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by Greg Harden
When reviewing sales listings for a client, some will jump out as great deals - a 925 square foot “junior 4” on the Upper East Side for $199K, a 1000 square foot “junior 4” in Trump Plaza for $715,000, a one bedroom condominium in Battery Park City for $335,0000. Upon further examination, however, these discounted prices are usually offset by high maintenance.
Maintenance fees (or, in condominiums, combined taxes and common charges) typically range from $1.50 to $2.00 per square foot. These fees pay the building staff, common utilities, water, insurance and, in the case of co-ops, the underlying mortgage and real estate taxes. When maintenance starts exceeding $2.50 per square foot, some investigation is in order.
There are a number of reasons why a building can be beset with high maintenance. At hotel co-ops like the Pierre or the Carlyle, the cost of amenities can drive maintenance for a 1BR apartment to over $10,000 per month. Even in non-hotel buildings, health clubs, pools, doormen and other services can drive up maintenance, especially in buildings with a small number of units.
High real estate taxes and large underlying mortgages also increase maintenance costs. At one Upper East Side co-op, maintenance fees run about $3.00 per square foot due to a 99 year retail lease issued by the sponsor when the building converted to a co-op in the 1980's. The co-op leases two floors of the building to a MRI practice for only $5,000 per month, whereas the market rate is several times as much! The building pays taxes on the space but is deprived of about $400,000 in annual revenue that must be made up elsewhere.
The most frequent cause for high maintenance is the land lease. There are approximately 100 land lease buildings in New York City. Under a land lease, the co-op or condominium owns or leases the building while a separate entity owns the land upon which it is constructed.
Land leases are common in Battery Park City, where maintenance tends to be very high. In Battery Park, the land is owned by the Battery Park City Authority. The land rent fee gets rolled into owners' monthly maintenance fees, along with PILOTs (payments in lieu of taxes) and building maintenance costs.
This past May, a group of 11 condo buildings whose ground rents were scheduled to increase 63%, or a combined $14.7 million a year, reached a deal with the Battery Park City Authority that lowered the combined ground rents by $279 million over the next 30 years. Disastrous consequences had been adverted, but scenarios like this keep popping up around the city.
301 East 63rd Street
Perhaps Manhattan’s most infamous land lease can be found at 301 East 63rd Street, a 16 floor, 166 postwar doorman co-op on 2nd Avenue. When the initial land lease expired in 2008, the co-op was forced to renegotiate a much higher rate or face foreclosure. Under the new lease, maintenance fees skyrocketed, and sale values plummeted, leaving many owners with loans in excess of the value of their apartments. Upon the execution of the new lease, a 925 square-foot unit that had been purchased two years earlier for $650,000 was listed for a mere $250,000. The discounted price was the consequence of maintenance fees increasing from $1420 to $3163 per month! The co-op has since purchased the land for $45,000,000, so owners can now at least deduct the interest on the loan payments.
160 East 61st Street
At 150 East 61st Street. a 16 floor, 131 unit postwar doorman co-op, a potential land lease disaster was resolved more satisfactorily for homeowners. The $135,000 annual land lease was set to expire 2008. The landlord was upset about "artificially low" rent and not receiving rental income from retail space that was going to the co-op. He sought to raise the annual rent to a rate that would have quadrupled the maintenance fees and left open the possibility that they would climb even further. The co-op and the land owner eventually reached a compromise. In late 2010, the co-op and the landlord entered into a new 99-year lease. The landlord controls the retail space, while the landlord and the co-op share the expenses of managing the building and paying the real estate taxes. The land rent was set at $260,000 per year and increases to a little over $1 million after five and a half years, with CPI adjustments for the remaining years.
Brokers and buyers looking at these buildings must determine the degree to which prices should be adjusted to offset the high maintenance. It has been accepted that, in the case of two like apartments, the sale price of the apartment with higher maintenance should be lowered by $10,000 for each $100 difference in monthly maintenance. However, with interest rates so low, it costs only $50 per month to borrow $10,000 on a 30 year mortgage with a 4.5% interest rate. At this rate, a buyer should adjust the sale price by $20,000 for each $100 difference in maintenance.
Purchasing an apartment in a land lease building like 301 East 63rd Street may provide an unusual opportunity for an adventurous buyer. Purchasing a 925 square foot apartment for $195,000 would require less than $40,000 down for a qualified buyer. Furthermore, a 71% tax deduction would provide an additional monthly savings of about $1,200 for a buyer in a high tax bracket. Should the co-op eventually pay off the land lease mortgage, the apartment could regain much of its former value. So don't let the high maintenance scare you away!
