Developers Walking Away From Ground Lease Properties

David Goldsmith

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Vornado walks away from Fifth Avenue property
Topshop closed its store at 608 Fifth Avenue last year

After the bankrupt retailer Topshop shuttered its Fifth Avenue flagship last year, Vornado Realty Trust has walked away from the property.
The real estate investment trust turned over control of the property at 608 Fifth Avenue late last month to the Korein family, which owns the ground under the building, sources told The Real Deal.
A spokesperson from Vornado did not immediately respond to a request for comment, but company president Michael Franco said on the REIT’s October earnings call that they were planning to walk away from the lease.

“This ground lease had only 14 years left on it,” he said. “It was not economic for us to hold on to.”
A representative for the Korein family could not be immediately reached for comment.
The Koreins have owned the property at 608 Fifth Avenue since the 1960s, property records show. The building, which sits on the corner of 49th Street near Rockefeller Center, spans 144,00 square feet, including 40,000 square feet of retail.

The family granted control of the property to Aby Rosen’s RFR Holdings in the late 1990s through a ground lease. But RFR was forced to hand over the keys in 2013. It sold its lease to, Vornado which then negotiated a new ground lease.
Rosen also had a ground lease with the Koreins at the Lever House at 390 Park Avenue — which he just ceded control of to Waterman Interests and Brookfield Property Partners. Rosen sold his lease to the new partners and still maintains an interest in the property.

David Goldsmith

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Is the Chrysler Building on the menu?

Aby Rosen hands over Lever House to Tod Waterman and Brookfield
RFR Holding chief will keep a minority interest in the landmark office tower at 390 Park Avenue

A partnership between Brookfield and Philip M. “Tod” Waterman III of Waterman Interests has taken over the Lever House from Aby Rosen and Michael Fuchs’ RFR Holding.
A source said Waterman will be responsible for all aspects of leasing and management of the landmark property at 390 Park Avenue.

The source said the new owners would be “investing a substantial amount of capital to restore” the office tower.

Rosen, meanwhile, is turning his charms on the Chrysler Building where he is planning a new observation deck, dining and retail — and is also trying to renegotiate its ground lease. Asked for comment on the Lever House, he emailed, “No comment. Sold our interest and kept a minority interest in the new venture.”

PincusCo first reported the news.
Rosen’s partner, Michael Fuchs, previously operated the building’s Lever House restaurant but the Sant Ambroeus group now operates what is known as Casa Lever.
Sources say except for one office floor, the restaurant and garage, the building’s remaining nearly 200,000 square feet across its 21 stories is available for lease through Alan Bernstein at Waterman Properties at rents estimated by CoStar at $102 to $124 per square foot.

RFR and the Waterman-Brookfield partnership were sparring in state court last fall over an appraisal that was needed for a rent reset tied to the property’s ground lease. That action was discontinued in December with prejudice and cannot be refiled. Formal agreements to transfer the ground lease were signed May 20.

At the same time, the Waterman-Brookfield venture terminated the ground lease with the Korein family, which owns the land under the office tower. Rosen’s RFR had defaulted on its loan on the property because of a rent reset in the ground lease, which would have escalated its annual payments to more than $20 million starting in January 2024 — a huge jump from the current $6.15 million.

Rosen had sued Waterman in November, accusing him of going behind his back to become his landlord at the tower. According to Rosen, Waterman offered to help with the struggling property, but instead teamed up with Brookfield to approach the Korein family and negotiate another lease for the building.

This new ground lease became a “sandwich” lease that sat between Rosen and the landowners — making the Waterman-Brookfield group Rosen’s landlord. That lease has now been recast to have started on May 20, 2020. It is also valued at $240 million over the term of the lease which ends on May 31, 2100, city records show.

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Ceruzzi’s $272M loan on Lipstick Building ground lease goes to special servicing
Developer has been seeking to sell ground lease since last fall

The coronavirus-fueled economic fallout has pushed countless hotel and retail property loans into special servicing. But one of the latest CMBS loans to run into trouble is from a different asset class altogether — the ground underneath a famed Midtown East office building.
The $272 million CMBS loan on the ground under the Lipstick Building at 885 Third Avenue has been transferred to special servicing, according to Trepp data. The reason is listed as “Imminent Monetary Default.” The borrower, Ceruzzi Properties, missed June’s payment; the loan had been paid through May 1.

