Wednesday, June 24, 2015

Luxury Living Or High-Priced Urban Trailer Parks? Skyrocketing NYC Real Estate Values Have Some Apartment Owners In Ground-Leased Buildings Biting Their Nails; Periodic Upward Rent Adjustments, Lease Expirations Threaten To Evaporate Their Home Equity While Appreciation Inures To Landowner

In New York City, The New York Times (via The Real Deal (NYC)) reports:
  • [A]pproximately 100 [residential] buildings in Manhattan have land or ground leases, according to several people in the real estate industry. They are mostly co-ops, although the list includes some condominiums. These buildings tend to have high monthly carrying charges because of the rental payments for the land. And as the co-ops do not pay real estate taxes, shareholders cannot deduct as much from income taxes as shareholders in typical co-ops do.

    ***

    Discounts in land-lease buildings are 25 percent, although I’m beginning to think it is more like 35 to 40 percent,” said Susan Landau Abrams, an associate broker at Warburg Realty. Ms. Abrams lives at 190 East 72nd Street, a land-lease co-op, and is marketing a four-bedroom there for $4 million, with a monthly maintenance fee of $14,000. She says it is deeply discounted. “This unit would probably be $8 million if it wasn’t a land lease,” she added.

    “The value of the apartments decrease because the maintenance is so obnoxiously high,” said Robert Dankner, the president of Prime Manhattan Residential.

    ***

    Land-lease buildings aren’t unique to New York. Many buildings in London are subject to ground leases that can run for 1,000 years; the queen is often the landowner, said Stuart M. Saft, a partner at the law firm Holland & Knight.

    ***

    In recent years, as the price of land surged to historic levels, some owners of land-lease apartments began biting their nails. Many land-lease buildings pay the landowner rent based on a percentage of the value of the land.

    “All over Manhattan, land values are escalating at a very rapid pace,” said Brian Corcoran, an executive vice president of Cushman & Wakefield who advised the Trump Plaza board on its land purchase. “There are many co-ops on ground leases and it is rare that shareholders get a chance to buy the land. But if they do, it is in their best interest to do so if at all possible.”

    The Excelsior, a land-lease co-op at 303 East 57th Street, is facing a potential rent increase. According to the terms of its lease, every 10 years the rent resets to 6 percent of the value of the land. The co-op’s next reset will be in 2018. With prices rising, particularly along 57th Street, where a dozen luxury towers are underway, shareholders are growing anxious that the land rent could rise precipitously.

    ***

    Co-op owners in land-lease buildings must also confront lease expirations. Every lease is different, but most are lengthy, extending 99 years or more. But as they tick down, problems may arise.

    For instance, residents of buildings that have less than 30 years left on their leases may have difficulty securing mortgages. “Banks are a little bit wary of land-lease buildings,” said Ace Watanasuparp, the regional manager for Citizens Bank. “If a buyer takes a 30-year mortgage, but the land lease only has 17 years left, who knows what will happen.

    The expiration of a lease is particularly fraught for land-lease co-ops that were once rent-regulated apartment buildings. When their land leases expire, these co-ops will be dissolved and the apartments will once again become rent regulated, with the landowner becoming the landlord, Mr. Saft said. Unless new terms are negotiated, the co-op shareholders could become tenants of their former homes.(1)

    “This has not happened yet, to my knowledge,” Mr. Corcoran said. “But it will.”

    As for Trump Plaza, when Donald Trump built the co-op in 1983, he struck a deal with the landowner in which for 40 years, the building would pay a below-market annual rent of approximately $1.2 million. But in 2023, the rent would become 8 percent of the value of the land. Mr. Corcoran could not estimate what that might be, but he advised the board that today the land would be worth about $200 million, making the annual rent $16 million.
Source: Rising Costs a Concern for Land-Lease Building Owners.
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(1) To a significant degree, these apartment owners appear to be in a position somewhat parallel to homeowners living in many trailer parks. While they may own their homes, trailer park residents must often pay rent for the lot their homes are sitting on. Such an arrangement stifles the possibility of any real appreciation for their homes while most, if not all, of any appreciation in general real estate values inures to the landowner. To add insult to injury, when the lot lease expires (assuming they're not already on month-to-month leases), the homeowners may be saddled with a significant rent increase, or face having to move, no different than any tenant. Similarly, the values of the New York City apartments in buildings built on leased land will likewise be stifled by the periodic increases in ground rent and, ultimately, will be like tenants in their own homes (with any home equity having gradually evaporated over the years) when the buildings' ground leases expire.

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