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A ground lease is a long-term lease of land (often 99 years), on which a tenant is permitted to erect structures and make land improvements. During the term of the lease the tenant is responsible for taxes, maintenance, insurance, and other expenses associated with the property. At the end of the lease the land reverts back to the owner.
Several condominiums and coops in New York City are subject to ground leases. If you are considering buying a unit in such a building, here are a few factors to consider:
- Increased expenses. In addition to common carrying expenses (mortgage, maintenance fees, tax), owners in a ground leased building are also responsible for paying a share of the rent owed under the ground lease.
- Risk when the lease expires. When the lease runs out, typically a new lease will be negotiated between the tenants and the land owner. However, if both sides cannot reach an agreement, in theory the tenants must vacate the property and the building would be demolished. This leaves the tenants with little bargaining power in such a negotiation, and little recourse to a land owner insisting on a drastically higher rent.
- Mortgage approval. Mortgage companies generally want to secure both the building and the land as collateral, and may be reluctant to extend credit for units in ground leased buildings, particularly those that are scheduled to expire in the next 30 years.
- Reduced price. A big benefit of ground leased buildings, which may offset the above drawbacks, is that they are often priced significantly lower than comparable buildings that do not have ground leases.
Revaluate is aware of about 100 residential buildings in New York City with a ground lease, and we include this information in our reports.