Office Turmoil Roils Ground-Lease Negotiations

livemint.com:

For over a century in New York, commercial-property investors have carved up the value of the city’s skyscrapers by separating the land from the building and trading the pieces separately. But now, in the midst of one of the worst office downturns since World War II, that practice is escalating disputes between the owners of the different pieces. Under ground-lease arrangements, the building operator pays rent to the owner of the land.

Historically, these rents have been recalibrated periodically based on the land’s appraised value at that moment in time. That process, often contentious, is especially tricky now because of slowing property sales and turmoil in the office sector. Office-building operators are hoping they might be spared dramatic jumps in their ground rent in part because the office market is getting pummeled by high interest rates and the weak return-to-office rate.

Office rents have been declining since the pandemic, with building owners forced to offer significant concessions to attract tenants. “If I am a ground-lease tenant, right now is probably a good time to be doing a rent reset," said Joshua Stein, a New York real-estate attorney and the author of a coming book on ground leases. “The value of land is declining dramatically." Ground rents historically have been based on the appraised value of the land as if it were vacant.

But the value of land under office buildings is based partly on surrounding office-market values. Those values are difficult to determine right now because there has been a dearth of office-building sales. In the first quarter of 2023, investors purchased only $489.5 million in Manhattan office properties compared with $5 billion in the first quarter of 2022, according to data