The phrase “land lease” often strikes terror in the hearts of co-op and condo buyers and brokers alike.
That’s because a land lease means that the building sits on land it doesn’t own. Someone else holds title to the property and rents it to the building.
A two-year-old article Wall Street Journal article notes that the arrangement occurs when developers fall in love with a site but the owner refuses to sell. Or, land leases are known to occur when developers convert a rental property to an owner-occupied cooperative building and, again, the original owners refuse to sell the land. The leases usually run 50-100 years.
Paying rent wouldn’t be so bad if (1) the property were not subject to the landlord’s possession legally but, for the most part, just theoretically; (2) the rent were not renegotiable (always up) at intervals as frequent as 10 years; (3) the were no tax consequences.
When the rent goes up, generally by an unforeseeable amount, maintenance increases for that reason alone.
For potential residents, such properties can be hard to finance and thus harder to sell. Moreover, the usual co-op tax deduction will be smaller. Reason: The portion of the real-estate tax paid by the co-op on the value of the land will not be deductible because the tax on the land is paid on the behalf of someone else, a usual stipulation in the lease. Also, the ground rent is not deductible; that’s in contrast to interest payments on a mortgage that frequently covers the cost of a co-op’s ownership of that land.
Withal, there is one big advantage to purchasing an apartment in a land-lease building, and that is the tradeoff for the disadvantages: Purchase price.
Consider the appealing 680-sf co-op pictured above and below on the sixth and top floor of a modest 1950 building in a prime Greenwich Village location. The one-bedroom corner unit has open views north and west, gleaming hardwood floors, a big and decently renovated open kitchen with breakfast bar, nice bath, plenty of closet space and generously proportioned rooms.
The elevator building itself has a common garden, live-in super, central laundry and a garage. The board allows pets, renters, pieds-à-terre and co-purchasing. Included in the maintenance of $1,063 a month is the cost of electricity plus the usual heat and hot water.
Two days after the collapse of Lehman Brothers on Sept. 15, 2008, when everyone knew that the local housing market would tank, the apartment went on the market for $650,000. After fluctuating in price up and down 10 – 10! – times and changing brokers once, the seller is asking $519,000, a bargain in contrast to comparable apartments that are unburdened by its presence in a land-lease building.
If buyers have proved wary of making an offer on the place, their reluctance is not only understandable but justifiable as well.
(This post originally appeared in the newsletter that I write every two weeks along with critiques of properties that I see. To read the critiques and other information such as the latest news about the U.S. and New York housing markets, research, celebrity sales and purchases, household tips and mortgage developments, you can subscribe free.)
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022