If you’ve ever gone shopping in New York City for a co-op or condo, you may have heard that some are on a land-lease. A small fraction of residential buildings in New York (mostly in Manhattan) sits on land-lease ground that does not belong to the building. What makes these properties attractive is that they typically sell for less, usually 20-30% less than similar properties without a ground lease. However, they do present risks and require diligent research before making any final decision.
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Land-Leases in New York CityLand-Leases in New York City
A land lease in NYC is usually for 99 years, with two 20-year extension options. Condo, co-op or cond-op 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 an apartment priced as much as 20% below similar homes, the ground under the building is likely a land-lease. Means 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. It is forcefully 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 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 LandGround 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. Why apartments there have such high monthly charges. In return, property taxes do not need to be paid because of their government agency status. Instead, a “pilot payment” is made, which goes towards the neighborhood’s maintenance and improvement.
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 OrganizationsGround Leases with Not-For-Profit Organizations
The Roman Catholic Church is one of the biggest private landlords in New York City. 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 problematic landlord when renewing the lease.
In general, not-for-profit organizations present lower risks with renewing a lease. However, you should still be cautious if less than 20 years are remaining on the land-lease.
Land-Lease Buildings with Private LandlordsLand-Lease Buildings with Private Landlords
When it comes to private landlords, this is where it can get tricky. The price of a land-lease can step up overtime at fixed intervals. The language in the lease will state how much this increase can be. If this is not n the agreement, you risk significant cost increases with little notice.
What Happens When a Land-Lease Expires Without Renewal?What Happens When a Land-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 means you are buying equity ownership, not real property. Should a land-lease not be renewed, the shares will plummet to zero for the shareholders — the reason why the value of land-lease properties in NYC depreciate as the land-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 land ease renewal is refused. With private owners, thou there is less leverage and a higher risk involved.
With proper research, a land-lease property can be a great deal, but it is approaching the end of that lease to be aware of the risks involved, especially with private landlords.