Special servicer commentary on the deal indicates that the ground lease tenant — a partnership led by Argentina’s Inversiones y Representaciones Sociedad Anónima, or IRSA — defaulted on last month’s rent payment. “The borrower has expressed a need for relief, which was referred to the Special Servicer,” the commentary notes.
According to a lawsuit filed by a subtenant at the property last month — which has since been discontinued — Ceruzzi had sent a notice of default to IRSA on May 15. The annual base rent for the ground lease was about $18 million in 2017, and was subject to a potential “fair market value” reset on May 1, according to loan documents.
The debt-service coverage ratio for the ground lease was 2.0 in 2019, according to Trepp, indicating a rather solid financial position.
Representatives for Ceruzzi declined to comment.
In September, The Real Deal reported that Ceruzzi was seeking to sell the ground underneath the 592,000-square-foot office building after IRSA allowed an option to buy the ground underneath the 34-story tower to expire.
Ceruzzi and partners secured the financing for the fee and leasehold interests in the property in 2017, and the loan was packaged into a single-asset, single-borrower CMBS deal known as CSMC Trust 2017-LSTK. The developer owns about 78.9 percent of the ground outright, and the remainder in the form of a “sandwich” ground lease with another land owner.
Alongside Ceruzzi, Shanghai Municipal Investment owns an 80-percent stake in the borrowing entity, according to loan documents. SL Green also holds a preferred equity interest in the ground lease.
(Source: Loan prospectus, via Trepp.)
(Source: Loan prospectus, via Trepp.)

David Goldsmith

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Lipstick Building ground rent reset leads to appraisal dispute
Owner of tiny parcel under 592K sf Midtown East office tower seeks massive ground rent hike

Even in the best of times, market-value rent resets on ground leases have been notorious for causing disputes between building owners and the lessors of the ground underneath them.

And then there is what’s happening at the famed Lipstick Building, where the coronavirus has fueled an increasing number of problems that started in May. That’s when the office building owner — a partnership led by Argentina’s Inversiones y Representaciones Sociedad Anónima, or IRSA — defaulted on ground lease payments.

This caused Ceruzzi Properties, which leases the ground under the 34-story tower to IRSA, to miss a mortgage payment the following month, with the $272 million CMBS loan getting transferred to special servicing. That loan is now more than 30 days delinquent, according to Trepp.

The latest wrinkle has presented itself because Ceruzzi and partners Shanghai Municipal Investment and SL Green don’t own all of the ground under the building at 885 Third Avenue. Now, the LLC that owns a 5,500-square-foot parcel under the building, facing Third Avenue, wants to increase the ground rent nearly fivefold to $3.5 million a year. SL Green objects to the increase, and filed a lawsuit last month to have the property properly appraised, which would likely yield a lower value and lower rent.

Diagram showing location of Lot A. Source: Loan Prospectus via Trepp

Diagram showing location of Lot A. Source: Loan Prospectus via Trepp
According to the terms of the ground lease on the parcel known as Lot A, the annual rent was to be reset to 8 percent of the land’s market value on May 1. The ground rent for the next 20 years would be determined by an appraisal of the value of the land in 2020.
In SL Green and Ceruzzi’s view, 3 Company is relying on an unwritten agreement between two appraisers, from shortly before the onset of the coronavirus crisis. SL Green and Ceruzzi call the move “a desperate and belated attempt to avoid” taking into account the pandemic’s effect on real estate prices, “and the economic depression that has resulted therefrom.”

