Is paying less upfront for a co-op in a landlease building worth the risk?
This four bedroom, three and a half bath is for sale at 142 Duane St. in Tribeca, a landlease building. The co-op apartment recently had a $2,500,000 price cut to $10,000,000.
We're thinking of buying a co-op in a landlease building with a little under 50 years remaining on the lease. The land is to be re-assessed in 2025. We could afford to buy this co-op without a loan; if we buy in a traditional building, we would need a big loan. Which would be the better option?
Prices in landlease buildings are generally lower than conventional buildings to offset higher maintenance fees, so you'll pay less upfront, but more over time when you buy in this type of building. But there's an even bigger downside to consider: When the lease expires, the value of your co-op could decline, our experts say.
Only a small fraction of buildings in New York City are landlease, which means that they land they sit on is owned by a landlord—not the building. Landlease buildings are primarily co-ops, though there are a handful of landlease condos, including Brooklyn Point, which is owned by the developer Extell.
Landlease buildings do tend to have lower prices, but they also come with some additional expenses. Because the land is owned by someone else, co-op shareholders pay a portion of the land rent to the owner, which is usually incorporated into their monthly fees.
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"Landlease buildings are a hard sell because of the associated risks—that the co-op is vulnerable to a spike in the cost of renting the land that their asset occupies," says Gordon Roberts, a broker at Sotheby's International Realty. "From a broker’s point of view, it’s best to avoid them, as an unfavorable lease renewal can cause monthly maintenance charges to go through the roof, depressing sale prices."
If you are thinking of buying in a landlease building, it's important to do some research into who the landowner is and what their plans may be.
"It’s important to find out what the history of the landlease has been," says Deanna Kory, a broker a Corcoran. Knowing who the owner is, she says, "gives clues to what future negotiations could be. Check if there any parameters for rent increases, which will give you a clue as to where those might land."
Leases can range from 50 to 100 years. And as the lease nears the end of its term, values in the building can decline.
"One must view a cooperative on a ground lease that has no renewal options as a diminishing asset," says Jeffrey Reich, a partner in the law firm of Schwartz Sladkus Reich Greenberg Atlas. "As the ground lease termination date approaches, the value of the apartment would decline. At the expiration of the ground lease, the cooperative would cease to exist, and the shareholder would no longer 'own' their apartment, and would become a tenant of the ground lessor, pursuant to such rental laws in effect at the expiration of the ground lease."
It may be safe, on the other hand, to buy in a landlease building with a lease that is a long way off from expiring, particularly if you only plan to live in the property for short amount of time.
"If a lease has a long term left on it, say another 50 years, you may be able to get in and out as if it was a non-landlease building," Roberts says. "But the closer the lease is to expiration, the more difficult it will be to sell."
Even in a building with a lease that won't expire for many years, there are other caveats. For instance, it can be more challenging to get a mortgage for a co-op in a landlease building, because lenders may be concerned that the owner won't renew the ground lease. And your ability to take property tax deductions is limited, since the land is not owned by the co-op building and therefore it does not pay property taxes.
That said, some co-ops enter into negotiations with the lease holder to purchase the land, Kory notes. It's worth finding out whether the building you're considering may try to do this when the lease expires, which could solve many of the downsides of buying in a landlease.
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