They’re rare – and tricky – for boards and shareholders alike. There are roughly 100 “land-lease cooperatives” in the city, and if you live in one, you might be on your way to heaven, or you might be headed straight for real-estate hell.
A land-lease cooperative is based on an unconventional arrangement in which the co-op owns the building but only leases the land it sits on, usually for long periods (in some cases, up to 99 years). Apartments in such co-ops usually cost a fraction of their non-land-lease counterparts, but as a lease nears its expiration date, the financial challenges increase: banks grow skittish about offering loans, and boards face the prospect of precipitous rent hikes, not to mention the possibility that owners of the land-lease will terminate it and force the co-op out. Here are two case studies of land-lease cooperatives. One landed in heaven, the other went to hell.
Hitting the Trifecta
When Adelaide Polsinelli, a principal at the real estate investment firm Eastern Consolidated, moved to 2 Fifth Avenue, a landmarked 350-unit cooperative in Greenwich Village, in 1986, she knew little about land-lease units, other than that the price was right. “It was my first co-op apartment, and the location was so unique that I was willing to take whatever risk there was in the hope that it would change one day,” she says.
Over the decades, the co-op, which was built in 1952, had been unsuccessfully trying to buy the land it sits on. Then, in 2005, when the lease was approaching a reset that could have tripled the rent to as much as $3 million a year, the leaseholders finally decided to sell. The $30 million price tag seemed steep, and the co-op was given just 30 days to come up with cash, “but I was ecstatic,” says Polsinelli, who had become board president two years earlier.
“Buying made sense at any price, because land values were only going up and we’d have a tax deduction as owners instead of renters. Our units’ values would be more competitive with comparable apartments around us, especially given how grand our building is, our location bordering Washington Square Park, and our prestige amenities. We’d command a premium as opposed to a discount.”
In a race against the clock, Polsinelli scrambled to cobble together the financing – an unsecured $3 million bridge loan for a down payment, a long-term $31 million fixed-rate mortgage to buy the land, and a $2 million line of credit so money would be available for unforeseen capital improvements.
She and the co-op’s attorney cast a wide net in search of lending institutions, including firms that Polsinelli knew from experience were “miracle workers.” The co-op was turned down by more than a dozen banks before the National Cooperative Bank (NCB) agreed to the trifecta she was seeking, including a 10-year mortgage at 5.24 percent. Even so, there was resistance from shareholders and several of the board’s seven members, which came as no surprise to Polsinelli.
“[Land-] lease transactions are complex, and the average person usually has a limited understanding of what a purchase means for the value of their units and the co-op at large,” she says. “It wasn’t enough for me to think it was a good decision to buy – and I’m a commercial real estate broker. I had to hire impartial professionals to present and explain the facts and figures.” For 2 Fifth, the numbers added up. “In order to cover the interest payments, which were close to the amount of the ground rent, we raised the maintenance by 14 percent,” Polsinelli says. “But 60 percent of that is tax-deductible once the co-op owns the land, compared to just 36 percent on a land-lease.”
Still, a ground purchase is not for the faint of heart. “Make no mistake, it’s a herculean task,” she says. “But because it increases property values, and shareholders who’ve sold their apartments have reaped huge gains, it’s not just prudent. It’s usually a no-brainer.”
For her part, Polsinelli, whose four-bedroom apartment has quintupled in value, wouldn’t think of leaving her home on Fifth Avenue’s Gold Coast. “Our kids are grown, so my husband and I have it all to ourselves,” she says. “We have two terraces with a views to die for where we watch the sun rise in the east and set in the west. It’s a perfect place to call home.”
Into the Flames
Boards that don’t have the opportunity a buy a land-lease can be stuck, and as Melissa Green, a former board member at 101 West 23rd Street discovered, the way out can be painful. When she moved into the six-story, 80-unit building in Chelsea in 1987, Green, a commercial real estate banker, thought she knew what she was getting into.
“I was aware of the risks of ground-leases,” she says, “but since they are often renewed, I wasn’t worried about that, especially since the offering plan said that the co-op’s underlying mortgage was set to mature in 1999 with zero balance. But that turned out not to be true. There was a flurry of lawsuits, and the original co-op was replaced with a new co-op (with all the same shareholders) in 2000 that negotiated a new 40-year ground lease.”
The problem was that the new lease was onerous from the start. Maintenance fees rose by 30 percent that year, and jumped significantly again in 2008. “You could see the direction this was going, and it wasn’t good,” says Green. “It was a nightmare, and I lost sleep over this for years.”
Then, in 2014, residents got another nasty surprise: after trying for decades to buy the land beneath their building – only to be rejected every time – the board learned that the land had been sold to the Brooklyn-based investment firm E&M Associates. “The price tag was $95 million, an astronomical sum that we could never have afforded,” says Green.
But there was more bad news: the next scheduled rent hike was going to be especially punishing. “Land values had gone up so dramatically that maintenance charges could have doubled or even tripled,” says Green, whose monthly fees for her one-bedroom apartment would have jumped from $2,900 to as much as $8,700.
“Our units would be unmarketable,” she says. In addition, long overdue capital improvements, including repointing the brickwork and replacing windows, would have required additional maintenance increases or assessments. “The residents here are middle-class. We have freelance writers, artists, families with kids, and seniors with fixed incomes. They could never have afforded that.”
When Green and her four fellow board members crunched the numbers, the picture wasn’t pretty. “Because there was a real possibility of bankruptcy and foreclosure, we concluded it was in the shareholders’ best interest to find a financial solution that would benefit as many of them as possible,” she says. “We interviewed numerous developers, trying to find one who was interested in a partnership with us, maybe buying us out at a reasonable price or coming up with some creative solution – anything that might make us whole. But ultimately everyone dropped out. It was profoundly disappointing.”
The only logical partner left was E&M Associates. The board reached a deal with E&M where the shareholders were given the opportunity to sell at a fixed price per share; in order for the deal to go through, at least 81 percent of shareholders had to agree to sell.
A meeting was held to inform shareholders of the terms. “We made it clear every unit was getting an individual contract and that the decision to sell was entirely their own,” says Doug Heller, an attorney at Herrick, Feinstein, who represented the board. Shareholders were also strongly encouraged to consult their own attorneys. In the end, 87 percent of the shares were sold. But some owners refused and filed a lawsuit in state supreme court, claiming the board undersold the property and asking for $25 million in damages. The board denies the allegations. “We looked at every sale in the last few years and calculated that $21 million was in tune with the market, and presented that evidence in court,” says Green. The suit is pending.
It was an ordeal Green swears she will never repeat. “The board was vilified as the devil incarnate by non-selling shareholders,” she says. “I’m a good person, not a criminal, embezzler, thief, or anything we’ve been accused of. None of us were happy about this outcome.”
But for most shareholders, there was a sense of relief. Green and her husband have since downsized to a small one-bedroom apartment on the Upper East Side – “with a huge mortgage over our heads,” she adds. “We miss Chelsea, our old apartment, and our old neighbors. My experience has taught me that I would walk clear across the continent to avoid purchasing a land-lease again.”