David Goldsmith

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Ashkenazy debt in doubt as trustee moves to end Surrey Hotel ground lease
Lender sought bankruptcy to preserve ground lease and protect collateral on shuttered UES property

In late April, Ashkenazy Acquisitions took the unusual step of pushing the Surrey Hotel into bankruptcy to protect its debt interest in the shuttered property from being wiped out by a ground lease default.
Ashkenazy’s involuntary petition was granted in July but the ground lease on the Upper East Side hotel is now likely to be terminated anyway.
In a court filing this week, the Chapter 7 trustee for the hotel’s estate said the lease on the 190-room Surrey “provides little to no value to the debtor’s estate, while simultaneously creating a substantial administrative burden.” The trustee added that ground rent arrears were “substantial in this case” and continue to accrue.

Ground rent currently costs the hotel $525,000 a month, and back rent has grown to over $2.6 million since the hotel was shut down at the start of the pandemic. The property at 20 East 76th Street has also amassed another $1.8 million in tax arrears, the motion notes.

The trustee has signed a stipulation with the owners of the ground under the hotel, which would surrender possession of the premises to them pending the court’s approval. A hearing on the expedited motion is scheduled for Aug. 13.

Although Ashkenazy had originally petitioned for a Chapter 11 bankruptcy to reorganize the hotel LLC, the bankruptcy court converted it to a Chapter 7 liquidation case, and appointed a trustee for the hotel’s estate.

The Chapter 7 conversion was caused by Ashkenazy and the hotel’s inability to agree on a budget needed to fund a Chapter 11 proceeding, Crain’s reported last month.
The hotel, owned by Denihan Hospitality Group, “has no funds or financing to re-open or operate going forward,” its attorneys wrote in court filings, which would prevent the LLC from remaining as a debtor in possession.

The ground owners’ lawyers noted that this bankruptcy case was “atypical in many respects.” Ashkenazy noted in its petition that bankruptcy court was “the only available forum for relief” at the time of the April filing because other courts were closed by the pandemic.

“Typically, a ground lease mortgagee, like [Ashkenazy], would act to preserve its collateral — the ground lease — by funding a debtor’s costs and protecting the leasehold,” the attorneys wrote. They concluded that it could not be a Chapter 11 case unless Ashkenazy commited to funding it himself.

The ground lessor is a partnership that once included the late George Kaufman, head of Kaufman Organization, property records and court filings show. A representative for the partnership declined to comment.
Representatives for Ashkenazy, Denihan and the trustee did not respond to requests for comment.

In court filings, Ashkenazy wrote that it was prepared to fund taxes for the hotel on a monthly basis, but refused to fund ground rent payments, arguing that “entitlement to rents is highly disputed at this point.”
Ashkenazy was also planning to file an adversary proceeding against the ground lessor in bankruptcy court, alleging a “history of bad faith” going as far back as 2014. That was when the ground lessor withheld consent for a deal that would have seen Ashkenazy acquire a 49 percent interest in the hotel from Denihan.

Ashkenazy sued Denihan — but not the ground lessor — in 2014 over its failure to close the deal, and the complaint was dismissed after a judge found that Denihan had made a “commercially reasonable” effort to get consent from the ground lessor.

According to the proposed adversary complaint, which has not been filed but was included as an exhibit for “informational purposes,” the ground lessor also allegedly prevented two other sales from going through.
The complaint alleges that it arbitrarily rejected sales offers “despite its awareness that the financial health of the Hotel was declining and continued to erode” even prior to the pandemic.

The $45 million leasehold mortgage on the hotel was originally provided by the Canadian Imperial Bank of Commerce, but was acquired by Ashkenazy in 2018, when it was already in default — “at a steep discount ” according to the ground lessor’s court filings.

The total amount owed on the loan, including interest and other fees, is about $60 million according to Ashkenazy.
If and when the ground lease is terminated, it is unclear what other assets the hotel LLC possesses, with which it would be able to pay back its numerous unsecured creditors.

David Goldsmith

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Staff member

Aby Rosen’s Gramercy Park Hotel faces eviction​

Hotel is behind on ground lease payments to Solil Management

The latest visit paid to the Gramercy Park Hotel was from the debt collector.
Aby Rosen’s RFR Holding, which owns the swanky hotel, is behind on $900,000 in ground lease payments, according to Artnet. A notice on the hotel’s door states that if Rosen does not pay by Dec. 28, his hotel could face eviction.

