% cumulative annual cap on controllable operating expenses appears to provide adequate protection for Aurelius under normal operating conditions. The post-pandemic period (2021–2022) represented an atypical "catch-up" environment in which controllable expenses increased at above-average rates; however, even these increases would fall within the cumulative cap framework when measured from the proposed 2023 Base Year. Going forward, we anticipate that controllable expense increases will moderate to the 3–4% annual range, consistent with broader inflationary trends and the stabilization of building services. We recommend that Aurelius monitor annual operating expense statements carefully and exercise its audit right (discussed in Section X below) to verify the accuracy of controllable expense allocations.

Uncontrollable Operating Expenses. Under the proposed Lease, Uncontrollable Operating Expenses are those costs that are outside the Landlord's reasonable control and are therefore excluded from the 5% cumulative annual cap. These include real estate taxes, utility rates (to the extent affecting common areas and not within Landlord's control to manage through conservation or efficiency measures), building insurance premiums, government-mandated compliance costs (including costs related to Local Law 97 and other sustainability mandates), and water and sewer charges.

The following table summarizes the uncontrollable expense component (excluding real estate taxes, which are analyzed separately in Section V) for the review period:

The uncontrollable expense category has experienced more pronounced increases than controllable expenses, driven primarily by two factors: (i) significant increases in building insurance premiums (discussed in detail in Section VIII below), and (ii) rising utility rates for common area electricity and natural gas, reflecting broader energy cost trends in New York City. The 10.6% increase in 2022 is noteworthy and is primarily attributable to a substantial year-over-year increase in insurance premiums.

Because uncontrollable expenses are passed through to the Tenant at the Tenant's Proportionate Share of 12.76% without any annual cap, Aurelius bears full proportionate exposure to increases in these cost categories above the 2023 Base Year. This exposure is partially mitigated by the fact that the 2023 Base Year captures the current elevated levels of insurance premiums and utility costs, such that initial-year escalation charges should be modest. However, if insurance premiums or utility rates continue to escalate at above-average rates, this could represent a meaningful cost item for Aurelius over the 15-year Lease term.

C. Management Fee Structure

Greystone charges a management fee calculated as 3.0% of the Building's gross collected revenues, which is included in the operating expense statements as a controllable operating expense line item. This management fee structure is within the market range for comparable Class A Midtown Manhattan office buildings managed by institutional owners, where management fees typically range from 2.5% to 4.0% of gross revenues. Properties managed by affiliated management entities (as is the case here, where Greystone Capital Advisors LLC provides management services through Greystone Metropolitan Realty LLC) tend to fall at the lower end of this range.

We have confirmed that Article 27 of the proposed Lease provides that management fees included in operating expenses shall not exceed 3.0% of the Building's gross revenues in any calendar year. This cap is consistent with the current fee structure and protects Aurelius against any future increase in the management fee percentage. We note that some institutional landlords have sought management fee structures as high as 5.0% of gross revenues; the 3.0% cap negotiated here is favorable to the Tenant and is consistent with first-class institutional management standards.

D. Electricity. Electricity to the Premises will be directly metered pursuant to the proposed Lease, and Aurelius will be responsible for its own electrical consumption at the premises level. The Landlord has provided an estimated electrical cost of $3.15 per RSF per year as an informational benchmark, which translates to an estimated annual electrical cost of approximately $582,750 for the 185,000 RSF premises. This estimate is for budgeting purposes only and is not incorporated into base rent or the operating expense escalation pass-through structure.

The Landlord's estimate of $3.15 per RSF per year is consistent with comparable Class A Midtown Manhattan office buildings, where direct-metered electrical costs typically range from $2.75 to $3.75 per RSF per year, depending on the tenant's operational intensity, hours of HVAC usage, and supplemental cooling requirements. Aurelius should be aware that actual electrical costs may vary based on the specific buildout of the premises, the density of workstation installations, and the extent to which Aurelius operates server rooms or other high-demand electrical equipment within the demised premises.

Common area electricity (i.e., electricity consumed in building lobbies, corridors, elevators, mechanical rooms, and other shared spaces) is included in building operating expenses as an uncontrollable expense and is subject to escalation above the 2023 Base Year at the Tenant's Proportionate Share. Common area electricity has been approximately $3.8 million per year in recent years, representing a meaningful component of the uncontrollable expense category.

V. Real Estate Tax Analysis

A. Historical Assessment and Tax Levy Summary

Real estate taxes constitute the largest single expense category for the Building and represent the most significant component of uncontrollable operating expenses under the proposed Lease. The following table summarizes the Building's New York City assessed values and tax levies for the applicable review period:

The Building is classified as Tax Class 4 (commercial property) under the New York City property tax system. The applicable tax rate for Class 4 properties has remained relatively stable during the review period, fluctuating between approximately 10.5% and 10.7%. The primary driver of tax levy increases has been the steady increase in the Building's assessed value, which reflects both the general appreciation of Midtown Manhattan commercial real estate and periodic adjustments to the NYC Department of Finance's income and expense-based valuation methodology.

Over the five-year review period, the Building's assessed value has increased from $380,250,000 (tax year 2019/20) to a tentative assessed value of $426,600,000 (tax year 2023/24), representing a compound annual growth rate of approximately 2.9%. The annual tax levy has correspondingly increased from approximately $40.1 million to a projected $45.0 million, representing a compound annual growth rate of approximately 3.0%.

Tax Certiorari Proceedings. Landlord's counsel has confirmed that Greystone has filed tax certiorari proceedings challenging the assessed values for tax years 2021/22 and 2022/23. These proceedings are currently pending before the New York City Tax Commission and, if unresolved at the administrative level, may be continued in the Supreme Court of the State of New York. Landlord's counsel has estimated that a favorable outcome in these proceedings could result in aggregate refunds of approximately $1.5 million to $2.5 million across the two challenged tax years, although the timing and amount of any refund remain uncertain.

Under the proposed Lease, the allocation of any real estate tax refund is addressed in Section 27.04, which provides that Aurelius is entitled to receive its Proportionate Share of any net tax refund (after deduction of Landlord's reasonable legal and consulting costs in prosecuting the certiorari proceedings) for any tax year that falls within the Lease term or any portion thereof. We have reviewed this provision and believe it is consistent with market practice for institutional leases in Manhattan. We recommend confirming that the Lease also requires Landlord to provide Tenant with reasonable notice of the filing, progress, and resolution of any tax certiorari proceedings and to consult with Tenant before settling any such proceedings.

B. Real Estate Tax Escalation Projections

Real estate taxes are the single largest component of uncontrollable operating expenses and represent the most significant variable in Aurelius's escalation exposure under the proposed Lease. Because real estate taxes are passed through to the Tenant at the full Proportionate Share without any annual cap, increases in the Building's tax levy directly and proportionately affect Aurelius's additional rent obligations.

To illustrate the potential magnitude of Aurelius's real estate tax escalation exposure, we have prepared the following projection based on the historical compound annual growth rate of approximately 3.0% and the tentative 2023/24 assessment data. These projections are for illustrative purposes only and assume no material changes in the NYC Class 4 tax rate or in the Department of Finance's valuation methodology.

As illustrated above, at the Tenant's Proportionate Share of 12.76%, each $1 million increase in the Building's annual real estate tax levy results in approximately $127,600 of additional annual cost to Aurelius. Over the full 15-year Lease term, the cumulative real estate tax escalation exposure could be substantial, particularly if assessment increases accelerate beyond the historical trend. By Year 10, the projected annual tax escalation charge to Aurelius could exceed $1.7 million, and by Year 15, it could approach $2.9 million annually. These figures underscore the importance of the base year selection and the Tenant's ability to participate in the tax certiorari process.

C. Base Year Considerations

Calendar year 2023 serves as the Base Year under the proposed Lease for purposes of calculating both operating expense escalations and real estate tax escalations. The selection of 2023 as the Base Year has several implications that warrant careful analysis.

Favorable Aspects. The 2023 Base Year is favorable to Aurelius relative to an earlier base year (e.g., 2022 or 2021) because it captures a higher cost starting point. Post-pandemic normalization of building operating costs, recent increases in insurance premiums, and the upward trend in real estate tax assessments have all contributed to a 2023 expense base that reflects current market conditions. By establishing the Base Year at this elevated level, the magnitude of initial escalation pass-throughs in the early years of the Lease term is reduced. This is a negotiating advantage that was specifically sought and obtained by Aurelius during the lease negotiation process.

Risk Factors. Notwithstanding the favorable selection of the 2023 Base Year, certain risks should be noted:

• Budget vs. Actual. The 2023 Base Year operating expense figure is based on Greystone's projected full-year 2023 budget, supplemented by actual data for the first four months of the year. If the final audited 2023 operating expenses come in materially below the budgeted figure — for example, due to lower-than-anticipated utility costs during a mild winter, delays in completing budgeted maintenance projects, or vacancy-related reductions in variable costs — the Base Year figure could be artificially low, resulting in higher escalation charges in subsequent years.

• Vacancy-Related Credits. If the Building's occupancy level decreases during 2023 (currently approximately 91% leased), certain variable operating expenses (e.g., cleaning, security, and elevator usage) may decrease correspondingly, producing a lower-than-representative Base Year figure. This risk is mitigated by the Lease's gross-up provision, discussed below.

• Incomplete Tax Year Data. The New York City tax year runs from July 1 to June 30, which does not align with the Lease's calendar-year Base Year. The 2023 Base Year tax figure will therefore be derived from portions of two tax years (the second half of tax year 2022/23 and the first half of tax year 2023/24), which introduces some complexity in determining the precise Base Year tax amount. We recommend confirming with Landlord's counsel the methodology for calculating the Base Year real estate tax figure.

