Monday, February 29, 2016

Legal Line Question: Ground Leases

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:
  1. Can the rent payable by the co-op corporation increase during the term of the Ground Lease? 
     
  2. 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).
     
  3. If the rent increases in the future, how does the increase affect the maintenance paid by the co-op shareholders?
     
  4. Does the Ground Lease restrict the co-op corporation in making structural changes to the building?
     
  5. 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.
     
  6. What is the term of the Ground Lease and when does it expire?
     
  7. If the Ground Lease expires, does the co-op corporation have the right to renew the Ground Lease?
     
  8. 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.
     
  9. 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?
     
  10. 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

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