The Problem of Ground Leases

Summary

Recent dramatic ground rent reappraisals of office buildings in Midtown Manhattan in New York City have caused many leasehold mortgage lenders to avoid financing ground leases with any sort of reappraisal provisions. The issue often turns on whether the land underlying the project is to be valued at its highest and best use as if vacant and unencumbered, or as presently improved and used, an issue with a long history in rent reset reappraisal proceedings. Inflation indexing and “modern” ground leases have been proposed to replace traditional ground lease structures, with limited success. Some version of rent resets utilizing “use valuation” might satisfy financing concerns in new ground leases.