Rosen only owns the hotel, which before the pandemic was a go-to spot for art and fashion events. The estate of Sol Goldman owns the land underneath, which Rosen pays $5.3 million per year to lease.

The notice is signed by Louisa Little, an administrator at Solil Management, the company that represents Sol Goldman’s estate. Goldman was one of Manhattan’s largest landlords and at one period owned nearly 1,900 separate parcels, according to ArtNet.

Rosen bought the hotel with longtime friend hotelier Ian Schrager in 2003. The two redeveloped the property, and Rosen took full ownership in 2010.
The hotel had closed its doors to guests at the onset of the pandemic, but Rosen recently said he offered his employees who live in the suburbs the opportunity to stay there to avoid commuting to the office.

“I told everybody, ‘Guys, you want to stay Tuesday night or Wednesday? Be my guest. Breakfast is at 9. Then show up at the office when you feel like it,’ ” Rosen told Bloomberg News.
Hotels have been hit particularly hard by the pandemic. About 80 percent of hotel properties tied to the commercial mortgage-backed securities market are showing signs of distress, according to recent figures from Trepp.

David Goldsmith

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SL Green, Ben Ashkenazy duke it out over Madison Avenue office​

SLG bought debt on Ashkenazy’s 625 Madison position as crippling rent hike looms​

Two of New York real estate’s shrewdest chess players are attempting to outmaneuver one another for control over a billion-dollar Midtown office property.
SL Green Realty and Ben Ashkenazy have been on a collision course for the past several years that’s set to come to a head in 16 months, when the latter is expected to implement an astronomic rent hike on SL Green’s ground lease at 625 Madison Avenue.
The Marc Holliday-led REIT has some negotiating power: The company recently acquired a piece of debt that Ashkenazy borrowed against the ground under the Madison Avenue building, sources told The Real Deal, which gives SL Green leverage over its landlord. Court records show Ashkenazy had fallen behind on payments, and a judge in January ordered him to pony up more than $20 million.

But Ashkenazy — who went through with a rent hike on Barney’s Madison Avenue store that sent the company into bankruptcy, and threatened to “go nuclear” on the family that owns the Century 21 department store — is still in the driver’s seat when it comes to next year’s rent reset.
In papers filed in Manhattan state court, Ashkenazy Acquisition’s attorneys accuse “real-estate behemoth” SL Green of going out of its way to lean aggressively on the borrower over that $20 million — an attempt, the company says, to gain leverage in the ground lease negotiations.

“It should be reasonably apparent,” Ashkenazy’s lawyers wrote earlier this month in their appeal of the January decision, “that something else is driving [this] behavior.”
Representatives for SL Green and Ashkenazy declined to comment.
The two investors first squared off in 2014, when Ashkenazy bought the ground underneath SL Green’s building — a prime office property one block from Central Park — for $400 million.

The purchase price raised some eyebrows. SL Green was paying just $4.6 million a year in rent, hardly a figure that justified such a high valuation. But Ashkenazy was looking ahead to July 1, 2022, when the ground lease was scheduled to reset.
Marketing materials for the property projected the ground rent could go as high as $50 million. But Ashkenazy’s Michael Alpert, estimating in 2016 that the property was worth $1.4 billion, said that the rent could reach $80 million.

But SL Green eventually found a way to gain leverage over its landlord.
When Ashkenzy bought the ground in 2014, he financed the purchase with a $195 million mezzanine loan from the U.K.-based Children’s Investment Fund.
One of the loan’s provisions required Ashkenazy to pay down $40 million of the debt by November 2018. But when the deadline came, he had only paid down $30 million, leading to a kind of default that required him to pay down not just the remaining $10 million, but another $10 million on top of that.

At some point — it’s not exactly clear when — SL Green acquired a piece of Ashkenazy’s debt from the Children’s Investment Fund, a source with knowledge of the situation confirmed to TRD. Terms of the purchase aren’t public, but one debt expert speculated SL Green paid a premium considering its position with Ashkenazy.
In March of last year, Children’s Investment Fund filed a lawsuit to force Ashkenazy to pay the $20 million it says it’s owed. SL Green’s loan servicing arm, Green Loan Services, is listed as a party to the lawsuit as the special servicer, and the REIT’s attorneys at Fried, Frank, Harris, Shriver & Jacobson are handling the case.

