Vice President, Impact Real Estate Management
Beware the Impact of a Land Lease
Setting the Scene
About a year ago, the loan for one of our large properties – a 160-unit cooperative in Queens that was formed in 1956, under Section 213 of the Federal Housing Law – was coming due with the National Cooperative Bank (NCB). It was a 10-year note for $2.5 million, with a 30-year amortization. The interesting thing about this property is that there’s a land lease. There’s a landowner who has leased the property back to the cooperative since 1956. The lease expires in 2055 or 2056.
We needed to refinance the note, but we ran into a buzz saw: resistance from the banks in giving the standard cooperative loan – a 5- or 10-year note with a 30- or 40-year amortization, so that the co-op virtually pays no principal. Lenders, however, were not willing to get involved in this co-op because of the land lease issue.
Following the Action
We vainly tried to buy back the lease (since 1956, we’ve paid about $2,000 each year in rent). After that, NCB, the primary lien-holder, proposed doing a 25-year, fully amortized loan. Accepting the offer meant that we needed to anticipate all of the necessary capital work over the next 25 years because we probably would not be able to borrow additional funds. All of that principal had to be repaid over the term of the loan.
We sat down with accountants and engineers and contemplated what the cost would be, and we ended up borrowing an additional $2.5 million from NCB for a total of $5 million. Since Local Law 11 work runs in a five-year cycle, we had to plan for the modernization of the elevators and a host of other issues. We would have to increase maintenance to cover the increased principal payments.
Doing It Right
It was very difficult dealing with the situation. Getting everybody on board, and then ultimately selling it to the shareholders, was an absolute necessity. These are people who are not used to this type of thing. The lesson: if you have a land lease situation, you need to prepare as soon as you can. It’s not like a regular refinancing, where you’re only going out 5 or 10 years. You’re looking out 25 years. There are a lot of Section 213 co-ops out there, and they’re going to be facing this issue.