COLUMNS
“GROUND LEASE” … “LEASE EXPIRATION” … “RENT ESCALATIONS”
Steven Matz, Esq. Partner Romer Debbas LLP 275 Madison Ave., 8th Floor New York, NY 10016 smatz@romerdebbas.com (646)930-7776
The phrases alone are enough to send people walking away from these buildings in New York City who do not own the land upon which the building sits. Rather, the land is leased, and each lease has its own set of terms and nuances. Some of the landowners are educational or religious institutions, others are on land owned by a governmental entity.
buildings.
First, let’s take some of the mystique out of land leases, which can be used interchangeably with “ground leases.” While friends, colleagues and family will all have opinions, an apartment for sale in a land lease building may be a golden opportunity. Usually, prices per square foot are lower in these buildings; thus, you are receiving some of your appreciation on the front end.
There are two main factors in analyzing a land lease and ascertaining if it’s right for a purchaser: terms/length of the lease and rent escalations (if applicable). As for the length of the lease, some have clauses permitting renewal or negotiation while others may not. A typical land lease can expire on its face in 50, 60 or even 99 years from now.
When you look to sell the apartment, there may be a pool of people who don’t want to proceed, or even view the unit or make an offer. However, the owner of a unit with a land lease is likely getting the opportunity to live in an apartment they could not otherwise afford. Some of New York City’s toniest neighborhoods are home to land lease
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One thing to note is that while a land lease building makes a “rent payment,” which directly comes from the monthly maintenance or common charges, a “conventional” cooperative will likely have an underlying mortgage, where the loan must be paid back also from the monthly maintenance.
All of Battery Park City is built on land that is leased from the State of New York, with a master ground lease that had been set to expire in 2069. Just recently, this was extended to 2119. However, the main issue surrounding land leases is not so much the expiration, but the schedule of rent escalations. With just a few exceptions, most ground leases have a
set schedule of how much rent shall be paid and when. Some have escalations at a flat percentage year over year. Others have rent tied to the fair market value of the land, analyzed every five to 20 years. It should be emphasized though that the rent is just one piece of the monthly maintenance, which covers insurance, labor, energy and building services as well. Thus, a percentage increase in rent does not translate to the same increase in overall maintenance. In recent years, several condos and coops, particularly in Battery Park City, have been successful in renegotiating their rent schedules, changing the formulas on which it’s calculated, resulting in lower rent payments. While there are no guarantees, public policy and opinion have played a prominent role, particularly in land leases backed by governmental agencies. An apartment in a land lease building may not be for everyone but given the wide range of terms and provisions in these leases, it may behoove a purchaser to take a closer look if they’re interested in a particular apartment.
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