More on land leases

the group that paid 241 million for the land overpaid. When the co op defaults and the land owner takes possession, the building reverts to a rental. The landlord will not be able to earn the ten percent return that the arbitration awarded him. The building will probably revert to rent stabilization and he will be lucky if he earns two or three percent.

Value, What would be the process to revert to rent stabilization? What would be the stabilized rent?

Litigation would decide if the building returns to the rent stabilization status that it had before going co op. The litigation would also decide what the proper base rent should be. It is unlikely that the Courts would rule to allow the building to be market rate housing. Remember, judges are elected in New York and there are a lot more tenants than landlords.

There is a law that is going through the NY state senate which would revert any dissolved coop to the rent that it would have been had it never been deregulated. That would be a huge hit against landowners. Lets see if it passes and Hochul signs it. It would be a windfall to the owners who would see their maintenance fees fall to the new rent.

Value,

I thought once the building goes coop and condo and you buy a unit, rent regulation doesn't apply to your unit by law. Judges can only go by existing regulations/laws. There are no rent regulation laws for land lease. What would be the rationale for the judges in terms of legal justification, or precedents?

Of course politicians can pass new regulation for land lease buildings but as per the WSJ article, they failed to pass any regulation.

I am not saying that unit owners are SOL as they may be some legal strategy as in for share holders to stop paying the coop maintenance and go through the foreclosure and eviction process.

Woodside,

Are you referring to the second one from WSJ below or something else new?

The fundamental flaw in all these land lease seems to be that they allow a fixed percentage of new "market value" as rent at the time of reset rather than rent percentage being based on prevailing cap rates at the time of rent reset / market value re-calculation.

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State Sen. Liz Krueger and Assemblywoman Linda Rosenthal introduced joint legislation in 2024 to limit what landowners can do once a ground lease expires, including capping increases in rent and building expenses. But the bill didn’t advance during the 2024 legislative session.

A narrower version of the bill was considered by the legislature this year; it removed the rent-cap provision and instead aimed to ensure that residents in deconverted buildings would be offered fair rents. The bill passed in the Senate and the Assembly housing committee, but didn’t get a full-floor vote before the end of session.

There are some interim steps to the rent control question that have no obvious answer, but is the reason that the buildings have any leverage at all in these negotiations. The idea is that the co-op defaults on the mortgage, de-converts, and the ground lease owner forecloses and becomes the owner of a rental building. The law is pretty clear that the building reverts to its pre-coop rent regulated status. The ground lease owner says the rents convert to market rate as vacant apartments, which is significant, but the financial burden of owning a high-amenity (can those amenities be withdrawn? maybe not) building now subject to permanent regulated rents and agitated tenants is not all that attractive. The ex-coop owners say the apartments are not vacant and do not get a current market rate rent, presumably contending that the rent should be whatever the math would arrive at if you applied rent controlled increases to the pre-coop 1977 rents. That would be way below market. Therein lays the groundwork for years more litigation and a building that no one will spend money maintaining.

The legislation proposing to override an express contract term on the price and duration of a renewal term seems dubious. Imposing some penal rent controls on a deconverted building likely passes muster, and would severely kneecap the ground lease owner.

Sport. Thank you for the information below. Basically you lose your equity but you get your equity back in form of rent-regulation.

Assuming the building becomes rent-regulated, what happens if the luxury de-control threshold was hit when it was still applicable in the past, and the ownership changed hands which in past allowed for rent de-control/regulation. Perhaps State will pass some type of regulation to fill these gaps. Far fectched but do the previous unit owners get their reno money back?

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The law is pretty clear that the building reverts to its pre-coop rent regulated status.

It's time to move on, seriously.

https://www.youtube.com/shorts/erQVbU-s26k

>> Sorry, but I don’t have an ounce of pity for any of the homeowners in Carnegie House.

That’s a pretty harsh take. It’s one thing to think they struck a bad bargain and/or ended up with the short end of the stick. It’s another to have no pity for them, even if you think it’s a mistake of their own making. You’re allowed to simultaneously think they should honor the bad side of their trade while having pity for the ones who are in over their heads.

They did this to themselves, just like the complex in Queens. Gotta keep your eyes wide open.

I was referring to S2433A, which is this year’s version of the bill which didn’t pass in past years. I misspoke. The state senate approved it but it still needs assembly vote and governor's signature.

300M -- I highly doubt that the new owners of the de-converted building can try to go backwards in time and de-control the apartments based on historical incomes of residents that were then shareholders but would then (but not now) allow for de-control. There is a statute that treats the occupants as regulated tenants upon de-conversion (i.e., they can't be evicted either). I do not know/recall, but I believe that the outcome of the de-regulation dispute around Stuy Town/PCV was that the apartments were restored to stabilization and rents were recalculated as if the de-regulation never happened, which might be a roadmap for the outcome here, but going back 45 years. There are a lot of interesting permutations to this. Consider, for example, if the building just de-converts into a rental right now, and the corporation sets well-below market rents for every unit. Is that now the regulated rent, such that the later forclosing ground lease owner is stuck with +/- 2% regulated rent increases in perpetuity? I have no idea, but I also suspect that the coop board will never be able to get sufficient cooperation/votes from the shareholders to make take the economically rational, if not dramatic, outcome.

