How a Clever Co-op Escaped its Land Lease

Sometimes, however, a clever co-op can find a way out. With that in mind, take note of the saga of Fillmore Gardens, a 340-unit Brooklyn cooperative that used a slip-and-fall case to escape a land lease.

The 2013 slip-and-fall lawsuit was garden-variety, says attorney Robert J. Cecere, a partner at Daniels Norelli Cecere & Tavel. But a problem arose when the land leaseholder alleged that it was not being defended in the slip-and-fall litigation, and filed a federal claim seeking to have the land lease terminated. If the lease was voided in that fashion, Cecere says, it would have been a windfall for the leaseholder and a disaster for the co-op and its shareholders.

"They would have become the property's owner because they would have owned any improvements on the land — and that means the buildings," Cecere says. The building essentially would have reverted to a rental.

Cecere says the co-op contended that the insurance carrier was at fault in neglecting to initially cover the land leaseholder. The insurance carrier agreed, and immediately defended both the co-op corporation and the leaseholder in the slip-and-fall case.

But, the leaseholder's federal complaint remained, and Cecere says it could have continued to press to terminate the lease. It was time to find a way out. The 100-year lease was in its 65th year, and there was another 100-year option to renew. The lease payments were about $3,000 per year.

The two sides agreed on a price of $750,000. A $1 million mortgage was taken out on the property (with the added dollars to cover expenses) through a 10-year-fixed rate loan. Shareholders will be paying an added monthly assessment, which will amount to about $3,800 over the life of the loan.

"We have a healthy reserve fund," says property manager Paul Karaqi, of Century Management Services. "But we do have a lot of capital work that needs to be done and we didn't want to risk depleting those reserves."

Cecere notes that it's never easy to take out a loan that size, but that both the co-op and the leaseholder got a good deal. The co-op no longer has to worry about the threat of the land lease expiring, and the landowner got a healthy one-shot payment. While $750,000 is a bargain for a project that size in New York City, consider that under its old lease, it would have taken 250 years to get that much in rent.

With every land purchase, you have to obtain title insurance, but the team says they took great care with this step. Title insurance means that research has been done to ensure no one else can claim ownership of the property. If someone does try to make a claim of ownership, the title insurance company would cover the claim so that shareholders don't lose their apartments. Cecere says they used both the bank's appraiser and their own expert to obtain title insurance, which was enough to cover all the cooperative's interests.