Former WTC tenant in Md. challenging $317,500 in rent add-ons

Daily Record, The (Baltimore), Jun 6, 2008 by Andy Rosen

The bitter battle over alleged unpaid charges between Maryland and one of its former tenants at the World Trade Center is about to enter what could be its final stage, as the legal fight between the law firm Gebhardt & Smith LLP and the Maryland Port Administration heads to trial.

The two-year-old case encompasses reams of testy filings about the charges. Gebhardt & Smith is challenging $317,500 in rent add- ons, plus interest, over the five-year period following the terrorist attacks of Sept. 11, 2001.

Gebhardt & Smith says the state passed through operating costs, including for security and insurance, that it should not have been forced to pay, while the MPA argues that each cost is justified by the terms of the law firm's lease.

The firm alleges that the state has fraudulently inflated many costs, both in order to make the building appear more profitable and to cover a state revenue shortfall at the time. The possibility remains that the firm could attempt to call former Gov. Robert L. Ehrlich Jr. to testify about the state's financial situation when he took office and his philosophy for managing the building.

The state has argued against bringing Ehrlich into the case, saying he was not directly involved in its management in response to Gebhardt & Smith motions to depose Ehrlich and other administration employees. The court has not ruled on the motion for Ehrlich, so the question of whether he will testify will likely be decided in court.

The firm, which called the World Trade Center home between the time that the building opened in 1977 and 2006, has since moved to a new space in One South Street, the former Alex. Brown building.

Neither party had much to say directly about the case, citing the trial that is set to begin June 16 in Baltimore City Circuit Court and last several weeks. But the court filings tell a story of a contentious battle over the costs. One of the firm's key arguments is that the MPA did not have an independent accountant calculate operating cost overruns.

Though the last several months of filings in the case have revolved largely around that dispute, several other elements are likely to come up during the trial. In addition to challenging the way MPA expenses are calculated, the firm has also questioned the propriety of the administration's leasing to tenants that do not work in port-related industries.

Pass-through charges are common in commercial leases, and so are disputes over what a tenant should pay.

David H. Fishman, chairman of the real estate group at Gordon, Feinblatt, Rothman, Hoffberger & Hollander LLC, said he has seen many landlord-tenant disputes over operating costs, particularly with leases at shopping centers. He said they rarely go to trial, though.

"Most of the operating cost disputes that I've seen are resolved through negotiation and compromise," said Fishman, who is not involved with the World Trade Center suit. "A judge can't issue a compromise verdict. It's either a party wins or a party loses."

Ronald P. Deem, director of commercial sales and leasing at GMAC Real Estate Services in Largo, said he deals with many leases that have various forms of pass-through costs.

"The tenant either ends up paying one way or another," he said. "Otherwise, the building is going to go broke."

Still, he said he's seen increasingly complicated commercial leases, with more litigation surrounding them, in the nearly 35 years he's spent in the business.

"When I started in real estate, a lease was two to three pages," he said. "Now it's 60 to 100 pages."

In an interview with The Daily Record last year, Senior Partner Lawrence J. Gebhardt said the case was not just about money. The company initially sued the MPA, but the state later filed a countersuit to collect what it believes it is owed. The countersuit is the one now being litigated. The law firm dropped its own case, instead fighting the counterclaim, which places the burden of proof on the state.

"The whole situation with the World Trade Center is a series of ineptness and miscues," Gebhardt said last year. "We're simply not going to allow the Maryland Port Administration to euchre us out of money."

The Ehrlich administration wanted to sell the World Trade Center as surplus state property, a point that Gebhardt & Smith has used to bolster its argument that the state should not be allowed to make a large number of non-maritime leases at the building. Richard Scher, spokesman for the MPA, said by e-mail that the "MPA's philosophy is to attract and recruit tenants to the WTC who will pay the rent without any preference for maritime or non-maritime or any other category of tenants."

Also in an interview last year, Ehrlich's transportation secretary, Robert L. Flanagan, said the firm's allegations were untrue.

"I would question whether there was any motivation [for the increased building expenses] other than just trying to manage the lease," Flanagan said at the time.

Gov. Martin O'Malley has decided to keep the building, and the state has been trying to return it to profitability. It will be at about 70 percent occupancy after the Maryland Department of Business and Economic Development moves there this year, but it lost $1.3 million in fiscal 2007.