Rethinking land lease

(sorry, first time posting there after a long period of lurking - and somehow screwed up the line breaks)

>> In this case, lease increases are pegged to the CPI through 2030, though after that who knows.

You can't do any financial analysis unless you know how the land lease payments reset in 2030. That is the most important input.

>> I may have a stronger stomach for this sort of thing from living in London, where most flats are leaseholds.

As far as I know, most London leaseshold increases are capped by law with a right to buy the land at pre-determined prices. So NYC and London leaseholds are not really comparable.

The “doomsday scenario” is maintenance going up 18% but, also, after 2030 who knows. This is how I know you know nothing about land leases.

There have been numerous landlease buildings where value fell much more than 50%. You need to understand the lease terms inside out. Many land lease apartments are effectively worth ~$0.

>> The “doomsday scenario” is maintenance going up 18%

This seems grossly underpricing the risk for sure if OP thinks its just gonna cap out at +18% over 20 years.

I've had my maintenance go up 20% in one year because a new board came in and decided to spend like a bunch of drunks.

There is 0% chance your maintenance would be only $5k in 20 years. Try $5k in 3 years and then increasing at higher than inflation if you are lucky, 10% if you are unlucky.

2030 CPI peg going away seems like your maintenance bill risk is essentially uncapped.
Why couldn't the land owner demand 10% increases in perpetuity?

I would add that for the risk, I'm unimpressed with the price for the size. Maybe for $300k? I don't know. For $600k and obscene maintenance just go find an oversized 1bed uptown in a low service building. Or BK/QNS.
Building has a 3bed almost 2k sq ft unable to sell for under $1M on&off for last 3 years.

How would your numbers work if the maintenance was up to $10k in 20 years, and the resale value was essentially $0?

Don't let this city delude you into overstretching for a dubious buy. For $7k for a couple, you can continue to rent very very well in this city, and save yourself the risk.

Okay, disclosure: I am not a math person. (I mean, I always thought I was, and then I met all the finance people here who could buy and sell me.)

But first, the living room is lovely. The proportions, the furniture, the light -- it seems a very pleasant room. I am in a new apartment now, that I am quite happy with, and I would still like to live there.

That said, 2030 is right around the corner.

Anyway, in my mind, the math (which I'm sure my finance friends on this thread will correct) is:

$600K / 70 (I'm assuming this reset takes place sometime in the middle of 2030, and that after the reset, the residual value of the apartment is $0. That's not a given, but it IS a very real risk. ) = $8,571 a month
Plus
Maint = $4,233 a month

Total expenditure = $12,804 a month

Defrayed by
The $3,000 a month gains on the $600K you invested at 5%.

So you'd be spending an effective $9,804 a month to live there. You might get some slight tax benefit from that, but if you're currently thinking "vs. $7K rentals" I'm not sure that's the right comparison.

How does this apartment stack up vs. $8K rentals that you could put some Queen Anne furniture in?

Also, if your "life savings" is around a million, I'm not sure you would want to be spending six figures on housing annually, whether you're renting or buying ... but then again, your annual spending is really somewhat dependent on your income, which is a data point unknown to me. The higher your income is, the more the risk of the land lease seems bearable to me.

ali r.
{upstairs realty}

Ali’s calculation is similar to how I would look at it.

https://qtd.vua.mybluehost.me/land-lease-buildings-updated-thinking/

Here is a blog post from a broker who was selling in this building in 2018. He assumes CPI to 2030, then a 40% jump. So that would be rising to $5k maintenance by 2030 then going to $7k for 2031 and beyond. This is from a selling broker. I don’t think the original poster is in the zipcode of what is likely.

@Woodside - exactly.
So the base case .. again, this is someone selling you something, is that the maintenance is $7k in 2031.
The nightmare scenario could be far worse. Forget $5k in 20 years.

@Ali - a good point re: % of income angle.
If you gross $1-2M/year then taking a $300k-$600k bath on an apartment over a 1-2 decade period might be tolerable. Even then, doubtful, given the people I know grossing 10x that who squabble over leaving $10k "on the table" in a deal.

Now if you gross like $200k-$300k, it's hard to see this being a risk worth bearing.

Without knowing how the 2030 reset works, it is just famous "garbage in garbage out" financial calcuation.

Forget the math. Show me the land lease buildings where "everything worked out fine" after resets, other than those where they bought the land.

And since you're kind of looking at this as a "we don't really own this diminishing asset," why don't you do the math vs renting?

If you want to gamble on an el-cheapo white box conceived during the Robert F Wagner administration, you can't do better than this...

https://streeteasy.com/building/carnegie-house/sale/1678852

Bigger, less maintenance, better location, and more Kennedy vs Nixon charm.

Yet somehow the smart money keeps overlooking it.

George,
Steps to Central Park!!!

Billionaire's Row!!!

For the OP any anyone else who hasn't followed the case: https://www.habitatmag.com/Publication-Content/Legal-Financial/2022/2022-July/Billionaires-Row-Co-op-Board-Sued-Over-Land-Lease-Deal

"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."

