Land-Lease Co-op Sues Over Rent Calculations if Co-op Is Dissolved

Faced with a sharp spike in rent for the land its building sits on, the board at the land-lease Carnegie House co-op at 100 W. 57th St. has filed a lawsuit asking the state to establish how initial apartment rents will be calculated if negotiations with the land owner break down and the co-op is dissolved and converted into rent-stabilized apartments. The lawsuit points to state rules that give the division of Homes and Community Renewal the power to calculate initial rents if a landlord causes the “deconversion” of a co-op.

Richard Hirsch, the co-op board president at Carnegie House, says the lawsuit seeks clarity for shareholders about what they can expect if their co-op is dissolved. “We’re basically asked to drive a bus blind-folded,” Hirsch tells The Real Deal. “We want to operate in an honorable way. We just want to be treated honorably.”

The current lease on the land, at the southwest corner of Sixth Avenue and West 57th Street, expires on March 15, 2025. It's owned by Cammeby's International Group and David Werner Real Estate, which currently charge annual land rent of $4 million and want to raise it to $25 million. The co-op has countered with an offer to pay a 25% rent increase, or $5 million. A spokesperson for the owners contends that the lawsuit is premature and that the parties need to go through arbitration first, in an effort to bridge the wide gap between their offers.

The lawsuit is the latest salvo by the board and the owner of the building's retail co-op to prevent a significant hike to the ground lease. They have spent tens of thousands of dollars lobbying for legislation to cap rent increases on ground leases and to ensure renewals. That measure stalled in the state Legislature after opponents argued that the bill would be a windfall for wealthy co-op shareholders who were able to buy their buildings at a steep discount precisely because of the ground-lease arrangement. Shareholders of such co-ops argue that they could not have foreseen the kinds of increases in values in the city's current real estate market.

While the fates of the lawsuit and the proposed legislation remain unknown, one thing is certain: the resolution of the Carnegie House dispute is likely to set a precedent for other ground lease co-ops facing large rent increases.

Hirsch tries to put it in perspective: "We're just the first one in the barrel going over Niagara Falls."