Punishing Ground Lease Terms, Long-Overdue Capital Improvements Kill NYC Co-Op; Oncoming Financial Peril Forces Unit Owners To Dissolve HOA, Unload Apartments Soon After Investor Buys Land Out From Under Them
- A Chelsea co-op dissolves after the land is sold out from under it.
A land-lease – also known as a lease-hold or a ground-lease – is an unusual arrangement in which a cooperative or condominium owns its building but pays rent on the land it sits on. These rental agreements are usually for long terms, and when the term expires, the co-op or condo is in a ticklish position. Sometimes, the city’s 100 land-lease co-ops live happily ever after – after negotiating a favorable new lease or arranging to purchase the land beneath their building. And sometimes, the land-lease leads to disaster.
Meet Melissa Green, a former board member at the land-lease co-op at 101 West 23rd Street. When she moved into the six-story, 80-unit building in Chelsea in 1987, Green, a commercial real estate banker, thought she knew what she was getting into.
“I was aware of the risks of ground-leases,” she says, “but since they are often renewed, I wasn’t worried about that, especially since the offering plan said that the co-op’s underlying mortgage was set to mature in 1999 with zero balance. But that turned out not to be true. There was a flurry of lawsuits, and the original co-op was replaced with a new co-op (with all the same shareholders) in 2000 that negotiated a new 40-year ground lease.”(1)
The problem was that the new lease was onerous from the start. Maintenance fees rose by 30 percent that year, and jumped significantly again in 2008. “You could see the direction this was going, and it wasn’t good,” says Green. “It was a nightmare, and I lost sleep over this for years.”
Then, in 2014, residents got another nasty surprise: after trying for decades to buy the land beneath their building – only to be rejected every time – the board learned that the land had been sold to the Brooklyn-based investment firm E&M Associates for the astronomical sum of $95 million.
The next scheduled rent hike was going to be especially punishing. “Land values had gone up so dramatically that maintenance charges could have doubled or even tripled,” says Green. In addition, long-overdue capital improvements would have required additional maintenance increases or assessments. “The residents here are middle-class. They could never have afforded that.”
When the board members crunched the numbers, the picture wasn’t pretty. “Because there was a real possibility of bankruptcy and foreclosure, we concluded it was in the shareholders’ best interest to find a financial solution that would benefit as many of them as possible,” she says. “We interviewed numerous developers, trying to find one who was interested in a partnership with us, maybe buying us out at a reasonable price or coming up with some creative solution. But ultimately everyone dropped out. It was profoundly disappointing.”
The only logical partner left was E&M Associates. The board reached a deal with E&M where the shareholders were given the opportunity to sell at a fixed price per share; in order for the deal to go through, at least 81 percent of shareholders had to agree to sell.
A meeting was held to inform shareholders of the terms. “We made it clear every unit was getting an individual contract and that the decision to sell was entirely their own,” says Doug Heller, an attorney at Herrick, Feinstein, who represented the board. In the end, 87 percent of the shares were sold. But some owners refused and filed a lawsuit in state Supreme Court, claiming the board undersold the property and asking for $25 million in damages. The board denies the allegations, and the suit is pending.(2)
“The board was vilified as the devil incarnate by non-selling shareholders,” Green says. “I’m a good person, not a criminal, embezzler, thief, or anything we’ve been accused of. None of us were happy about this outcome.”
Green and her husband have since downsized to a small one-bedroom apartment on the Upper East Side. “We miss Chelsea, our old apartment, and our old neighbors,” she says. “My experience has taught me that I would walk clear across the continent to avoid purchasing a land-lease again.”
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