City slaps Forest City with lawsuit over Times Square ground lease

Company wants subtenant rents factored into the price at 234 West 42nd Street

Mary Anne Gilmartin and 234 West 42nd Street
Mary Anne Gilmartin and 234 West 42nd Street

The city has filed suit against developer Forest City Ratner over the terms of a ground lease for an entertainment complex the developer operates on West 42nd Street.

Forest City [TRDataCustom] and the city are at loggerheads over whether or not, in determining the terms of the lease, the rents being paid by sublease tenants in the space should be taken into account. Forest City says they should, while the city claims the value should be determined by current market conditions rather than old leases.

Forest City has held the ground lease on the 312,000-square-foot complex at 234 West 42nd Street, which is home to AMC Theaters and Madame Tussauds, since 1996, but it’s due to enter its second term in 2018 and is therefore due for renegotiation. Forest City paid a base rent of $1.17 million a year for the first 20 years of the lease, according to public filings.

The differential between the two methods of interpreting the terms of the next phase of the lease is vast.

“This, and other disagreements between the parties, produce ground rent calculations by each party that differ by as much as a factor of 10,” according to the suit, filed Wednesday in New York State Supreme Court.

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An attorney for the city declined to comment.

In a statement, a spokesperson for Forest City said the company was “surprised and disappointed” by the suit, especially since the contract called for arbitration in the event of a dispute.

“We are confident we will come to a resolution soon, but regret the course taken by the city, which threatens a partnership that was critical to creating an enormously successful destination retail hub, anchored by AMC and Madame Tussauds,” he said.

Forest City previously filed suit against another of the building’s tenants, Jacob and Solomon Ben Moha of Benmoha Restaurant Group, who were guarantors to the Liberty Diner in Times Square, alleging they had defaulted on the rent obligations. The diner has since shuttered.

Forest City won the lease for the property decades ago as part of an effort by the city to clean up Times Square, which was plagued by drug dealing and prostitution. The company was able to build the New York Times tower as part of the same deal, though that building is not a subject of the lawsuit.

Forest City is not alone in its ground lease woes. Tenants are increasingly finding that fee owners are citing murky legal language and calculating significant rent increases based on hypothetical property value. For instance, SL Green’s ground lease at 17-story office building at 625 Madison Avenue would be worth tens of millions more based on its value as a development site primed for a Billionaires’ Row condo tower, rather than the value of the existing building, fee owner Ashkenazy Acquisitions argues.