Land Leases

60 years wont save you. You should price a land-lease coop or condo the
way you would price an anniuty, although that is very difficult and over
a 30 or 60 year period requires assumptions of very questionable reliability

What else do people know on this?

http://www.nytimes.com/1992/08/09/realestate/talking-leaseholds-buying-land-under-a-co-op.html

Talking: Leaseholds; Buying Land Under A Co-op

By ANDREE BROOKS
Published: August 09, 1992

SHAREHOLDERS in leasehold co-ops -- which sit on leased land rather than on lots owned by the co-ops -- have always faced special issues.

Selling an apartment can be difficult, because potential buyers tend to be wary. The lease may have a clause allowing sharp increases in the ground rent, which can play havoc with maintenance charges, and a smaller part of the maintenance charges may be deductible from taxable income because the portion going to pay ground rent does not qualify.

Whenever feasible, a leasehold co-op should try to buy the land, and "I can't think of a better moment," said David Clurman, a lawyer in Manhattan who counsels leasehold co-ops.

Some sponsors who held onto the land when they converted rental buildings into co-ops are facing a cash-flow crises. Thus, said Ernest L. Bial, a New York lawyer recently involved in such a deal at 315 East 70th Street, they may be more willing to sell.

Moreover, land values are sufficiently depressed that the land's cost should be substantially lower than in the high-flying 80's. In addition, interest rates are so favorable that a co-op that is otherwise in good shape should be able to finance the deal at a lower cost than at any time in recent memory.

Even so, boards are not being aggressive in pursuing the opportunity, said Mr. Clurman. The reluctance, he maintained, comes not from a detailed analysis of the benefits of making a move now, but from an aversion to making a heavy investment at a time of depreciating values.

Lewis Taishoff, a lawyer in Manhattan who also has represented leasehold co-ops, insists that the sort of landowner most eager to make a deal will probably be an individual sponsor rather than an institution or foundation, which is rarely under the same pressures.

But there could be exceptions. Consider the ground lease at the 54-unit co-op at 139 East 63d Street. The owners, the Beekman Estate Inc., had been shifting towards a policy of owning and operating its own buildings rather than simply owning land leases, said Wright Palmer, Beekman's president. So the timing for a purchase was right when the rent came up for review three years ago.

But a way still has to be found to pay for the land. And even though the co-op may initially shy away because the cost appears prohibitive -- or financing seems unavailable -- there could be more flexibility than many shareholders realize.

At 139 East 63d Street, for example, the two sides had agreed on a value of $8 million for the land after each got its own appraisal. But instead of being paid entirely in cash, Beekman sought -- and got -- title to the five stores and the professional suite in the building, its prime objective in making the deal, leaving only $3.9 million still due from the co-op's coffers.

The swap was achieved by restructuring the co-op into a "condop" comprising three condominium units: the five stores, the professional suite and the residential co-op.

The net result was a maintenance increase to $46 a share, from $30. Even so, shareholders should be better off because they also benefit from higher tax deductions, said William R. Miller, a member of the board.

The co-op had no trouble financing the $3.9 million, although Mr. Miller conceded that the deal was arranged just before lenders became wary of real estate loans.

Board members who think financing will be a problem might look at the deal worked out at 125-unit co-op at 315 East 70th Street. In the late 1980's, Alex DiLorenzo, the president of the company that owned the site, wanted $10 million for it -- far more than the co- op could afford, said lawyers associated with the deal. Even so, they watched and waited for an opening.

(Page 2 of 2)

Sign In to E-Mail
Print
Single-Page

THEN, about a year ago, the Di Lorenzo company defaulted on a $1.2 million loan on the parcel. And since land values had also fallen, it reluctantly agreed to sell the site to the co-op for $3.4 million.

Moreover, it was in the interest of Lincoln Savings Bank, holders of the land loan, to exchange its nonperforming loan for a $3.4 million loan to the co-op to help buy the land, said William Lippman, a lawyer in Manhattan who was involved. It also helped that there was no mortgage on the building.

The difference between the monthly cost of the ground rent and the debt service on the new loan has increased maintenance charges by 7.5 percent, said Mr. Lippman. The average went from $227 a room to $249. But shareholders are still better off, he said, because 60 percent of maintenance is now tax-deductible compared to 16 percent before the co-op bought the land. This is because the new totals encompass mortgage interest costs for the land loan and its real estate taxes.

Although there was no default, the 160-unit co-op at 201 East 79th Street also recently bought its site from Mr. Di Lorenzo, said Donald Cohen, a board member. In this case, a total refinancing package of $19 million that folded in the existing underlying mortage on the building was used to pay the $16.5 million purchase price.

"We had no trouble getting the money," said Mr. Cohen.

Maintenance went up 12.7 percent, 67 percent of which became tax deductible compared to 20 percent. And sales have picked up sharply, Mr. Cohen said.

