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Lawsuit: after signing 20-year lease in 1999 with 20-year renewal, McDonald's across from Atlantic Yards site faces huge rent hike because landlord would rather build tower

Landlord hits Brooklyn McDonald’s with super-sized rent increase, the New York Post reported in an article that went online in the evening Saturday, 11/30/19, based on a federal lawsuit filed 11/15/19.

The gist: while McDonalds at Vanderbilt and Atlantic avenues in Prospect Heights opened in 1999 with a 20-year lease, and an option to extend it for 20 more years, a new plan for high-rise development at the site, premised on a rezoning, has led the landlord to propose jacking up the rent, from a possible $16,000 or $23,333 to $90,000 a month.

McDonald's has gone to court to argue that the proposed rent is unfair, based on an inflated land value, rather than the current land value, which should reflect the current zoning, which is mostly M1-1 (manufacturing), and wouldn't allow high-rise residential.

But Atlantic Yards, announced in December 2003, would extend to Vanderbilt Avenue across the street. So the possibility of new development makes the owner/leaseholder of the McDonald's property see new dollar signs.

Presumably, something will be built there--but the questions are: how big, and what's McDonald's owed for a buyout?

Not much of a response, yet

Writes the Post:
Vanderbilt reportedly wants to construct a 19-story building on the land. Vanderbilt spokesman Tom Li said, “I think there’s two sides to the story,” he but declined to comment further.
Um, "reportedly" means coverage by me in this blog and by the Brooklyn Daily Eagle, which went into considerable detail.

My article included this quote from Li: "This is a very long-term plan as we have a long-term leaseholder currently, but we are interested in the potential for a project that could provide affordable housing and other community benefits at this underutilized site."

It may not have been that long-term a plan, after all. And it puts in perspective the seemingly low value of the $7 million, 99-year ground lease signed in 2017.

Looking at the lawsuit

The court file includes only the complaint, McDonald's Corporation v. Vanderbilt Atlantic Holdings LLC, not any response, so for now it's a one-side dispute.

The fast-food restaurant, according to the suit, should be able to stay until April 2039. "By attempting to corrupt a contractually-required fair market rental valuation process," the suit charges, "Vanderbilt seeks to impose an unfairly high rent on McDonald’s for the last twenty years of the lease with the hope that McDonald’s will vacate the property, thereby allowing Vanderbilt to more quickly redevelop the parcel into a more lucrative, high-density residential complex."

"In furtherance of its plan, Vanderbilt paid a lobbying firm more than $50,000 to convince government officials and community members to support a rezoning of the property," the lawsuit states. "And this past summer, Vanderbilt pitched its plan for a large-scale residential development on the property to one or more members of the Community Board 8 Land Use Committee. These actions are not at all consistent with the actions of a landlord that intends to honor its contractual obligations to a tenant with nearly twenty years remaining on its lease."

That refers, I suspect, to a meeting with Gib Veconi, a member of the committee, who told me he wasn't representing the board at the meeting.

What's the valuation?

McDonald’s argues that Vanderbilt is not cooperating in good faith in the fair market rental valuation process called for in the lease, thus trying to push the restaurant out or "pay exorbitant rental payments" for 20 years.

McDonald’s entered into a ground lease with Anthony M. Musto for the parcel, known as 840 Atlantic Avenue, Brooklyn. The Lease required McDonald’s to pay rent in the following amounts for the initial twenty-year term of the Lease:
a. April 9, 1999 to April 8, 2004: $9,166.67/month ($110,000.04/year)
b. April 9, 2004 to April 8, 2009: $10,541.67/month ($126,500.04/year)
c. April 9, 2009 to April 8, 2014: $12,122.92/month ($145,475.04/year)
d. April 9, 2014 to April 8, 2019: $13,941.00/month (167,292.00/year).
Assuming a long-term presence, McDonald’s remodeled the restaurant in January 2018. The lease is supposed to be automatically extended for four successive option periods of five years each, with the rent set at the greater of 80% the Fair Market Rental Value of the premises, or $16,032.58 a month, to then be increased 15% in the three future periods. (Musto is now a partner in Vanderbilt, which also involves the Rabsky Group.)

Both sides chose appraisers. The landlord arrived at a valuation of $1,348,000, with an estimated annual rent of $1,078,400 ($89,866 per month), while McDonald's arrived at a valuation of $350,000, with an estimated annual rent of $280,000 ($23,333 per month).

The landlord's appraiser used land sales, and did not take into account the existing lease, while McDonald's appraiser used ground leases.

Moreover, McDonald's charges, the landlord claims that a third appraiser should not be allowed to discuss valuations with the other two appraisers. So McDonald's doesn't want the third appraiser to proceed until there's agreement on the valuation methodology.

It has asked the court to order the landlord to cooperate in good faith, and to order the rent be set at its appraiser's level. Alternatively, if a third appraiser is needed, the three should be required to work cooperatively.

Some context


  1. Anonymous2:16 PM

    I can't decide whether to cheer for the exploitative Fortune 100 company or the mid-tier, exploitative landlord. Decisions, decisions...


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