Durst feuds with Hell’s Kitchen ground landlord over reset of $6.8M leasehold rent

The Durst Organization as ground lease tenant is battling with a landlord group that owns the fee under an entire Hell’s Kitchen city block, over how to value the land for a rent reset. The current annual rent is $6.8 million.

This is a common problem in New York City, since small differences in interpretations of the reset process can yield enormously different valuations.

Case LINK
Court filings represent the position of one party and are not necessarily accurate or complete.

The landlord partnership, led by the Appleby family’s Four Plus Corporation, owns the fee interest in the city block, upon which the Durst Organization built three buildings, the Helena at 601 West 57th Street, the Via 57 West at 625 West 57th Street, and Frank 57 West at 600 West 58th Street. The buildings occupy the entire city block bounded by 57th and 58th streets and 10th and 11th avenues.

The landlord group filed the case in New York State Supreme Court in Manhattan yesterday, asking a judge to clarify how the two sides should interpret the language in the ground lease.
The Durst Organization signed the 99-year ground lease with the owners (under 10 separate entities), and the base ground rent, which is currently $6.8 million, is set for a reset.

As in many of these cases, the value of the lease depends on how the property is valued, which in turn depends on the parameters the lease sets for the reset. The resets typically seek to determine a value of the land as if it were vacant. The conflict in this case is over a 2013 restriction on the property, and if that restriction should be considered as part of the valuation or not.

In this case, the landlord says the property should be valued ignoring that 2013 restriction while Durst argues that the land should be valued with the 2013 restrictive declaration, which reduces the value of the land.

The parties envision a process known as “baseball-style,” in which each party picks an appraiser, then if the parties can’t agree on a value, they pick a neutral appraiser to select only one of the two valuations presented by
the parties. The landlord group picked Sharon Locatell, MAI, President, Appraisers & Planners, while the Durst Organization picked Albert Valuation Group New York.
According to the complaint, “Landlord maintains that (i) the Stabilization Date is February 1, 2007 and that the rent renewal date is, therefore, February 1, 2027; and (ii) the zoning to be considered when determining the Fair Market Value are those provisions that would govern the Land owned in fee simple, without regard to Tenant’s leasehold interest or the improvements that Tenant pursued… By contrast, Tenant takes the positions that (i) the Stabilization Date is March 1, 2007; and (ii) that an appraisal of the Land must consider zoning actions taken by Tenant that are specifically limited to Tenant and its leasehold interest, including, specifically, a Restrictive Declaration dated January 15, 2013…, Tenant is attempting to impose the 2013 LSGD [Large Scale General Development plan restrictive] Declaration upon the process as a means of depressing the Fair Market Value of the Land…While the 2013 LSGD Declaration binds Tenant and Tenant’s successors and assigns, it is expressly not binding on the fee or on Landlord…”

The lease says, “For each Lease Year commencing on the fifteenth anniversary of the Stabilization Date up to but not including the twentieth anniversary of the Stabilization Date, Six Million Eight Hundred Thousand Dollars ($6,800,000), payable in equal monthly installments of Five Hundred Sixty-six Thousand Six Hundred Sixty-six Dollars and Sixty-seven Cents ($566,666.67)… [The new reset base rent is] that is the greater of (a) the product of the Initial Adjusted Treasury Note Rate multiplied by the Fair Market Value and (b) the Base Rent due for the immediately preceding Lease Year. The twentieth (20th) anniversary of the Stabilization Date is March 1, 2027.”

The complaint does not specify an amout being litigated, the $6.8 million is a placeholder, being the last rent amount.

The neighborhood

In Hell’s Kitchen, The bulk, or 39 percent of the 40.8 million square feet of commercial built space are elevator buildings, with specialty buildings next occupying 18 percent of the space. In sales, Hell’s Kitchen has near average sales volume among other neighborhoods with $866.6 million in sales volume in the last two years and is the 13th highest in Manhattan. For development, Hell’s Kitchen has near average amount of major developments among other neighborhoods and is the 17th highest in Manhattan. It had 2.3 million square feet of commercial and multi-family construction under development in the last two years, which represents 6 percent of the neighborhood’s built space.

The block

On this tax block, PincusCo has identified the owners of two of the two commercial properties representing 690,367 square feet of the 690,367 square feet. The identified owner is Durst Organization. On the tax block, there was one new building construction project filed totaling 1,326,040 square feet. It is a 709-unit, 1,326,040 square-foot residential (R-2) building submitted by Thomas Duffe with plans filed September 24, 2010 and permitted February 11, 2016.

The owner

The PincusCo database currently indicates that Durst Organization owned at least 49 commercial properties with 2,194 residential units in New York City with 9,658,393 square feet and a city-determined market value of $4 billion. (Market value is typically about 50% of actual value.) The portfolio has $6.3 billion in debt, with top three lenders as Wells Fargo, Bank of America, and JPMorgan Chase respectively. Within the portfolio, the bulk, or 81 percent of the 9,658,393 square feet of built space are office properties, with elevator properties next occupying 17 percent of the space. The bulk, or 88 percent of the built space, is in Manhattan, with Queens next at 12 percent of the space.

The owners according to the Department of Housing Preservation and Development includes Jonathan Durst, head officer and Dan Mogolesko, agent. The business entities are Royal Realty Corp and The Helena Associates Llc.

The surrounding

This is the first commercial real estate event of interest identified within the 400-foot radius of 845 11 Avenue in the past 24 months.

Direct link to the property’s ACRIS page
Direct link to the property’s ACRIS page
Direct link to the property’s ACRIS page
Direct link to the property’s ACRIS page
Direct link to the property’s ACRIS page