Land Leases: Aw Freak Out!

  • Claudine O'Rourke
  • 12/7/18
 
Buyers hear the words land lease and they immediately dismiss whatever apartment they were considering because they think a land lease is some fatal factor attached to the apartment, like herpes. I’m here to tell you that not all land leases are bad. Don’t freak out.
 
Since there are only a handful of apartment buildings in the city with land leases (roughly 100, which is a lot less than people with herpes), it’s not something that you really need to worry about. Your real estate agent will be able to tell you whether a building sits on a land lease or not, as it may not be disclosed on consumer websites like Streeteasy.com. But, it will always be disclosed within our broker system. You should always be told upfront whether you’re viewing an apartment within a land leased building unless your broker is an idiot in which case fire them and hire me.
 
If you find yourself looking at a land lease apartment (don’t worry, I’ll define “land lease” in a minute), there’s one simple question that you should ask: “When does the lease expire?” If the answer is more than 30 years from now, then it’s business as usual; you should consider the apartment comparing all other aspects as normal. If it’s set to expire within the next 30 years, it’s a riskier purchase and it’s going to require more due diligence.
 
If I’m being honest with you, that’s really all you need to know. Your real estate attorney and broker should easily be able to uncover the rest. Having said that, if you’re a total research geek and google isn’t doing it for you, then feel free to read on and learn more about the exciting world of land leases.
 
All a land leased building means is that the coop (or in some rarer cases, a condo) does not own the land that the building sits on, so they lease it from the owner. This “ground rent” is rolled into the maintenance. If you notice an unusually high maintenance, this could be an indication that the building sits on a land lease (Anything around $2/sf is within normal range of monthly charges.)
 
All of Battery Park sits on a land lease because fun fact: When the Twin Towers were erected, the city dug two large holes in the ground for the building’s foundation. That dirt was dumped on the west side and created an extension of Manhattan land known today as Battery Park City. But of course, the city didn’t gift that land to developers; they didn’t even sell it to them! They kept ownership of that land and they have leased it back to every developer allowing the city to benefit from passive income in perpetuity. (Don’t even get me started on the virtues of passive income.)
 
Not all land leases are owned by the city, however. An individual landlord can own as well. (Can you imagine owning land in Manhattan? Who’s that lucky bastard?) What’s significant to know is that land leases endure for 99 years, at which point they have to be renegotiated. A real estate attorney will be able to review the lease in its entirety during the due diligence period. If there are periods of increase within the 99-year lease, he’ll enumerate how those increases will affect your maintenance.
 
I brokered a deal where the land lease had 98 years left to go. Under normal circumstances, of course, this should be business as usual—you’re beyond the 30 years, so no need to worry. However, the attorney uncovered major increases in the lease but only within the first 15 years. It was still a great deal—Here’s why.
 
The owner of the land was old as dirt and clearly wanted the bulk of his money before he kicked the bucket, so he imposed increases during and only the first 15 years. The board instituted what’s called a “flip tax,” to offset these increases so they wouldn’t have to raise the maintenance at all and the remaining 84 years of the land lease remained stable. This was a great solution by the board in managing the financial health of the building. If one dismissed this property merely at surface value because there was a land lease with incremental increases, they’d be overlooking a valuable option. (The building is 150 E 61st, by the way. Great value here.)
 
If a land lease is coming due within the next 30 years, there’s a complete unknown as to how much the next lease is going to be. The owner—let’s call him Art—could literally ask for millions of dollars more and bankrupt the building. Why would Art want to bankrupt the building that sits on his land? Answer: He wants to sell that land, thus giving him a huge chunk of money now so that he can retire with his 20-year-old girlfriend, Liv, in Bora Bora.
 
 

Stick with Me Here. Here’s How This Goes Down

Art raises the cost of his land to astronomical levels. The coop board responds in kind: they increase the maintenance fees in order to cover the cost. Unsurprisingly, that increase is unsustainable for the tenants/shareholders, so everyone attempts to sell. But, the increased fees have devalued the property, so no one wants to buy. Because the shareholders can neither sell nor afford their maintenance, they stop paying it—the building goes bankrupt because there’s no money to pay for any building expenses. Art can now sell his land to a new developer, and voila: Bora Bora with Liv, baby.
 
 

Sound Crazy? It’s Happened

And so has this: sometimes, the building has enough money in its reserve fund for a down payment and if it can also get lending, the coop can buy the land directly from Art. Artie gets what he wants (his money right now) and the building avails itself of the land leas. The maintenance will be very high for a while to cover the cost of the new underlying mortgage, but it’s a good move for the building in the long term. This is what 301 E 63rd Street did. (Names have been changed to protect the innocent.)
 
After reading all (or any) of this, would any idiot ever prefer an apartment within a land leased building especially if the maintenance was unusually high? I’m here to tell you that there’s a tailored deal for everyone, so don’t be so quick to judge because, yes. Yes, there is. Especially if you’re on a fixed income. Read on oh wise one, for your next lesson.
 
An apartment’s sale price is correlative to its maintenance fees. In other words, if the maintenance is $3 or more per square foot (remember, average is $2), then the sale price will be discounted to offset that elevated maintenance. A person over 60 may be happy to plunk down $600,000 in cash to live in a comparable $1M apartment with high maintenance fees. It’s the perfect way to stabilize their expenses and keep them low: 1.) they don’t want a 30-year mortgage because let’s face it, they’ll probably be dead by then, and 2.) renting would be double the price of the maintenance. (Rent increases exponentially every year, whereas maintenance only increases nominally.)
 
 

Let’s Practice the Math

Given fair market value, 1,000sf Apartment X should be priced at $1 million, with an additional $2/square foot in maintenance. But Apartment X is not priced at $1 million—it’s priced at $650,000, with a $3.40/sf in maintenance.
 
 

Is This a Good Deal

The difference in price versus worth is $350,000. A $350,000 30-yr fixed mortgage at 5% is almost $1,900 per month In this scenario, you’d only be paying an extra $1,400/ month in maintenance (beyond the normal) so you’re “saving” $500/month. Is the $500/month discount worth it? Maybe, if you want a $1M apartment and don’t qualify for a larger mortgage (ie: a larger down payment). So, if you don’t have the liquidity but you have the income, I say, this is a good deal for you! Even if the maintenance is high, it’s likely that the land lease has stabilized and so will the maintenance over the long haul. A high maintenance now is an average maintenance in ten years, and a low maintenance in 25. Check out 420 E 51st. Great deals here.
 
At the end of the day, you have to run the numbers, people. And if that just made your head explode, then simply know that your trusted real estate broker Claudine O’Rourke is not just a hat rack. This shit’s foreplay to me.
 
But in all seriousness, if you’re buying NYC real estate, you’re already making a sophisticated purchase. Land leases are just another quirky added element. Don’t complicate things. Just remember the under-over: 30 years. I got the rest.
 

Work With Claudine

Want a no B--S-- agent who knows her stuff and is nice?? Yah, nice. I love my job and I calculate debt to income ratios in my sleep! Nobody knows a co-op better than me. If you want someone shrewd who uses her kindness as a weapon, then I’m your girl.

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