If a land lease expires without being successfully renewed, then the land and everything built upon the land reverts back to the landowner.
This means the condo or co-op building and everything else attached to the land belongs to the landowner if a land lease expires, even if the construction of the building was paid for by the tenant.
As you would expect, land lease buildings in NYC typically trade at a discount because of the uncertainty associated with lease renewals. This presents a great opportunity for savvy buyers with experienced buyers’ agents if they understand what happens when a land lease expires.
If you’re working with a veteran buyer’s broker, he or she will advise you that what happens when a land lease expires depends enormously on who the owner of the land is.
Ground leases on government owned land
For example, most people do not know that all of Battery Park City is on a land lease or that the neighborhood is partially built on new land excavated from landfill material from the construction of the World Trade Center.
As a result, the land in Battery Park City is owned and managed by the Battery Park City Authority, a local government agency.
Ground leases are the reason Battery Park City apartments have such high monthly charges.
The Battery Park City Authority does not need to pay property taxes because of its status as a government agency.
In lieu of having to cover the land owner’s property taxes as is common in many ground lease agreements, buildings in Battery Park City are charged “pilot payments” which the Battery Park City Authority uses to build out and improve the neighborhood.
Therefore, an experienced buyer’s agent will be able to advise you that you have little to worry about buildings having land leases in Battery Park City.
The Battery Park City Authority is a not for profit, government agency whose sole mission is to maintain and improve the neighborhood. There is very little risk that they won’t agree to renew land leases with reasonable terms.
Ground leases with not for profit organizations
Did you know that the Roman Catholic Church is the biggest private landlord in New York City?
Not only do they own a lot of land with religious buildings situated, they also lease out a lot of land to NYC condos and co-ops.
Because religious institutions are also not for profit organizations, the risk of having a difficult landlord when it comes to renew your ground lease is lower.
While the risk is higher than government organizations like the Battery Park Authority whose sole task is to maintain the neighborhood, not for profit organizations like the Catholic Church still present a substantially lower risk profile than private land owners when it comes to what happens when a land lease expires in NYC.
Land lease buildings in NYC with private landlords
Land lease buildings in NYC built on privately owned land can present a major challenge in valuation and marketability, especially if a lease is close to expiring.
Land lease buildings in NYC typically have a 99 year lease agreement with two 20 year extension options.
Therefore, if you are only 20 years into the lease you might not have much to worry about. However, if you only have 20 years left on the lease you face some serious risks!
When inflation was high in the 1970’s and 1980’s, private landlords wanted land leases to step up according to a cost of living or inflation index.
Since real assets have rallied significantly when inflation was tamed, ground leases in the last 15 years or so have instead been stepped up according market value of the buildings.
The valuation process can be complex and can involve appraisals and counter appraisals by either party.
Therefore, a good buyer’s agent will advise you to check the ground lease language regarding step ups in rent to get an idea of how much your future maintenance might be.
The ground lease language will also determine which party gets to deduct the property taxes paid.
So what happens when a ground lease expires without renewal?
This is a nightmare scenario for condo and co-op buildings built on ground that they do not own.
The ground lease agreement states that all structures on and capital improvements of the land, including anything added by the tenant, is forfeit upon the expiration of the ground lease.
So the building that the co-op corporation paid for and built will simply be handed over the to landlord if a land lease is not successfully renewed.
For a co-op shareholder, that means the value of their shares will plummet to zero. Remember that they simply held equity ownership in a co-op corporation, not real property of any sort.
Furthermore, this co-op corporation unfortunately did not even own the land, in which case shareholders effective owned a portion of “lease equity.”
As you can imagine, the co-op or condo board will be in a pretty tough negotiating position when it comes to lease renewal with a private, for profit landlord.
Because of the uncertainty involved with ground lease buildings in NYC, they actually decline in value over time especially as a lease expiration date becomes imminent.
Note: A famous example of a ground lease building is the Empire State Building!
Why might land lease buildings in NYC be a good purchase?
Because land lease buildings in NYC trade at a discount and can be very difficult to value when a ground lease expiration is looming, it might present unique opportunities to a buyer who is more concerned about lifestyle and affordability.
For example, a land lease building in NYC might have cheaper 3 bedroom apartments available which would otherwise be out of a buyer’s budget.
Perhaps the buyer is a retired couple without children who do not care what happens in 20 years when the lease expires.
In situations like this, it may make a lot of sense for the buyer if they are both able to buy property at a significant discount plus enjoy lower monthly mortgage payments.1
1Lower monthly mortgage payments as a result of a discounted purchase price. Monthly maintenance payments are typically higher for a co-op building with a land lease than a comparable building that owns its land.
Pro Tip: Someone once famously said, you should buy or rent, but never do both. Perhaps there’s no need to be so extreme as to avoid land lease buildings altogether, but you should certainly be aware of the ramifications of buying an apartment in a ground lease building.
