The NYC real estate market is full of oddities—bathtubs in kitchens (or no kitchens at all) and windows that frame views of brick walls. On a grander scale, you'll find the truly strange arrangements, and one of these is the landlease building.
First, a definition: In the case of a landlease, the co-operative that owns the building leases the land beneath it from another owner, often a real estate investor. The ground is leased for a long period—usually 99 years—by the building. And that's where the complication comes in. If you buy in the early stages of a landlease, there's nothing to fret about; those five, seven or nine decades left in the lease will seem so far away. But not when it's 15 or 20 years in the offing, less than the life of a mortgage.
In the worst case scenario, the land owner and building cannot renegotiate a lease extension, and the shareholders essentially "lose" the building, which becomes a rental. In short, if you're a co-op owner, you lose the equity in your apartment. But in all likelihood, your mortgage would already be paid off, since a bank would never issue a loan that has a longer term than the time left on the lease.
Sandor Krauss, a real estate attorney with a focus in residential and commercial transactions (who himself bought an apartment in a landlease building), notes that this “ultimate disaster" is “admittedly rare."
Trusting in the real estate gods
While apartment hunting, I kept running into "landlease" properties in my preferred neighborhood because I was looking for lower-priced apartments. When I Googled the term, I uncovered scary stories of co-op boards unable to renegotiate their building lease with the land owner, who would wind up owning the building too.
Then my broker calmed me down with a reasonable description of landleases, reminding me that very few of them actually "disappear."
I got over my initial unease and even decided to push the envelope a bit, settling on an apartment with a fast approaching "end of lease" date. This particular property had 33 years left on the lease--at 30 years, banks will stop lending to buyers because mortgages generally have 30-year terms.
On one hand, it was a risky purchase.
But if you, like me, are on a beer budget with Champagne taste, it may be worth it to put long-term fear aside. Generally, these types of properties tend to be about 30 percent less expensive than comparable apartments in non-landlease buildings. This is because buyers tend to be wary of a landlease, especially one with a fast approaching lease expiration.
In my case, the owner was eager to work with me. They weren’t going to push for a higher sale price, as they just wanted to unload it before the 30-year mark approached.
My lawyer and broker felt strongly that the lease would be renegotiated successfully, based on the history of this land owner, and the finacial strength of the co-operative (meaning it has a good savings account, responsible spending, no outstanding maintenance fees from shareholders). Most importantly, I had a gut feeling—it was going to work out. I trusted in the real estate gods.
Higher monthly nut
While prices might be lower, maintenance fees tend to be high--about 30 percent more expensive than in a regular building--because of the landlease payments.
As it stands, my maintenance fee is more than I wanted to spend. At almost $1,000 a month for a junior one-bedroom in a non-doorman building, it's about 30 percent above where it should be--but the building is well cared for, with an elevator, lobby and large garden. I could see that my maintenance fee was being well spent.
Sure, this won’t be a family property for generations, but it's an ideal place for me to have a starter home. I am looking to stay for five years, max, before moving on to a new space and neighborhood.
I was also comforted by the strong financials of the co-operative. They have a large cash reserve to maintain the mortgage on the property, none of the apartments owe outstanding maintenance fees, and there are no recorded liens.
Flexible rent rules
While some might find landleases more difficult to sell, co-op boards in landlease buildings generally have a more lenient policy when it comes to renting: Unlike the many co-ops that limit how long you can rent out the apartment or won’t allow it at all, landlease buildings will often offer unlimited renting.
This is to mitigate the worst-case scenario—i.e., the remaining time on the lease falls below 30 years, and shareholders cannot sell their apartment, so to turn a profit, they look to rent it out until the lease expires. This way, shareholders can get the maximum monetary value out of their apartments until the last day of the landlease.
In my building's case, the landlease was renegotiated within six months of my moving in, with hardly any impact on shareholders. My maintenance fee went up 1 percent because of the renegotiation, and the lease was extended an additional 66 years, bringing the lease term back to 99 years in total. As an added bonus, my property value went up (by $90,000, according to my broker) from the time of purchase, simply because 66 years were added to the lease.
I don’t worry about the land my apartment sits on. My co-op board is calm, cool and collected. They have a solid relationship with the land owner—negotiations were very quick, and the new terms were extremely reasonable; the landowner requested to set up one more shop in the retail space on the first floor of the building.
Going into my purchase, I knew I could give up three little things (a large bathroom, style, an elevator) or one giant thing (location, price, windows). In this case, I gave up one giant thing: the parcel on which my apartment sits. But I gained light, a renovated kitchen and a well-kept building. In my calculus, the trade was worth it.
If you find yourself with a small budget, looking for a large place for less than five years, and willing to take the risk, check out StreetEasy's list of every landlease property in New York.