Gross-Up Recommendation. We strongly recommend confirming that the proposed Lease includes a standard gross-up provision requiring that the 2023 Base Year operating expenses be calculated as if the Building were at least 95% occupied. This is a critical tenant protection that prevents the Landlord from establishing an artificially low Base Year by reporting actual expenses during a period of below-normal occupancy, only to pass through disproportionately large escalation charges in subsequent years when occupancy (and associated variable costs) increase. The proposed Lease at Section 27.02(c) contains a gross-up provision, but we recommend confirming its terms prior to execution, specifically that it applies to the Base Year calculation and that the 95% occupancy threshold is clearly specified.

VI. Building Occupancy and Revenue Context

Based on the redacted rent roll summary provided by Landlord's counsel, Greystone Tower was approximately 91% leased as of Q1 2023, representing occupied space of approximately 1,319,500 RSF out of a total rentable area of approximately 1,450,000 RSF. This occupancy level is solid for the Midtown West office submarket, where the overall Class A vacancy rate has been in the range of 12% to 16% during the post-pandemic period, according to published market reports from CBRE, Northgate Management Consulting, and Cushman & Wakefield. The Building's above-market occupancy reflects its LEED Gold certification, recent capital improvements, and the quality of Greystone's institutional management.

Several aspects of the Building's tenancy are relevant to this diligence review:

Major Tenants. The redacted rent roll indicates that the Building's tenant base includes several institutional-quality tenants occupying multi-floor blocks. Of particular relevance, Kestrel Insurance Holdings Inc. ("Kestrel") is identified as the current tenant on Floors 30 through 32. Kestrel's tenancy is significant because the proposed Lease includes a right of first offer ("ROFO") in favor of Aurelius with respect to Floors 30 through 33. However, as negotiated, the ROFO on Floors 30 through 33 is expressly subordinate to Kestrel's existing rights (including any renewal, extension, or expansion rights) as of the Lease Date. Aurelius should be aware that the ROFO may not be actionable with respect to Floors 30 through 32 until after the expiration or earlier termination of Kestrel's lease, which we understand extends through approximately 2029 based on the information available in the redacted rent roll.

Occupancy and Base Year Stability. The Building's strong occupancy level of approximately 91% provides comfort that the 2023 Base Year operating expense figure is reflective of normal building operations and is not materially distorted by vacancy-related expense reductions. When combined with the gross-up provision discussed in Section V.C above, this occupancy level supports the reliability of the Base Year as a benchmark for calculating escalation charges.

Landlord Financial Capacity. Greystone's institutional ownership structure — a well-capitalized private equity fund with an $8.6 billion portfolio across 22 institutional-quality commercial office properties — provides comfort regarding the Landlord's financial capacity to maintain the Building at a Class A standard over the 15-year Lease term. The Fund's scale and access to institutional capital markets also reduce the risk of deferred maintenance or underfunding of building operations, which could adversely affect the operating expense profile and the tenant experience.

VII. Capital Expenditure Review

Greystone provided a capital expenditure summary for calendar years 2019 through 2022, which we have reviewed in detail. The following table summarizes major capital projects completed during the review period:

Total capital expenditures during the 2019–2022 period aggregated approximately $33.4 million. These expenditures are consistent with the profile of a well-maintained Class A office tower that has been proactively investing in building infrastructure and common areas. The lobby renovation and elevator modernization projects are typical of institutional-quality buildings seeking to maintain competitive positioning in the Midtown Manhattan leasing market. The BMS upgrade and LED lighting retrofit are consistent with Greystone's LEED Gold certification and ongoing sustainability commitments.

Under the proposed Lease, capital expenditures are excluded from operating expenses except to the extent that they are amortized over their useful life in accordance with Generally Accepted Accounting Principles ("GAAP"), with interest on the unamortized balance calculated at a rate equal to the lesser of (i) the prime rate published by Greaves Bancorp plus 2.0%, or (ii) the actual interest rate incurred by Landlord in financing the capital improvement. This provision was specifically negotiated by Aurelius and represents a favorable departure from the Landlord's initial proposal, which would have permitted amortization at a flat 8.0% interest rate regardless of actual financing costs.

We recommend confirming that the Lease also includes the following protections with respect to capital expenditure pass-throughs: (a) capital costs attributable to other tenants' improvements, fit-out, or special requirements are excluded from operating expenses; (b) capital costs required to cure defects in the Building's original construction are excluded; and (c) the Tenant is provided with reasonable documentation supporting any capital expenditure pass-through, including the nature of the expenditure, the amortization period applied, and the interest rate used.

Based on our review, no unusual or concerning deferred maintenance items have been identified. The Building appears to be in well-maintained condition, and the capital expenditure program reflects a proactive and institutional approach to asset management. We note that the elevator modernization program (Phase I) covered 8 of the Building's 24 passenger elevators; Phase II (covering an additional 8 elevators) is expected to commence in 2024. This future capital expenditure may result in amortized pass-through charges to Aurelius in future years, and should be monitored accordingly.

VIII. Insurance Premium Trends

Building-wide insurance premiums have increased significantly during the review period, consistent with the broader hardening of the commercial property and casualty insurance market that has affected institutional-quality office buildings throughout Manhattan and other major U.S. gateway markets. The following table summarizes the Building's annual insurance premiums for 2020 through 2023:

The cumulative increase in insurance premiums from 2020 to 2023 is approximately 50.3%, representing a compound annual growth rate of approximately 14.6%. This escalation is driven by a combination of factors, including: (i) increased replacement cost valuations for Class A Midtown Manhattan office towers; (ii) reinsurance market tightening following catastrophic loss years; (iii) increased terrorism risk insurance costs; and (iv) general commercial insurance market rate hardening across all property and casualty lines. These trends are not specific to Greystone Tower but reflect market-wide conditions affecting comparable institutional-quality properties.

Under the proposed Lease, insurance premiums are classified as uncontrollable operating expenses and are passed through to the Tenant at the full Proportionate Share of 12.76% without any annual cap. Aurelius's share of the 2023 projected insurance premium of $4,690,000 is approximately $598,494. Because the 2023 Base Year captures the current elevated premium environment, Aurelius's escalation exposure is limited to increases above the 2023 baseline. If insurance premiums continue to escalate at the rates experienced during 2021–2022 (approximately 16–18% annually), the annual incremental cost to Aurelius could be significant. However, market forecasters anticipate that the rate of insurance premium escalation will moderate in 2024 and beyond as the insurance market cycle moves toward stabilization.

We note that the Tenant has no ability to control or influence the Landlord's insurance procurement decisions, including the selection of carriers, policy limits, deductible levels, or coverage types. However, the proposed Lease does require that the Landlord maintain insurance at commercially reasonable levels consistent with institutional ownership standards, which provides some assurance that Greystone will not procure unnecessary or excessive coverage at the Tenant's proportionate expense.

IX. Tenant's Proportionate Share — Financial Exposure Summary

Aurelius's Proportionate Share under the proposed Lease is 12.76%, calculated as 185,000 RSF (the rentable area of the Premises) divided by 1,450,000 RSF (the total rentable area of the Building). This Proportionate Share applies to both operating expense escalations and real estate tax escalations above the 2023 Base Year.

The following table presents an illustrative escalation exposure analysis for Aurelius under three scenarios — conservative, moderate, and aggressive — for Lease Years 2 and 5. The scenarios vary the assumed annual rate of increase for each expense category:

Assumptions:

Estimated Additional Annual Cost to Aurelius (Above 2023 Base Year):

These projections illustrate that under the moderate scenario, Aurelius can expect to incur approximately $371,000 in additional rent attributable to operating expense and real estate tax escalations in Year 2 of the Lease term, increasing to approximately $1.58 million by Year 5. Under the aggressive scenario, Year 5 escalation exposure could approach $2.4 million. These are significant cost items that should be incorporated into Aurelius's real estate budget and financial planning.

Rent-Free Period. It is important to note that the six-month rent-free period negotiated under the proposed Lease (August 1, 2023 through January 31, 2024) applies to base rent only. Pursuant to Section 3.02 of the proposed Lease, the Tenant is responsible for its Proportionate Share of operating expense and real estate tax escalations from the Commencement Date (August 1, 2023), subject to the Base Year construct. However, because the Commencement Date falls within the 2023 Base Year, the escalation charges for the period from August 1, 2023 through December 31, 2023 will be zero (as there is no increase above the Base Year during the Base Year itself). Meaningful escalation exposure commences in calendar year 2024, which is also the calendar year during which the rent-free period expires.

Aggregate Year 1 Additional Rent Exposure. For the reasons stated above, Aurelius's Year 1 additional rent exposure attributable to operating expense and real estate tax escalations is expected to be minimal — effectively zero for the period from August 1, 2023 through December 31, 2023 (which falls within the Base Year), and relatively modest for the first few months of calendar year 2024 as escalation charges begin to accrue.

X. Key Observations and Recommendations

Based on the analysis set forth in this memorandum, we make the following observations and recommendations for Douglas Fairchild's consideration in connection with the final review of the proposed Lease:

1. Base Year Gross-Up. We recommend confirming that the proposed Lease includes a standard gross-up provision ensuring that the 2023 Base Year operating expenses are calculated as if the Building were at least 95% occupied, regardless of actual occupancy levels during the Base Year. This protection is critical to preventing Aurelius from bearing disproportionate escalation charges attributable to vacancy fluctuations. Section 27.02(c) of the current draft Lease contains a gross-up provision, but we recommend reviewing the specific language to ensure that: (a) the 95% occupancy threshold is clearly specified; (b) the gross-up applies to all variable operating expense categories (not just cleaning and utilities); and (c) the gross-up methodology is applied consistently to the Base Year and all subsequent comparison years. We should also confirm that the gross-up provision cannot be used by the Landlord to inflate the comparison year expenses without a corresponding adjustment to the Base Year.

