What Happens When a Land Lease Expires in NYC? - YouTube

What is a Land Lease Building in NYC Real Estate?

A land lease building is a condo or co-op building that does not own the land underneath the building itself.

What this means is that the building pays rent to the owner of the land, under the terms of a land lease.

Land leases are generally very long, and apartment owners pay for the land lease as part of their

normal monthly co-op maintenance or condo common charge payments.

You may be wondering: what happens when a land lease expires in NYC?

In most cases, buildings would simply renegotiate and renew the lease with the land owner well in advance of the expiration date for the current lease.

How risky the lease renewal process is depends on whether the land beneath a building is government owned or privately owned.

For example, most people do not know that all of Battery Park City is on a government land lease.

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.

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.

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Here's another good example: Did you know that the Roman Catholic Church is the biggest private landlord in New York City?

They 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 the time 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.

How risky is an expiring land lease for privately owned land?

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.

Due to low inflation, ground leases in the last 15 years or so have instead been stepped up according to the 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.

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 the land, including anything added by the tenant, is forfeited 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 effectively 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.

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.

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.