How can you check if a building has a ground lease?
A good real estate attorney will inform you of this material fact during legal and financial due diligence. However, you can find out yourself by looking at the building’s annual financial statements.
If the building has title to the land it sits on, you’ll be able to see land as one of its assets in its balance sheet. You will also be able to see lease payments as an expense in its income statement if it has a ground lease.
The notes section in the building’s financial statement will also mention the land lease if there is one. The original offering plan will mention the ground lease as a special risk if there is one.
Lastly, you may be able to find evidence of the land lease by searching through public records on ACRIS.
Note: ACRIS data won’t be available for deals done before 2005 or 2006 which was when the online database was rolled out. You can always check physically with the City Registrar which covers Brooklyn, Manhattan, Bronx and Queens. Staten Island is not in ACRIS at all, you’ll have to check with Richmond County for Staten Island records.
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Interesting article. I will say that the only coop in the city I’m aware of that has a land lease that expires in less than 30 years is 575 Park Ave (I recall, may have forgotten the exact address). Banks won’t lend to it and as a result there’s only been all cash deals in the building. A lot of them are trades between building residents who are essentially gambling on the outcome when the land lease expires.
What will happen when the land lease actually expires? I’m not sure, but I always counsel my clients in this type of situation that they are buying a depreciating asset. My guess is that there will be litigation. Will they win? Who knows, though some residents seem to be purchasing their neighbors’ units as a bet on winning some concession. Though the way land leases are written, the land and everything that is built on it (i.e. the coop building) reverts back to the landowner if the lease is not successfully renewed.
It’ll be very interesting to see. A situation like this hasn’t happened in my years of practicing real estate here in the city. Will be an interesting case study.
Interesting comment. Do you know the terms for renewal in that land lease agreement? Are there provisions for renewal?
From your comment it seems like there is not, and there is real risk that the landlord takes the building back.
I would also point out that it’s not just the risk of a land lease expiring that you need to worry about. If you’re buying in a land lease coop or building, you also have to be wary of the lease payment reset dates and terms. Obviously the lease payments will adjust over the life of a long land lease, but will they adjust periodically based on CPI (i.e. Consumer Price Index, basically inflation) or will the lease payments adjust based on some sort of an appraisal?
You can be in big trouble if the lease payments adjust based on an appraisal. Think about it. What if the land value doubles at the next reset date? All of a sudden the maintenance for everyone in the coop building will double. The offering plan will typically stipulate how the lease payments are reset. You need to check as getting your land lease payments reset by appraisal is highly dangerous. It’s much better to have you land lease payments be reset by CPI or some other similar metric.
Lastly, you really only have to watch out for land lease buildings in Battery Park City (BPC), Roosevelt Island and a handful on the UES in my experience. Sure I’m missing a lot of areas but happy to hear other areas that folks are aware of.
This is wrong: “most people do not know that all of Battery Park City is on a land lease or that the entire neighborhood is built on new land excavated from World Trade Center debris after the September 11, 2001 terrorist attacks”. Development in Battery Park City started in the 1980’s on landfill excavated from the original WTC construction in the 1970s.
Lol you completely misquoted the article there
Based on the above, can anyone provide a table of hypothetical values and hypothetical discounts from the original construction to today? For agument sake, say an apartment sold for $1M in 1987 what would the annual selling price and % discount look like if projected to 2048?
Another land lease, 100 W 57th Street (Carnegie House) is an interesting one. Very competitive pricing for the location and unit sizes. I believe the reset is happening 2065. Any thoughts on those?
Indeed, there appears to be over 20 listings for sale in the building as of this writing, many of which are being offered for well under 1,000 price per square foot. While we cannot comment publicly on the interior workings of a building, if the reset is happening in 2065 as you say (this is unverified by Hauseit), then a prudent co-op board would want to renew the land lease soon. Why? Because some banks may not provide financing to potential unit purchasers if a building has a shorter remaining ground lease term than a standard 30 year mortgage. We’d love to hear more about this specific building, please feel free to share another comment here, or in our forum!
It’s interesting that domestic buyers are afraid of land leases, whereas land leases are the norm in London and Hong Kong and buyers are used to it. It’s a common method for old families to hold onto the land over generations.
A building having a land lease isn’t a reason to be afraid of it. It simply means there are some additional questions to ask on what is going on with this property during the due diligence period.
Remember that land lease buildings are all co-ops, unless the landowner is the New York government. That’s why you only see land lease condo buildings in for example Battery Park City, because a NY government agency owns the land. Leasehold condos are simply not allowed under NY law.
As an interesting segue, that’s why many condops are land lease buildings. They would rather develop a condo as that’s the trend, but can’t. As a result they style it as a condop, i.e. a co-op with condo rules.