2. Controllable Expense Cap. The negotiated 5% cumulative annual cap on controllable operating expenses is an important tenant protection that limits Aurelius's exposure to above-market increases in costs within the Landlord's discretion. Historical data supports the reasonableness of this cap — actual controllable expense increases have generally fallen within the 5% cumulative annual threshold, with the exception of the post-pandemic catch-up year (2022). We recommend ongoing monitoring of annual operating expense statements to verify that the Landlord is properly categorizing expenses as "controllable" or "uncontrollable" and that no costs are being reclassified to circumvent the cap. The tenant audit right, discussed below, is essential for this purpose.

3. Real Estate Tax Exposure. Real estate taxes represent the largest uncontrollable cost variable under the proposed Lease. Historical NYC assessment trends suggest that assessed values — and, correspondingly, tax levies — will continue to increase during the Lease term, potentially at rates exceeding the historical average as the NYC Department of Finance recalibrates post-pandemic valuations. We recommend that Aurelius calendar periodic reviews of tax assessment notices published by the NYC Department of Finance (typically issued in January of each year for the following tax year) and participate in any tax certiorari proceedings to the extent permitted under the Lease. The Lease should include provisions requiring Landlord to: (a) provide Tenant with prompt notice of annual assessment notices; (b) consult with Tenant before deciding whether to challenge or accept an assessment; and (c) allocate any tax refund proceeds proportionately to Tenant.

4. Capital Expenditure Amortization. We recommend confirming that the proposed Lease restricts the pass-through of capital expenditures to those that are amortized over their useful life in accordance with GAAP, with a reasonable interest rate as described in Section VII above. Additionally, the Lease should expressly exclude from operating expenses: (a) capital costs attributable to other tenants' improvements or special requirements; (b) capital costs required to cure defects in the Building's original construction; (c) capital costs incurred in connection with any sale, financing, or refinancing of the Building; and (d) capital expenditures that are reimbursed by insurance proceeds or warranty claims. We should also confirm that the Tenant has the right to review documentation supporting any capital expenditure pass-through, including invoices, contracts, and amortization schedules.

5. Insurance Escalation. While insurance premiums are classified as uncontrollable operating expenses and are passed through without a cap, the 2023 Base Year captures the current elevated premium environment, which provides some degree of built-in protection for Aurelius. Future increases above the 2023 baseline will be borne proportionately at 12.76%. We note that the commercial insurance market is cyclical, and current projections suggest that the rate of premium escalation may moderate in the near term. Nevertheless, Aurelius should budget for continued insurance cost increases at rates above general inflation, consistent with the trends observed during the 2020–2023 period. We also recommend that the Lease include a provision requiring the Landlord to use commercially reasonable efforts to obtain competitive insurance pricing and to provide the Tenant with summary information regarding insurance renewals upon request.

6. Audit Right. We recommend confirming that the proposed Lease includes a robust tenant audit right permitting Aurelius, or its designated independent certified public accountant, to review and audit the Landlord's books and records relating to operating expenses and real estate taxes on an annual basis. The audit right should include: (a) the right to review source documents, invoices, contracts, and payroll records; (b) a reasonable audit window (not less than 180 days following receipt of the annual reconciliation statement); (c) the right to conduct the audit at Landlord's offices during normal business hours; and (d) a provision requiring Landlord to reimburse Tenant's reasonable audit costs in the event that the audit reveals an overcharge in excess of a specified threshold (typically 3% to 5% of the total charges for the applicable year). The audit right is an essential tool for verifying the accuracy of operating expense and tax escalation charges and ensuring that the Landlord is properly applying the controllable expense cap, the gross-up provision, and the capital expenditure amortization methodology.

7. Overall Financial Assessment. Taking into account the totality of the building-level financial data reviewed, Greystone's financial position as an institutional owner with a substantial diversified portfolio, and the Building's strong occupancy and well-maintained physical condition, we believe there is reasonable comfort regarding the Landlord's management capability and the reliability of the operating expense data provided. The operating expense structure and cost levels are consistent with comparable Class A Midtown Manhattan office properties, and the negotiated Lease protections (controllable expense cap, gross-up provision, capital expenditure amortization restrictions, and tenant audit right) provide meaningful safeguards against excessive escalation charges. No material financial red flags have been identified in the course of this diligence review.

XI. Conclusion

Based on our comprehensive review of Greystone's building-level financial statements and operating expense history for 787 Seventh Avenue (Greystone Tower), no material financial concerns have been identified that would affect the decision to proceed with the proposed Lease on the terms currently under negotiation.

The Base Year (calendar year 2023) operating expense and real estate tax figures appear consistent with market norms for comparable Class A Midtown Manhattan office buildings. The 2023 Base Year captures the current elevated cost environment — including post-pandemic normalization of building operations, recent insurance premium increases, and current real estate tax assessment levels — which is favorable to Aurelius and will serve to moderate initial-year escalation charges.

Aurelius's estimated ongoing escalation exposure is within expected parameters for a 185,000 RSF, 15-year lease at this location and is consistent with the long-term occupancy cost assumptions that Aurelius's real estate team has modeled in connection with the headquarters relocation decision. Under a moderate escalation scenario, Aurelius can expect to incur approximately $370,000 to $400,000 in annual additional rent attributable to escalations in Year 2, increasing to approximately $1.5 million to $1.6 million by Year 5, with the trajectory continuing upward over the balance of the 15-year term.

The controllable expense cap (5% cumulative annual increase), gross-up provision (95% occupancy adjustment), capital expenditure amortization restrictions, and tenant audit right that have been negotiated in the proposed Lease provide meaningful protections against excessive or unjustified escalation charges and are consistent with market-standard protections for institutional tenants in Class A Manhattan office leases.

This memorandum will be filed with the due diligence records for Matter No. 1017-00009 and will be incorporated by reference into the final due diligence summary to be prepared in connection with Lease execution.

I am available to discuss any of the items addressed in this memorandum in further detail and will plan to address outstanding open items in connection with the final lease review currently scheduled for the week of June 26, 2023. Please let me know if you have questions or would like to schedule a call in advance of that review session.

Respectfully submitted,

CALDERWOOD & HARKNESS LLP

By: ________

Rafael Dominguez Lead Associate, Real Estate Practice Group

cc: Cynthia Ho, Working Associate, Real Estate, Calderwood & Harkness LLP

Calderwood & Harkness LLP 425 Park Avenue, 18th Floor New York, NY 10022

ATTORNEY WORK PRODUCT — PRIVILEGED & CONFIDENTIAL

Item	Detail
Building Name	Greystone Tower (also known as 787 Seventh Avenue)
Address	787 Seventh Avenue, New York, NY 10019
Block/Lot	Block 1024, Lot 18, Borough of Manhattan
Building Class	Class A, LEED Gold Certified Office Tower
Year Constructed	2001
Total Floors	52 above grade (plus 3 below-grade levels for parking and mechanical)
Total Rentable Area	Approximately 1,450,000 RSF
Owner of Record	Greystone Metropolitan Realty LLC, a Delaware limited liability company
Managing Principal	Jonathan R. Whitfield
SVP, Leasing	Catherine Ng
VP, Asset Management	Brendan T. Kozlowski
Calendar Year	Total Operating Expenses (Excl. RE Taxes)	Per RSF	Year-over-Year Change
2019	$34,510,000	$23.80	—
2020	$31,885,000	$21.99	(7.6%)
2021	$34,020,000	$23.46	6.7%
2022	$36,975,000	$25.50	8.7%
2023 (Projected)	$38,280,000	$26.40	3.5%
Calendar Year	Controllable Operating Expenses	Per RSF	Year-over-Year Change
2019	$24,150,000	$16.66	—
2020	$22,310,000	$15.39	(7.6%)
2021	$23,680,000	$16.33	6.1%
2022	$25,540,000	$17.61	7.9%
2023 (Projected)	$26,320,000	$18.15	3.1%
Calendar Year	Uncontrollable Operating Expenses (Excl. RE Taxes)	Per RSF	Year-over-Year Change

2019	$10,360,000	$7.14	—
2020	$9,575,000	$6.60	(7.6%)
2021	$10,340,000	$7.13	8.0%
2022	$11,435,000	$7.89	10.6%
2023 (Projected)	$11,960,000	$8.25	4.6%
Tax Year	Market Value (NYC DOF)	Assessed Value	Tax Rate (Class 4)	Annual Tax Levy	Per RSF	Year-over-Year Change
2019/20	$845,000,000	$380,250,000	10.537%	$40,066,343	$27.63	—
2020/21	$862,000,000	$387,900,000	10.694%	$41,481,366	$28.61	3.5%
2021/22	$878,000,000	$395,100,000	10.694%	$42,251,994	$29.14	1.9%
2022/23	$912,000,000	$410,400,000	10.556%	$43,321,824	$29.88	2.5%
2023/24 (Tentative)	$948,000,000	$426,600,000	10.556% (est.)	$45,032,136	$31.06	3.9%
Lease Year	Calendar Year	Projected Tax Levy	Increase Over 2023 Base Year	Tenant's Share (12.76%)
Year 1	2023	$44,200,000 (est.)	— (Base Year)	—
Year 2	2024	$45,526,000	$1,326,000	$169,197
Year 3	2025	$46,892,000	$2,692,000	$343,501
Year 5	2027	$49,748,000	$5,548,000	$707,927
Year 10	2032	$57,683,000	$13,483,000	$1,720,431
Year 15	2037	$66,887,000	$22,687,000	$2,894,861
Year	Project Description	Approximate Cost	Amortization Period
2019	Lobby renovation and modernization	$12,500,000	15 years
2019–2020	Elevator modernization (Phase I — 8 passenger elevators)	$8,200,000	20 years
2021	Building management system (BMS) upgrade	$3,400,000	10 years
2021	Common area lighting retrofit (LED conversion)	$1,800,000	7 years
2022	Cooling tower replacement	$4,600,000	15 years
2022	Fire alarm and life safety system upgrade	$2,900,000	12 years

