Q: I am a licensed real estate salesperson and I am representing a purchaser who is considering a co-op apartment in a building that has a Ground Lease. Can you please clarify exactly what a Ground Lease is? Also, are there any particular considerations that should be made before purchasing a co-op apartment in a building that has a Ground Lease?
A: If a co-op building has a Ground Lease (also known as a Land Lease) it means that the co-op corporation does not own the land under the building. Rather, the co-op corporation leases the land from the owner of the land. About 100 buildings in Manhattan have Ground Leases, many of which are co-ops. Generally the terms of Ground Leases are quite long, varying from terms of 50 to 99 years.
Several important considerations should be made before purchasing a co-op apartment in a building with a Ground Lease:
- Can the rent payable by the co-op corporation increase during the term of the Ground Lease?
- If the rent can increase during the term of the Ground Lease, how is the increase calculated? Is the increase in rent a set amount or is it based on a formula that requires a determination in the future (for example, the rent increase could be tied to the fair market value of the property).
- If the rent increases in the future, how does the increase affect the maintenance paid by the co-op shareholders?
- Does the Ground Lease restrict the co-op corporation in making structural changes to the building?
- What are the "events of default" under the Ground Lease and does the Ground lease provide for the co-op corporation to cure such defaults.
- What is the term of the Ground Lease and when does it expire?
- If the Ground Lease expires, does the co-op corporation have the right to renew the Ground Lease?
- How does the Ground Lease affect 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 are not going to make a loan in the co-op.
- 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?
- 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 is not an exhaustive list and each situation may vary. Accordingly, 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
The Legal Line Question by:
Neil B. Garfinkel
REBNY Broker Counsel
Partner-in-charge of real estate and banking practices at Abrams Garfinkel Margolis Bergson, LLP