Back to the Future: A Q&A With Skyline Property’s Robert Khodadadian on Ground Leases
Skyline Properties is a commercial real estate advisory firm that has historically focused its core business on off market investment sales.
Over the last few years, however, Khodadadian and his team have garnered attention by guiding owners and tenants through the sophisticated yet lucrative process of ground leasing.
We spoke with Founder and CEO Robert Khodadadian for an overview on ground leasing in New York.
Commercial Observer Industry Insights: 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 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.
What inspired you to start introducing owners to the concept of ground leasing?
RK: As the market evolved, we needed 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 help guide us and what we have found is how well ground leases have worked for both parties. So, we are reintroducing this concept, while applying our own creativity and it’s producing long-term positive outcomes for everyone.
Are most owners familiar with ground leases and how do they respond when you tell them?
RK: Most owners either don’t know anything about ground leasing or they’ve only heard part of the story. The way ground leases are structured opens up opportunities for owners that don’t want to sell but are still open to doing a deal. On the other side of the equation, for an investor looking to purchase office properties in Manhattan south of 96th street, there are roughly only 1,571 office building that are over 20,000 sf so there’s a finite amount of inventory. This means that tenants are open to approaching deals in creative ways as well. Ultimately, owners understand that a ground lease is just like any other type of real estate transaction, both sides of the table need to feel like they’re making a deal that works for them.
Who should consider a ground lease?
RK: Ground leases make the most sense for long-term property owners who themselves are not going to put in the capital improvements to maximize the potential upside, someone who owns a plot of land or property with significant air rights, but they don’t want or need to build, or to ensure a property remains in the family producing generational income.
How do owners benefit from ground leases?
RK: 1. Title to the property never transfers to the tenant, therefore, the owner stays the owner of to the property while generating more income on the property.
- The owner is not responsible for any capital gains (unless there is an upfront payment) or and is eligible to avoid transfer tax payments in some cases.
- The property remains in the family. This means that asset will generate hassle-free income stream for generations;
- The ground lessee (the tenant) is responsible for all the management, costs, and expenses of the leased property.
- The ground lessee will maximize the potential and improve the property by making capital improvements to the existing structure or in the case of a development site, they will be constructing a new building.
- Many ground leases contain a clause (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?
RK: Developers and commercial tenants have long been faced with property owners asking prices that aren’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?
RK: Just like any transaction, the more knowledgeable the parties to the transaction are, the smoother it is. To that end, our real edge is our personal relationships with the most sophisticated real estate investors, which for owners translates into not wasting time and actually getting a deal done correctly. Ground leases are considered sophisticated and complex transactions, because if done correctly can be tax efficient and provides protections for the landlord and the tenant.
What asset classes can be ground leased?
RK: Technically, you can ground lease any asset class, but the most common are vacant land, industrial properties, office buildings, residential buildings, and hotels. An example of recent ground lease transactions in New York City include: 885 Third Avenue “The Lipstick Building” which was sold by SL Green to Ceruzzi Holdings; Extell Development signed a 99-year lease from Goldman-owned properties at 516 East 14th Street, 530 East 14th Street and 222 Avenue A, as well 236 5th Avenue Skyline closed with The Kaufman Organization.
Once the ground lease is in place is the owner stuck?
RK: Since title to the property never transfers to the tenant, the property owner still has the options to mortgage the leased property or sell it. In fact, owners can borrower more money from a bank once a ground lease is in place because often times the net income has increased substantially.
Once the tenant has committed to a ground lease, are they trapped?
RK: The ground lease tenant retains the option to mortgage their lease or assign the lease to a new tenant. However, since the tenant never goes on title, the owner is not responsible for any debt they incur, so if they default on the debt the landlord isn’t responsible.
What makes an appropriate ground lease tenant?
RK: Ground leases can be thought of as long-term partnerships. Therefore, it’s vital that landlords have the right partners who have the knowledge in ground leases to provide the owner with tax efficient structures, coupled with the financial ability to perform the renovations or development in the timeframe set forth 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?
R.K.: I honestly believe that ground leases are the future for real estate in New York City. With the limited availability of land and properties that are not controlled by families or companies that hold on to their assets for generations, ground leases bridge the gap in allowing these owners to actually transact.