In January, the judge in the case ordered Ashkenazy to pay the $20 million plus another $4 million in interest. Ashkenazy has appealed the decision, disputing the full amount of interest owed.

David Goldsmith

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Aby Rosen dodges liability at Gramercy Park Hotel​

Solil Management sued to end RFR Realty’s lease​

If someone pays for RFR Realty’s default at the Gramercy Park Hotel, a judge says it won’t be Aby Rosen.
Landlord Solil Management owns the dirt under the iconic hotel. The company sued to evict RFR and collect almost $80 million owed under the lease terms in April. The firm had been leasing the land for about $5 million per year, but stopped making payments in November 2020 after the hotel closed amid the pandemic.

A state Supreme Court justice has now ruled the real estate investor isn’t personally liable for the ground lease at the hotel, Crain’s reported. The ruling said the limited liability corporations that own the hotel could still be liable, although that remains to be seen; Rosen is the principal of those LLCs.

Between RFR falling behind on payments and Solil suing to terminate the lease, JPMorgan Chase sold a $75 million debt in January secured by the hotel to RDAC 8 LLC.
The hotel owner was compelled in July to pay $5.5 million in back rent and property taxes from November 2020, Crain’s noted. The status of the $80 million Solil was seeking has not been decided.

Solil’s lawsuit also involved allegations that RFR tried to renegotiate the 72-year lease at the hotel, removed art and furniture from the building, failed to make rent and tax payments, allowed the hotel to deteriorate, and that Rosen allowed his mother to stay at the hotel free of charge. Rosen denied all of those allegations.
RFR signed the lease in October 2006 to operate the hotel through 2078, according to Solil. Four years later, Rosen bought out his partner — hotelier and developer Ian Schrager — and took full control of the hotel.

Rosen has a history when it comes to claims of default and overdue payments.
In 2017, Rosen faced foreclosure at Lever House at 390 Park Avenue as he struggled to refinance a $110 million loan. A partnership between Brookfield and Philip M. “Tod” Waterman III ultimately took control of the building.
More recently, Rosen in 2020 fell behind on payments for a $25 million CMBS loan for four commercial condo units at the base of the Core Club, which he purchased in 2016.

David Goldsmith

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645 Madison ground lease trades to Titan Golden for $27M

Deal comes 2 months after East West Bank took over property in lieu of foreclosure​

East West Bank’s brief time as the leaseholder for 645 Madison Avenue has come to an end after the firm found a golden opportunity to move on.
Titan Golden Capital paid $26.6 million to East West Bank for the ground lease of the office building, PincusCo first reported. The deal was made through Titan Golden Property Investor LLC and works out to about $161 per square foot for the 164,000-square-foot building.

Titus Golden Capital has offices in Irvine, California, and are looking to hire in New York City, PincusCo reported.

The deal comes just two months after East West Bank stepped in to seize the property and Friedland Properties and Nightingale Properties lost possession. The takeover took the form of an assignment of lease in lieu of foreclosure.
The bank was responsible for $50 million in loans that aided the developers’ acquisition of the building’s lease in 2015.

The deal represents a major dive from the lease’s previous value. As of October, the lease was valued at $79.6 million, slightly more than the $76 million the developers paid TF Cornerstone and Pershing Square Capital Management’s Bill Ackman for the ground lease in 2015.
In 2015, asking rents for the building’s office space were believed to be more than $100 per square foot. The property included 36,000 square feet of vacant retail space at the time and the two companies were planning on infusing capital into the project, Nightingale’s first in Manhattan.

Nearly 50 Department of Buildings renovation projects were filed for the building, which cost more than $13 million, PincusCo previously reported.
Friedland and Nightingale put the building up for sale two years ago, but failed to find any takers. Marcus & Millichap were marketing the building and sought about $120 million for it, according to the New York Post.

