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The firm consolidates staff in 143,000 square feet of East Palo Alto office space two months after Brobeck died. - April 14, 2003

By Erik Cummins
Daily Journal Staff Writer

SAN FRANCISCO - Gray Cary Ware & Freidenrich has answered one of the key unresolved questions following Brobeck, Phleger & Harrison's collapse: What would happen to the defunct firm's sparkling new offices in East Palo Alto?

Gray Cary announced Friday it will take over almost all of Brobeck's 143,000 square feet at University Circle, a year-old redevelopment project in East Palo Alto's Whiskey Gulch neighborhood.

"It's great news for everybody," said Eric Berson, a former attorney who brokered the 15-year lease for Gray Cary.

Gary Cary, for one, gets a great deal - saving as much as $2 million a year once the lease runs out for the firm's office space on Palo Alto's Hamilton Avenue in 2005. University Circle Investors, Gary Cary's new landlord, also acquires a major tenant in a tough real-estate market just two months after Brobeck closed shop.

In addition, Brobeck significantly reduces the damages it could owe for breaking a 12-year lease that began January 2002.

"It's not bad news for Brobeck," said Richard Shapiro, a Thelen, Reid & Priest partner who represents University Circle Investors in its $100 million suit against the former firm.

"Obviously, this will reduce it," Shapiro added of the amount sought by University Circle. Brobeck "would have been subject to a much larger claim" without a new tenant to lower the landlord's losses.

Steve Snyder, the chairman of Brobeck's liquidation committee, had not responded to questions at press time.

Brock Gowdy, a former Brobeck partner who now is managing partner of Morgan, Lewis & Bockius' San Francisco office, wasn't familiar with the deal.

"Is it good news? My uneducated reply would be that I think so," he said. "It should mitigate the landlord's damages."

Shapiro, who also represented the landlord in Gray Cary's lease, said other tenants at University Circle include Bingham McCutchen and Dewey Ballantine, which acquired former Brobeck partner Jim Elacqua's intellectual property group last year before Brobeck's collapse. A Four Seasons hotel is being developed on the site as well.

In the wake of the news on Brobeck, landlords increasingly have been cautious about signing up law firm tenants, according to Berson, who also is chairman of Washington Realty Group, which deals exclusively with law firms.

"I've been educating landlords about law firms after Brobeck," said Berson, a former developer. "Landlords in general are more conscious of law firm strengths and weaknesses. They're becoming more sophisticated but they have a long way to go."

University Circle Investors "really worked hard to get up to speed" on Gray Cary, a firm with "a balance sheet that is strong as hell," he added.

The firm is slated to move July 1, taking over five floors, or 120,000 square feet, and all of the building's furnishings, which the landlord seized after Brobeck's implosion.

Gray Cary will consolidate the 150 lawyers in its three Silicon Valley offices at a single site. The existing offices are located at 300 and 400 Hamilton Ave. and on Embarcadero Road in Palo Alto.

"People are very excited about the opportunity to have all the lawyers under one roof," said Terry O'Malley, the firm's chairman. Just hours after announcing the news Thursday night, he received 40 e-mails congratulating him on the deal.

"To the extent that you wanted to have meetings with people from disparate practice groups, people had to get in their cars and drive," O'Malley noted. "Having everyone in the same building will facilitate that collaborative work. For us, it's an economic and an operating win."

Gray Cary is seeking tenants for its space at Hamilton Avenue and has already found two small subtenants. Those new tenants and others expected to locate there will keep Gray Cary's rental costs flat until its lease runs out in two years, according to O'Malley. After that, the firm's Palo Alto rental costs will drop substantially.

"It was a unique combination of circumstances," O'Malley said. "You had a sharp, unprecedented downturn in Silicon Valley real estate [prices]. It was a once-in-a-lifetime opportunity."

Once Brobeck collapsed, negotiations for the space began almost immediately.

"As events began to unfold, we moved quickly," O'Malley added. "Most law firms like to get started a year and a half ahead of their move date. The elapsed time here will be a little less than five months."

Citing the economic downturn, Gray Cary laid off 45 lawyers last year. Since then, the firm slowly has been hiring lateral partners, noting growth in its white-collar criminal defense, intellectual property litigation, product liability and transactional practices.

"We had a very strong first quarter that exceeded even our own projections," O'Malley observed of the 420-lawyer firm. "We're on pace to have a really strong year."

Gray Cary "did what it needed to do last year" by laying off lawyers, he said. But unlike firms such as Brobeck, which had $90 million in loans at its peak, Gray Cary "has never been willing to incur a lot of debt."

"Our profile was exactly what the landlord wanted," O'Malley added.



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