For ground lease co-ops, expiration could mean decimation
As ground leases expire, owners must pony up millions or lose ownership rights
Birinder Madan has lived at 100 West 57th Street with his wife and daughter for 20 years.
But since the Werner Group bought the land underneath his co-op in 2014, he’s been in a “perpetual state of fear.”
Madan, who last year filed a lawsuit against the group led by real estate investors David Werner and Rubin Schron, is worried his new landlords will oust his family and ruin him financially.
“Carnegie House is, or at least it was … a community of young families and long-time elderly residents, many of whom have lived there for decades,” Madan’s attorney wrote in the complaint accusing Werner and Schron of a “brazen land grab.”
It’s a cautionary tale of what could happen when a ground lease co-op reaches its expiration. Sandwiched between glitzy supertalls on Billionaires’ Row, the 21-story building is facing a dreaded decision: pony up $280 million to buy the land, pay almost $25 million more in rent or lose all ownership rights.
They’re a sliver of the city’s residential buildings, but the co-ops are up against a wall of troubles. The uncertainty around their futures also drives down prices and deters buyers and lenders.
As deadlines loom over a handful of these buildings, shareholders like Madan are bracing themselves for renegotiation losses that could render their homes unaffordable.
Ground lease co-ops: explained
Shareholders in a ground lease co-op don’t own the land underneath the building. They instead pay the landowner rent, typically reflected in monthly maintenance fees. Most ground leases run for 99 years with the option to renew the lease, but these timelines can vary.
Roughly 100 of the city’s residential buildings are on ground leases, and most of those are co-ops located in Manhattan. Some, like Battery Park City and Roosevelt Island, are controlled by the state or city government. Others are owned by private landlords.
Often these leases include incremental rent resets every 30 to 40 years, though some are as frequent as every 10 to 20. For many older leases drawn up in the 1960s and 1970s, the rent recalculation is 5 percent or 6 percent of the land’s market value at the time of reset.
As a co-op approaches the end of its lease, shareholders can either renegotiate the lease, likely with a significant rent increase, or purchase the underlying land — if the opportunity arises.
In 2015, shareholders at Trump Plaza scraped together $190 million to buy the land underneath the Lenox Hill co-op. The 176-residence building was hurtling toward an astronomical rent reset that would have hiked rents up to 8 percent of the market value in 2023.
“We took a storied building from what could have been the depths of despair and restored it,” co-op board President Marc Cooper told The New York Times.
But at Carnegie House, the board wasn’t able to corral shareholders into buying when it received an offer to do so in 2019. Werner and Schron had outbid shareholders five years prior and nabbed the parcel for $261 million.
Shareholders rejected the $280 million offer, but it didn’t clear them of their potential financial woes. The co-op’s lease is set to expire in March 2025 and includes an option to extend, but rent would likely jump to five times the $4 million it pays now.
With the building’s future on the line, owners fled the co-op, and the sale prices of their apartments plummeted. After the board sent a letter to shareholders in 2019 informing them of the predicament, few apartments sold for more than $200,000, according to the complaint.
Trouble on the market
At first glance, listings at land leased buildings seem like dream deals. At a Midtown East co-op just a block from the river, a spacious two-bedroom unit is asking just $465,000. On the Upper East Side, a 6,000-square-foot, 21-room apartment is priced below $4 million.
But with low prices come high stakes.
Circumstances for co-ops near the end of their lease turn dire once they enter the 35-year threshold, said attorney Joshua Stein. That’s crunch time for shareholders who need to strike a deal to buy the land or renegotiate.
But updated rents or land purchases can send maintenance costs skyrocketing beyond what shareholders can afford. If Carnegie House renews its lease with the Werner Group, an owner paying $3,000 a month in maintenance would have to pay $18,600 come March 2025, according to the lawsuit.
“You’ll lose that housing stock to the market and replace it with something far more valuable. That’s the play.”
Even ahead of that doomsday moment, fear and unpredictability can cause a hit on prices.
At 101 West 23rd Street, which is facing a rent reset in the next four to five years, the median sale price is less than half that of the neighborhood overall, an analysis by The Real Deal shows.
