RESURGENCE OF THE GROUND LEASE : Q & A WITH SKYLINE PROPERTIES CEO
Skyline Properties is a commercial real estate advisory firm . Traditionally , Skyline focuses on off-market investment sales , but over the last few years , Robert Khodadadian and his team have garnered attention guiding owners and tenants through the sophisticated yet lucrative process of ground leasing .
We caught up with Khodadadian , Skyline Properties ’ Founder , and CEO , for an overview on why the current market conditions have led to the recent resurgence of ground leasing in New York City .
What is a ground lease ? Robert Khodadadian : Simply put , a ground lease is a long-term net lease of land between an owner ( ground lessor ) and a tenant ( ground lessee ). Among other things , this arrangement allows property owners to maximize their asset ' s upside potential without incurring the expenses associated with a conventional sale , such as capital gains tax .
What inspired you to start introducing owners to the concept of ground leasing ? As the market evolved , we wanted to find a way to help both investors and owners make money on deals , so we looked to see how deals were structured in the past to guide us . We came to understand how well ground leases work for both parties , so we began reintroducing this concept with our creative approach , and it ' s been producing long-term positive outcomes for everyone who ' s gone down this road with us .
Are most owners familiar with ground leases ? How do they respond when you explain how they work ? Most owners either don ' t know anything about ground leasing or they ' ve only heard part of the story , so we created an informational website ( Groundlease . nyc ) to help educate them . The way ground leases are structured opens opportunities for owners who don ' t want to sell but are still open to doing a deal . Ultimately , owners should understand that a ground lease is just like any other type of real estate transaction in that both sides of the table need to feel like they ' re making a deal that works for them .
On the other side of the equation , an investor who ' s looking to purchase an office property south of 96th street in Manhattan should understand that there are only roughly 1,571 office buildings that are over 20,000 square feet , which means there ' s a finite amount of inventory . This knowledge helps tenants approach deals creatively as well .
Who should consider a ground lease ? Ground leases make the most sense for long-term property owners who aren ' t prepared to make the necessary capital improvements required to maximize their property ' s upside potential . Someone who owns a plot of land , a property with significant air rights , doesn ' t want or need to build , or someone who wants to ensure that their property remains in the family to produce generational income would also benefit from considering a ground lease .
What asset classes can be ground leased ? Technically , you can ground lease any asset class , but most commonly vacant land , industrial properties , office buildings , residential buildings , and hotels are ground leased . An example of recent ground lease transactions in New York City include : SL Green leased 885 Third Avenue , “ The Lipstick Building ”, to Ceruzzi Holdings ; Extell Development signed a 99-year lease for Goldman-owned properties at 516 East 14th Street , 530 East 14th Street and 222 Avenue A ; and Skyline closed 236 5th Avenue with The Kaufman Organization .
Is the owner stuck once the ground lease is in place ? Since the title to the property never transfers to the tenant , the owner retains the right to mortgage the leased property or sell it . In fact , the owner can borrow more money from the bank once the ground lease is in place because often their net income has increased substantially .
Once the tenant has committed to a ground lease , are they trapped ? The ground lease tenant retains the option to mortgage their lease or assign the lease to a new tenant . It ' s also worth mentioning that since the tenant is not on the title , the owner is not responsible for any debt they incur , so if the tenant default on the debt , the landlord isn ' t held accountable .
What makes an appropriate ground lease tenant ? Ground leases can be thought of as long-term partnerships . Therefore , it ’ s vital that landlords have partners who are knowledgeable about ground leases to provide the owner with tax efficient structures . The tenant also needs the financial ability to perform the renovations or development in the time frame outlined in the lease . When picking a ground tenant , owners should look for tenants who are willing to provide personal guarantees for the work they are saying they are going to do , and they should obtain a comprehensive understanding of the tenant ’ s financial history including defaults .
Can you give us a forecast for ground leases in New York City in 2018 and beyond ? I believe that ground leases are the future for real estate in New York City . Due to the current state of the market ground leases are becoming the most tax efficient way for long-term or generational property owners to get a deal done .
How do owners benefit from ground leases ? The property title never transfers to the tenant ; therefore , the owner stays the owner of the property while generating income on the property . The owner is not responsible for capital gains tax , unless there is an upfront payment , and in some cases the owner is eligible to avoid transfer tax payments . The property also remains in the family , which means the asset will generate a hassle-free income stream for generations to come .
The ground lessee ( the tenant ) is responsible for all the management , costs , and expenses of the leased property . By making capital improvements to the existing structure or in the case of a development site , constructing a new building the ground lessee will maximize the potential and improve the property . Many ground leases contain a reversionary clause , which transfers any improvements made by the tenant to the landlord at the end of the lease .
How do tenants benefit from a ground lease ? Many developers and commercial tenants have long been faced with property owners who ask for a price that isn ' t supported by comparable deals . The owners are emotionally attached to the asset , and they ' d rather sit on it than do a deal that makes sense for both parties . The tenant ’ s basis is significantly reduced because they don ' t need to invest upfront capital for a purchase . If an owner is unwilling to sell , a ground lease can still get a deal done that will give them long-term access to prime locations .
Are ground leases complicated ? The more knowledge each party brings to the transaction , the smoother it will go . To that end , our real edge at Skyline is our personal relationships with the most sophisticated real estate investors . For owners , this translates into not wasting time and getting a deal done correctly . Ground leases are considered sophisticated and complex transactions . If done correctly , ground leases can be tax efficient and protect both the landlord and the tenant .