It was a crapshoot. When Drew Glick attempted to buy into the cooperative at 22 West 26th Street some 14 years ago, he almost didn’t get in. It wasn’t the board; it was the potential difficulty of getting a 30-year mortgage on a property that had a big question mark. That question mark was the land lease.
The converted building sat on a parcel with a 35-year lease that was set to expire in June 2015. There were five renewal options that would extend the lease to 99 years, according to Lynn Whiting, vice president at Argo, who has managed the property for 21 years.
With the property’s land lease expiring 16 years from the date Glick would be purchasing, that left a big hole in the buying scenario that made most banks wary. After all, who could predict where the market would be in 2015, and what the market value of the land would be?
“[The lease] was very vague and worded in such a way that it could be anything,” says Glick, a senior vice president with Brown Harris Stevens. “We were continually turned down [in our loan applications], so we almost didn’t move forward.”
If Glick had a problem a mere 14 years ago, imagine the dilemma of the original purchasers back in the early ’80s, when the property first went on the market.
As spotlighted in Habitat’s “Silhouette” column in June 1982 (see box on p. 39), the building was billed as “one of Midtown’s last and best loft conversions,” with open-plan apartments and views of the Empire State Building and the World Trade Center. Less than 50 percent of the industrial buildings on the block at the time had been converted to residential use, and local zoning preserved much of the gritty feel that drew buyers to the Flatiron District. Prices at the time ranged from $208,000 to $295,000 for a mix of 14 single units and 6 duplexes that ranged in size from 750 to 2,190 square feet. There was 4,000 square feet of commercial space on the ground floor.
Units sold well initially; later resales were hamstrung by the land lease. As Glick discovered, anyone seeking a 30-year mortgage when there was less than 30 years left on the initial lease would be hard-pressed to get financing. Terms were based on a percentage of the land’s market value, and that was unpredictable at best. Ground rent at the time was set at $30,000 a year, reports Whiting.
Banks also take a dim view of land leases because they can have a negative impact on unit prices, according to Alan Miles, Glick’s longtime companion. “Reduce the pool of people who can buy apartments and you reduce the value of the apartments,” he says.
Glick and Miles eventually were able to buy when the holder of the lease, Madison Park Loft Corporation, defaulted in 1998. The savvy board was able to extract the parcel from among many owned by the company and buy it. The price was $1 million. The building took out a second mortgage, paying 6 percent interest (roughly $60,000) per year to service the debt, or only double what the annual ground rent was. The co-op recently refinanced the mortgage at a 3.95 percent interest rate.
“Ground leases are always an issue when buildings are refinancing, so we avoided a potentially bad financial situation,” Whiting notes. “We really hit a home run.”
A Second Problem
Another home run for the building came about the same time, with a default by Royalex Realty, the sponsor that owned the 4,000 feet of commercial space that was spread over two floors.
Whiting and the co-op board saw a possible “80/20” tax problem. Under the Internal Revenue Service’s so-called 80/20 rule in force at the time, the co-op owners would lose their tax deductions if less than 80 percent of the building’s revenues came from shareholders.
The board then took some important steps: it applied for and received a zoning variance, then converted a portion of the commercial space to residential status. It sold those units, boosting the residential revenues above the 80 percent mark. (This point has become moot because of relatively recent changes in the 80/20 requirements.)
The co-op thus went to 22 units from 20, and prices for most recent sales of two- and three-bedroom units ranged from $1.675 million to $2.15 million. The character of the building has also changed a great deal, with the gradual addition of high-end amenities such as two-shift doormen, a roof deck, major restoration of the façade and cornice, lobby renovation, an elevator upgrade, and installation of a new cooling tower. Six months ago, the building lost its commercial tenant, a clothing wholesaler, and a replacement has yet to be found. To cover costs, the board imposed an assessment.
Living in Harmony
Bill Strachan, board president since 2006 and a resident since 1984, reports that there has never been any friction among residents or board members over improvements. There was some political divide over whether to set up a reserve fund, but that situation resolved itself to everyone’s satisfaction.
“There is a lot of conversation in the building in terms of letting people know what is going on,” says Strachan. “It’s been a lot of work over the years, but we all put the work in. It’s a pioneer-spirited group.”
As the building has changed and gone upscale, so has the neighborhood. What was once a dead industrial zone at night is now one of the borough’s hottest neighborhoods, with bars and businesses going almost 24 hours a day and tourists filing in and out of Eataly and the refurbished Madison Square Park nearby. The building’s population has changed from urban pioneers to wealthy, younger Wall Street types, who demand that their amenities are in sync with the prices of the apartments and that the neighborhood provide convenient entertainment venues.
Indeed, 30 years have made a difference. “It used to be deserted at night, with no activity. The gates came down and that was it,” recalls Whiting. “Now it’s a much more desirable neighborhood. It has more life.”