🗞️Understanding Ground Leases in Co-op Buildings

Credit: Neil B. Garfinkel: REBNY Broker Counsel, Partner-in-charge of real estate and banking practices at Abrams Garfinkel Margolis Bergson, LLP

What is a Ground Lease?

A Ground Lease, also known as a Land Lease, is a lease agreement where the co-op corporation does not own the land under the building. Instead, the co-op corporation leases the land from the landowner. In Manhattan, about 100 buildings operate under Ground Leases, many of which are co-ops. The terms of Ground Leases are typically long, ranging from 50 to 99 years.

Key Considerations for Purchasing a Co-op with a Ground Lease

Before purchasing a co-op apartment in a building with a Ground Lease, several important considerations should be made:

1. Rent Increase

Ask if the rent payable by the co-op corporation can increase during the term of the Ground Lease. If so, understand how the increase is calculated. Is it a set amount or based on a formula that requires a future determination? For instance, the rent increase could be tied to the fair market value of the property.

2. Impact on Maintenance Fees

If the rent increases in the future, how does this affect the maintenance paid by the co-op shareholders?

3. Restrictions on Structural Changes

Does the Ground Lease restrict the co-op corporation from making structural changes to the building?

4. Default Events and Remedies

Understand the “events of default” under the Ground Lease and whether the Ground Lease provides for the co-op corporation to cure such defaults.

5. Lease Term and Renewal Rights

Know the term of the Ground Lease and when it expires. Also, find out if the co-op corporation has the right to renew the Ground Lease.

6. Impact on Loan Acquisition

Consider how the Ground Lease affects the ability of prospective purchasers to obtain loans in the co-op. For example, if the Ground Lease expires in 30 years or less (the term of a 30-year mortgage), most lenders may not be willing to make a loan in the co-op.

7. Tax Implications

What are the tax implications of purchasing a co-op unit in a building with a Ground Lease? More specifically, do shareholders have a lower maintenance deductibility percentage (than co-op corporations that do not have Ground Leases) because the shareholders are prevented from deducting the portion of maintenance charges used to pay the rent under the Ground Lease?

8. Resale History

Does the co-op have a history of strong re-sales, or does it appear that the Ground Lease creates an impediment to the ability to re-sell the co-op?

Important Tip

This list is not exhaustive, and each situation may vary. Therefore, it is recommended that anyone seeking to buy a co-op apartment in a building with a Ground Lease should consult with an attorney beforehand.

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Syd Harewood is a real estate professional with a passion for NYC’s architectural gems. For inquiries, call or message Syd Harewood at 📞646-535-3819. Experience the finest in NYC real estate with Syd’s expert guidance and deep knowledge of the city’s most exquisite properties.

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