Dave Davis, Home Buyer in Fort Lauderdale, FL

what is the inherent danger in buying a land lease coop in NYC?

Asked by Dave Davis, Fort Lauderdale, FL Sun Aug 26, 2012

167 east 61st street

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11
Not a direct danger, other than the price per square foot will be higher due to above average property taxes. Hence why it's so expensive to buy and rent in battery Park City, I'll second anyone who says that there are better investments out there.
0 votes Thank Flag Link Sat Feb 9, 2013
Its not worth it right now. There are better investments out there.
0 votes Thank Flag Link Mon Nov 26, 2012
You have some great answers here already. You should review the land lease terms carefully and understand how often the rent steps (increases) are and how significant, when the lease expires and what is going to happen at that time (some leases have an option to renew at certain rent, some say they can renew at the market price that will exist at the time of expiration, etc. The less time is remaining until expiration, more uncertainty with an amount of future maintenance payment, since the lease payments are passed through to individual owners as a part of their monthly maintenance.
High maintenance is reflected on the purchase price, the higher the maintenance, the lower the price is.
0 votes Thank Flag Link Mon Nov 26, 2012
Hello Dave, consider that residents pay rent for the ground on which the building is located rather than owning it outright, as most co-ops and condos do. There is a potential difficulty when you decide to sell, buyers may hesitate fearing an increase for the ground rent in the future. Another concern might be about their prospects of selling to a future buyer, who would have similar concerns. Furthermore, the ground rent is not deductible; that’s in contrast to interest payments on an underlying mortgage that often covers the cost of a co-op’s ownership of that land.
0 votes Thank Flag Link Sat Sep 1, 2012
Your back is the against the wall when your building goes to renew its lease- they have no leverage. Second, the building may decide to buy the land, which is extremely costly in the short/intermediate-run. 301 E 63rd is a good example of this - apartments are going for under $100k

The buyer community is severely restricted for when you go to sell. Many if not most buyers will simply not consider a land lease.

But, on the "everything at a price" concept, you can buy in at a very very low price and presume you can still get out at a price not much lower later.
0 votes Thank Flag Link Thu Aug 30, 2012
Buying an apartment where the co-op corporation leases the land under the building creates uncertainties.

The co-op’s rental payments to the owner of the land are likely to be subject to adjustment from time to time. Often, the land lease specifies that the rent should be renewed at the “fair market value.” In such a case, this can cause sharp increases in the land rent in a rising or unstable market.

These leasehold rental payment obligations are then passed on to apartment owners in their maintenance fees.
Other leases may spell out a formula for rent increases. But even here, if the remaining lease term on the underlying land is for less than 30 years, there could be problems. Because many fixed-rate share loans are for 30 years, some potential buyers may shy away from buying the unit because of uncertainty about what a new lease will say.
There is one bright note, however. Because of all the uncertainties, apartments in leasehold co-ops typically sell at a discount.
Good luck!
Veronika Baba Kian Realty NYC
0 votes Thank Flag Link Mon Aug 27, 2012
Dave, I have worked with buyers and sellers with land lease properties in Manhattan. What I've found is the number one danger for a buyer is understanding the terms of what they are getting into.

They think they understand but miss sublte points in the structure of the building.

A few examples are:
- Most land lease buildings do no have any tax deductibility since they do not own the land (although they are paying the real estate taxes).
- Most have reset clauses in the land rent payments which can increase the maintenance dramatically even though there are 50 or 75 years left on the lease.
- Some have high investor concentrations which makes financing more of a challenge.
- I looked at a land lease with a buyer where the sponsor and commercial space picked up 80% the land rent cost but it was strategically worded where there exposure went down year to year so in reality the apartment buyers maintence woud increase quickly.

I don't know the specifics at Trump Plaza but can look into them. If you would like assistance , please let me know.

Thanks,
Arthur "Ungie" Golden
Prudential Douglas Elliman | 1995 Broadway, 4th Fl| New York, NY 10023
C: 212.866.8717 | P: 212.712.6078 | F: 646.497.5476 | E: agolden@elliman.com
Commercial/Residential Sales and Leasing Services
0 votes Thank Flag Link Sun Aug 26, 2012
The danger is mostly related to the uncertainty of what will happen to your maintenance when the ground lease comes up for periodic increases (or ultimate expiration). There are many example of buildings on former land leases that bought out the land owner. This could also result in an assessment to pay the cost of the buy-out. The other agents who answered brought up good points about lender concerns as well.
Charlie Summers
0 votes Thank Flag Link Sun Aug 26, 2012
You don't know what the terms of the lease will be as you reach the end of the lease. Those terms will effect the maintenance you'll be charged.

Also, as you reach the end of the lease, banks may become reluctant to loan in the building and pricing may slip.

If you need further help navigating this and other pitfalls in the Manhattan marketplace, call me at 917-517-8572.

Joyce Mincheff
VP, Associate Broker
The Corcoran Group
0 votes Thank Flag Link Sun Aug 26, 2012
Consult with an attorney who specializes in real estate beforehand, he/she can better advise as to any and all risks; check the land lease terms see how increases are structured, how much time is left on the lease, how much of the maintenace will be tax deductible, etc. There could be pitfalls in such a situation therefore conduct your due diligence before entering into a contract.
0 votes Thank Flag Link Sun Aug 26, 2012
Hey Dave,

Depending on how many years remaining on the lease you may have a difficult time finding a lender for this Coop. The same issue may arise when you are going to resell the unit.

So, Its something to keep in mind for the future.


Boris
0 votes Thank Flag Link Sun Aug 26, 2012
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