Land Lease - Carnegie House

Similarly, what about a land-lease in an extremely desirable/hot neighborhood? Say, prime Tribeca or Greenwhich Village? If a landlease is approaching it's 30-year mark, would it nonetheless be a good idea to buy in a place like this, since such areas move very quickly and there's a very high demand for apartments in these areas?

You're both grasping at straws here, wanting to be told that something too-good-to-be-true really might be true.

It all boils down to the co-op owning the depreciating part (the building) of the property and renting the non-depreciating part (the land.) You'll always be paying the landlord 6% or whatever of the land's value, with that value being reappraised periodically. Towards the end of each period (e.g. five years) the rent, and the corresponding maintenance you pay, will appear to be relatively low. Then a new period starts, rent/maintenance jumps, and you're screwed if you under-predicted what land values would be in prime Manhattan when you figured out what price the co-op shares were worth.

Shovel-ready land is now about $600 per buildable ft². E.g., a 100x100 lot with a 10 FAR for $60,000,000. A co-op with a typical land lease of that lot would pay $3,600,000 in rent, plus the RE taxes, etc.

UE98, the more a neighborhood increases in value, the worse off you are when the lease term or appraisal period ends.

NWT makes the much more accurate mathematical case for avoiding land lease buildings. As the former owner of a land lease coop unit, I can attest also to the emotional case for avoiding it... They are highly illiquid, regardless of the amenities, location, etc... There are so many choices in Manhattan, it simply does not pay to try and convince yourself that ANY land lease coop is worth the trouble.

Besides predicting future land value, you also have to guess at the future legal and regulatory environment.

Maybe the neighborhood gets landmarked, and so the land value goes down at the next appraisal, or doesn't go up as much as it would've in a non-landmarked neighborhood.

Or maybe the rules change. It is used to be that a co-op couldn't get more than 20% of its income from its commercial-space rents and still be able to pass through RE tax and interest deductions to its shareholders. That IRS rule went away at the end of 2007, and those deductions will be going away too.

In 2006, Carnegie House didn't know the 80/20 rule would be going away and didn't predict that those deductions would lose value. It went and sold 25% of its leasehold interest, for the retail space, for a lousy $3,000,000 and change. So 25% of its rent obligation went away, but if it had predicted the 80/20 rule would be gone it would now be covering more than 25% of its rent with its retail rent. (It did hedge by keeping the garage space, since its rent wouldn't approach the old 20%.)

Lanzz, right. Too much work up-front at guessing and calculating, and unless you're a glutton for worry and don't have enough of it otherwise, too much of that.

Maybe the best tack, as in most things, would be to put yourself in the other party's position. Think, why would the landowner have held on to the land? Duh, could it be the perpetual inflation-protected revenue stream with very little potential downside? Do you want that or do you want to be the fodder for that?

These comments are incredibly wise and helpful. Lanzz and NWT, you're correct that I've been looking for reasons to buy into Carnegie House, rather than reasons for not doing so. NWT, getting rid of the retail space sounds like it was a very bad move. I'm wondering that if the building had not done that and retained that rental income whether the current "discounted" apartment prices would have been less discounted. I guess that this all boils down to the analysis of just how much less you can get the same apartment at Carnegie House than you could get it at a non-land lease building. Lanzz,I wonder how much as an owner it would be a constant worry on where the maintenance would be going. NWT, any further thoughts on when the next likely big jump in maintenance is coming at Carnegie House? And any further thoughts on how much of a price discount would make a purchase at Carnegie House worth it? Thanks again. Really appreciate it.

I wouldn't go so far as to say *very* bad, just that the co-op might've done things differently had it known what was coming. (As might we all.) They sold an income stream they didn't think they could use, so made sense at the time.

Look at 31 E 70th, a landowning co-op in another prime retail area. For decades they couldn't collect market rents on their retail. Then the 80/20 rule went away and those rents now cover a huge part of their maintenance. If in 2000 they'd jumped the gun and condoized in order to sell the retail and monetize what they couldn't then use, they'd have been unhappy in 2008.

Another of the many ways to look at it: land leases exist because of high land prices in Manhattan, land cost being a much larger component of our housing cost than in more spread-out places.

You can't control RE taxes, or upkeep of a depreciating structure, or labor expense, but you can lock in your land cost. (Assuming you buy at what turns out to be a good time.) With a land lease you're giving up the one thing you can control, so you may as well rent altogether.

I don't know the timing on Carnegie House's rent resets. The financials should detail that.

It's tough enough determining whether anything's worth what people are paying, let alone with the land-lease factor thrown in. In one way it's simpler, as you know that the co-op's shares will be theoretically valueless at the end of the lease term, so you can make a sort of annuity calculation. You'd still be guessing at what rents will be under each of your options.

Just. Say. No.

I'm getting the message loud and clear. It seems that there would have to be a massive discount to balance out the risks. NWT, based on your last comment though, you're suggesting that the best approach is to assume that, at the time of the renewal of the lease, your equity is gone so you go into a land lease deal with eyes wide open - and that, under this scenario, you basically tell yourself that you're a "renter" and the equity that you lost really is the tradeoff for the purchase price discount. Am I interpreting this correctly?

And, lastly, although there is a downside to buying into a building that has a very high maintenance because of an large underlying mortgage (assuming that you get a good purchase discount to account for the high maintenance), this is "apples and oranges" from the situation where the high maintenance is due to a land lease (I think that I'm stating the obvious here.).

Right. For starters, look at what you're buying with any co-op or condo. There's the land component and the building component.

With a land-lease, then, subtract the land value from what the place'd be worth to you in a landowning co-op, and there's the price for the building you're buying a share in. Then subtract some more for the anxiety and the uncertainty in valuing land. (When leases reset, both parties get appraisers to value the land and fight it out.)

In a market where everybody's flinchy, it could work out, on the principle that the thing to buy is what's undervalued because nobody else wants it rather than for some intrinsic reason. The thing is, that same market would present plenty of other options, so why bother with an iffier one?

Or in other words, if the market is skewed toward buying rather than renting, then buy. Don't go half-assed and both rent and buy.

NWT, you might have saved me my retirement! The deep discount that a land lease building provides is an allure that can be hard to resist, especially if it appears to enable one to live better than one ever thought one could. But there's the rub, as the high living might not merely be illusory, but if the worse case scenario comes to pass, then the results cold be devastating.

I do agree, though, with your last 2 posts, i.e., that a particular market could present itself such that buying a land lease could work out to be a good gamble, but indeed a "gamble" is what it is. And I've decided that I don't have the stomach for it. I once pulled my offer on an apartment that had virtually all lot line windows, not that it was likely that a building would actually go up and force me to brick up the windows, but I decided that the anxiety of that possibility would ruin the joy of the apartment. I think that this is a similarly bad move for anyone who doesn't have the stomach for taking risks.

The landlord sold the land last November for $261,000,000. That'll make a good starting point when the co-op and new landlord get together to determine the value of the land, next time the rent resets.

She bought herself a new apartment (not in a land-lease building) last week: http://streeteasy.com/sale/1151309. It's nice to know where the money goes....