What Lies Beneath

Among New York City co-ops, the land-lease is a rare bird. Unlike the vast majority of buildings that own the land on which they sit, the city’s approximately 100 land-lease cooperatives are based on an unconventional arrangement: The co-op owns the building but leases the land from a third party for very long periods, typically 99 years. Many land-lease co-ops were created under Section 2013 of the National Fair Housing Act of 1949 with the goal of providing affordable housing — and indeed, apartments in such buildings cost a fraction of their non-land-lease counterparts. But as leases in these buildings edge closer to their expiration dates, shareholders are staring down a daunting future.

Narrowing Horizons

While most co-op apartments increase in value as time goes by, apartments in land-lease co-ops tend to lose value as the lease expiration date gets closer. Selling them is difficult because banks grow skittish about offering loans to potential buyers when they can see the co-op’s land-lease expiration date on the horizon. “A lot of these co-ops were built in the ’50s, so if a lease is expiring in, say, 2050, banks don’t want to do a 30-year loan when the building’s remaining lease term is less than that,” explains Marc Bresky, an attorney of the Bresky Law Firm who represents several land-lease co-ops in Queens.

For the same reason, land-lease co-ops are having an increasingly hard time with lenders when it comes to refinancing their underlying mortgages to pay for capital projects such as facade repairs or energy-efficiency retrofits. Land-lease co-ops must provide lenders with an estoppel certificate from the landowner, which basically says the ground lease is in effect, no outstanding rent is owed and the landowner consents to the loan. But landowners are often resistant to providing an estoppel certificate. “The certificate is a detailed document, and I’ve had situations where owners just won’t do it until you threaten to go to court,” Bresky says.

The problem that really puts co-ops over a barrel, however, is their powerlessness when it comes to renewing their land leases. Many land leases don’t contain renewal option clauses or extension provisions, which means shareholders face the prospect of astronomical rent hikes when the lease expires. “In many cases, an investment group has swooped in to buy the land underneath the building so they can position themselves to force shareholders or tenants to pay unreasonable increases in order to renew the lease,” explains Massimo D’Angelo, a partner at the law firm Blank Rome.

There are some lease renewal demands that place even more of a financial chokehold on the building. “I have one co-op where the renewal is conditional on limiting indebtedness and mortgage refinancing,” D’Angelo says. “For example, the current lease might hypothetically say that you can’t borrow more than $2 million during its 99-year term, but in order to get a renewal the owner will only increase the limit to $3 million. In the real world, those numbers don’t cut it. These co-ops need more money than that.”

The ultimate nightmare can happen if a co-op is unable to negotiate a land-lease renewal — the landowner terminates the lease upon expiration. If that happens, Bresky says, “the land and the building revert back to the owner, and some leases provide landlords the right to reenter, repossess the property and remove everyone.” If a landowner decides to sell the property, the co-op may not have the right to make the first offer before the owner can negotiate with other buyers. “I don’t want to sound like an alarmist, but there are maybe tens of thousands of shareholders in land-lease co-ops who face dire consequences,” Bresky adds. “And they don’t have a lot of leverage.”

Feeling The Pinch

A case in point is 6665 Colonial Road, a six-story, 49-unit co-op in Brooklyn that has 29 years remaining on its ground lease. “The value of the apartments has gone down, and we’re already seeing an impact on people trying to get 30-year loans to buy into the building,” says Stuart Fish, a senior property manager at Choice New York Management and the co-op’s managing agent. The co-op currently pays an enviable ground rent of just $1,700 a year, but when the lease expires, the real estate investment firm that owns the land, United Capital, will own the building, and will convert it from a co-op to a rental — and shareholders will lose their investments. 

While United hasn’t set a hard dollar figure for the new rent, it’s already playing hardball. “We made an offer of around $180,000 a year and were prepared to go somewhat higher,” Fish says. “After opening the door slightly to a conversation, it then declined to have anything further to do with the co-op and wouldn’t respond to the 20 or so inquiries and follow-ups made.” As it was, $180,000 “would have been a huge expense that required a substantial raise in maintenance,” he adds, “but it would have taken the building into a safety zone for the future.”

Colonial Road also explored buying the land from the owner. The board consulted real estate professionals, who determined the cost would be somewhere between $4 and $6 million. “We broached the subject with our mortgage lender,” Fish says: exploring a refinance for the co-op’s underlying mortgage. But the 29 years remaining on the co-op’s land lease made refinancing much riskier, and the talks never went any further. And even if the co-op had secured a loan, “it would have meant a maintenance increase of 30% to 40%,” Fish adds. “That would have been just too painful for shareholders.”

For board president Shana Wertheimer, the co-op’s straits are a rude awakening. “When I moved here in 2017, I knew a little about land leases, and the risk seemed minimal,” she says. Wertheimer soon learned otherwise, which prompted her to join the board in the hopes that her experience as a vice president at Breaking Ground, a nonprofit that supports affordable housing, might help the co-op in its dealings with United Capital. “But we have negotiated with the owner, to no avail,” she says. “Our land lease is so vague it’s to our detriment. It was not intended to put us in this situation, but here we are.”

Putting Up A Fight

At Carnegie House, a 324-unit land-lease co-op on 100 W. 57th St., embattled residents are facing a more imminent threat. The lease is expiring in 2025, and shareholders have been presented with an unappetizing choice: pay $280 million to buy the land under the 21-story building or pony up an additional $26 million a year in ground rent on top of the current $4.4 million a year. The land is owned by the real estate firm Werner Group, which bought it for about $270 million in 2014. The lease between the co-op and the land’s previous owner included a formula for determining the annual rent beyond the 2025 lease expiration, which would have been only $53.4 million. But Werner claims that the purchase automatically valued the land at $270 million — and that the new rent should be based on that much higher price.

One resident is trying to stop the process. He is suing Werner on behalf of all the co-op’s shareholders and also suing the co-op board, alleging it is acting improperly by going along with Werner’s scheme to extract the exorbitant rent increase. The strategy seems to be working. Carnegie House is home to many older, longtime residents who “would literally be kicked out to the street” if the landowner has its way, says Blank Rome attorney D’Angelo, who represents the resident. “The court has already issued a declaratory judgment to cap the ground-lease rent increases at a certain percentage that it will determine, which is exactly what the suit was seeking.” And Werner appears to be rethinking the numbers, he adds. “I don’t know if it’s because of the legal drama, but certainly they have come down a bit.”

Albany To The Rescue

With the clock ticking for many land-lease co-ops, legislative relief may finally be on the way. A bill, S7825, is currently pending in the New York State Senate that would limit rent increases when the land-lease expires, recently moved to the New York State Senate (S7825). “It’s been clear for a while that residents in land-lease buildings deserve some kind of protection against exorbitant rent hikes, bankruptcy and future eviction,” says A0531’s sponsor, Assemblyperson Linda Rosenthal, who represents District 67 in Manhattan, which includes the Upper West Side and Hell’s Kitchen. In addition to setting rent increase caps — Rosenthal is aiming for 3% or 4% — the bill would also give land-lease co-ops the right of renewal and an opportunity to purchase the land. As for its chances of passage, “I’m optimistic,” she says. “At this moment when we’re bemoaning the scarcity of affordable housing, now’s not the time to lose thousands of units when land leases expire. We need to make the playing field more even.”