New York's iconic Chrysler Building, famous for its appearances in movies including "Godzilla" and "Spider-Man," is in the spotlight again, but this time its ownership is taking the lead role.
Private college The Cooper Union for the Advancement of Science and Art, owner of the land beneath the landmarked art deco tower, said it has taken control of the building after developer RFR Realty, which controls the ground lease, stopped paying some $21 million in rent since its last payment in May. Cooper Union, in a letter to RFR on Friday, said it acted in “good faith” to restructure the ground lease with RFR.
Cooper Union went on to say RFR failed to line up necessary financing despite a number of changes to the restructured leases and conversations with prospective investors.
“As a result of their nonpayment, they are in default of the ground lease agreement,” John Ruth, vice president of finance at Cooper Union, said in an emailed statement to CoStar News. He added that Cooper Union sent a lease termination notice to RFR on Sept. 13, two weeks before the lease ended Friday. Cooper Union also has hired Cushman & Wakefield to manage the property to ensure “a smooth transition” for the building’s tenants.
The Wall Street Journal earlier reported Cooper Union’s move to take over the Chrysler Building.
The children of Peter Cooper, who established the school in 1859, transferred the land where the building sits at 405 Lexington Ave. by 42nd Street to Cooper Union in 1902, a spokesperson for the school told CoStar News.
The bifurcation of New York skyscrapers typically leaves the owner of the physical space, also known as the leasehold interest, on the hook for ground lease payments to the owner of the land beneath the building. Those added expenses leave the leasehold owner less room for error if rental income falls.
Lease takeover
RFR’s involvement with the Chrysler Building began after it took over control of the ground lease in 2019 with its Australian partner Signal Holding before Signal was reportedly ordered last year to sell its stake in the building as part of its bankruptcy filing.
The partners bought the Manhattan leasehold interest in 2019 for $151 million from an ownership group that included the Abu Dhabi Investment Council, Tishman Speyer and Prudential Financial, which had spent about $720 million for the property in 2008, according to CoStar data.
For its part, RFR, in a lawsuit filed with the New York State Supreme Court on Thursday and reported earlier by real estate news website PincusCo, called Cooper Union’s attempt to evict RFR as “improper and fatally defective.” Cooper Union not only didn’t “properly serve upon” RFR “a correct predicate default notice and notice of termination,” but it also said the amounts Cooper demanded “in those improperly-served notices are materially incorrect.”
RFR said it’s invested more than $150 million in preventing the building, “an icon of the New York City skyline,” from “deteriorating and falling into disrepair and decline” amid the COVID-19 pandemic’s “deleterious economic effects” and the remote working trend that hurt office buildings in the city. The funding was also partly used to cover the building tenants’ rental shortfalls following the pandemic’s onset, RFR said, adding Cooper Union “obstinately refused to engage with” it “to effect reasonable and necessary modifications” to the amended ground lease, set to expire in 2147.
RFR said it “offered to commit hundreds of millions of dollars of additional capital expenditures and payments to” Cooper Union to bring the Chrysler Building “up to present Class A building standards in order to make it a premier, world-class office destination for decades to come,” but instead, it said Cooper Union “unreasonably insisted upon draconian terms and conditions that were not only unrealistic in light of the new economic environment precipitated by the pandemic, but were largely even more onerous than the financially impractical terms” of the ground lease.
Cooper Union increased the building’s annual ground rent to $32.5 million in 2019 through 2027 from $20.1 million in 2018, according to its report in February. The Financial Times had previously reported the ground rent was expected to increase to $41 million in 2028.
“Cooper Union’s misguided decision to share its inaccurate and self-serving letter with the media is a transparent and desperate attempt to deflect attention from, and create a false narrative around, RFR’s commencement of a lawsuit against it mere hours earlier,” Terrence Oved and Darren Oved of Oved & Oved, attorneys for RFR co-founders Aby Rosen and Michael Fuchs, said in an emailed statement to CoStar News on Monday. “While RFR prefers to resolve this matter amicably, and privately, if possible, it is also prepared for the alternative, if necessary.”
Rising vacancy
The million-plus-square-foot Chrysler Building, completed in 1930 and once the tallest building in the world, was designated a New York landmark by the city’s Landmarks Preservation Commission in 1978. The commission at the time described the building as a “stunning statement in the art deco style by architect William Van Alen” and “embodies the romantic essence of the New York City skyscraper.”
While its vacancy rate rose even before the pandemic — up from a low of 5.3% in the fourth quarter of 2014 to almost 29% in the fourth quarter of 2019 — the rate shot up to almost 38% in the first quarter of 2022 following the pandemic's start before declining to 14.3% this quarter, according to CoStar data.
IWG’s flexible workplace brand Spaces is its largest tenant with 125,000 square feet occupied, followed by law firm Moses Singer at 73,500 square feet, and Creative Artists Agency with 50,000 square feet, according to CoStar data. Most of some 30-plus tenants in the property occupy less than 10,000 square feet each, CoStar data shows.
Even though the high-profile building’s vacancy rate falls below that of 16.4% in the Grand Central market, where the tower has a direct connection to the transit hub, the building has trailed some new and renovated properties nearby. For instance, One Vanderbilt, developed by Manhattan’s largest office landlord, SL Green Realty, has what CoStar data shows as a zero vacancy rate. The market asking rent at the Chrysler Building is about $77 per square foot, in contrast to One Vanderbilt’s $217 per square foot, CoStar data shows.
“The building needs some deferred maintenance work,” Daniel Fishbein, an adjunct professor at New York University’s Schack Institute of Real Estate and a former real estate executive at firms including CIT Bank and Vanguard Group, told CoStar News in an email. Small floor plates with a lot of columns “are not ideal for many firms,” Fishbein said. “But it is a landmark building with outstanding architectural features and excellent access to commuter rail and [Metropolitan Transportation Authority lines]. So it has potential.”