Montgomery Street Partners (MSP), a well-established name in diversified commercial real estate investment, has announced the formation of a new venture: The Ground Lease REIT (GLR). This dedicated real estate investment trust will concentrate on the creation and acquisition of long-term, unsubordinated ground leases, marking a significant expansion for Montgomery Street Partners into this specialized area of real estate finance. In a noteworthy first transaction for the REIT, GLR has successfully acquired and simultaneously leased the iconic Hudson Hotel in New York City under a 99-year ground lease agreement with an undisclosed tenant.
The Hudson Hotel, a historic 24-story building dating back to 1929, located in Midtown Manhattan, has a rich history, including a previous conversion into a hotel by Ian Schrager. The recent transaction saw the undisclosed tenant initially contract to purchase the property from Cain International for $207 million. This contract was subsequently assigned to GLR, enabling Montgomery Street Partners‘ newly formed REIT to finalize the acquisition. Concurrent with the purchase, GLR entered into a 99-year ground lease with the undisclosed tenant, who is planning a significant redevelopment of the property into a luxury apartment building, capitalizing on the strong residential market in New York. To facilitate this ambitious conversion, Parkview Financial has provided $207 million in leasehold construction financing.
Max Nipon, Senior Vice President at Montgomery Street Partners, highlighted the strategic rationale behind the redevelopment, stating, “With apartment vacancies in New York near record lows and rents reaching unprecedented heights, the developer astutely recognized that the optimal use for the property was as a residential rental offering. This conversion will contribute to addressing the supply-demand imbalance within the desirable Columbus Circle submarket.” Nipon further added, “Our tenant partner effectively utilized our ground lease capital, combining it with leasehold financing to secure control of this prime asset and initiate its repositioning. We are enthusiastic about this partnership, given their exceptional track record and engagement of a top-tier team to execute this business plan.”
The legal intricacies of the acquisition and ground lease were expertly managed by Duval & Stachenfeld, with a team led by Danielle Ash, Morgan Stevens, and Jenna Imbrogno advising the REIT. Danielle Ash commented on the complexities of the deal, “Beyond the inherent nuances of the ground lease structure and related tax considerations, this transaction presented unique legal challenges stemming from the hotel-to-apartment conversion. Operating under a tight 60-day timeframe, we collaborated closely with our client to navigate these complexities, ensuring all parties were confident in proceeding with the transaction.”
Expanding on the financial advantages of the chosen structure, Max Nipon further explained, “Our ground lease, when combined with leasehold financing, offers our tenant partners a compelling financial execution with a reduced blended cost of capital.” This innovative approach underscores Montgomery Street Partners‘ commitment to providing flexible and efficient capital solutions in the commercial real estate market, and the Ground Lease REIT is poised to become a significant player in the ground lease sector.
