Why It's A Rough Time To Hold A Ground Lease In Manhattan

Manhattan’s surging market — particularly for residential and hotel space — is rippling through the borough’s office market and making things difficult for some office landlords.

Specifically, for the ones that lease, rather than own, the land where their buildings sit. Clauses in many ground lease agreements allow the landowner to raise the ground rent in proportion with booming property values, Crain's reports.

The mere possibility of the land the building sits on being used for a supertall Billionaires’ Row residential tower means that what’s called a rent reset could raise RFR's ground rent from $6M a year to $20M a year at Lever House, at 390 Park Ave.

It doesn’t matter that the building is landmarked or that it’s an office building. RFR has faced speculation that it may have to give up the building—arguably the crown jewel of its office portfolio—in the event of a rent hike of that magnitude.

Rent resets aren’t new, but stratospheric land values in many parts of Manhattan have meant that they’ve become increasingly high stakes for ground-lease holders.

"I have never seen so many disagreements over ground rent resets where the landowner and the leaseholder are so far apart on values," Fried Frank real estate attorney Janice MacAvoy told Crain’s.

At SL Green’s lease at 625 Madison Ave, the ground rent is $5M a year. But if the landowner, Ashkenazy Acquisition Corp, is right about what it thinks the site is worth—$1.4B or more—that ground rent could be jacked up to as high as $80M a year.

SL Green is not sold on that number.

"Expectations of astronomical prices and rents in the future are pure speculation and not representative of the current market," SL Green president Andrew Mathias (pictured) told Crain’s. [Crain’s]

UPDATE, JAN. 3 10:15 A.M.: A previous version of this story incorrectly identified the owner of 390 Park Ave. RFR owns the property. This story has been updated.