Kings and queens they aren’t, but some New York City landowners are enjoying the perks of royalty.
Buoyed by a sizzling real estate market, leasehold condominiums, cooperatives and condops are catching on with apartment buyers in New York City.
Arrangements where tenants lease the land under their dwelling instead of purchasing have typically been the province of monarchies, where rulers want to hang on to their land in perpetuity. They abound around the world, and can be found in such places as Hawaii, the Netherlands and Aruba.
But creative developers in New York City and their even more inspired lawyers are devising new legal structures enabling landowners to lease their land for development instead of selling it. And in a real estate market with little inventory, prices for units in these new developments are rivaling those of condominiums where buyers own the land.
“This is going to happen,” said Nancy Packes, president of the project marketing division at Brown Harris Stevens. “People are suddenly realizing that they don’t have to sell their land, that developers would be just as happy to take 100-year or 99-year leases. This is happening more and more.”
Land-lease arrangements have been around for decades in New York City, but residential situations are less common than commercial ones. Apartment cooperatives, such as Trump Plaza at 167 East 61st Street and the Sovereign at 420 East 59th Street, among others, have leased their underlying property, but never achieved the popularity and prices of fee cooperatives or condominiums. There may be around 15 such buildings in the city.
Recently, a new form of leasehold development has shattered this pattern.
The Related Companies built One Carnegie Hill at 215 East 95th Street as a leasehold condop, where prices have climbed from $700 a square foot to around $1,100 a square foot, the price of a typical fee condominium in the area. The company is working on two other condop projects.
(A condop is a condominium building divided into at least two segments. One is typically sold or leased to commercial interests, and the other is sold to an apartment cooperative. Condops have come to be associated with looser bylaws than apartment cooperatives, perhaps because that’s how brokers have marketed them.)
The conversion of the Inter-Continental Hotel at 110 Central Park South will also be a leasehold condop, with Anbau Enterprises putting in 65 units in a building with a 99-year lease on the land underneath.
The Stanhope Hotel on Fifth Avenue and 81st Street, purchased by Extell Management earlier this year, could be a similar setup, brokers said, and will be marketed by Corcoran. The land on which the hotel sits is reportedly owned by the Goldman family.
Another, similar type of ownership leasehold condominiums, not condops can only be done in three areas in the city under state statute: Battery Park City, Roosevelt Island, and on the Queens West site in Long Island City.
The belief that condops are more flexible, legally, is an anectodal notion, as condominiums can have very strict bylaws restricting subletting and resales, and cooperatives can have very loose bylaws. There is no legal mandate in either case.
Real estate experts say it’s unlikely that buyers are responding to the uniqueness of the property ownership structure as much as in spite of it. A hot real estate market has driven buyers to all corners of Manhattan.
“It just so happened, when they opened the building, nothing else had been opened on the Upper East Side, and the building gained enormous demand and success, and the prices are shooting up,” said Asher Alcobi, founder and president of Peter Ashe, Inc. a brokerage.
Since then, Related has developed tony Astor Place at 445 Lafayette Street, designed by celebrity architect Charles Gwathmey, as a leasehold condop, and its units have been selling for at least $1,700 a square foot. Related is planning another leasehold condop in the Midtown West area.
“It is actually pretty cutting edge,” said Michel S. Evanusa, a real estate lawyer with Stroock & Stroock & Lavan LLP, who structured the Related deals. “It’s a way of coming up with these different structures to accommodate the needs of the parties. It’s become almost a joint venturing mechanism.”
While land-lease arrangements may be advantageous for lessors who don’t want to part with the land they develop, what do they mean for apartment buyers? Real estate brokers say buyers naturally have concerns about land-leases.
“Most of the clients that we brought to One Carnegie Hill loved it because it’s beautiful, and the location is very good,” said Alexander Bogod, a broker with Lincoln Center Realty. “But the idea of a 99-year lease was also a factor in that it would be hard to resell.”
One Carnegie Hill’s land is owned by the Islamic Cultural Center of New York and will revert back to the organization after the lease expires. Each leasehold situation is different, and New York, unlike some states, does not guarantee unit owners in land-lease situations the right to buy the land at market value when the lease expires.
Real estate lawyers say there are drawbacks to land-lease situations. Tenants can try to renegotiate the terms of their lease before it expires, but nothing is guaranteed. In New York City, there have been cases where cooperatives have successfully arranged to purchase the land upon which they’re built.
“There have been leasehold coops in the city that have negotiated with the sponsor to acquire the property,” said Dennis Greenstein, a Manhattan lawyer who specializes in co-op and condominium law. “In some instances, there were only 40 years left on the lease, and that’s not really a long time.”
Greenstein said he couldn’t think of any cases where a land lease expired and tenants were forced out of their property in New York. Still, real property in a leasehold situation is a diminishing asset, he said.
“If you’re borrowing money and want to take out a 30-year loan, and the bank checks and finds out there’s 29 years left on the lease, would the bank make the loan?” asked Greenstein. “I don’t know.”
In the case of developments done by the Related Companies, the land lease fees have been paid by the developer for many years, lowering initial fees for buyers. But those who buy into other land-lease developments are often confronted with higher monthly fees. Lawyers suggest they check their contracts carefully to see when and how rent is recalibrated over the term of the lease.
Real estate attorney Benny L. Kass, a senior partner at Washington, D.C., law firm Kass, Mitek & Kass PLLC, said those who buy into leasehold situations typically receive reduced tax benefits. While mortgage interest and building taxes can be deducted, land taxes cannot.