Maybe you've been looking for an apartment for a few months; a one bedroom on the Upper East Side, nothing too glamorous, just a proper living room, a large enough bedroom, and if possible, a bit of outdoor space.
Through your search you've mostly seen co-ops as well as a few condos starting out around $500k, and going up to around $800k. While you may have seen a number of strong possibilities, you haven't quite seen an apartment that you've fallen in love with just yet.
Then one evening, in the wee hours of the night, you're browsing through Zillow, or Trulia, or StreetEasy, and you see it: a beautiful pre-war apartment on a high floor that hits everything on your list: a large living room, a terrace, a great location, a relatively friendly subleasing policy, as well as a washer and dryer unit in the apartment to boot.
Yet, this isn't even the best part, the apartment that you've fallen in love with not only has everything on your list, but is also a few hundred thousand dollars below what you planned on spending. You're hooked.
So you do a bit more investigation, maybe you reach out to your buyer's agent, or maybe you contact the listing agent for the property and inquire: "Is this apartment still available, and if so, when can I see it? This afternoon, tonight, first thing tomorrow morning?"
Then, alas, the agent responds, “Yes, it is still available, and I can show it to you tomorrow, but I do want to tell you that this is a land lease building."
Well now that you have your answer, more likely than not, that answer only raises a number of questions; primarily, what the heck is a land lease building, and why is this apartment priced so far below market?
While defining a land lease building is quite simple, the consequences of having a building in which the corporation that owns the co-operative is renting the land on which the building is situated, rather than owning the land, can create important considerations. The most pressing of these considerations often being, will purchasers be able to obtain financing for the apartment?
If you're considering purchasing in a land lease building, whether you would be purchasing with all cash, or would need to obtain financing, one of the key components of evaluating your decision lies within the answer to the question: when does the building's lease expire?
If it's sometime that's beyond the next thirty years, then you'll be pretty likely to find a well-known and well-regarded bank that would assist you with financing the purchase. However, if for instance, the lease expires sometime within the next five to ten years, then you'll likely be up against a tougher fight.
For if a bank is going to issue a thirty year mortgage, then it's far less risky to do so for a building that will still have a right to occupy the land on which it is situated for the entire duration of those thirty years.
It's also important to note that once the lease expires, the owner of the land always has the option "evict" the corporate tenant (the co-operative), or to renew the lease, and allow the co-operative to continue to utilize the land. More often than not, owners have plenty of incentives to permit co-operatives to renew their leases. The main one, of course, is that it's traditionally easier for a landlord to continue receiving rent from a good tenant, rather than advertising a space again and finding a new tenant.
With this said, if you don't mind the increase maintenance, if you can obtain a mortgage for the apartment, or if you'll be purchasing all cash, then the second most important consideration relates with the apartment's resale value, and when you anticipate having or wanting to sell.
Usually, apartments in land lease buildings tend to stay on the market longer than apartments that are not in land lease buildings. If you anticipate wanting to move away from the apartment that you're considering purchasing relatively soon, i.e., within the next 3-5 years, then keep in mind that once you're ready to sell, you may not see a great appreciation of your apartment's value; and moreover, you may not be able to sell the apartment very quickly.
However, if you truly love the space that you've seen, and do not anticipate needing or wanting to move away from the apartment in the foreseeable future, then there's a strong likelihood it may be a good idea for you to take advantage of the lower listing price.
Though we haven't hit on all of the implications and considerations of land lease buildings, we hope that we've at least given you a helpful introduction. If you decide to view an apartment within a land lease, you should do your research regarding prior sales in the building, as well as the number of apartments that are currently for sale in the building, and also keep at least a few of the following questions in mind:
When will the lease end?
Which banks have loaned in the building?
What percentage of the maintenance is tax-deductible? and
What percentage of the maintenance goes toward the ground lease?
As always, feel free to give us a call or drop us a line if you have any questions here, or would like to discuss purchasing or selling real estate here in New York.