What are the risks with a Land-Lease building?

According to NYT, there are about 100 building in Manhattan, that have land or ground leases. Due to the rental payments they need to make on the land, they tend to have high monthly charges. Also, sometimes as in the case of Trump Plaza at 167 East 61 street, increases in the land lease can lead to a sharp inrease in the monthlies. With this on the horizon, the co-op Board at Trump Plaza decided to buy the land from the owner. In order to do this, there was to be a large assessment of several hundred thousand dollars to a few million for each apartment. Without the purchase of the land,due to a deal that Donald Trump made when he constructed the building, the maintenance figures would have gone so high that the apartments would have been worthless.

So it pays to excercise caution when purchasing in a building with a land lease. Although, according to the NYT article, there are some very sophisticated buyers who are purchasing in Land lease buildings. All of Battery Park city is on a land lease and as a result, values in some buildings go up generally less than the market as whole due to the high carrying charges. In Battery Park City, each building makes a different deal with the City so it pays to excercise caution and find out when the land lease is due to expire and estimate what the carrying charges will be at that time. Many buildings pay a percentage of the fair market value  for the rental of the land. As a result, of the current sky high price of land, the land lease prices will spike up as well.

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