Man of Steel v. Man of Green

Last year, we wrote a piece on land leases, a structure that can create unusually low purchase prices but carries very real, long-term risk .

For reference, a land lease (or “ground lease”) is an ownership structure in which an apartment owner purchases the residential unit and a proportional interest in the building, but not the land beneath it . The land is owned by a separate entity — often a family trust, estate, religious institution, or investment group . The building itself, i.e., the ownership entity, pays ongoing rent under a long-term lease for the right to occupy that land .

Because the land component is excluded from ownership, pricing, financing, and long-term costs in land-lease buildings behave differently than in “fee-simple” buildings . The benefit to prospective buyers is that purchase prices can often be discounted relative to the surrounding market ; however, buyers must beware: Future expenses are subject to lease terms, scheduled rent resets, and renewal negotiations that can materially affect shareholder or owner costs .

Plainly? The risk is real .

Take Carnegie House, located at 100 West 57th Street, as a current and very public example .

For years, the building’s annual ground rent stood at approximately $4.36 million. When the lease reached its reset point, the landowners — Rubie Schron and David Werner — raised that rent more than sixfold , to roughly $24 million annually .

Ouch .

The co-op board objected, negotiations broke down, and the dispute ultimately landed in New York County Supreme Court . How did it turn out?

Wait for it…

The court ruled in favor of the landowners, preserving the higher rent . Uh-oh . That means that the shareholders of Carnegie House will have to absorb an additional $20M/year .

Three questions, then, which will address in our next post:

1. What does this mean to individual shareholders?

2. How does this risk show up in the market?

3. What does this mean for the Lower East Side?