Ground Leased Hotels

New York Real Estate Journal recently published an article written by Olshan Real Estate Partner Thomas Kearns entitled “Ground Lease Hotels” that examines the current hotel climate in New York City post COVID-19 and, in particular, hotels that operate on ground leases. Drawing on Olshan’s extensive ground lease practice, Mr. Kearns outlines some default scenarios especially in the wake of COVID-19: “First, it’s important to remember that the city’s hotel market had been hit hard over the last several years by the over-building of hotels, the rise of Airbnb and its competitors, and weak economic growth generally. Hotel room rates have been well below hoped for levels. And then the Coronavirus arrived.”  He continues by explaining the typical arrangements that are kept between the hotel and property owners “Ground leases are very long term (99 year terms are typical) arrangements under which the fee owner typically gives wide latitude to operate and manage the property to the lessee in exchange for a steady, easy to manage rent stream.” Due to the lock downs and a steady decline in tourism hotels have suffered immensely and have struggled to make their debt and lease payments. However, Mr. Kearns points out that there are still ways for hotels to survive. “In one matter we handled, a lessee invested additional equity by buying out its mortgagee at a discount. To avoid defaults, some fee owners may be willing to grant rent concessions or short- or long-term forbearance in exchange for commitments to upgrade the hotel or to reduce mortgage debt.” While helping lessees with these negotiations Mr. Kearns outlines some non-economic issues that may arise: “Has the lessee or its mortgagee been litigious? Has the lessee or its mortgagee had a history of transparency? Has the hotel been well run? Have investments been made to keep the hotel in top condition? Is the mortgagee prepared to take its share of the pain?” These may seem like small issues but it may allow the fee owner to hold to their lease which can lead to, “forcing the mortgagee to protect its collateral and, if it doesn’t, to terminate the lease so the fee owner can start fresh with a new operator.” Mr. Kearns concludes that this may lead to ground leases changing in the future to “adjust to changing market conditions.”