Vornado Realty Trust is getting some reprieve in the annual ground rent it’s expected to shell out for the mega full-block Penn 1 redevelopment that’s part of its portfolio surrounding the Penn Station transit hub in New York.
A panel appointed to determine the ground rent payable for a 25-year period that began on June 17, 2023, has decided the annual rent payable will be $15 million, Vornado said Tuesday in a statement. That’s lower than the $26 million Vornado had projected in 2022.
A lawsuit is still pending between Vornado and the property’s landowner, which is said to be a private family. If the landowner should win in a final judgment on the ongoing litigation, the annual rent for the 25-year term will be $20.22 million, retroactive to June 17, 2023, Vornado said.
Vornado declined to comment to CoStar News beyond what’s in the statement.
Vornado in January 2022 exercised a 25-year renewal option on its Penn 1 ground lease, extending the term through June 2073 as the rent was to be reset in June 2023 based on fair market values, according to the company’s regulatory filings.
Prior to the scheduled rent reset, Vornado’s ground lease rent was $2.5 million annually, analysts following the situation said.
To be sure, while the reset rent is better than Vornado expected, Vornado acknowledged in filings it’s “exposed to risks” related to “properties that are subject to ground leases arrangements which could adversely affect our results.”
A case in point, a judge ruled against developer RFR Realty when it came to the control of the iconic Chrysler Building after the owner of the land, The Cooper Union for the Advancement of Science and Art, said RFR failed to pay some $21 million in ground rent since its last payment in May 2024. RFR had argued that the building had suffered the COVID-19 pandemic’s “deleterious economic effects” and the remote working trend that hurt office buildings in the city.
Analysts cheered Vornado's lower-than-expected ground rent for Penn 1, a Class A tower with more than 2.5 million square feet and direct access to Penn Station. Vornado has redeveloped the property to feature amenities including different food and beverage options, a Life Time fitness center, an Industrious coworking space, bleacher seating, and lounge spaces. The property has commanded top dollar rents in the so-called flight-to-quality trend.
Vornado’s “financials have been burdened by this hypothetically higher ground lease payment for the past 18 months,” Evercore ISI analyst Steve Sakwa said in a note Wednesday. “This is clearly a positive outcome for [Vornado] and shareholders.”
Describing the development as a “win” for Vornado, analyst Alexander Goldfarb at Piper Sandler said the current macro backdrop helped Vornado in getting the lower ground rent as “revaluing the site for purposes of setting the ground rent is challenged by the limited appetite for large-scale projects.”
As the Federal Reserve’s rate hike moves since 2022 and the pandemic-led remote and hybrid work pattern disrupted the office market and hurt deal and financing activity before some signs of improvement last year, industry professionals have said it’s hard to determine properties’ fair market value, which affects how ground leases are determined.
“This is an extremely large asset where very few buyers could have the financial wherewithal to do it,” Vornado Chief Executive Steven Roth previously said on the company’s second quarter 2022 conference call. “We think that all sort of plays to a constructive kind of a process where the outcome will be something that we can certainly live with.”
The “favorable outcome” for Vornado comes as an appraisal would be based on its “realistic transaction value, given the current environment and its highest-and-best use,” BMO Capital Markets analyst John Kim said in a report Tuesday. “With funding and construction costs rising and challenges to obtain development funding increasing, the site's estimated value was lowered.”