Tips & AdviceThe Problem With Land-Lease Buildings

The Problem With Land-Lease Buildings

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You’re in the home buying process and looking for potential properties in your price range. For the average New York family, that means your budget would be around $975,000. As you scroll through the list of available properties in your area, you find a sun-soaked one-bedroom with updated fixtures and generous closet space. It’s everything you’re looking for, and somehow the asking price is $150,000. You’ve found a hidden gem!

Come to find out, this unit resides in Carnegie House, a land-lease building. What does that mean for you as a homeowner?

What Is A Land-Lease Agreement?

Land-lease agreements, also referred to as ground–lease agreements, are situations in which you own the property on a piece of land that you do not own, and instead lease from the land owner. While this type of ownership is common for commercial real estate, there are residential units that come with a land-lease arrangement. A popular example is a mobile home in a trailer park, where owners lease their land from someone who owns the entire plot of land, and then own their individual manufactured home.

Some residential units in New York City are part of land-lease buildings. When you purchase these units, you will have cheaper mortgage payments but higher than normal monthly fees. The land’s monthly rent gets divided by all unit owners in the building, and you pay that on top of any other building fees.

Since someone else owns the land, the building has a rental agreement with the owner and therefore must renegotiate. Typically, both parties will come to renew a negotiated rental agreement every 50 to 99 years. That means that your monthly fees could further increase at the time of a new agreement. If you consider purchasing a land-lease property, make sure to inquire about when the lease term expires, as you will not have control over how much your fee increases.

There are two kinds of land-lease agreements, government and private. In a government land lease, a government agency owns the land, and property owners do not pay property taxes. They make “PILOT” payments that go toward neighborhood development. Private land leases apply to every other situation, where a private owner negotiates the terms of their lease with the building and then charges the individual unit owners monthly ground-lease payments. The remainder of this article discusses private land lease agreements.

Benefits of Land-Lease Purchases

The following situations may be to your benefit should you decide to make this kind of purchase.

Lower mortgage payments

Your mortgage payments will be lower thanks to a low purchase price. This means you can potentially buy a piece of property that you could not if it was under a regular ownership agreement. You may be able to afford a property with an extra bedroom, outdoor space, amenities, nicer finishes, etc.

Additionally, you may be able to purchase a property in an area you could not previously afford.

No property taxes

You will not pay property taxes as you don’t actually own the land. This will save you money that you can put toward the other costs of owning property. If you live in an area with high property taxes, you avoid this relatively high charge.

Drawbacks to Land-Lease Purchases

You should consider the following characteristics of this kind of purchase and ask for more information from your agent and the building.

High monthly fees

You will likely pay high monthly/HOA fees that even out to, if not exceed, the monthly amount you would pay with standard ownership.

Lease expiration

If you purchase a property close to the end of the building’s lease term, you will have to pay higher monthly fees after the lease renewal. These fees could increase by such a large amount that you can no longer afford to live in your home.

Land-lease buildings typically come with a surrender clause which means should your building not renew its land lease, you will have to cease living there. Make sure to inquire about the terms of this clause prior to signing.

Perhaps one of the most significant downsides to land-lease agreements is the idea that you could potentially lose your equity in your home at lease expiration, depending on your surrender clause. Since most homeowners treat their purchases as an asset and look to build equity, this single factor could be enough to sway them away from this purchase style.

As you approach the end of the land lease, you may find it increasingly difficult to sell your home, as cautious buyers will likely not want to purchase the property for the above reasons.

Land-Lease Example

There are a fair amount of land-lease buildings in New York City, with most consolidated in Manhattan. The Excelsior is another example of a land-lease building, and we can see how your monthly expenditures compare to that of a non land-lease building by looking at the listing pages and monthly cost breakdown.

The monthly mortgage payment comes from our mortgage calculator, assuming that a homebuyer spends 20% on their down payment and has a 6% interest rate on their mortgage.

Building Excelsior, 303 E 57th St Connaught Tower, 300 E 54th St
Unit #9F #28G
Purchase Price $450,000 $695,000
Monthly Mortgage Payment $2,158.38 $3,333.50
Maintenance & HOA $3,611 $1,461
Total monthly payment $5,769.38 $4,794.50

Considering the above table, we can see that the total amount you will pay each month living at The Excelsior costs $5,769.38 while living at the non land-lease building, Connaught Tower, costs $4,794.50. That $974.88 difference costs you an extra $11,698.56 per year, and that could increase should your building’s lease expire.

Land-Lease Buildings in Manhattan

The following lists consists of potential land-lease buildings in Manhattan. Should you decide to pursue purchasing a unit in any of these buildings, we recommend inquiring with your agent to see if they are still under a land-lease.

100 West 57th 242 East 25th 445 Lafayette
101 West 23rd 27 East 65th 465 Park Ave
110 Central Park South 303 East 57th 48 Bond Street
142 Duane Street 305 West 16th 50 East 8th
150 East 61st 333 East 91st 50 Gramercy Park North
167 East 61st 34 Leonard St 520 West 23rd
175 East 62nd 343 East 74th 54 East 8th
190 East 72nd 4 West 21st 575 Park Ave South
2 Tudor City Place 40 East 80th 70 Charlton St
205 East 63rd 419 West 55th 88 Morningside Ave
21 East 61st 420 East 51st 995 5th Ave

Conclusion

Purchasing a property in a land-lease building means you will likely pay a low monthly mortgage cost, offset by high monthly fees. Should this type of purchase appeal to you, we recommend moving forward by asking questions about all the above factors to ensure you have as much protection as possible. Consult with professionals before conducting any purchase activity, and you may just get a good deal on a new home.

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