Living With A Ground Lease

What’s the story with living with a ground lease? Are you aware of how a ground lease affects the real property that is built on it? Let’s look a little further into this. First off, in short, what is a ground lease?

A ground lease is a long-term lease of land that permits the tenant to erect improvements at his own expense. Not a desirable arrangement from the tenant’s perspective, but sometimes it’s the only way to gain access to extremely valuable real estate in an excellent location. The owner may be willing to sell, or the owner may have received the property as a gift or by deed (such as a church or university), and be prohibited from selling the land for a certain period of time. At the end of the lease term, the improvements become the property of the landowner.

A little scary, right? I’m probably underemphasizing how scary this can be if you rent a section of the property located on a ground lease and you are caught unawares once the lease expires and it’s time to negotiate a new lease (and price) with the landowner.

When a developer decides to build an apartment building on a property with a different owner holding the ground lease, this can affect the individual purchasing one of the apartments in a serious way.

Let’s say the developer leased a property from the ground lease owner for 99 years at an agreed-upon price before he started building. Ninety-nine years sounds like a long time, and for some it might equal a lifetime. But the reality comes into play at the end of 99 years when it’s time to negotiate a new ground lease price and terms, and the price might be prohibitive compared to the original term, which results in a negotiating nightmare for the tenants in the building.

This recently happened in a luxury building on the east side of Manhattan where the tenants (all co-op owners) found themselves suddenly facing the end of a ground lease that everyone forgot about, and the owner of the ground lease wanted to negotiate a new lease for tens of millions of dollars, which the co-op owners had no hope of paying.

The alternative to not making a deal with the owner of the property where the building is located is to give him the building and everything inside instead of re-negotiating the term of the ground lease to everyone’s satisfaction.

With real estate prices in Manhattan flying (especially over the last 99 years), the numbers to renew a lease were beyond prohibitive for the residents of this building, and they’re now in a position of either having to walk away from their investments in the building or find the money to renew the ground lease on which the building was built—both extremely difficult options.

Although ground leases are not a common feature with buildings being built on them, they are out there and you have to deal with them from time to time and have to be extremely careful when purchasing a dwelling or even a commercial property that sits on one.

Ironically, in Israel, it is even more common to have buildings sitting on ground leases. Whereas most ground leases in Israel are owned by the government, or Keren Kayemet, there are a number of high-profile situations playing out in Jerusalem where 99-year leases for long-term agreements were running out. In these cases, the government may have to step in to actually resolve how to move forward with ground lease extension agreements for those residents affected so they do not lose their properties due to the ground lease owners raising their leases for millions of dollars.

The Manhattan situation is a real nail-biter and will probably end up in the Supreme Court with the government working out some kind of solution to protect all parties involved, not an easy situation by any means.

Ground leases are definitely not for everyone and you can conclude that using them is a lot like playing roulette. n

Anessa Cohen lives in Cedarhurst and is a licensed Real Estate Broker (Anessa V Cohen Realty) with over 20 years of experience offering full service residential and commercial real estate services and management services. She can be reached at 516-569-5007. Readers are encouraged to send any questions or scenarios by email to [email protected].