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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Getting Started: How Much Cash Do I Need To Buy in New York City?

Piggy Bank

Oh no. There it is again. Your landlord is raising your rent to some ungodly number just so you can have the privilege of living in a top floor walk up in a building where the amenities consist of a door. Is it time to buy?

It certainly is! Of course I always think it’s time to buy, mostly because a) New York real estate is always a good investment and b) it sucks being a tenant. So the real question now is CAN you buy? How much money do you exactly need?

Let’s imagine that you found a $500,000 apartment with $1,000 a month maintenance charges (numbers chosen for easy math, like the kind I can do without a calculator). You know you’ve got the paycheck to cover your monthly mortgage payments and maintenance charges, but that’s all in the future. How much cash do you need to have on hand now just to get approved by a co-op board and close on your $500K apartment?

Down Payment Most co-op and condo buildings in New York City require a down payment of 20% of the purchase price. There are some that require more, like 25% or even 35% (these buildings tend to be found on the Upper East Side). Occasionally you may find a condo that only requires 10% down or even an FHA approved building that only calls for 6%, but I wouldn’t plan my sales search with those numbers in mind.Let’s go with the 20%:

20% of $500,000 = $100,000

Closing Costs A lot of things are covered in the big category called closing costs: attorney fees, title fees, court recording fees, any move in fees the building may require, etc. The amounts for each of these things can vary widely, so it’s pretty much impossible to give anyone a definitive number before the closing; as you get closer to the date your attorney may be able to give you a clearer estimate, but I would feel safe if I set aside $10,000 to cover everything. That may be way too much–it could be as little as $5,000–but I’d rather overestimate than underestimate. And if you end up with extras, you can go buy some candy (or a drink, because nothing says, “I need a drink” like a few hours of handing over large checks to attorneys).  So let’s say you need another $10,000

$100,000+$10,000

Savings to Impress the Co-op Board You’ve probably heard stories about co-op boards analyzing your reference letters for signs of character flaws, or asking difficult personal questions at interviews to find out if you will be the right kind of neighbor, but you know what they’re really interested in? How much money you have. You could have the best personality in the world and the heart of a saint, but if they don’t see that you a serious amount of liquid assets, that won’t matter one bit. Co-op boards want to be sure that if you lose your job, you’ll be able to cover your monthly maintenance fees for a year or two; The amount of years will vary from building to building. The seller’s broker should be able to give you some idea of how much the board would like to see. If it looks like you don’t have enough, someone will let you know; no one wants a buyer to go through the process of filling out a board package and waiting weeks for word on that if there’s little chance the buyer will pass financially. That would be a waste of time for both the buyer and seller. Let’s go with the two year number for our sample case:

$100,000+$10,000+$24,000

…and Something Extra The co-op board won’t be that impressed if you only have $24,000 saved because they won’t believe that you may not do something like, oh, I don’t know, buy some furniture for that new apartment. Let’s throw in another $10,000 (and that’s probably skimping on things) just to show that you’re not going be pushed down to nothing if you have to tap into those savings.

$100,000+$10,000+$24,000+$10,000

Okay! Time to add it up:

$100,000 + $10,000 + $24,000 + $10,000 = $144,000

So yeah, to buy that $500,000 apartment, you probably should have about $144,000 easily accessible to you. Does that sound doable? Of course it does (provided you don’t work in the arts–but you knew that already). Now get ready to say goodbye to your landlord!

Stacks of Cash