Bill Morris in Legal/Financial on July 1, 2022
A drama is playing out on Billionaires' Row that graphically illustrates why land-lease buildings — buildings that sit on land owned by a different party — are so undesirable. Shareholders at the 324-unit Carnegie House co-op at 100 W. 57th St. are faced with an unappetizing choice: pay $280 million to buy the land under the 21-story building, or face an additional $26 million a year in ground rent on top of the current $4.4 million a year. Take your pick — or get out.
The land at the southwest corner of Sixth Avenue and West 57th Street is owned by David Werner’s and Rubin Schron’s real estate firm the Werner Group. Co-op apartment owners pay ground rent to Werner Group, which bought the land for about $270 million in 2014. A contract between the co-op and the land’s previous owner included a formula for determining the annual rent beyond the lease expiration in March 2025 — which would have been only $53.4 million. But the purchase automatically valued the land at $270 million, Werner said, claiming the rent should be based on that much higher price.
Resistance came to a head in a lawsuit filed by Birinder Madan, a resident since 2003, who is suing all 10 of the co-op board members, as well as consulting firm JM Zell Partners. The suit, filed on behalf of the other shareholders, claims that the board, rather than fighting for shareholders’ interests, is playing ball with Werner’s “illicit” scheme to overcharge residents, The New York Post reports.
Madan's lawsuit, filed by Massimo D’Angelo, a partner at the Akerman law firm, charges that JM Zell was supposedly hired to negotiate better terms with Werner but instead endorsed its high-priced offer. The board thus “became a willing participant in Werner’s scheme” to force residents to pay “exorbitant additional sums” to keep their apartments or to give them up so that Werner can put up a new building on the site. As a result, shareholders “live in a perpetual state of fear that they will be uprooted from their homes,” the suit claims.
With the clock ticking down on the ground lease expiration in 2025, apartment owners wasted no time to start bailing out right after the board sent shareholders a “doomsday letter” on June 14, 2019, and followed it up on June 19 of that year at a meeting that spelled out Werner’s terms. Some 50 units have traded since them, according to public records, at prices that seem too low to be real — including several for just $100,000 and most under $300,000.
The largest price was $695,000 for an 1,800-square-foot penthouse with a terrace overlooking Sixth Avenue. Such a unit in a normal co-op without a ground lease would fetch several million dollars. Scotty Sheriff bought the penthouse in October 2020. Unlike some Carnegie residents, he has always wanted to buy the land. “I thought we would just buy the land lease and be done with it,” he said. “[But] our board has been sitting around for two years, using COVID-19 as an excuse and not making any counter offers and spending money on professional fees. They should have made an aggressive counter offer.”
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