Carnegie House, a mid-tier white-brick building from the 1960s, has a ground lease on West 57th Street, now one of the priciest strips in the city.
Photo: Highline Residential
In the decade since real-estate investors bought the land beneath their building, residents of Carnegie House, a white-brick co-op on West 57th Street, have been bracing for the fallout. Now, it has finally arrived, and it’s bad: a 450 percent increase on their land lease, from $4.36 million annually to $24 million, The Wall Street Journal reports. Maintenance fees will more than double. Equity will vanish. “Basically death,” as the president of the co-op board put it.
In 2014, the land beneath 100 West 57th sold to owners who seemed keen to take advantage of the block’s transformation from a somewhat undistinguished Midtown thoroughfare of souvenir shops and mid-tier buildings to Billionaire’s Row. In the lead-up to the land lease reset, apartment prices plummeted, dropping as low as $99,000 for some studios (in the last few years, even sprawling two and three bedrooms have traded for a few hundred thousand). Now that it’s here, long-term residents say the new fees — maintenance on a two-bedroom in the building would go from $5,000 a month to $13,000 — will drive them from their apartments and in many cases, out of Manhattan altogether. The landlords, an LLC tied to Rubin Schron and David Werner, have argued that a contract is a contract and that residents knew about the land lease — and its risks — when they bought.
The reality, of course, is somewhat complicated. Buying in a building with a ground lease is a riskier arrangement than buying in a co-op that owns the land outright, as ground lease rents are tied to the value of the land and reset at regular intervals. But until recently, the land beneath Carnegie House was worth far less, and the last ground lease reset was in 2004. And while land values in all of Manhattan are much, much higher than they were in the 1960s, when Carnegie House was built, in most places the climb has been more gradual. Most of the residents the Journal talked to bought in the 1990s and early 2000s, and had little reason to think their real estate investment would be wiped out by skyrocketing land values on their street, where sprawling condos at supertalls like One57 and 111 W. 57th Street now sell for upwards of $50 million.
But in the past few years, the bargain-basement prices in the building made it impossible not to know that something was up. There are currently 12 units on the market, ranging from a $139,000 studio to a $499,000 three-bedroom. A handful seem to have been listed and then taken off the market, but some have sold for shockingly low prices, like apartment 3B, a studio that was originally asking $125,000 and ultimately closed for $89,000 in March.
Which means any political intervention — capping ground-lease increases, for instance — is a fraught proposition: A rent cap would benefit both longtime residents and recent all-cash buyers who gambled on getting a deal there (banks won’t lend money for an apartment with an unpredictable, looming ground lease).
While a number of other buildings in the city also have land leases, most resets are not so dramatic. More common in commercial buildings, ground leases are relatively rare in residential ones — the Journal puts the number at 25,000 residential units citywide — and a lot of those are on government-owned land, like Battery Park City, where public authorities that control the land tend to seek modest increases rather than maximizing a recent investment. (The owners of Carnegie House’s land, in contrast, paid $261 million in 2014.) The 450 percent increase was the result of arbitration after earlier negotiations between the landowners and the co-op broke down. (The co-op board says it’ll fight the decision “through all available legal channels.”)
A spokesperson for the landowner wrote that they “remain open to good-faith discussions with Carnegie House residents… notwithstanding the fact that the arbitration was concluded in accordance with our lease agreement,” and pointed out that residents’ responsibility for the rent increase was offset by a commercial tenant and parking garage. (He also noted that more than 100 apartments in the building are investment units.)
And there’s one more bit of intrigue to the whole saga: If the co-op can’t pay the new rent and the ground lease is terminated, the building will revert to rent stabilization. This is a rare-enough occurrence that it’s not entirely clear how it would play out, but according to the Journal, it would bring on a new phase of drama — setting rents, for one. Co-op owners would also lose their equity, and those with mortgages would still be responsible for paying them off, but the monthly costs would likely be far less than $13,000 a month for a two-bedroom.