David Goldsmith

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Staff member
This is strike 2 for Aby Rosen after losing Lever House. What will happen with the Chrysler Building?

Checkout time: Aby Rosen booted from Gramercy Park Hotel​

Judge orders RFR to hand control to Goldman family’s Solil​

Aby Rosen has officially overstayed his welcome at the storied Gramercy Park Hotel.
Rosen was ejected this week from his lease controlling the hotel by the judge presiding over a lawsuit filed by his landlord, the Goldman family’s Solil Management.

The 190-room hotel, which featured Danny Meyer’s Italian restaurant Maialino and works by such artists as Jean-Michel Basquiat and Damien Hirst, shuttered its doors as the start of the pandemic in March 2020 and never reopened.
Solil sued in April last year seeking damages of nearly $80 million and to oust Rosen from the property at 2 Lexington Avenue, which has been stripped of furniture and artwork and left to collect building violations.
“We believe the property is not being maintained and is deteriorating,” Janice Goldberg, an attorney for Solil at Herrick, Feinstein, said during a hearing last week.
Goldberg said Solil’s attempts to replace Rosen have been hindered because he won’t give the firm access to show the hotel to potential tenants.
“Right now we cannot say to prospective tenants when we have any realistic expectation of being able to deliver the premises if we were to be able to enter into a new lease,” she added.
A spokesperson for RFR, Roxanne Donovan, said, “Due to the impact of Covid and the terms of the lease, the tenant found it was no longer economically feasible to operate the hotel.”

While the judge ordered RFR off the property, the matter of damages is still left to be decided.
Rosen’s RFR Holding acquired the hotel with longtime friend hotelier Ian Schrager in 2003 and took full ownership in 2010. The ground lease on the property runs through 2078.
Solil Management had sued to collect nearly $80 million in rent, but the judge in the case ruled that Rosen wasn’t personally liable for the sum.
Solil has split their request for damages, laying out the $11.8 million figure and asking for additional “liquidated” damages that are yet to be calculated.
Rosen’s attorneys neither disputed that his company owed rent nor opposed the order of eviction. But they argued that a collective bargaining agreement governing the hotel prohibited him from voluntarily surrendering it.
The Gramercy isn’t the only trophy property that Rosen has had to give up. In 2020 he handed over control of the Lever House to Tod Waterman’s Waterman Interests and Brookfield after he got mired in a ground-lease dispute with his landlord at the property, the Korein family.
Those troubles haven’t sidelined Rosen, though. He recently closed on a $290 million purchase of the office building at 475 Fifth Avenue in Midtown.

David Goldsmith

All Powerful Moderator
Staff member

Rethinking the ground lease​

Inflation-based rent solved one problem for these long-term deals but is now creating another​

Vornado Realty Trust says the land beneath its office building at 330 West 34th Street is worth $145 million. The land’s owner, Haymes Investment Company, claims its value is $225 million — entitling Haymes to more than $5 million in additional annual rent.
Assuming no further hikes, that would be nearly $170 million over the course of Vornado’s 30-year lease. Vornado and Haymes are suing each other to make their respective valuations stick.

Ground leases, in which a party agrees to develop a vacant property that will eventually be returned to the owner, often after several decades, are ubiquitous in New York City. But so are the legal battles they cause.
Such disputes have embroiled some of Manhattan’s most iconic properties, including the Chrysler Building, the Plaza Hotel and Lever House. Nearly all of them spring from disagreements over how to calculate future rent.
Historically, rent is reset for these long-term leases every 20 to 30 years, often based on the estimated fair market value of the property if it were still a developable plot. The discrepancy between how appraisers interpret this often invites litigation.
To avoid that, some have opted for incremental increases based on inflation. This newer model worked when inflation was steady, providing relatively predictable rent growth. That dynamic has changed dramatically.
“There has been a shock to the marketplace,” said Tzvi Rokeach, a partner at Kramer Levin, during an industry event in May. “Just slow, periodic escalations over time are not going to work.”
For the 12 months ending in March, the Consumer Price Index increased 8.5 percent, the largest annual jump since December 1981, according to the U.S. Bureau of Labor and Statistics. This could spur parties in ground leases to revisit how they structure rent resets, potentially opting for other models, such as those based on a building’s gross revenue. But that could lead to the same discord that drove some land owners and lessees away from the fair market valuation structure.
“The problem is that it is fertile ground for disputes,” said Joshua Stein, a commercial real estate attorney. “Any opening you leave, that is the opening that is going to screw you.”

