What Is A Land-Lease Building…?

You see a listing at a price that seems too good to be true. A 2 bedroom? In Manhattan prime for $450,000? That must be a typo, right? Hmm, no, it looks legit. Well, it must need a gut renovation. Let me read that again…no, it actually HAS been renovated. Seriously, what’s the catch? Okay, that maintenance is high, but still…What’s this now? A note on the listing saying this is in a land-lease building? What’s a land-lease building?

Land...

Land…

...Lease

…Lease

A land-lease building is actually one of those things that is wonderfully what it sounds like. The owners of the building own the building, but not the land it is built on. Instead, they lease the land. This is typically found in co-op buildings (I doubt it would occur with a condo, but in New York real estate, never say never), which means the co-oop’s shareholders are responsible for paying the lease on the land. That’s why the maintenance charges for land lease apartments are so high–in addition to the the usual common charges, RE taxes, and any mortgage payments included in the monthly maintenance, there also is a charge to help pay the monthly land lease. And as you may guess, the lease rate on New York land is not exactly cheap. Plus the owner of the land has the co-op owners over the proverbial barrel during lease negotiations: “You don’t like these terms? Fine, I’ll sell the land. Hope your new landlord doesn’t want to tear you down.”

And that right there is why the prices are low. There is a feeling of instability that comes with a land-lease building, that when the lease is up, the land owner could say, “Hey, I don’t care what you’re willing to pay, I’m getting 80 kabillion dollars from Big Condo Developer to sell this land, and oh yeah, they’re going to raze the building.” The co-op doesn’t have 100% control over the property they own, which is why many people shy away from buying in a land-lease building.

So should YOU stay away from that incredible apartment with its high monthly charges? Here’s who I think should actually consider it: if you’re an all cash buyer, this might be a great deal for you. In most buildings, your amount of cash might get you just little one bedroom, but in a land-lease buiding you’ll get that spacious two bedroom you thought was out of your reach. Since you wouldn’t have a mortgage, you’d just have to deal with the monthly maintenance. And you think the monthly maintenance is high? You’ve seen rent in Manhattan, right? Chances are good that even though the maintenance charges are high for a co-op, they’re less than you’d be paying to rent a similar apartment in the same neighborhood.

Okay, so if you think you fit that picture, there are two very important questions you should ask:

  • How much is left on the current lease? If the lease runs until 2050 (and yes, I’ve seen some of these deals in place), then you’re probably safe, unless the building owner has some kind of out that can break the lease (put that under questions to ask the co-op). If the lease only has ten more years on it, I’d hesitate, no matter how much the co-op assures you that they have a good relationship with their land owner and plan to renew it easily as usual. I’d rather not be a shareholder in that building to find out that this time is going to be different.
  • I would also ask about the sublet policy. If they allow subletting with relatively few restrictions, then you can make some money off the apartment if you decide you’re not comfortable with the situation. Even with the high maintenance, you’ll still turn a profit because as I said, rent in Manhattan is just crazy.

So land-lease building, yea or nay? Don’t dismiss it immediately, find out the facts, think about your finances and your tolerance for some instability in exchange for a good deal, and of course, discuss it all with your broker ( who may have some dirt on the building that the seller isn’t anxious to share).

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