Another way out of any financing problem, said Mr. Taishoff, might be to offer to pay the landowner only part of the money in cash and have him finance the rest.

But Mr. Taishoff warned that funds from a co-op's statutory reserves may not be used for the purchase or a modification of lease terms as they are strictly limited to capital improvements. Only the reserves from an auxiliary capital fund -- which many have been set up to provide greater flexibility -- can be tapped.

Mr. Clurman said that even if some landowners are unwilling to part with their land they may be persuaded to re-negotiate the terms of the lease in exchange for a lump-sum payment to bolster their cash levels.

For example, he said, lengthening the term to 50 years or more with tight caps on any rental increase could go a long way towards making the co-op more financially stable and appealing. Another compromise, he said, might be to pay a lump sum in exchange for an option on the land.

Mr. Miller, who is also president of William B. May Management Corporation, said a board must present its numbers clearly when going before the residents for approval. Shareholders in a few co-ops, he warned, have actually turned down good land deals simply because "they couldn't understand what was going on."

The Marriott Marquis:

http://www.nytimes.com/2013/02/13/nyregion/marriott-marquis-deal-could-cost-taxpayers-344-9-million-audit-says.html

But because of a lease signed by the Giuliani administration in 1998, Marriott can buy the property from the city for only $19.9 million, one-tenth of its current $193 million value, according to a new audit by the city comptroller, John C. Liu.

Mr. Liu said the problems with the 1998 lease could end up costing taxpayers $344.9 million in lost rent and proceeds from the sale of the property.

Marriott, whose Marquis Times Square generates more revenue than any hotel in its worldwide portfolio, also owes the city $3.6 million and failed to keep adequate records that would enable the city to determine whether it has received all the money that it is due, according to the audit.

“Even in 1998, it’s hard to imagine that property values would slump so badly,” Mr. Liu said. “There is an opportunity here to renegotiate this deal in a way that could bring millions back for taxpayers.”

Marriott and the Bloomberg administration sharply disputed the audit’s conclusions.

“The comptroller’s office did not understand the Marriott Marquis hotel deal, and its audit report is wrong on all counts,” Marriott said in a statement.

Julie Wood, a spokeswoman for Mayor Michael R. Bloomberg, issued a sarcastic response to the audit on Twitter: “Looks like @JohnCLiu has run out of things to audit, now rummaging thru Giuliani files. Shocker: Times Sq turnaround didn’t happen by itself.”

But Mr. Liu stood by his report, saying the audit relies on Marriott’s lease, prior audits and internal memos at the city’s Economic Development Corporation.

Randy Levine, who was the deputy mayor in the Giuliani administration who negotiated the 1998 agreement, said he could not recall its specifics. Mr. Levine is now president of the New York Yankees.

The most striking finding in the audit is that the city appears to have drastically undervalued the land under the hotel.

The hotel, which includes over 1,900 rooms, a ballroom, exhibition and meeting space, shops and a theater, sits on the west side of Broadway, between 45th and 46th Streets. The hotel is the flagship for Marriott’s 33 hotels in New York City under nine different brands.

“Times Square is a unique market in which the sky may be the limit for land,” said Daniel F. Sciannameo, president of Albert Valuation Group, an appraiser. “Recent prices are off the charts.”

In the early 1980s, the city and the state were desperate to redevelop Times Square, then a district of T-shirt and X-rated shops and shuttered theaters that many New Yorkers avoided. With Times Square considered a risky location, government provided a menu of tax breaks and other incentives to encourage redevelopment projects by Marriott and others.

The city and the state signed a 75-year lease with Marriott in 1982 that was intended to ease the hotel’s financial burden by setting a low initial rent, a portion of which was deferred until the lease expired in 2057.

Under its original 1982 lease, Marriott had the option to buy the land for “fair market value,” after paying all deferred rent and a low-interest federal loan. The lease stipulated that each side would hire an appraiser to establish the price.

Seventeen years later in 1998, Marriott asked the Giuliani administration to revise the terms of its lease, so that it could comply with requirements for forming a real estate investment trust.

By then, Times Square was beginning to thrive.

Marriott agreed to pay $54 million to cover some deferred rent and to repay a federal loan. The city, in turn, changed the rent calculation and amended the purchase price, inserting a formula that effectively reduced it to $19.9 million, according to the audit.

Marriott contends that it does not owe the $3.6 million cited by the comptroller because the original sum had been paid in 1998.

As for the purchase option, Marriott said the annual rent payments it had made to the city should be deducted from the purchase price.

But the comptroller’s office points out that nowhere in the original lease does it say that there would be a deduction for rent payments.

But the revised 1998 lease eliminated the requirement for appraisers and instead set a price. According to the audit, the Economic Development Corporation failed to do a comparative analysis to establish whether the revised lease was in the best interests of the city.

According to internal city documents, Marriott offered to buy the property in 2010 for even less than what was stipulated in the revised lease, $10.7 million, although nothing came of it.