So yes it raises the question of - what happens to the value of your apartment & maintenance when the land under it is demanding $860k per unit to buy-out or a $65k/year per unit rent increase. Obviously it means numbers that are almost unfathomably bad.

Aha, this is the classical thinking that if you saw many people passed by the 100 dollar lying on the sidewalk, the bill must be worth zero.

Another thing common in NYC, when the subway is arriving, if all cars are super crowded with the exception of a single car, the single car must have some problems (no AC, or a homeless or something else).

I am with kind of with George on this one. I think landleases can be the right choice for some. The one in our neighborhood at 420 E51st has quite a few happy seniors who knew exactly what they were getting into and are pleased with their choice. They don't plan on being around when the lease resets and the higher maintenance they expect to pay over the next 15 years was factored into what they were willing to pay for the privilege/burden of ownership.

There is a strong element of "I'll just go on until I drop dead, and I'm not leaving anything to my heirs," in many of the arguments. My concern is: What if your situation changes? Divorce? Spouse death? Financial crisis? Institutionalization? A forced sale is never great, and an illiquid one less so. If you need the asset to pay your bills, you may find yourself in timeline and cash trouble. I thought about leaseholds when I was looking, and couldn't make the numbers work out for my likely retirement scenarios, even with fairly long-dated leases.

I recall in a prior thread doing the math and concluding that Carnegie House properties are trading at a fair price if you consider them basically prepaid rent. The maintenance isn't cheap already, but it is cheaper than a straight rental. And I tend to think that there will be a fair price negotiated with the landowner since they're not going to evict a bunch of grandmas for failure to pay an astronomical charge for land

In addition, with the higher cap rates currently, the market and appraised price of land should come down vs the previous purchase price.

We looked at 100 West 57th about 15 years ago. But ran away when we realized it was a land lease.

300,
By what percentage have you actually seen those come down and what's you projection of the maintenance increase as a result? Reduced from gargantuan to merely catastrophic?

I think the way George explained it is the way I am looking at. For example, had I expected that our time in NY would be limited to 15 years, and had I been able to negotiate a price in a landlease building in my preferred precise location for the present value of what I would expect to pay in rent over those 15 years plus some premium for my ability to customize the finishes to my precise quirky tastes, that would have been a smarter choice from a financial management perspective than buying a first class cabin on The Titanic.

Aren't all these "get a price in a land lease building equal to X years of rent" calculations thrown off by the unpredictable ticking time bomb ground lease reset within your X years window?

What happens if maintenance goes from $4.5k to $8k to $10k ?

Can you simply walk away from a property if its maintenance make it no longer economic to live in & resale value/illiquidity make it pointless to sell?

Don't do it. Imagine living in a building with common ownership where each owner had to come up with their own unique justifications to make it possibly work in the presence of so many unknowns? Your long explanation alone, I won't touch it any of the elements, but I'll offer you a Johnnie Cochranism - if the explanation is too long, the choice is wrong.
Rent for a couple more years, or lower your expectations on what you'll accept for a purchase, although this comment, "our life savings would be locked in a single piece of property" really says, rent!

@steve123 - Yes, you can walk away. This is not intended as legal advice, but as a practical matter, typically yes, and, moreover, the unambiguous right to do so may even be clearly laid out in the Proprietary Lease as it is in ours. With that said, I would never enter into such an arrangement were the lease scheduled to be re-set during my anticipated residence.

@Rinette - I agree that nobody should lock their life savings in a landlease under any circumstances. I would only consider this option if the money allocated to the entire endeavor was not essential to one's ability to live comfortably (whatever that adverb means to the particular individual using it) should personal circumstances change such that living in that particular apartment was no longer tenable. My personal opinion is that in an ideal world, the price of the freedom to pick up and move whenever you want should always be kept within reach to the extent feasible. Again, that is in an ideal world. I get it that many don't have that freedom no matter what choices they make, so this is a very Manhattan-rich-people discussion.

I am clearly not well-versed in landleases and have this basic question: How frequently does the ground rent re-set in these buildings? Does it vary by building? Is it typically every 5 yrs? 10yrs? 25 yrs?

The terms of land leases are limited only by the creativity of the lawyers. There are some with a fixed rent which expires after 99 years. The are some with increases of a fixed percentage or increases tied to inflation. There are some with periodic appraisals which reset the lease to a certain formula based on the appraised value.

What about condos in BPC? These seem to be on the cheaper side, but not dramatically so, and they seem to transact a bit more than the midtown/uptown land lease buildings. Did they get a better deal with the city that makes them less risky than the private land leases?

Yes

Bill seems to limit ground lease rent increases.
https://www.habitatmag.com/Publication-Content/Legal-Financial/2024/May-2024/new-york-co-op-ground-lease-bill

https://therealdeal.com/new-york/2024/06/05/co-op-ground-lease-bill-opposed-by-real-estate-gets-new-life/