Co-op Ground Lease

Many commercial real estate land parcels in New York are held through a long-term ground lease structure. This includes approximately 100 co-op buildings in New York City that are located on property that is ground leased. When a co-op’s long-term ground lease is set to expire, landowners have often demanded a significant increase in rent correlating with the often higher market value of the building. This rent hike can make it difficult for residential and commercial co-op unit owners to sell their apartments near the end of a ground lease, and the purchase prices of these apartments are generally 20-30% below market value due to the foreseeability of these hikes and likely higher maintenance fees. During this past New York state legislative session, two different bills were proposed to address the difficulties associated with co-op long-term ground leases. The first bill, sponsored by Senator Liz Krueger and Assembly member Linda Rosenthal (the “KR Bill”), which would have capped annual rent increases for co-op ground leases and guaranteed lease renewals, failed to garner the support needed to pass. However, the more limited bill sponsored by Senator Toby Ann Stavisky and Assembly member Linda Rosenthal (the “SR Bill”) that relaxes contractual limitations on extensions and renewals, was successfully passed.[1]

The SR Bill enables ground lease residential co-ops to extend or renew their leases at any point, provided their leases allow such extensions or renewals at the sole option of the tenant co-ops. The SR Bill provides more certainty for shareholders and allows greater freedom to tenant co-ops in determining when they would like to renew or extend their leases, as well as seek out financing. The SR Bill also makes it easier for prospective cooperative homeowners, who often have difficulty obtaining loans secured by their units when the renewal date is approaching within the next 30 years, since the cooperative can now exercise its renewal option before the extension date.

The failed KR Bill would have limited rent increases on ground leases to the greater of the Consumer Price Index for that year or 3%; granted co-op corporation shareholders the right to renew ground leases on the same terms other than limited rent increases; overridden provisions in ground leases that prevent shareholders from borrowing money secured by their shareholder interests and appurtenant leases over certain specified thresholds; and granted shareholders a right of first refusal if the landowner decides to sell the property. The KR Bill would not have applied to co-ops on city- or state-owned land purchased before January 1, 2023, but would have applied to both residential and commercial co-ops.

Supporters of the failed KR Bill argued that it would have helped protect homeowners from extreme rent increases and prevented them from facing foreclosure and possible bankruptcy. In opposition, the Real Estate Board of New York and many landowners argued that the proposed bill would have been an unconstitutional legislative handout to millionaire co-op owners who bought their homes at below market rates due to the ground lease arrangements. Although the KR Bill failed to get released from committee due to constitutionality concerns, it is expected to be proposed again in the 2025 legislative session. The Morrison Foerster team continues to monitor whether this bill, in some form, will be resurrected again in future legislative sessions. Feel free to contact any member of our team if you have any questions.

[1] NY State Senate Bill 2023-S9721A (nysenate.gov).