Ground Leases and Assemblages

New York Real Estate Journal recently published an article written by Olshan Real Estate partner Thomas Kearns entitled “Ground Leases and Assemblages.”  Speaking from decades of experience in assemblages of multiple parcels representing both the ground landlord of a key parcel and the developer attempting to incorporate a ground tenant position in the assemblage, Mr. Kearns explains, “The ground lease structure reduces management headaches but also reduces some of the upside in value in exchange for a secure rent stream. The rent for vacant parcels does not truly become secure, however, until a new building is constructed on the parcel–once constructed, the building gives significant value to the tenant’s estate and, since a default in rent would deliver the building to the landlord without a payment, the incentive to stay current on rent is overwhelming.” He notes several complications that arise when a developer seeks to add a ground lease parcel to an assemblage: one instance is if a developer seeking to upzone a block can only secure the municipality’s approval if a park, school, or other amenity is built in parts of the assemblage. The ground landlord of the parcel on which the amenity would go will reject the idea as the amenity will reduce the parcel’s value. Mr. Kearns offers advice to ground landlords who face these and similar drawbacks: “the key element that ground landlords must focus on is to be in a position after a default by the ground tenant or the expiration of the term to independently operate a property which has not been reduced in value by zoning changes or other restrictions.”