Getting creative​

With decades-long lead times, parties sometimes start fighting over impending rent hikes years in advance. The battle over the rent reset at 625 Madison Avenue, for example, has been brewing for a few years, with the ground rent expected to jump from $4.6 million to as much as $50 million. The fight escalated in December when SL Green sued owner Ben Ashkenazy over the rent reset process.
At the office building One Penn, owner Vornado is staring down a significant rent reset in June 2023. On an earnings call in May, CEO Steve Roth said the real estate investment trust expects its ground rent to jump to $25 million to $26 million, up from $2.5 million. Roth noted, however, that the arbitration process will be different from the one with Haymes on West 34th Street and that Vornado can “easily handle” rent of $26 million.

In the case of West 34th Street, Vornado has accused the appraiser, who selected the higher estimate put forward by the landlord’s appraiser, of failing to disclose potential conflicts related to a business relationship.
Speaking generally, Adam Gilbert, a partner at Nixon Peabody who focuses on commercial litigation and real estate valuation issues, said disputes often arise from “less than crisp drafting” of leases. Market fluctuation can also affect valuations. After the economy collapsed in 2008, appraisers had few land sales for comparisons and turned to alternative methods to assess properties.
“In a stable marketplace, you will see perhaps less of a difference in valuation,” Gilbert said.
As real estate investment trusts, Vornado and SL Green are limited in how they can negotiate rent resets, but some landlords and tenants have gotten creative. Janice Mac Avoy, a partner in Fried Frank’s real estate litigation department, said appraisals based on the fair market value of the land can make it more difficult for the tenant to secure financing, given the threat of an unknown and potentially massive rent hike.
She said landlords and tenants have turned to alternatives in recent years, including flat percentage increases, as well as those based on CPI and gross revenue. She expects the current market uncertainty to drive more parties to try these and other models for new ground leases and when negotiating renewals.
“A smart landlord who is looking at the long term is going to realize there is something in it for them to agree to modify those provisions,” she said, noting that the financial survival of the tenant is often in the land owner’s best interest.

Inflation woes​

To protect tenants against inflation, land owners can cap rent increases that are based on CPI. But most private owners do not favor such limits, said David Eyzenberg, president of Eyzenberg & Company, an investment bank that advises land owners on ground lease structures and raises capital for leasehold and leased fee transactions.
“It would be stupid to start with caps today,” he said, noting that owners would lose out if inflation exceeded them.
Sometimes owners will offer a compromise where the first few years of rent increases are uncapped, followed by a period when they have ceilings or a shorter time frame between rent resets.
Rokeach thinks land owners and lessees may increasingly look to a building’s gross revenue to determine ground rent, though he acknowledged that the model comes with its own challenges.
During a down market — during the pandemic, office and retail tenants struggled to pay rent and vacancy rates soared — basing rent on gross revenue could spell disaster for a landlord. Owners also sometimes suspect tenants will find ways to exclude certain income from revenue totals to drive down the ground rent, he said.
Stein echoed this concern, saying a ground lessee could artificially lower the rent levels for its subtenants. He did not dismiss the model entirely, however.
“It is something that has a ring of fairness to it,” Stein said. “You are protecting the tenant from an uneconomical situation.”
Eyzenberg said that model gets away from the purpose of a ground lease: to economically separate the land itself from whatever asset is developed atop it.
Stein said the expectations and standards for ground lease deals change “glacially,” so it will likely take time for ground leases to reflect today’s market turbulence. Bob Knakal, chair of New York investment sales for JLL Capital Markets, said the agreements will still need to rely on historical data and projections on where the market is headed.
“Ground leases are typically for 99 years,” Knakal said. “You can’t base a 99-year deal on one moment in time.”