As the price of land in Manhattan continues to reach record heights, more co-op residents may have to pay large amounts of money to avoid changing their address.
Such a situation recently played out with the Trump Plaza, a luxury co-op building on the Upper East Side that closed on a land purchase transaction worth $185 million.
Photo by Richard Lewin
The co-op decided to buy the land underneath the building to avoid a ground lease reset in 2024, thereby forcing residents to choose between contributing up to $1 million and selling their apartments.
“Land prices are at record levels now. So it’s not surprising that you would see this kind of event occurring (compared to) ten years ago,” said Jonathan Miller, the president and CEO of real estate appraisal firm Miller Samuel.
Miller, who provided analysis on the deal’s impact on property values to the co-op board, said that the Trump Plaza’s lease “had the most adverse effect to any ground lease I’ve come across.”
“The reset of the ground lease payment would have been catastrophic and effectively make the individual apartments unsellable,” he said.
“In 2024, there is a significant escalation in how much rent the corporation has to pay. As a result, the monthly payment for apartments is going up in the magnitude of four times where they currently are, which is already high.”
Apartments in land lease buildings generally come as a bargain compared to regular condominiums.
The lower price is meant to compensate for higher maintenance fees and the difficulty of getting mortgage financing for such transactions.
“Residences in land lease buildings typically trade 20 to 30 percent less than equivalent properties,” said John Janangelo, the executive vice president of Douglas Elliman Property Management.
Residents in land lease buildings buy shares in a corporation that own the building rather than get deeds for their apartments. Every month, they pay maintenance fees that cover rent for the land and operating expenses. For the duration of the Trump Plaza’s 40-year land lease, the co-op was on the hook for six payments. Had the lease been allowed to reset, the board would have had to pay eight percent of the land’s value in 2024.
Marc Copper, the president of the co-op board and vice chairman of investment banking firm Peter J. Solomon Company, said that the co-op’s rent payments would have gone up from $1.3 million to $16 million. “It would have had an enormously negative effect on value,” he said.
The price of land in Manhattan has been consistently flirting with unprecedented heights in recent years.
According to real estate firm Massy Knakal (now owned by Cushman & Wakefield), prices reached a record average of $511 per buildable square foot during the first half of 2014. This means that land owners are more agreeable to selling their land as they look to sell high.
Stuart Saft, the chair of the New York Real Estate Practice at law firm Holland & Knight, said that while owners are now easier to convince to sell, co-op boards should wait until prices are lower before trying to close a deal. With most land leases having a length of 99 years, building owners have a lot of time to be opportunistic.
“Building owners should consider buying the land when the economy is weak, but they don’t,” he said.
The Trump Plaza board managed to avoid a common ailment among building co-ops- nearsightedness.
According to Saft, co-op boards tend to ignore the ground lease until the deadline approaches, leaving them vulnerable to market conditions. “Usually buildings that have a land lease leave it to the last minute. They sort of assume that the problem would be resolved. When they get to the point about, maybe five years from the end of the term, then they start to focus on it,” he said.
In the case of Trump Plaza, the co-op lodged a bid for the land nine years before the deadline. However, there were factors that pushed the board to act. The family that owns the land put the property on the market, opening the possibility of a third party inserting itself into the equation.
There are approximately 100 residential buildings in Manhattan that stand on leased land. These include the Excelsior at Midtown East, Rockefeller Center in Midtown and the Carnegie House in Midtown West.