Calendar Year	Total Insurance Premiums	Per RSF	Year-over-Year Change
2020	$3,120,000	$2.15	—
2021	$3,640,000	$2.51	16.7%
2022	$4,280,000	$2.95	17.6%
2023 (Projected)	$4,690,000	$3.23	9.6%
Expense Category	Conservative	Moderate	Aggressive
Controllable Operating Expenses (capped at 5%)	2.5% per year	4.0% per year	5.0% per year (cap)
Real Estate Taxes	2.0% per year	3.0% per year	4.5% per year
Insurance Premiums	3.0% per year	7.0% per year	12.0% per year
Other Uncontrollable Expenses	2.0% per year	3.5% per year	5.0% per year
Expense Category	Year 2 — Conservative	Year 2 — Moderate	Year 2 — Aggressive	Year 5 — Conservative	Year 5 — Moderate	Year 5 — Aggressive
Controllable OpEx	$83,945	$134,312	$167,890	$331,782	$553,178	$717,284
Real Estate Taxes	$112,760	$169,197	$254,103	$469,148	$723,622	$1,136,489
Insurance Premiums	$17,945	$41,849	$71,791	$76,121	$194,834	$353,497
Other Uncontrollable	$14,694	$25,714	$36,726	$60,862	$110,308	$181,752
Total Additional Rent	$229,344	$371,072	$530,510	$937,913	$1,581,942	$2,389,022

