Ground leasing is the latest domino to fall in the office-sector slump.
Negotiating rent resets for ground leases has become more contentious as office building owners look for discounts from the owners of the land beneath them, the Wall Street Journal reported. It’s become more complicated, too, because a paucity of sales and instability in the sector is making it difficult to agree on a land valuation, on which ground rent is typically based.
In the first quarter, investors spent less than $500 million buying Manhattan office properties, down from $5 billion in the first quarter of last year, according to data firm MSCI Real Assets.
Ground leases allow commercial real estate investors to divide the value of a property by treating the land and the building above independently. The building operator typically pays the landowner rent, which is adjusted periodically based on the land’s appraised value.
One example of the fights over ground rents is between Vornado Realty Trust and the Korein family, which owns the land under Penn 1, Vornado’s marquee office tower. At stake is how much rent the company will pay the Koreins over the next 25 years.
Early last year, Vornado’s Steve Roth estimated the annual rent for Penn 1’s ground lease might skyrocket to $26 million from $2.5 million. But by the end of the year, he expected the price to be far lower, given the state of the sector and other economic factors. The Koreins do not agree.
Building owners sometimes walk away from a property if the ground lease becomes too expensive. In that case, the ground owner takes over the building and becomes responsible for operating it, something many don’t want to do.
Vornado handed 608 Fifth Avenue back to the Korein family in 2020. Aby Rosen’s RFR relinquished Lever House to Tod Waterman and Brookfield that same year.
— James Van Bramer
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Commercial
New York
Safehold was top-performing REIT of 2019 and doesn’t own any buildings