At Carnegie House, the median sale price over the last three years was $202,500, compared to just under $1 million for all co-ops in the Plaza District.
People buying at those prices are betting the uncertainty will be resolved, appraiser Jonathan Miller added, and that they’ll be sitting on a gold mine.
It’s the same wager Werner and Schron made by purchasing the 57th Street parcel, attorney Massimo D’Angelo argued in the lawsuit.
D’Angelo accused the Werner Group and the co-op’s board of using “various strong-arm tactics” to coerce shareholders into paying “exorbitant sums of money to remain on that land or to abandon their apartments and make way for new development.”
It’s a move that can be chalked up to what Miller described as “the runaway cost of land.”
If shareholders at a building can’t purchase it from the owner or cover the rent increase, “you’ll lose that housing stock to the market and replace it with something far more valuable,” Miller said. “That’s the play.”
Though these issues are more pronounced with private landlords, government-owned ground leases aren’t immune. In Battery Park City, condo owners are fighting to renegotiate the ground lease as the neighborhood’s rising property values drive ground rents up.
“No new working families can buy into the neighborhood anymore,” John Dellaportas, who owns a condo in Battery Park City, told Curbed last year. “The [Battery Park City] Authority is completely undermining their mission to create affordable homeownership.”
It’s also difficult for buyers to secure a mortgage, William Raveis executive Melissa Cohn said. For those that will consider lending, the lease has to extend at least five years beyond the mortgage’s maturity.
“You’ve no idea what’s gonna happen to the maintenance in the building,” she said. “If the value of the land is 10 times what it was the last time, that ground lease possibly grew exponentially.”
But lending decisions ebb and flow along with the real estate market. When conditions are strong, banks are more likely to lend to land lease buildings; they’re less likely to do that when the credit environment is tighter.
“It’s sort of like a stock market beta, where the value falls more in a declining market than other apartment types because of this restriction,” Miller said.
The plight of these buildings has caught legislative attention. Assembly member Linda Rosenthal, who represents the Upper West Side and parts of Hell’s Kitchen, introduced a bill in February that would limit rent increases and give co-ops the right to purchase the land.
Brokers’ uphill battle
For brokers, ground lease co-ops are often a tough sell, and many shy away from taking on listings or steering buyers in their direction.
The hesitation is largely due to wide variety of specifics for each building and how the lease affects the apartments’ value over time.
“[They’re] almost like individual people,” Corcoran’s Deanna Kory said.
Kory, who ranked among the city’s top co-op brokers last year, said one of the biggest hurdles to selling is finding comprehensive information about the lease terms.
“We’re on the front lines,” Kory said. “If we can’t understand it, and can’t explain it in a way that makes sense, how can these get sold?”
StreetEasy in 2021 began attaching a land lease identification to properties and links to a blog post for more information “after finding home shoppers didn’t understand” what the building was or the terms of buying in one, according to a spokesperson.
While ground leases might spook some buyers, they’re a value play for others.
Because prices are often discounted, ground lease buildings are an opportunity to purchase large apartments in desirable locations, said Coldwell Banker Warburg’s Susan Landau Abrams, who lives in a ground lease building.
At 190 East 72nd Street, the maintenance is often higher, but comparable units nearby can go for up to $2 million more. The costs could shake out in favor of taking on a ground lease.
Abrams, who bought her home in 1997, also cautioned that many of these apartments require extensive renovations because their owners held on to them for decades.
For buyers with their hearts set on a certain building, the ground lease isn’t as much of a concern, The Agency’s Mike Fabbri said.
In a recent deal at the Beekman, a 129-unit co-op on Park Avenue, Fabbri said the ground lease wasn’t a deterrent but did require more input from attorneys, outside accountants and other experts to get the deal over the finish line.
As for Carnegie House, its fate still hangs in the balance.
A judge dismissed five of Madan’s six claims, and a final motion to dismiss is pending. D’Angelo last month filed an opposition to the defendant’s move, arguing that the court should take a second look at the interpretation of the lease renewal terms.
Until then, D’Angelo said, he’s hoping Rosenthal’s legislation will pass before the March 2025 deadline.
“It’s sort of like D-Day,” he said.