MEMORANDUM
ATTORNEY WORK PRODUCT — PRIVILEGED & CONFIDENTIAL
June 22, 2023
TO: Douglas Fairchild, Partner, Real Estate, Calderwood & Harkness LLP
FROM: Rafael Dominguez, Lead Associate, Real Estate, Calderwood & Harkness LLP
RE: Landlord Financial Diligence — Building-Level Financial Statements and Operating Expense History, 787 Seventh Avenue, New York, NY 10019 (Greystone Tower)
MATTER: Aurelius Global Media Group PLC — Headquarters Lease
MATTER NUMBER: 1017-00009
CLIENT: Aurelius Global Media Group PLC / Aurelius Media Holdings Inc.
This memorandum is prepared as attorney work product in connection with the representation of Aurelius Global Media Group PLC and its wholly owned subsidiary, Aurelius Media Holdings Inc. It is protected by the attorney work product doctrine and the attorney-client privilege and is intended solely for the use of Calderwood & Harkness LLP attorneys and the client. No portion of this memorandum may be disclosed to third parties without the prior written consent of the undersigned.
I. Purpose and Scope
The purpose of this memorandum is to summarize the results of our review of building-level financial statements and operating expense history provided by Greystone Metropolitan Realty LLC ("Greystone" or "Landlord") for the commercial office building located at 787 Seventh Avenue, New York, NY 10019, commonly known as "Greystone Tower" (the "Building"). This review has been undertaken in connection with the proposed Agreement of Lease (the "Lease") between Greystone, as Landlord, and Aurelius Media Holdings Inc. ("Aurelius" or "Tenant"), as Tenant, pursuant to which Aurelius would occupy approximately 185,000 rentable square feet ("RSF") across multiple floors of the Building as its new North American headquarters.
The documents and data analyzed in this memorandum were provided by Landlord's outside counsel, Pemberton Locke & Strauss LLP (contact partner: Diane Ashford), in response to the formal due diligence request letter that we transmitted on behalf of Aurelius on May 12, 2023. The documents were received in three tranches between May 22 and June 9, 2023, and were uploaded to the Calderwood & Harkness document management system under Matter No. 1017-00009. We have reviewed each document in detail and have cross-referenced the financial data provided against publicly available records, including New York City Department of Finance assessment data and tax levy information, to verify the accuracy and completeness of the Landlord's disclosures.
The scope of this memorandum encompasses the following areas of analysis:
1. Historical Operating Expenses. A review of total building operating expenses for calendar years 2019 through 2022 (audited) and the projected 2023 budget (unaudited), with particular attention to the distinction between controllable and uncontrollable expense categories as those terms are defined in the proposed Lease.
2. Real Estate Tax Escalation Trends. An analysis of the Building's real estate tax history over the applicable review period, including assessed valuations, applicable tax rates, and year-over-year increases, together with a projection of Aurelius's proportionate share of future tax escalations.
3. Base Year (Calendar Year 2023) Implications. An assessment of the financial implications of the negotiated base year — calendar year 2023 — for purposes of calculating operating expense and real estate tax escalation charges payable by Aurelius under the Lease.
4. Financial Exposure Assessment. A calculation of Aurelius's estimated financial exposure to escalation charges under the Lease, based on the Tenant's Proportionate Share of 12.76%, which is calculated as 185,000 RSF divided by 1,450,000 RSF of total building rentable area.
5. Lease Provision Implications. An evaluation of how the building-level financial data interacts with key negotiated provisions of the proposed Lease, including the 5% cumulative annual cap on controllable operating expenses, the gross-up provision, the capital expenditure amortization methodology, and the tenant audit right.
This memorandum does not address the creditworthiness of Greystone or its parent fund at the entity level, nor does it constitute a formal financial audit of Greystone's books and records. Rather, it is intended to provide the deal team and the client with a practical assessment of the building's financial performance and the likely cost implications for Aurelius under the proposed Lease.
II. Building Overview
Set forth below is a summary of the key building and ownership information relevant to this diligence review:
Ownership Structure. Greystone Metropolitan Realty LLC is the operating entity and title holder for 787 Seventh Avenue. Greystone is wholly owned by Greystone Capital Partners Fund VI LP (the "Fund"), a closed-end real estate private equity fund managed by Greystone Capital Advisors LLC, a registered investment adviser. The Fund's general partner is Greystone Capital GP VI LLC. The Fund's manager and Chief Executive Officer is Harrison Drexel. We understand from publicly available information and from representations made by Landlord's counsel during the diligence process that the Fund has a targeted investment horizon of ten to twelve years from its final close, which occurred in 2017, and that the Fund is not currently in a disposition phase with respect to the Building. This is relevant to the extent it provides assurance regarding the Landlord's long-term holding intent and willingness to invest in building operations over the Lease term.
Portfolio Context. Greystone Capital Advisors LLC manages a diversified institutional real estate portfolio encompassing approximately $8.6 billion in aggregate value across 22 institutional-quality Class A commercial office properties located in New York, Boston, and Washington, D.C. The scale and composition of this portfolio are consistent with the profile of a well-capitalized, experienced institutional landlord, and provide comfort regarding Greystone's financial capacity and professional management infrastructure. The portfolio's geographic concentration in major gateway office markets suggests a depth of operational expertise in high-cost, heavily regulated urban environments, which is relevant to the quality and reasonableness of the Building's operating expense structure.
Existing Mortgage. Based on publicly recorded documents and information confirmed by Landlord's counsel, Atlas Continental Bank, N.A. holds a first mortgage lien on the Building, recorded on January 15, 2019, with an outstanding principal balance of approximately $620 million. The mortgage is understood to be performing, and Landlord's counsel has represented that there are no defaults or events of default currently outstanding under the loan documents. The existence of this mortgage is relevant to the extent the Lease will include a subordination, non-disturbance, and attornment agreement ("SNDA") from Atlas Continental Bank, N.A., which is being negotiated separately and is addressed in a separate memorandum.
III. Documents Reviewed
The following documents were provided by Landlord's counsel, Pemberton Locke & Strauss LLP, in response to our due diligence request, and form the basis of the analysis set forth in this memorandum:
1. Building-Level Operating Statements — Calendar Years 2019, 2020, 2021, and 2022 (Audited). These statements were prepared by Greystone's property accounting department under the supervision of the VP, Asset Management, Brendan T. Kozlowski. Each statement bears an audit certification from Severin Beck CPAs LLP, the Building's independent auditor. The statements are presented in a standard format with line-item detail for each major operating expense category, including management fees, payroll and benefits (building staff), cleaning and janitorial services, utilities (common area), repairs and maintenance, elevator maintenance, HVAC operations, lobby and common area upkeep, security, insurance premiums, management and administrative fees, and building-wide capital reserve contributions.
2. Preliminary (Unaudited) Operating Statement — January through April 2023, with Projected Full-Year 2023 Budget. This document was provided in unaudited form and reflects actual operating expenses for the first four months of calendar year 2023, together with Greystone's projected budget for the full calendar year 2023. The 2023 budget is of particular significance because calendar year 2023 serves as the Base Year under the proposed Lease for purposes of calculating operating expense and real estate tax escalation charges.
3. Real Estate Tax Bills and Assessment Notices — Tax Years 2019/20, 2020/21, 2021/22, 2022/23, and Tentative Assessment for 2023/24. These documents were obtained from the New York City Department of Finance and were provided by Landlord's counsel in their original form. We have independently verified the assessed values and tax levies against the NYC Department of Finance's online property assessment database (ACRIS and the Notice of Property Value records) and have confirmed the accuracy of the figures provided.
4. Building Insurance Premium Schedules — 2020 through 2023. These schedules set forth the annual premiums paid by Greystone for building-wide property insurance, general liability insurance, umbrella/excess liability coverage, and ancillary coverages (including terrorism risk insurance). Premium amounts, carrier names, and policy periods are detailed in the schedules.
5. Capital Expenditure Summary — 2019 through 2022. This summary provides a year-by-year accounting of major capital expenditures undertaken at the Building, including the nature of each project, the total cost, the amortization period applied, and the portion, if any, that is or may be passed through to tenants as an operating expense under the applicable lease provisions.
6. Building Occupancy Reports and Rent Roll Summary (Redacted) — As of Q1 2023. The rent roll summary was provided in redacted form, with tenant names partially obscured and specific rental rates redacted, but with sufficient detail to assess building occupancy levels, weighted average remaining lease terms, and the identity of major tenants occupying significant portions of the Building. This level of redaction is customary for institutional landlords and was accepted pursuant to the terms of the confidentiality undertaking executed by our firm on behalf of Aurelius.
Note Regarding Scope of Disclosure. Greystone declined to provide full audited fund-level financial statements of Greystone Capital Partners Fund VI LP, citing limited partner confidentiality restrictions under the Fund's limited partnership agreement. This refusal is customary for institutional landlord entities structured as private equity funds and is not unusual in our experience in comparable transactions. We do not view this limitation as a material impediment to the diligence review, given the availability of building-level audited financial statements and the institutional profile of the Landlord. All documents were received and are maintained subject to a mutual confidentiality undertaking executed between Calderwood & Harkness LLP (on behalf of Aurelius) and Pemberton Locke & Strauss LLP (on behalf of Greystone) dated May 18, 2023.
IV. Historical Operating Expense Analysis
A. Total Operating Expenses — Summary Table
The following table summarizes total building operating expenses (excluding real estate taxes) for calendar years 2019 through 2022 (audited) and the projected 2023 budget (unaudited):
The general trend in total building operating expenses reflects a pattern consistent with the broader commercial office market in Manhattan during this period. Calendar year 2019 represents a normalized pre-pandemic operating year, with total expenses of approximately $34.5 million, or $23.80 per RSF. Calendar year 2020 reflects a meaningful decline of approximately 7.6%, attributable to pandemic-related reductions in variable operating costs. Specifically, during the period from approximately March 2020 through the end of that calendar year, Greystone reduced staffing for certain building services (including cleaning frequency, security shifts, and lobby attendant hours) in response to significantly reduced building occupancy and foot traffic associated with government-mandated office closures and the transition to remote work.
Calendar year 2021 saw a return toward pre-pandemic levels, with total operating expenses of approximately $34.0 million, representing a 6.7% increase over 2020 but still modestly below the 2019 baseline. This is consistent with the gradual reopening of office buildings in Midtown Manhattan throughout 2021 and the partial restoration of full building services.
Calendar year 2022 reflects a more significant year-over-year increase of approximately 8.7%, bringing total operating expenses to approximately $37.0 million, or $25.50 per RSF. This increase is attributable to several factors, including: (i) the full restoration of pre-pandemic building service levels (cleaning, security, lobby staffing); (ii) inflationary pressures on wages and materials costs, particularly in the building services and maintenance labor sectors; (iii) increased utility rates for common area electricity and natural gas; and (iv) elevated insurance premiums, as discussed in further detail in Section VIII below.
