January 4, 2017
Property owner SL Green received a terrible surprise regarding the ground lease for its office building at 625 Madison Avenue, at 59th Street. The annual bill for SL Green’s ground lease could grow tremendously, making it impossible to profitably operate the building.
SL Green owns the office building at 625 Madison Avenue, but Ashkenazy Acquisition Corp. owns the ground underneath. SL Green pays its landlord $5 million a year. But the fine print of the long-term ground lease contract allows the landlord to adjust the rent based on the value of the land as a development site. The new rent could be as high as $80 million, depending on the appraisal of the land’s development value.
Many ground lease contracts have similar fine print. Hypothetically, landowners could hike up rents on building owners like SL Green, forcing them out and allowing the owners to redevelop the land.