Residents of Carnegie House are asking for a time out.
The shareholders of the building, a 324-unit co-op at 100 West 57th Street, are staring down a ground lease that expires on March 15, 2025. Barring any last-minute deals for the co-op to buy the land, co-op shareholders are left with the option of a new ground lease or becoming rent-stabilized tenants.
But the board and the land owners, Ruby Schron‘s Cammeby’s International Group and David Werner Real Estate, have not been able to reach an agreement on the new ground rent.
Now, the co-op board and an LLC that controls the retail co-op in the building are suing the state housing regulator and an entity tied to Cammeby’s and David Werner, seeking to halt arbitration over the ground lease renewal. The board wants to ensure that new rents set at their apartments are not too high, in the event that their ground lease co-op is converted to rent-stabilized housing.
If the co-op board and the landowner can’t agree on a new ground lease, and either the co-op is dissolved or a new lease is approved but the residents are unable to pay the new rent, the apartments could become rent-stabilized.
Before any of those scenarios play out, the board wants the court to force the state’s Division of Homes and Community Renewal to establish how initial rents will be calculated if the units are converted to rent-stabilized. The lawsuit points to state rules that hand HCR the reins in calculating initial rents if a landlord caused the “deconversion” of the co-op.
The lawsuit accuses the owner of orchestrating “a thinly choreographed effort to go through the motions and give the appearance of negotiation with the latent intent to cause insolvency and failure of Carnegie House to survive as a cooperative corporation.”
Carnegie House Board President Richard Hirsch said the lawsuit boils down to seeking clarity for co-op shareholders about what they can expect if the co-op is dissolved.
“We’re basically asked to drive a bus blind-folded,” he said.
“We want to operate in an honorable way,” he added. “We just want to be treated honorably.”
A spokesperson for the owners said the lawsuit was premature and that the parties need to go through arbitration first.
“The co-op and ground lessor agreed in the initial ground lease to settle rent reset amounts through arbitration,” the spokesperson said in a statement. “If the co-op believes its proposal was made in good faith, then it must believe an arbitrator would find it persuasive. But by filing this complaint, the co-op has tacitly conceded that it believes its proposal is meritless.”
The co-op pays $4 million in annual rent on the ground lease, and the board pitched a 20 percent, $1 million, increase. The owners offered raising the rate to $25 million.
The lawsuit is the latest salvo by the board and the owner of the retail co-op (which includes Georgetown Company) to prevent a significant hike to the ground lease. They have spent tens of thousands of dollars lobbying for legislation to cap rent increases on ground leases and to ensure renewals.
Despite 11th-hour changes to the bill at the end of the legislative session, the measure did not progress. Opponents of the measure argued that the bill would be a windfall for wealthy co-op shareholders who were able to buy their buildings at a steep discount because of the ground lease arrangement. Shareholders of such co-ops argue that they could not have foreseen the kinds of increases expected in the current market.
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However the ground lease at Carnegie House is handled could set a precedent for other ground lease co-ops facing large rent increases.
“We’re just the first one in the barrel going over Niagara Falls,” Hirsch said.