The 2023 projected budget of approximately $38.3 million, or $26.40 per RSF, represents a more moderate 3.5% increase over 2022. This moderation suggests that the post-pandemic "catch-up" in operating costs has largely stabilized and that Greystone anticipates a return to more normalized annual increases going forward. The 2023 projected figure is of particular importance because it will establish the Base Year operating expense figure against which Aurelius's escalation charges will be calculated.
It is worth noting that the 2022 and 2023 figures on a per-RSF basis ($25.50 and $26.40, respectively) are generally consistent with comparable Class A office buildings in the Midtown West submarket of Manhattan, where operating expenses (excluding real estate taxes) typically range from $24.00 to $28.00 per RSF, based on market data from CBRE, Cushman & Wakefield, and Northgate Management Consulting published benchmarks.
B. Controllable vs. Uncontrollable Operating Expenses
The proposed Lease distinguishes between "Controllable Operating Expenses" and "Uncontrollable Operating Expenses" for purposes of determining the applicability of the negotiated annual escalation cap. This distinction is critical to Aurelius's financial exposure and is analyzed below.
Controllable Operating Expenses. Under the proposed Lease, Controllable Operating Expenses are defined as those operating costs that are within the Landlord's reasonable discretion and management control. These include, without limitation, management fees, building staff payroll and benefits, cleaning and janitorial services, repairs and maintenance, security services, administrative costs, and supplies. The following table summarizes the controllable expense component of total building operating expenses for the review period:
The historical trend in controllable operating expenses mirrors the overall operating expense trend discussed above: a pandemic-related dip in 2020, a partial recovery in 2021, and a more significant increase in 2022 as building services were fully restored and inflationary pressures took hold. The 2022 increase of 7.9% over 2021 is the most notable single-year jump, and it reflects the "catch-up" effect of restoring deferred maintenance, rehiring building staff, and absorbing wage increases that were delayed during the pandemic.
The negotiated 5% cumulative annual cap on Controllable Operating Expenses is a meaningful tenant protection for Aurelius. Under this provision, annual increases in controllable operating expenses that are passed through to the Tenant are capped at 5% per year on a cumulative, compounding basis measured from the Base Year. This means that even if actual controllable expenses increase by more than 5% in a given year, Aurelius's escalation obligation is limited to the capped amount. The cumulative nature of the cap means that unused cap room from a year with below-5% increases carries forward, providing the Landlord with some flexibility in subsequent years.
To assess the adequacy of this protection, we compared the historical controllable expense increases against the 5% cumulative annual cap:
• 2020 vs. 2019: Controllable expenses decreased by 7.6%, creating significant cumulative cap room.
• 2021 vs. 2020: Controllable expenses increased by 6.1%, which exceeds the single-year 5% threshold but would be well within a cumulative cap calculation that accounts for the prior-year decrease.
• 2022 vs. 2021: Controllable expenses increased by 7.9%, which again exceeds a single-year 5% threshold. However, on a cumulative basis from a 2019 baseline, the three-year compound annual growth rate is approximately 1.9%, well within the 5% cumulative annual cap.
• 2023 (Projected) vs. 2022: The projected 3.1% increase is within the single-year cap.
Assessment. Based on the historical data, the 5% cumulative annual cap on controllable operating expenses appears to provide adequate protection for Aurelius under normal operating conditions. The post-pandemic period (2021–2022) represented an atypical "catch-up" environment in which controllable expenses increased at above-average rates; however, even these increases would fall within the cumulative cap framework when measured from the proposed 2023 Base Year. Going forward, we anticipate that controllable expense increases will moderate to the 3–4% annual range, consistent with broader inflationary trends and the stabilization of building services. We recommend that Aurelius monitor annual operating expense statements carefully and exercise its audit right (discussed in Section X below) to verify the accuracy of controllable expense allocations.
Uncontrollable Operating Expenses. Under the proposed Lease, Uncontrollable Operating Expenses are those costs that are outside the Landlord's reasonable control and are therefore excluded from the 5% cumulative annual cap. These include real estate taxes, utility rates (to the extent affecting common areas and not within Landlord's control to manage through conservation or efficiency measures), building insurance premiums, government-mandated compliance costs (including costs related to Local Law 97 and other sustainability mandates), and water and sewer charges.
The following table summarizes the uncontrollable expense component (excluding real estate taxes, which are analyzed separately in Section V) for the review period:
The uncontrollable expense category has experienced more pronounced increases than controllable expenses, driven primarily by two factors: (i) significant increases in building insurance premiums (discussed in detail in Section VIII below), and (ii) rising utility rates for common area electricity and natural gas, reflecting broader energy cost trends in New York City. The 10.6% increase in 2022 is noteworthy and is primarily attributable to a substantial year-over-year increase in insurance premiums.
Because uncontrollable expenses are passed through to the Tenant at the Tenant's Proportionate Share of 12.76% without any annual cap, Aurelius bears full proportionate exposure to increases in these cost categories above the 2023 Base Year. This exposure is partially mitigated by the fact that the 2023 Base Year captures the current elevated levels of insurance premiums and utility costs, such that initial-year escalation charges should be modest. However, if insurance premiums or utility rates continue to escalate at above-average rates, this could represent a meaningful cost item for Aurelius over the 15-year Lease term.
C. Management Fee Structure
Greystone charges a management fee calculated as 3.0% of the Building's gross collected revenues, which is included in the operating expense statements as a controllable operating expense line item. This management fee structure is within the market range for comparable Class A Midtown Manhattan office buildings managed by institutional owners, where management fees typically range from 2.5% to 4.0% of gross revenues. Properties managed by affiliated management entities (as is the case here, where Greystone Capital Advisors LLC provides management services through Greystone Metropolitan Realty LLC) tend to fall at the lower end of this range.
We have confirmed that Article 27 of the proposed Lease provides that management fees included in operating expenses shall not exceed 3.0% of the Building's gross revenues in any calendar year. This cap is consistent with the current fee structure and protects Aurelius against any future increase in the management fee percentage. We note that some institutional landlords have sought management fee structures as high as 5.0% of gross revenues; the 3.0% cap negotiated here is favorable to the Tenant and is consistent with first-class institutional management standards.
D. Electricity. Electricity to the Premises will be directly metered pursuant to the proposed Lease, and Aurelius will be responsible for its own electrical consumption at the premises level. The Landlord has provided an estimated electrical cost of $3.15 per RSF per year as an informational benchmark, which translates to an estimated annual electrical cost of approximately $582,750 for the 185,000 RSF premises. This estimate is for budgeting purposes only and is not incorporated into base rent or the operating expense escalation pass-through structure.
The Landlord's estimate of $3.15 per RSF per year is consistent with comparable Class A Midtown Manhattan office buildings, where direct-metered electrical costs typically range from $2.75 to $3.75 per RSF per year, depending on the tenant's operational intensity, hours of HVAC usage, and supplemental cooling requirements. Aurelius should be aware that actual electrical costs may vary based on the specific buildout of the premises, the density of workstation installations, and the extent to which Aurelius operates server rooms or other high-demand electrical equipment within the demised premises.
Common area electricity (i.e., electricity consumed in building lobbies, corridors, elevators, mechanical rooms, and other shared spaces) is included in building operating expenses as an uncontrollable expense and is subject to escalation above the 2023 Base Year at the Tenant's Proportionate Share. Common area electricity has been approximately $3.8 million per year in recent years, representing a meaningful component of the uncontrollable expense category.
V. Real Estate Tax Analysis
A. Historical Assessment and Tax Levy Summary
Real estate taxes constitute the largest single expense category for the Building and represent the most significant component of uncontrollable operating expenses under the proposed Lease. The following table summarizes the Building's New York City assessed values and tax levies for the applicable review period:
The Building is classified as Tax Class 4 (commercial property) under the New York City property tax system. The applicable tax rate for Class 4 properties has remained relatively stable during the review period, fluctuating between approximately 10.5% and 10.7%. The primary driver of tax levy increases has been the steady increase in the Building's assessed value, which reflects both the general appreciation of Midtown Manhattan commercial real estate and periodic adjustments to the NYC Department of Finance's income and expense-based valuation methodology.
Over the five-year review period, the Building's assessed value has increased from $380,250,000 (tax year 2019/20) to a tentative assessed value of $426,600,000 (tax year 2023/24), representing a compound annual growth rate of approximately 2.9%. The annual tax levy has correspondingly increased from approximately $40.1 million to a projected $45.0 million, representing a compound annual growth rate of approximately 3.0%.
Tax Certiorari Proceedings. Landlord's counsel has confirmed that Greystone has filed tax certiorari proceedings challenging the assessed values for tax years 2021/22 and 2022/23. These proceedings are currently pending before the New York City Tax Commission and, if unresolved at the administrative level, may be continued in the Supreme Court of the State of New York. Landlord's counsel has estimated that a favorable outcome in these proceedings could result in aggregate refunds of approximately $1.5 million to $2.5 million across the two challenged tax years, although the timing and amount of any refund remain uncertain.
Under the proposed Lease, the allocation of any real estate tax refund is addressed in Section 27.04, which provides that Aurelius is entitled to receive its Proportionate Share of any net tax refund (after deduction of Landlord's reasonable legal and consulting costs in prosecuting the certiorari proceedings) for any tax year that falls within the Lease term or any portion thereof. We have reviewed this provision and believe it is consistent with market practice for institutional leases in Manhattan. We recommend confirming that the Lease also requires Landlord to provide Tenant with reasonable notice of the filing, progress, and resolution of any tax certiorari proceedings and to consult with Tenant before settling any such proceedings.
B. Real Estate Tax Escalation Projections
Real estate taxes are the single largest component of uncontrollable operating expenses and represent the most significant variable in Aurelius's escalation exposure under the proposed Lease. Because real estate taxes are passed through to the Tenant at the full Proportionate Share without any annual cap, increases in the Building's tax levy directly and proportionately affect Aurelius's additional rent obligations.
To illustrate the potential magnitude of Aurelius's real estate tax escalation exposure, we have prepared the following projection based on the historical compound annual growth rate of approximately 3.0% and the tentative 2023/24 assessment data. These projections are for illustrative purposes only and assume no material changes in the NYC Class 4 tax rate or in the Department of Finance's valuation methodology.
As illustrated above, at the Tenant's Proportionate Share of 12.76%, each $1 million increase in the Building's annual real estate tax levy results in approximately $127,600 of additional annual cost to Aurelius. Over the full 15-year Lease term, the cumulative real estate tax escalation exposure could be substantial, particularly if assessment increases accelerate beyond the historical trend. By Year 10, the projected annual tax escalation charge to Aurelius could exceed $1.7 million, and by Year 15, it could approach $2.9 million annually. These figures underscore the importance of the base year selection and the Tenant's ability to participate in the tax certiorari process.
C. Base Year Considerations
