What happens when a land lease expires?

If you’ve ever gone shopping in NYC for a co-op or condo you may have heard that some are on land which is being leased. A small fraction of residential buildings in New York (mostly in Manhattan) sits on land that does not belong to the building. What makes these properties attractive is that they typically go for cheaper, usually 20-30% less than similar properties. However, they do present risks and require diligent research before making any final decision.

Land Leases in NYC

A land lease in NYC is usually taken out for 99 years with two 20-year extension options. Condo, co-op or condop buyers pay for a part of this lease when they make a purchase. It’s usually wrapped into maintenance fees and distributed according to the number of shares allocated to each unit.

If you see a property priced as much as 20% below similar properties this is likely because the ground under the building is being leased. This will mean higher monthly maintenance fees and chances are a portion of these are not tax deductible. In some instances, if a lease comes to an end, the building can revert to the owner. Effectively evicting the co-op, condo or condop.

However, if that lease still has a long way to go or it’s on government land there may be little to worry about. In general, it would be advised to not to buy a land leased property that is not on government land. As you’ll see, who owns the land plays a big part in deciding whether a purchase is risky or not.

Ground Leases on Government Land

It’s a little-known fact that all of Battery Park City is on a land lease. The entire neighborhood is owned and managed by the Battery Park City Authority. This is why apartments there have such high monthly charges. In return, property taxes do not need to be paid because of its status as a government agency. Instead, a “pilot payment” is made which goes towards the maintenance and improvement of the neighborhood.

Since the Battery Park Authority is a not-for-profit agency there is little risk that they won’t renew land leases with reasonable terms.

Ground Leases with Not-For-Profit Organizations

The Roman Catholic Church is one of the biggest private landlords in NYC. Along with the land their religious buildings are on they also lease out land for condos and co-ops. However, because they are a not-for-profit organization the chances are low that you will have a difficult landlord when it comes time to renew the lease.
In general, not-for-profit organizations present lower risks with renewing a lease. However, you should still be cautious if there are less than 20 years remaining on the lease.

Land Leases with private Landlords

When it comes to private landlords this is where it can get tricky. The price on a land lease can step up over time at fixed intervals. The language in the lease will state how much this increase can be. If this is not spelled out in the agreement you risk being subjected to large increases with little notice.

What happens when a lease expires without Renewal?

Should this happen the entire structure, along with anything added by a tenant, will become forfeit. Purchasing a co-op on a land lease really just means you are purchasing equity ownership, not real property. Should a lease not be renewed the shares will plummet to zero for the shareholders. This is the reason why the value of ground lease properties in NYC depreciate as the lease matures. The co-op or condo board knows they will be in for tough negotiations with a private landlord for renewal once that time comes. The more residents it has the less likely that a renewal will be refused. With private owners, thou there is less leverage and a greater risk involved.

With good research, a leased property can be a great deal but if it’s approaching the end of that lease to be aware of the risks involved. Especially with private landlords.