Wednesday, May 7, 2008

Ground leases...oh joy, oh rapture

I've done a ground lease deal or two in my time. They are fun. But if you are buying a building subject to a ground lease you have to make sure you comply with the lease terms or you may have to face the consequences.

Such is the case at the Drake Hotel, where the ground lessor is suing the ground lessee, alleging a default under the lease for, among other things, failing to provide the lessor with copies of financing and hotel management documents. All I can say is good grief. One thing I've always liked about being the ground lessor is the ability to just sit down, be quiet and collect rent. Obviously that isn't the case here, and I have seen and been involved with matters where the ground lessor raised a fuss. Here's an example of one.

Full disclosure: the lessee is represented by my good friend and former colleague, Gene Leone. Gene is quoted in Tom Corfman's story as saying, “In 26 years of practice I have seen some very silly things, this is near the top.” I have not read the lawsuit, read the lease or contacted Gene about this (setting up a golf game with him is my priority), but if Gene said what he said, I'm inclined to believe him. Why? Simply stated: Gene's earned that level of respect from me over nearly a decade. (Additional full disclosure: I have represented Walton Street Capital, L.L.C., one of the JV parties of the lessee, in the past, though not on this deal.)

By the way, I recommend Mitchell Passell's book Empire if you want to learn more about ground leases from a layman's perspective. It is a fun read involving many of the characters of New York real estate, including Donald Trump and Leona Helmsley.


Deal Junkie said...

my head hurts.

Doug Cornelius said...

The tough part of ground leases is that when buying a tenant's interest is one, the price is lower. Since the transaction price is lower, the client thinks the legal cost should be lower.

But in fact the transaction is much more complicated and requires much more legal involvement.

Clients hate the legal fees for buying a ground leased property.

David Stejkowski said...

I wonder when clients will realize that there is often no correlation at all between purchase price and complexity. Sometimes the smallest deals have the most headaches.