Capping Ground Lease Charges for New York Co-Ops Would Be Disastrous
There has been press recently about co-operative buildings on ground leases, where land ownership is separate from building ownership. The co-op does not own its land but “rents” it from the actual landowners, allowing co-ops to lease the land under their buildings for a fixed period, often decades. In cities like New York, where land is scarce and property prices soar, co-ops built on ground leases have long been a pragmatic solution.
As these leases approach expiration or face substantial rent increases, some co-op owners are looking to politicians for relief. While their concerns are real, proposed political interventions raise serious legal and economic questions, particularly regarding the sanctity of contracts and the ripple effects on the investment community.
A pending New York state bill aims to artificially cap the amount a landowner can charge co-op residents when a ground lease escalation occurs or when a lease expires. It also seeks to sidestep free-market economics and established contracts by giving residents a first right of refusal to buy the land. In Manhattan, an estimated 60 to 84 co-op buildings operate under such leases, with Carnegie House at 100 West 57th Street standing out as the most high-profile example.
A ground lease, like all leases, is a contract. The lease agreement is generally 50 to 99 years, land is owned by one party, and the building above is owned separately. In a co-op structure, the co-operative corporation leases the land and then subleases apartments to shareholders. In exchange for monthly payments to the landowner, tenants get building usage, allowing buyers to access and utilize prime real estate at a lower upfront cost, since they aren’t purchasing the land.