more flexibility<\/a> to renew their ground leases before the end of the term. This prevents shareholders from being in limbo in the last 30 years of the lease, unable to sell because of uncertainty over the building\u2019s future in the next few decades. That\u2019s because when a ground lease ends, questions arise about whether it can be renewed or whether the building reverts to being a rental building.<\/p>\n\u201cThere needs to be reliability and people need to know what they are buying into,\u201d Eiben said.\u00a0<\/p>\n
Co-ops on city, state, or federal land\u2014like The Azure\u2014are exempt from this law and that is largely because a government entity has different objectives from a private landlord. \u201cThey are not looking for litigation and maximizing profits,\u201d Eiben said.\u00a0<\/p>\n
That\u2019s a very different setup from buildings such as Carnegie House, where lawsuits have been filed because the ground lease was acquired by private investors who wanted to hike the annual ground rent by 450 percent to $25 million. Earlier this month, the Appellate Division of the New York State Supreme Court overturned that rent increase on appeal, citing an arbitrator\u2019s communications with the landlord\u2019s attorney and finding an appearance of partiality.<\/p>\n
Convincing the owner of a shared interest<\/h3>\n
ECF\u2019s mission is to build schools, not maximize profits. The board used that distinction to make its case for renegotiating the lease. The lease term was not due to expire, but the 2030 market reset on rent was a sticking point.\u00a0<\/p>\n
\u201cIt could have been 30 percent or 40 percent\u2014but even if it was five percent, the point was, no one knew,\u201d Strongin said.\u00a0<\/p>\n
Ground leases typically give landlords significant leverage. \u201cEven if they are not going to exert that control to the maximum amount permitted by the law they still want it as an option,\u201d Eiben said. ECF wasn\u2019t initially receptive to the board\u2019s requests but negotiations finally started moving when the condop retained an attorney.\u00a0<\/p>\n
The board’s strategy was to show ECF that uncertainty was as bad for the landlord as it was for shareholders. If apartments became harder to sell, shareholders could default and the building’s financial position could deteriorate.\u00a0<\/p>\n
\u201cWe were able to convince ECF that this wasn\u2019t just an issue for us but for them as well,\u201d Strongin said. \u201cJust like we want to maintain fair value for our units, the last thing they want is people going into default and the building to have a financial crisis.\u201d\u00a0<\/p>\n
Reaching a deal with a predictable payment schedule<\/h3>\n
Negotiations with ECF took three years and the end result is a ground lease running to 2082 where payments increase at a fixed rate. Shareholders at The Azure don\u2019t pay traditional property taxes and instead make Payments in Lieu of Taxes (PILOTs) to the city. With the renegotiated lease, the combined ground rent and PILOTs now appreciate annually at 3.7 percent.\u00a0<\/p>\n
\u201cIt is super simplified with no uncertainty,\u201d Strongin said.\u00a0<\/p>\n
At the end of the lease shareholders have an option to purchase the land or renew the lease for another 50 years. The agreement also provides some tax efficiency, with around 50 percent of the monthly payments being tax deductible.<\/p>\n
Waiting for the payoff\u00a0<\/h3>\n
The co-op spent $100,000 on legal fees, and while the board considers the renegotiation a success, it has yet to see an impact on sales prices. \u201cThere\u2019s a ton of value for a buyer in this building and at the same time sellers should be getting more money for these apartments,\u201d Boriskin said.<\/p>\n
Strongin bought in The Azure because he loved the apartment and was willing to roll the dice on a land-lease building. He also knew he\u2019d be paying far more for a comparable condo. \u201cWe were happy to take it as it was,\u201d he said. \u201cI don\u2019t think any of us thought the market reaction would be so negative.\u201d<\/p>\n
A land-lease buyer\u2019s checklist<\/h2>\n
His experience offers a checklist for buyers considering a land-lease building. First, find out who owns the land and understand their objectives. A government entity, nonprofit or private investor may have very different reasons for owning the ground lease.<\/p>\n
Next, look at when the lease expires and how rent is calculated. A market reset can create a very different risk from a lease with predictable annual increases. When a land lease comes to an end there may be questions about what happens to the building. Finding out whether the lease can be renewed or renegotiated before expiration is also important, and whether the building has an option to purchase the land.<\/p>\n
Also consider how the lease could affect financing and resale. If a building has only 10 or 20 years left on its land lease, buyers may be harder to find and lenders may be reluctant to finance the purchase.\u00a0<\/p>\n
\u201cEither purchasers might not be interested or, if they are, they may not be able to get a loan,\u201d Eiben said.<\/p>\n
\u00a0<\/p>\n<\/div>\n