When Buying A Home Comes With A Monthly Rent Payment (#GotBitcoin)
What to consider when purchasing property with a land lease, which can affect everything from monthly payments to mortgage terms. When Buying A Home Comes With A Monthly Rent Payment (#GotBitcoin)
When buyers peruse agent Domingo Perez Jr.’s listings at 420 East 51st St. in Manhattan, they swoon over the high square footage, and list prices that he said are nearly half those of comparable units in the neighborhood.
The romance sours when shoppers realize the cooperative apartments are in a “land lease” (also called “ground lease,” “lease hold” or “lease land”) building, which means it was built on separately owned land. The building itself owes rent to the land’s owner. In New York co-ops, residents’ portion of that rent is folded into a monthly charge, which includes upkeep and taxes, called “maintenance.”
“Every time I speak to a buyer, it’s ‘oh my God, this place is so huge, I love it. But, oh my God, that maintenance,’” said Mr. Perez, an agent at Warburg Realty. The one-bedrooms owe maintenance of about $3,000 a month; a two bedroom charges $4,611 a month.
Making a land lease scarier is the fact that the lease duration is defined, leaving a question about what happens when it expires.
Land leases are scattered throughout New York City as well as Palm Springs, Calif., and surrounding cities. They pop up in Pennsylvania, Hawaii, Virginia and Maryland. Land owners vary widely.
Sometimes the owner is a municipality: Battery Park City, in New York City, for example, sits on land owned by an authority created by the state of New York. Not-for-profit entities, including churches, are also frequently landlords.
Sometimes the landlord is a private entity, such as a group of individuals, an investment firm or a commercial real-estate group.
In Palm Springs, Calif., and nearby areas, 7,671 residential leases are owned by members or descendants of the Agua Caliente Band of Cahuilla Indians and other federally recognized tribes, according to a spokesperson for the Bureau of Indian Affairs Palm Springs agency.
Most of the leases were written in the 1960s through the 1980s for 65-year terms, which means some are nearing termination. The bureau has to approve renewals, which are typically for 25- to 34-year terms.
Property owners can attempt to buy the land from an owner, though this rarely happens. In 2014, the co-op owners of Trump Plaza, a building at 167 East 61st St. in Manhattan, paid $180 million for the land under their building, said Marc Cooper, co-president of the co-op board. Each of the 150 units were assessed a portion of the bill, which had to be paid all at once. For shareholders who didn’t have the cash, Wells Fargo offered loans, Mr. Cooper said.
About 15 co-op members who couldn’t afford the large assessments on their units had to sell. The units had roughly doubled in value after the land purchase, Mr. Cooper said, allowing sellers to use their additional profits to repay their assessment costs.
Land leases may sound strange to Americans, but they’re common in Britain. Most flats in London are “leaseholds,” which require paying rent to the “freeholder,” who owns the land. Some of the largest landowners are aristocrats whose families have been collecting rent for generations.
Another Big Owner: Queen Elizabeth II, through the Crown Estate, though she doesn’t benefit personally: Revenues flow to the government.
There can be big downsides to buying in a land-lease building. The first is evident in some listings:
Martin Eiden, an agent with Compass, has a $3 million three-bedroom listing on Park Avenue where monthlies are $11,516. In Palm Springs, Camron Carrier, an agent with the Paul Kaplan Group at Bennion Deville, has a $875,000, three-bedroom listing in the upscale Indian Canyons neighborhood. The land lease adds $4,985 a year, which translates to an extra $415 in monthly costs for the homeowner.
Real-estate agents argue that the higher monthlies are offset by lower sales prices. Mr. Perez hands out a “math worksheet” to visitors to his listings. His worksheet for the $735,000 two-bedroom calculates monthly carrying costs at $7,357.18.
A similar unit in a non-land-lease building might cost $1,295,000 with maintenance of $3,110, he estimates, yielding a monthly carrying cost of $7,981.66. Mr. Eiden argues that the extra maintenance costs of his listing would be offset by gains made by investing the margin by which the list price is discounted compared with non-land-lease properties. Of course, mortgage rates, investments gains, and future resale values are highly variable, making a comparison unreliable.
Another concern: financing. Sandy Edelstein, a loan officer and Palm Springs branch manager of Homebridge Financial Services, a national lender, said loans—including jumbos—follow Fannie Mae guidelines, which require that mortgages are written for a term equal to the duration of the land lease, minus five years. If a lease expires in 25 years, the longest loan a borrower can get is a 20-year, “custom term” mortgage.
Jon-Eric Lehman, branch manager of the Palm Springs LoanDepot office, ran into this while the condo board in the building where he lives spent 10 years in lease negotiations.
For a decade, he was unable to refinance into a new 30-year loan; he could only get a 20-year loan, then later a 15-year loan. A new board president took over and completed the process, he said, adding that he is now in contract to sell the unit.
When the remaining term on a land lease approaches 35 years, properties can start losing value as buyers’ ability to take out 30-year mortgages are curtailed. Even cash-paying buyers may stay away, worried they may be unable to sell in the future.
There is also the anxiety of a doomsday scenario, in which a landlord refuses to renew a lease.
Some leases spell out that a building on leased land reverts to the landlord upon termination of the lease. All of the agents and loan officers interviewed said they have never known this to occur in a residential context. However, there are scenarios where the value of the land has appreciated so much that a landlord might be eager to strike a new deal with a developer to replace an old building.
Real-estate agents and buyers assume that is the future of River Place, in Arlington, Va., said Hiwa Sheikh, a buyer’s agent with the Keri Shull Team at Optime Realty, who has done several deals in the 1,700-unit complex. A more hopeful theory is that the landowner will buy out the co-op’s interests before the lease term is up in 2053, Mr. Sheikh said. A limited liability company managed by Monday Properties, a New York and Washington, D.C.-based real-estate investment firm, owns the 13 acres under the four River Place buildings. Lease discussions thus far have yielded no results, according to board meeting minutes.
One bedrooms sell for between $150,000 to $250,000 and rent for roughly $1,500 to $2,100, said Amber Williams, principal broker at Sweet Homes America in Tysons, Va., who also manages nearly 50 units in the complex. Many of Ms. Williams’s buyers, and most of Mr. Sheikh’s, are cash investors who rent out the units, the agents said.
Monday Properties emailed a statement saying: “There are 34 years remaining under the land lease and we look forward to building upon our partnership with River Place to the benefit of everyone involved.” River Place South’s vice president of the board of directors, Waqas Ali, said the board had no comment.