A few notable land lease buildings in NYC:
303 East 57th Street, The Excelsior, is a ground lease co-op building whose land lease term expires in 2064. 2038 or 2028 are the next change dates for rent step-ups. It has really high maintenance which just went higher. But it’s a really full service building (i.e. you won’t even have to push an elevator button).
215 East 96th Street is a land lease condop where the land is owned by the Islamic Cultural Center of New York, which operates a mosque next door on the adjacent lot. It’s a coop with liberal subletting rule (i.e. condo rules) and some investors like this building as a result.
100 West 57th Street is an interesting case where the real estate family that owns the land sold it to another real estate family and not to the coop. Remember that the land lease is still binding even if there’s a change of ownership, so the terms stay the same. The rent reset date is in 10 yrs for this building.
167 East 61st Street, Trump Plaza, is an interesting example where the coop corralled all the shareholders together to buy the land from the landowner. They paid $185mm for the land, which resulted in an assessment of ~$1mm per apartment. It takes a certain type of residency base to be able to come up with that kind of money!
333 East 91st Street, The Azure, is an example where the land is owned by the Educational Construction Fund, a NYC governmental agency. Because NYC doesn’t like selling land, they did a long term land lease with a developer. This agency typically owns land for use for schools or educational offices, but will occasionally lease out unused land in this fashion. In this case, the developer was able to renegotiate the land lease with the agency (i.e. option to purchase or extend for 25 more years at expiration) because buyers were getting spooked otherwise.
2 Fifth Avenue is an interesting case where the coop bought the land from the Rudin family in 2005, paying $29.25mm for the land. The coop financed the purchase and maintenance went up 14% due to debt service costs.
252 East 57th Street is another example where the landlord is NYC’s Educational Construction Fund. The developer built a great building with lots of glass and great views. This one’s land lease expires on 4/30/2114 and is the longest land lease we’ve seen, plus it has an option to extend for another 26 years. Furthermore, PILOT payments are on a fixed schedule through 2035 and payments for ground rent are also on a fixed schedule through 2090 with change dates in 2090 and 2114.
This is great information. Thank you for sharing. Where would you suggest is the best way to check who owns the land on some of these?
Hi Stacy, you can always view the property tax bill of any real property on the New York Department of Finance website. For example, for condos you’d be able to see the property tax bills of individual units, as well as the owner’s names. If it’s a land-lease co-op, my guess is if you look up the street address (without unit numbers since they own all of it) you’ll see the land owner’s name and mailing address. As always, we recommend consulting one of our partner lawyers if you have any further questions: https://www.hauseit.com/real-estate-lawyer-partners/
What happens when a land lease expires? Well, if it’s not renewed then a leasehold interest is just there, ownership interest in a lease. Thus, just like my office lease, when it expires you’re expected to move out and leave everything as is. There is no automatic buyout and the building and anything attached to the property/land belongs to the landowner.
However, that is a worst case scenario and I’ve never seen anything reach that critical of a stage in NYC. For example, did you know that all Battery Park City condo buildings have the same land lease expiration date in 2069?
As a result, it’s rather inconceivable that in 2069, the Battery Park City Authority, a government agency beholden to the people, will refuse to negotiate and kick out all the voters in Battery Park City.
In fact, some Battery Park City buildings have already gone through a rent change date. A few buildings got together with their government representatives and negotiated a compromise, and therefore got a smaller increase that was more affordable.
It’s very likely that all BPC condo building land leases will get extended before 2039, otherwise banks won’t be able to finance and extend a standard 30 year mortgage.
What are PILOT charges in Battery Park City condos?
PILOT stands for Payment in Lieu of Taxes, and applies to leasehold condos only where the landowner is the government. The government as the landowner is exempt from paying property taxes to itself. However, the government wants to charge an equivalent of what property taxes would be if it wasn’t a landlease building, so they created PILOT.
Fun facts: Brooklyn Bridge Park is very similar to Battery Park City. Remember that BPC wasn’t there before, it was land created from the debris from the World Trade Center construction, and built into the river.
So how do land lease payments usually work? Well there’s usually an initial period of built-in increases in rent, such as a 3% increase per year that is predictable.
However, after 25 years or so, there may be a rent change date, and the 3% annual increase doesn’t apply anymore. Instead, there might be a complicated formula to calculate the new rent, such as a percentage of the appraised land value built into a formula etc. Usually there will be a lower limit on how low it can go, but often there won’t be an upper limit on how high it can reset. This unpredictability is not optimal.
Of course, land leases will vary by building, and I’ve heard of some land leases for example in Jackson Heights which will automatically renew for another 100 years with no payment exchanging hands at expiration.
P.S. Remember that you can use ACRIS, and if not then your title company, to find out who the true landowner is! You’ll be able to find the original deed.
Anyone know the Land-lease situation for Brooklyn Point? Any serious concerns for this property? Thanks.