Calendar year 2023 serves as the Base Year under the proposed Lease for purposes of calculating both operating expense escalations and real estate tax escalations. The selection of 2023 as the Base Year has several implications that warrant careful analysis.
Favorable Aspects. The 2023 Base Year is favorable to Aurelius relative to an earlier base year (e.g., 2022 or 2021) because it captures a higher cost starting point. Post-pandemic normalization of building operating costs, recent increases in insurance premiums, and the upward trend in real estate tax assessments have all contributed to a 2023 expense base that reflects current market conditions. By establishing the Base Year at this elevated level, the magnitude of initial escalation pass-throughs in the early years of the Lease term is reduced. This is a negotiating advantage that was specifically sought and obtained by Aurelius during the lease negotiation process.
Risk Factors. Notwithstanding the favorable selection of the 2023 Base Year, certain risks should be noted:
• Budget vs. Actual. The 2023 Base Year operating expense figure is based on Greystone's projected full-year 2023 budget, supplemented by actual data for the first four months of the year. If the final audited 2023 operating expenses come in materially below the budgeted figure — for example, due to lower-than-anticipated utility costs during a mild winter, delays in completing budgeted maintenance projects, or vacancy-related reductions in variable costs — the Base Year figure could be artificially low, resulting in higher escalation charges in subsequent years.
• Vacancy-Related Credits. If the Building's occupancy level decreases during 2023 (currently approximately 91% leased), certain variable operating expenses (e.g., cleaning, security, and elevator usage) may decrease correspondingly, producing a lower-than-representative Base Year figure. This risk is mitigated by the Lease's gross-up provision, discussed below.
• Incomplete Tax Year Data. The New York City tax year runs from July 1 to June 30, which does not align with the Lease's calendar-year Base Year. The 2023 Base Year tax figure will therefore be derived from portions of two tax years (the second half of tax year 2022/23 and the first half of tax year 2023/24), which introduces some complexity in determining the precise Base Year tax amount. We recommend confirming with Landlord's counsel the methodology for calculating the Base Year real estate tax figure.
Gross-Up Recommendation. We strongly recommend confirming that the proposed Lease includes a standard gross-up provision requiring that the 2023 Base Year operating expenses be calculated as if the Building were at least 95% occupied. This is a critical tenant protection that prevents the Landlord from establishing an artificially low Base Year by reporting actual expenses during a period of below-normal occupancy, only to pass through disproportionately large escalation charges in subsequent years when occupancy (and associated variable costs) increase. The proposed Lease at Section 27.02(c) contains a gross-up provision, but we recommend confirming its terms prior to execution, specifically that it applies to the Base Year calculation and that the 95% occupancy threshold is clearly specified.
VI. Building Occupancy and Revenue Context
Based on the redacted rent roll summary provided by Landlord's counsel, Greystone Tower was approximately 91% leased as of Q1 2023, representing occupied space of approximately 1,319,500 RSF out of a total rentable area of approximately 1,450,000 RSF. This occupancy level is solid for the Midtown West office submarket, where the overall Class A vacancy rate has been in the range of 12% to 16% during the post-pandemic period, according to published market reports from CBRE, Northgate Management Consulting, and Cushman & Wakefield. The Building's above-market occupancy reflects its LEED Gold certification, recent capital improvements, and the quality of Greystone's institutional management.
Several aspects of the Building's tenancy are relevant to this diligence review:
Major Tenants. The redacted rent roll indicates that the Building's tenant base includes several institutional-quality tenants occupying multi-floor blocks. Of particular relevance, Kestrel Insurance Holdings Inc. ("Kestrel") is identified as the current tenant on Floors 30 through 32. Kestrel's tenancy is significant because the proposed Lease includes a right of first offer ("ROFO") in favor of Aurelius with respect to Floors 30 through 33. However, as negotiated, the ROFO on Floors 30 through 33 is expressly subordinate to Kestrel's existing rights (including any renewal, extension, or expansion rights) as of the Lease Date. Aurelius should be aware that the ROFO may not be actionable with respect to Floors 30 through 32 until after the expiration or earlier termination of Kestrel's lease, which we understand extends through approximately 2029 based on the information available in the redacted rent roll.
Occupancy and Base Year Stability. The Building's strong occupancy level of approximately 91% provides comfort that the 2023 Base Year operating expense figure is reflective of normal building operations and is not materially distorted by vacancy-related expense reductions. When combined with the gross-up provision discussed in Section V.C above, this occupancy level supports the reliability of the Base Year as a benchmark for calculating escalation charges.
Landlord Financial Capacity. Greystone's institutional ownership structure — a well-capitalized private equity fund with an $8.6 billion portfolio across 22 institutional-quality commercial office properties — provides comfort regarding the Landlord's financial capacity to maintain the Building at a Class A standard over the 15-year Lease term. The Fund's scale and access to institutional capital markets also reduce the risk of deferred maintenance or underfunding of building operations, which could adversely affect the operating expense profile and the tenant experience.
VII. Capital Expenditure Review
Greystone provided a capital expenditure summary for calendar years 2019 through 2022, which we have reviewed in detail. The following table summarizes major capital projects completed during the review period:
Total capital expenditures during the 2019–2022 period aggregated approximately $33.4 million. These expenditures are consistent with the profile of a well-maintained Class A office tower that has been proactively investing in building infrastructure and common areas. The lobby renovation and elevator modernization projects are typical of institutional-quality buildings seeking to maintain competitive positioning in the Midtown Manhattan leasing market. The BMS upgrade and LED lighting retrofit are consistent with Greystone's LEED Gold certification and ongoing sustainability commitments.
Under the proposed Lease, capital expenditures are excluded from operating expenses except to the extent that they are amortized over their useful life in accordance with Generally Accepted Accounting Principles ("GAAP"), with interest on the unamortized balance calculated at a rate equal to the lesser of (i) the prime rate published by Greaves Bancorp plus 2.0%, or (ii) the actual interest rate incurred by Landlord in financing the capital improvement. This provision was specifically negotiated by Aurelius and represents a favorable departure from the Landlord's initial proposal, which would have permitted amortization at a flat 8.0% interest rate regardless of actual financing costs.
We recommend confirming that the Lease also includes the following protections with respect to capital expenditure pass-throughs: (a) capital costs attributable to other tenants' improvements, fit-out, or special requirements are excluded from operating expenses; (b) capital costs required to cure defects in the Building's original construction are excluded; and (c) the Tenant is provided with reasonable documentation supporting any capital expenditure pass-through, including the nature of the expenditure, the amortization period applied, and the interest rate used.
Based on our review, no unusual or concerning deferred maintenance items have been identified. The Building appears to be in well-maintained condition, and the capital expenditure program reflects a proactive and institutional approach to asset management. We note that the elevator modernization program (Phase I) covered 8 of the Building's 24 passenger elevators; Phase II (covering an additional 8 elevators) is expected to commence in 2024. This future capital expenditure may result in amortized pass-through charges to Aurelius in future years, and should be monitored accordingly.
VIII. Insurance Premium Trends
Building-wide insurance premiums have increased significantly during the review period, consistent with the broader hardening of the commercial property and casualty insurance market that has affected institutional-quality office buildings throughout Manhattan and other major U.S. gateway markets. The following table summarizes the Building's annual insurance premiums for 2020 through 2023:
The cumulative increase in insurance premiums from 2020 to 2023 is approximately 50.3%, representing a compound annual growth rate of approximately 14.6%. This escalation is driven by a combination of factors, including: (i) increased replacement cost valuations for Class A Midtown Manhattan office towers; (ii) reinsurance market tightening following catastrophic loss years; (iii) increased terrorism risk insurance costs; and (iv) general commercial insurance market rate hardening across all property and casualty lines. These trends are not specific to Greystone Tower but reflect market-wide conditions affecting comparable institutional-quality properties.
Under the proposed Lease, insurance premiums are classified as uncontrollable operating expenses and are passed through to the Tenant at the full Proportionate Share of 12.76% without any annual cap. Aurelius's share of the 2023 projected insurance premium of $4,690,000 is approximately $598,494. Because the 2023 Base Year captures the current elevated premium environment, Aurelius's escalation exposure is limited to increases above the 2023 baseline. If insurance premiums continue to escalate at the rates experienced during 2021–2022 (approximately 16–18% annually), the annual incremental cost to Aurelius could be significant. However, market forecasters anticipate that the rate of insurance premium escalation will moderate in 2024 and beyond as the insurance market cycle moves toward stabilization.
We note that the Tenant has no ability to control or influence the Landlord's insurance procurement decisions, including the selection of carriers, policy limits, deductible levels, or coverage types. However, the proposed Lease does require that the Landlord maintain insurance at commercially reasonable levels consistent with institutional ownership standards, which provides some assurance that Greystone will not procure unnecessary or excessive coverage at the Tenant's proportionate expense.
IX. Tenant's Proportionate Share — Financial Exposure Summary
Aurelius's Proportionate Share under the proposed Lease is 12.76%, calculated as 185,000 RSF (the rentable area of the Premises) divided by 1,450,000 RSF (the total rentable area of the Building). This Proportionate Share applies to both operating expense escalations and real estate tax escalations above the 2023 Base Year.
The following table presents an illustrative escalation exposure analysis for Aurelius under three scenarios — conservative, moderate, and aggressive — for Lease Years 2 and 5. The scenarios vary the assumed annual rate of increase for each expense category:
Assumptions:
Estimated Additional Annual Cost to Aurelius (Above 2023 Base Year):
These projections illustrate that under the moderate scenario, Aurelius can expect to incur approximately $371,000 in additional rent attributable to operating expense and real estate tax escalations in Year 2 of the Lease term, increasing to approximately $1.58 million by Year 5. Under the aggressive scenario, Year 5 escalation exposure could approach $2.4 million. These are significant cost items that should be incorporated into Aurelius's real estate budget and financial planning.
Rent-Free Period. It is important to note that the six-month rent-free period negotiated under the proposed Lease (August 1, 2023 through January 31, 2024) applies to base rent only. Pursuant to Section 3.02 of the proposed Lease, the Tenant is responsible for its Proportionate Share of operating expense and real estate tax escalations from the Commencement Date (August 1, 2023), subject to the Base Year construct. However, because the Commencement Date falls within the 2023 Base Year, the escalation charges for the period from August 1, 2023 through December 31, 2023 will be zero (as there is no increase above the Base Year during the Base Year itself). Meaningful escalation exposure commences in calendar year 2024, which is also the calendar year during which the rent-free period expires.
Aggregate Year 1 Additional Rent Exposure. For the reasons stated above, Aurelius's Year 1 additional rent exposure attributable to operating expense and real estate tax escalations is expected to be minimal — effectively zero for the period from August 1, 2023 through December 31, 2023 (which falls within the Base Year), and relatively modest for the first few months of calendar year 2024 as escalation charges begin to accrue.
X. Key Observations and Recommendations