Sport, Indeed very complex. Thank you for your insight.

Some additional insights from Jonathan Miller:

https://housingnotes.com/why-on-earth-would-someone-buy-in-a-ground-lease-building/?utm_source=rss&utm_medium=rss&utm_campaign=why-on-earth-would-someone-buy-in-a-ground-lease-building

In the long run we are all dead, so the trick is to make the land lease coterminous with your personal demise.

That is the expressed plan of one resident I know at 420 E51st. She viewed her purchase as a rental that she could customize as she pleased, while having a sense of community and a say in the governance of that community. She said none of those to whom she plans on leaving any of her assets have any interest in inheriting real estate. I do believe these things can make sense under the right circumstances.

It is surprising (to me, anyway) that the shareholders are surprised.

MTH,

Once the land got sold at $264mm, I think $24mm number or there abouts was likely known to people. However, I think 20-30 years back it would have been hard to anticipate for buyers that land value could be so high.

Human beings tend to get anchored to the current or historical precedents. That is why deep thinkers like NADA have an edge in the markets.

It is also in politician interest to kick the can down the road as is increasing federal debt (both parties have contributed to it) and local pension promises.

While I am not generally a fan of more regulation, in this case govt clearly should have made a rule that you can't do a coop on a landlease without a predefined $ schedule on lease payments with steady increases without large jumps and in far out years predefined year by year land buy-out option linked to say inflation. Essentially eliminate subjective "land valuation" issue.

“It is surprising (to me, anyway) that the shareholders are surprised.”

This is partly the reason I don’t have any pity, the predicament they are in could easily have been predicted/anticipated when they were considering their purchase. I’m sorry, but it’s not a case of being in over their heads. The land lease expired and now the landowners want a huge rent increase based on how pricey the area has become. Wow, big shock, wouldn’t have seen that coming. And now they are whining to the media and using the courts to try to solve their problems. No doubt they were pleased with their initial purchase which was presumably much less expensive than a comparable condo or non land lease coop. Personally, I would never purchase a land lease if the lease expired at a future time when I still anticipate being alive! If it expired 50-60 years from today, certainly I’d consider it. 10-20 years, no way

Turbo, Land lease didn't expire. Only the rent reset based on market valuation which are highly subjective.

Some old threads:
https://streeteasy.com/talk/discussion/34212-land-lease-carnegie-house
https://streeteasy.com/talk/discussion/12132-carnegie-house-land-lease-bummer
https://streeteasy.com/talk/discussion/41306-carnegie-house-what-price-psf-is-a-good-deal

“Turbo, Land lease didn't expire. Only the rent reset based on market valuation which are highly subjective.“

That’s even worse. I would be extremely hesitant to buy any land lease knowing there would be rent reset in my expected lifetime.

nyc_sport, how old is the law about de-conversion leading to rent stabilized tenancy by defaulting owners? That certainly seems like the smart financial play, although I can see why you say the coop owners wouldn’t see it that way.

Interesting - so they'd get to keep their home, just lose all the equity. Isn't that how a lot of assisted living places work? You pay a big chunk down and go on living there for a monthly maintenance fee. I guess that's how it would work out for some of the residents.

Problem is with assisted living setup is the company can go bankrupt and there you are.

Wonder what happens to the mortgages taken out by the unit owners? I am guessing they are still on the hook to pay them back.

@stache very true and it has happened.

@300 I would think so. So no equity + mortgage payments + rent = expensive retirement.

@nycsport - so the coop can set rents wherever they like upon deconversion? Isn't there a third party - some government agency or court - that would decide what is reasonable going back 45 years with regular increases?

>> I am guessing they are still on the hook to pay them back.

I believe that’s what the WSJ article implied. Although I thought NY was a non-recourse state, in which case what’s the recourse? Maybe land lease loans are underwritten differently.

I believe NY is recourse but coop are loans against shares. So I don't know whether coop loans are recourse as well and how realistic/expensive it is for the banks to go after the borrow via foreclosure and deficiency judgement.

its not a question of New York State being recourse or non recourse. In residential mortgage notes you accept the obligation to repay the loan. If the bank would let you cross that line out it would be a non recourse loan. Most commercial mortgage loans are non recourse.

Value, How common is it for bank to let you cross out the recouse in NY?

never on residential loans

It's my understanding that banks won't issue a mortgage depending on the length of time remaining on the land lease. I'm pretty sure this has been discussed here before.