The Dark Cloud of a Land Lease

A two-building Queens co-op with more than 100 units faced a challenge that some experts say is becoming more common every day: it had trouble refinancing its underlying mortgage because it does not own the land on which it stands.

The co-op, whose board requested anonymity, was in a difficult situation. The property needed extensive repairs, some required under Local Law 11, according to Stuart Halper, co-owner of Impact Real Estate Management, which manages the property. The board approached its lender, the National Cooperative Bank (NCB), to refinance the underlying mortgage from $1.5 million to $5 million.

“We weren't able to offer a typical 10-year loan on a 30- or 40-year amortization because of the ground-lease maturity,” says Harley Seligman, a vice president at NCB who handled the loan. The co-op’s land lease expires in 2055. “In real life, 40 years is a long time, but in drawing up legal documents, it gets a bit tricky. The problem is when the lease gets closer to expiration, the lease-holder becomes more relevant. The bank doesn't want to be in a position where the ground lease-holder can actually foreclose and take all the apartments.”

While refinancing its mortgage, the co-op did the smart thing: it tried to buy the land, which is one of three options for dealing with a land lease. The owner, however, was not interested in selling, and efforts ceased before the co-op could even make an offer.

The refinanced loan is a 25-year self-liquidating mortgage, meaning that over 25 years both the principal and interest will be paid. “Every month,” says Seligman, “they're paying more principal than they normally would be on a 10-year loan. Then, they just keep paying the loan down, and then we're out of the deal. The co-op then has 15 years to figure out what to do with the ground lease situation, if it hasn’t already been resolved.”

The property is a “Section 213” co-op, one of many that was either built or converted to cooperative status under that section of the National Fair Housing Act of 1949. “The nature of a 213 like this is that it's very modest,” Halper, the manager, notes. “The people who live there are real working- and middle-class, and they've always been on the lower side of maintenance in terms of their fees.” To cover the new mortgage’s carrying costs, the board raised maintenance by about 10 percent.

“The big issue now is what's going to happen when the co-op needs more money beyond this?” Halper says. “They're not going to be able to borrow, we believe, because of the type of loan they have. Anything that needs to be done at that point is going to be done on the backs of the shareholders.”

The issue of the expiring land lease is a growing problem, says NCB’s Seligman, who notes: “I've talked about this with some management companies and lawyers. It seems like this is becoming more common. No one wants to get caught holding the hot potato.”

PRINCIPAL PLAYERS – MANAGEMENT: Impact Real Estate Management. LENDER: The National Cooperative Bank.