Based on the analysis set forth in this memorandum, we make the following observations and recommendations for Douglas Fairchild's consideration in connection with the final review of the proposed Lease:
1. Base Year Gross-Up. We recommend confirming that the proposed Lease includes a standard gross-up provision ensuring that the 2023 Base Year operating expenses are calculated as if the Building were at least 95% occupied, regardless of actual occupancy levels during the Base Year. This protection is critical to preventing Aurelius from bearing disproportionate escalation charges attributable to vacancy fluctuations. Section 27.02(c) of the current draft Lease contains a gross-up provision, but we recommend reviewing the specific language to ensure that: (a) the 95% occupancy threshold is clearly specified; (b) the gross-up applies to all variable operating expense categories (not just cleaning and utilities); and (c) the gross-up methodology is applied consistently to the Base Year and all subsequent comparison years. We should also confirm that the gross-up provision cannot be used by the Landlord to inflate the comparison year expenses without a corresponding adjustment to the Base Year.
2. Controllable Expense Cap. The negotiated 5% cumulative annual cap on controllable operating expenses is an important tenant protection that limits Aurelius's exposure to above-market increases in costs within the Landlord's discretion. Historical data supports the reasonableness of this cap — actual controllable expense increases have generally fallen within the 5% cumulative annual threshold, with the exception of the post-pandemic catch-up year (2022). We recommend ongoing monitoring of annual operating expense statements to verify that the Landlord is properly categorizing expenses as "controllable" or "uncontrollable" and that no costs are being reclassified to circumvent the cap. The tenant audit right, discussed below, is essential for this purpose.
3. Real Estate Tax Exposure. Real estate taxes represent the largest uncontrollable cost variable under the proposed Lease. Historical NYC assessment trends suggest that assessed values — and, correspondingly, tax levies — will continue to increase during the Lease term, potentially at rates exceeding the historical average as the NYC Department of Finance recalibrates post-pandemic valuations. We recommend that Aurelius calendar periodic reviews of tax assessment notices published by the NYC Department of Finance (typically issued in January of each year for the following tax year) and participate in any tax certiorari proceedings to the extent permitted under the Lease. The Lease should include provisions requiring Landlord to: (a) provide Tenant with prompt notice of annual assessment notices; (b) consult with Tenant before deciding whether to challenge or accept an assessment; and (c) allocate any tax refund proceeds proportionately to Tenant.
4. Capital Expenditure Amortization. We recommend confirming that the proposed Lease restricts the pass-through of capital expenditures to those that are amortized over their useful life in accordance with GAAP, with a reasonable interest rate as described in Section VII above. Additionally, the Lease should expressly exclude from operating expenses: (a) capital costs attributable to other tenants' improvements or special requirements; (b) capital costs required to cure defects in the Building's original construction; (c) capital costs incurred in connection with any sale, financing, or refinancing of the Building; and (d) capital expenditures that are reimbursed by insurance proceeds or warranty claims. We should also confirm that the Tenant has the right to review documentation supporting any capital expenditure pass-through, including invoices, contracts, and amortization schedules.
5. Insurance Escalation. While insurance premiums are classified as uncontrollable operating expenses and are passed through without a cap, the 2023 Base Year captures the current elevated premium environment, which provides some degree of built-in protection for Aurelius. Future increases above the 2023 baseline will be borne proportionately at 12.76%. We note that the commercial insurance market is cyclical, and current projections suggest that the rate of premium escalation may moderate in the near term. Nevertheless, Aurelius should budget for continued insurance cost increases at rates above general inflation, consistent with the trends observed during the 2020–2023 period. We also recommend that the Lease include a provision requiring the Landlord to use commercially reasonable efforts to obtain competitive insurance pricing and to provide the Tenant with summary information regarding insurance renewals upon request.
6. Audit Right. We recommend confirming that the proposed Lease includes a robust tenant audit right permitting Aurelius, or its designated independent certified public accountant, to review and audit the Landlord's books and records relating to operating expenses and real estate taxes on an annual basis. The audit right should include: (a) the right to review source documents, invoices, contracts, and payroll records; (b) a reasonable audit window (not less than 180 days following receipt of the annual reconciliation statement); (c) the right to conduct the audit at Landlord's offices during normal business hours; and (d) a provision requiring Landlord to reimburse Tenant's reasonable audit costs in the event that the audit reveals an overcharge in excess of a specified threshold (typically 3% to 5% of the total charges for the applicable year). The audit right is an essential tool for verifying the accuracy of operating expense and tax escalation charges and ensuring that the Landlord is properly applying the controllable expense cap, the gross-up provision, and the capital expenditure amortization methodology.
7. Overall Financial Assessment. Taking into account the totality of the building-level financial data reviewed, Greystone's financial position as an institutional owner with a substantial diversified portfolio, and the Building's strong occupancy and well-maintained physical condition, we believe there is reasonable comfort regarding the Landlord's management capability and the reliability of the operating expense data provided. The operating expense structure and cost levels are consistent with comparable Class A Midtown Manhattan office properties, and the negotiated Lease protections (controllable expense cap, gross-up provision, capital expenditure amortization restrictions, and tenant audit right) provide meaningful safeguards against excessive escalation charges. No material financial red flags have been identified in the course of this diligence review.
XI. Conclusion
Based on our comprehensive review of Greystone's building-level financial statements and operating expense history for 787 Seventh Avenue (Greystone Tower), no material financial concerns have been identified that would affect the decision to proceed with the proposed Lease on the terms currently under negotiation.
The Base Year (calendar year 2023) operating expense and real estate tax figures appear consistent with market norms for comparable Class A Midtown Manhattan office buildings. The 2023 Base Year captures the current elevated cost environment — including post-pandemic normalization of building operations, recent insurance premium increases, and current real estate tax assessment levels — which is favorable to Aurelius and will serve to moderate initial-year escalation charges.
Aurelius's estimated ongoing escalation exposure is within expected parameters for a 185,000 RSF, 15-year lease at this location and is consistent with the long-term occupancy cost assumptions that Aurelius's real estate team has modeled in connection with the headquarters relocation decision. Under a moderate escalation scenario, Aurelius can expect to incur approximately $370,000 to $400,000 in annual additional rent attributable to escalations in Year 2, increasing to approximately $1.5 million to $1.6 million by Year 5, with the trajectory continuing upward over the balance of the 15-year term.
The controllable expense cap (5% cumulative annual increase), gross-up provision (95% occupancy adjustment), capital expenditure amortization restrictions, and tenant audit right that have been negotiated in the proposed Lease provide meaningful protections against excessive or unjustified escalation charges and are consistent with market-standard protections for institutional tenants in Class A Manhattan office leases.
This memorandum will be filed with the due diligence records for Matter No. 1017-00009 and will be incorporated by reference into the final due diligence summary to be prepared in connection with Lease execution.
I am available to discuss any of the items addressed in this memorandum in further detail and will plan to address outstanding open items in connection with the final lease review currently scheduled for the week of June 26, 2023. Please let me know if you have questions or would like to schedule a call in advance of that review session.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Rafael Dominguez Lead Associate, Real Estate Practice Group
cc: Cynthia Ho, Working Associate, Real Estate, Calderwood & Harkness LLP
Calderwood & Harkness LLP 425 Park Avenue, 18th Floor New York, NY 10022
ATTORNEY WORK PRODUCT — PRIVILEGED & CONFIDENTIAL
Item | Detail
Building Name | Greystone Tower (also known as 787 Seventh Avenue)
Address | 787 Seventh Avenue, New York, NY 10019
Block/Lot | Block 1024, Lot 18, Borough of Manhattan
Building Class | Class A, LEED Gold Certified Office Tower
Year Constructed | 2001
Total Floors | 52 above grade (plus 3 below-grade levels for parking and mechanical)
Total Rentable Area | Approximately 1,450,000 RSF
Owner of Record | Greystone Metropolitan Realty LLC, a Delaware limited liability company
Managing Principal | Jonathan R. Whitfield
SVP, Leasing | Catherine Ng
VP, Asset Management | Brendan T. Kozlowski
Calendar Year | Total Operating Expenses (Excl. RE Taxes) | Per RSF | Year-over-Year Change
2019 | $34,510,000 | $23.80 | —
2020 | $31,885,000 | $21.99 | (7.6%)
2021 | $34,020,000 | $23.46 | 6.7%
2022 | $36,975,000 | $25.50 | 8.7%
2023 (Projected) | $38,280,000 | $26.40 | 3.5%
Calendar Year | Controllable Operating Expenses | Per RSF | Year-over-Year Change
2019 | $24,150,000 | $16.66 | —
2020 | $22,310,000 | $15.39 | (7.6%)
2021 | $23,680,000 | $16.33 | 6.1%
2022 | $25,540,000 | $17.61 | 7.9%
2023 (Projected) | $26,320,000 | $18.15 | 3.1%
Calendar Year | Uncontrollable Operating Expenses (Excl. RE Taxes) | Per RSF | Year-over-Year Change
2019 | $10,360,000 | $7.14 | —
2020 | $9,575,000 | $6.60 | (7.6%)
2021 | $10,340,000 | $7.13 | 8.0%
2022 | $11,435,000 | $7.89 | 10.6%
2023 (Projected) | $11,960,000 | $8.25 | 4.6%
Tax Year | Market Value (NYC DOF) | Assessed Value | Tax Rate (Class 4) | Annual Tax Levy | Per RSF | Year-over-Year Change
2019/20 | $845,000,000 | $380,250,000 | 10.537% | $40,066,343 | $27.63 | —
2020/21 | $862,000,000 | $387,900,000 | 10.694% | $41,481,366 | $28.61 | 3.5%
2021/22 | $878,000,000 | $395,100,000 | 10.694% | $42,251,994 | $29.14 | 1.9%
2022/23 | $912,000,000 | $410,400,000 | 10.556% | $43,321,824 | $29.88 | 2.5%
2023/24 (Tentative) | $948,000,000 | $426,600,000 | 10.556% (est.) | $45,032,136 | $31.06 | 3.9%
Lease Year | Calendar Year | Projected Tax Levy | Increase Over 2023 Base Year | Tenant's Share (12.76%)
Year 1 | 2023 | $44,200,000 (est.) | — (Base Year) | —
Year 2 | 2024 | $45,526,000 | $1,326,000 | $169,197
Year 3 | 2025 | $46,892,000 | $2,692,000 | $343,501
Year 5 | 2027 | $49,748,000 | $5,548,000 | $707,927
Year 10 | 2032 | $57,683,000 | $13,483,000 | $1,720,431
Year 15 | 2037 | $66,887,000 | $22,687,000 | $2,894,861
Year | Project Description | Approximate Cost | Amortization Period
2019 | Lobby renovation and modernization | $12,500,000 | 15 years
2019–2020 | Elevator modernization (Phase I — 8 passenger elevators) | $8,200,000 | 20 years
2021 | Building management system (BMS) upgrade | $3,400,000 | 10 years
2021 | Common area lighting retrofit (LED conversion) | $1,800,000 | 7 years
2022 | Cooling tower replacement | $4,600,000 | 15 years
2022 | Fire alarm and life safety system upgrade | $2,900,000 | 12 years
Calendar Year | Total Insurance Premiums | Per RSF | Year-over-Year Change
2020 | $3,120,000 | $2.15 | —
2021 | $3,640,000 | $2.51 | 16.7%
2022 | $4,280,000 | $2.95 | 17.6%
2023 (Projected) | $4,690,000 | $3.23 | 9.6%
Expense Category | Conservative | Moderate | Aggressive
Controllable Operating Expenses (capped at 5%) | 2.5% per year | 4.0% per year | 5.0% per year (cap)
Real Estate Taxes | 2.0% per year | 3.0% per year | 4.5% per year
Insurance Premiums | 3.0% per year | 7.0% per year | 12.0% per year
Other Uncontrollable Expenses | 2.0% per year | 3.5% per year | 5.0% per year
Expense Category | Year 2 — Conservative | Year 2 — Moderate | Year 2 — Aggressive | Year 5 — Conservative | Year 5 — Moderate | Year 5 — Aggressive
Controllable OpEx | $83,945 | $134,312 | $167,890 | $331,782 | $553,178 | $717,284
Real Estate Taxes | $112,760 | $169,197 | $254,103 | $469,148 | $723,622 | $1,136,489
Insurance Premiums | $17,945 | $41,849 | $71,791 | $76,121 | $194,834 | $353,497
Other Uncontrollable | $14,694 | $25,714 | $36,726 | $60,862 | $110,308 | $181,752
Total Additional Rent | $229,344 | $371,072 | $530,510 | $937,913 | $1,581,942 | $2,389,022

MEMORANDUM

MATTER NUMBER: 1017-00009

CALDERWOOD & HARKNESS LLP

Record

Parties

Dates

Amounts