Land owners to ground leaseholders: Surprise! Pay up!

The site at 625 Madison Avenue may be occupied by a 17-story office tower — but it can be billed as if it were a vacant lot.

That’s what SL Green Realty [TRDataCustom] and other ground leaseholders are learning the hard way: Landowners, thanks to some murky contract language, can calculate rent increases based on hypothetical property value, i.e. as if the property were vacant, Crain’s reported. For SL Green’s Ground Lease On Madison Avenue, that means landowner Ashkenazy Acquisition Corp. could technically jack up the $5 million annual rent by tens of millions of dollars. The reason for this is location, location, location: If the Madison Avenue office building were a development site, it could instead be home to a Billionaire’s Row condo tower.

SL Green’s president, Andrew Mathias, disagreed.

“625 Madison has been a great investment for this company since the day it was acquired, and we have every expectation it will continue to perform for the company well into the future,” Mathias said. “Expectations of astronomical prices and rents in the future are pure speculation and not representative of the current market.”

Michael Alpert, president and vice chairman of Ashkenazy, said the property is now worth at least $1.4 billion, which would allow the ground lease rent to reach $80 million per year by 2021.

Landowners and leaseholders have long fought over ground lease rental resets, but in the current market — where residential, retail and other uses may be more lucrative than office — these disagreements are on the rise, Crain’s reported.

“Ground lease rental resets can be exceedingly unfair to the leaseholder,” Eugene Pinover, chairman of DLA Piper’s real estate practice. “A higher value gets read into the building because the market may be hot, but the leaseholder is still stuck with the property as it is.” [Crain’s] — Kathryn Brenzel