This is a nightmare scenario for condo and co-op buildings built on ground that they do not own. The ground lease agreement states that all structures on and capital improvements of the land, including anything added by the tenant, is forfeit upon the expiration of the ground lease. So the building that the co-op corporation paid for and built will simply be handed over the to landlord if a land lease is not successfully renewed. For a co-op shareholder, that means the value of their shares will plummet to zero. Remember that they simply held equity ownership in a co-op corporation, not real property of any sort. Furthermore, this co-op corporation unfortunately did not even own the land, in which case shareholders effective owned a portion of “lease equity.”
As you can imagine, the co-op or condo board will be in a pretty tough negotiating position when it comes to lease renewal with a private, for profit landlord. Because of the uncertainty involved with ground lease buildings in NYC, they actually decline in value over time especially as a lease expiration date becomes imminent.
Because land lease buildings in NYC trade at a discount and can be very difficult to value when a ground lease expiration is looming, it might present unique opportunities to a buyer who is more concerned about lifestyle and affordability. For example, a land lease building in NYC might have cheaper 3 bedroom apartments available which would otherwise be out of a buyer’s budget. Perhaps the buyer is a retired couple without children who do not care what happens in 20 years when the lease expires. In situations like this, it may make a lot of sense for the buyer if they are both able to buy property at a significant discount plus enjoy lower monthly mortgage payments.
Please note: this article is not intended to serve as legal or tax advice. You should consult your lawyer and tax attorney for all aspects of your real estate transaction.