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Understanding Land Lease Buildings in NYC: Risks, Opportunities, and Due Diligence

Land lease buildings in New York City offer unique opportunities for savvy buyers, as they typically trade at a discounted price due to the uncertainties associated with lease renewals. Understanding the implications when a land lease expires is crucial for buyers, and working with an experienced buyer’s agent can provide valuable insights into this matter.

Government-Owned Land Leases: Battery Park City

The outcome of a land lease expiration largely depends on the land owner. For example, Battery Park City, an entire neighborhood built on new land excavated from World Trade Center debris after the September 11, 2001 attacks, is owned and managed by the Battery Park City Authority, a government agency. In Battery Park City, buildings are charged “pilot payments” instead of property taxes, which the Battery Park City Authority utilizes to enhance and improve the neighborhood. The authority’s mission to maintain and improve the area assures buyers that land leases in Battery Park City will likely be renewed with reasonable terms.

Not-for-Profit Organizations and Land Leases

Not-for-profit organizations, such as the Roman Catholic Church, also play a significant role as land lease landlords in NYC. These organizations own substantial amounts of land with religious buildings and lease out land to condos and co-ops. While not-for-profit organizations present a lower risk profile than private landowners, they still pose a higher risk than government organizations like the Battery Park City Authority. However, the likelihood of complex lease negotiations is lower with not-for-profit organizations, reassuring buyers.

Private Landlords and Valuation Challenges

Land lease buildings in NYC constructed on privately owned land can be challenging to value and market, particularly as the lease expiration approaches. These buildings usually have a 99-year lease agreement with two 20-year extension options. A lease with only 20 years remaining presents serious risks for buyers. In the past, when inflation was high in the 1970s and 1980s, private landlords preferred land leases to be adjusted based on a cost of living or inflation index. However, in recent years, ground leases have been changed according to the market value of the buildings. Valuing these lease adjustments can be complex, involving appraisals and counter appraisals by both parties. Reviewing the ground lease language regarding rent step-ups is crucial for buyers to estimate future maintenance costs. The ground lease agreement also determines which party deducts property taxes.

Nightmare Scenario: Lease Expiration without Renewal

If a ground lease expires without renewal, it becomes a nightmare scenario for co-op and condo buildings. The ground lease agreement states that all structures and capital improvements on the land are forfeited upon lease expiration. Co-op shareholders face the loss of their equity ownership in the co-op corporation as their shares become worthless. This situation is exacerbated when the co-op corporation does not own the land, leaving shareholders with “lease equity” rather than actual property ownership. Negotiating a lease renewal with a private, for-profit landlord puts the co-op or condo board in a challenging position, and the uncertainty surrounding ground lease buildings in NYC often results in declining values over time.

Opportunities and Due Diligence

Despite the risks, land lease buildings in NYC can be attractive for specific buyers. These buildings often trade at a discount, offering affordability and lifestyle benefits. For example, buyers who prioritize affordability may find cheaper three-bedroom apartments in land lease buildings that would otherwise be out of their budget. Retired couples without children may not be concerned about the lease expiration in 20 years, making such properties a viable option. Purchasing property in a land lease building at a significant discount and enjoying lower monthly mortgage payments can be a compelling choice for these buyers.

Buyers should consult a reliable real estate attorney during legal and financial due diligence to determine if a building has a ground lease. However, there are some steps buyers can take to investigate this matter themselves. Reviewing the building’s annual financial statements is a good starting point. 

The title to the land will be listed as an asset on the balance sheet, while lease payments will appear as an expense in the income statement if there is a ground lease. The notes section of the financial report and the original offering plan may also provide information about the presence of a ground lease as a special risk. Public records on ACRIS can also offer evidence of a land lease, although data before 2005 or 2006 may not be available online. In such cases, physical verification from the City Registrar, covering Brooklyn, Manhattan, Bronx, Queens, or Richmond County for Staten Island records, is necessary.

In conclusion, land lease buildings in NYC present both risks and opportunities for buyers. Understanding the implications of lease renewals and the nature of the landowner is crucial in assessing the potential risks and rewards associated with these properties. Working with experienced buyer’s agents (like us!) and conducting thorough due diligence can help buyers navigate the complexities of land lease buildings and make informed decisions. 

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