As seen in Crain’s NY on October 2, 2024. Click here to view the full story online.
By Aaron Elstein — New York City
In 2011, Barbara and Lou Grumet bought a two-bedroom co-op for $775,000 at 100 W. 57th St., leaving behind their house in Riverdale for a fully accessible apartment close to Mount Sinai West, Weill Cornell Medical Center and NYU Langone Health.
“We use all three hospitals,” said Barbara, a retired dean at Long Island University’s Westchester campus who is 80 years old and uses a wheelchair. “We also like going to Broadway shows,” said Lou, also 80, who uses a cane.
But the golden years for these grandparents are under threat by something happening in the dirt below them, something that could force them to move out in as little as six months. That something is a ground lease. In a ground lease, the land underneath has a different owner than the building above.
These leases are common in commercial real estate. The office tower at 40 Wall St. owned by Donald Trump has one, and last week the troubled operator of the Chrysler Building, RFR Holding, was booted out by ground lease owner Cooper Union after defaulting on $21 million in rent payments. (RFR is litigating.) Ground leases were rare for apartments until the 1980s but became more popular after a court-ordered policy change. Today, residents are paying the price as ground leaseholders seek to dramatically raise rents to reflect soaring values for New York housing.
At the Grumets’ co-op, called Carnegie House and located across from Billionaires Row on 57th Street, the ground lease resets March 14. The new holders, which own several Manhattan office buildings, have proposed to raise the rent to $25 million a year from $4 million. Residents say such a drastic rent increase will bankrupt their building. They have offered to pay $5.6 million a year.
“We’re not billionaires, we’re thousand-aires,” said Richard Hirsch, president of the 324-unit building where, like in all co-ops, residents own shares in a housing corporation and divide the operating costs. “We are the tip of a spear that’s coming straight for co-ops across the city.”
There are between 65 and 100 co-ops with a ground lease in and around the city, housing up to 25,000 people, according to estimates from the Real Estate Board of New York and the Ground Lease Co-op Coalition. Residents in these buildings occupy a special place in the Byzantine world of New York real estate, as they are both homeowners and renters at the same time.
If Carnegie House residents are unable to agree on new lease terms and default, the ground-lease owners would seize control of their building, homeowners would lose all their equity and have to pay off the balance on their mortgage immediately. If they have any money left over after that, they would be eligible to lease their apartment at a stabilized rent, meaning the cost could rise only by levels prescribed by the city. However, the initial rent could be set at an unaffordable price for many residents, said Stuart Saft, a ground-lease expert at law firm Holland & Knight.
“That,” he said, “is the problem.”
The Grumets have no idea where they’d go if they can’t afford to stay in Carnegie House. Affordable housing is scant everywhere, and they’d like to stay close to their doctors.
“We’re not wealthy people,” said Barbara. Lou, a former executive director of the New York State School Boards Association, looked at his wife of 56 years and said: “I assure you we wouldn’t go quietly.”
Carnegie Houses’s ground lease is owned by billionaire real estate investor Rubin Schron and partner David Werner. They bought it 10 years ago for $315 million from the previous owner who’d held it for at least 60 years. As they see it, the co-op is a housing corporation whose ground rent is priced far below market value, which has soared since the supertall towers of West 57th Street rose across the way from the 21-story co-op developed in 1960. The partners want the new rent determined by an arbitrator and have offered each tenant a 10% discount if the sum exceeds $25 million a year and to create a fund to subsidize lower-income residents. They’ve also offered to extend the lease’s remaining term to 62 years from 43.
“They’re living practically rent-free on Billionaires Row,” said Schron, who co-owns the Woolworth Building. “There are multi-millionaires in the building, there are investors. It’s not just middle class.”
Asked if $25 million is a fair price for ground rent, Schron said: “Maybe they’ll appraise it at $20 million. Maybe 25 or $26 million.”
Carnegie House residents are fighting back. They’ve found powerful allies in the state Legislature, and this month filed a lawsuit against the ground-lease owners and the New York state Division of Homes and Community Renewal, which oversees rent-stabilized housing. The lawsuit could buy co-op residents some time to negotiate a new lease.
“The situation at Carnegie House reveals a clear hole in our housing-protection laws,” said state Sen. Liz Krueger. “It isn’t about just this building, but bigger issues we have to confront.”
Wanting bigger returns
Ground leases date back to at least 1928, when Columbia University rented its land to Rockefeller Center.
Typically the leases last from 50 to 99 years, and the rent resets about every 25 years. The leases produce a steady stream of cash for holders who collect a monthly check.
“Ground leases are a way for wealthy parties to maintain the real estate they own,” Saft said.
Traditionally landlords didn’t get rich from ground leases, which typically generate investment returns of about 3% a year. But they are attractive investments because leaseholders didn’t have to pay for a building’s upkeep or property taxes.
“It was like owning a Treasury bond,” Hirsch said. “Until investors decided they wanted Nvidia.”
A marketing presentation from CBRE a decade ago showed ground leases could produce returns akin to a super-hot AI-chip maker. At the time, Carnegie House’s ground lease was being sold by the estate of Evelyn Sharp, mother of Peter Jay Sharp, developer of 450 Park Ave., former owner of the Carlyle Hotel and ground-lease holder who died in 1992. Symphony Space’s theater on the Upper West Side is named for him.
CBRE’s “base case” was that the ground rent for Carnegie House’s residential and retail space would rise from $6.4 million a year to “nearly $40 million” in 2025. That’s because provisions written when the lease was drafted around 1960 called for the rent in 2025 to equal 8.1667% of the fair market value of the “demised land, considered as vacant, unimproved and free of this lease.”
For Schron and Werner, Carnegie House’s rent-reset comes when some of their other properties are struggling. Schron’s portfolio includes towers at 42 Broadway and 45 Broadway in the Financial District, a neighborhood with a 27% office vacancy rate, according to Cushman & Wakefield. He also owns what one attorney described as nursing homes “at an industrial scale.” Schron wouldn’t comment on his holdings.
Werner owns 5 Times Square, a building formerly occupied by Ernst & Young that could be partially converted into apartments. He leads a syndicate of investors that owns 40% of 237 Park Ave., a tower poised to lose tenant JPMorgan after the bank’s new headquarters across the street is completed next year, according to bond-rating firm KBRA. Werner avoids the press, according to real estate newsletter The Promote, citing “ayin hara,” which is Hebrew for “evil eye.”
Last year billionaire Michael Dell’s merchant bank, MSD Partners, extended a $100 million loan to Schron and Werner, according to the Real Deal. MSD declined to comment.
Ground-lease negotiations are often contentious. Two years ago, Vornado Realty Trust renewed its lease for land near Penn Station through 2073 and is still fighting in court with the landlord over the rent. Vornado CEO Steven Roth estimated the lease could jump to $26 million a year from $2.5 million. Vornado says in a regulatory filing that the final price “may be materially higher or lower” than its estimate.
Schron and Werner are bringing the same kind of fight to Carnegie House, a place where residents get their mail and packages handed to them daily by doorman Bryan Gallardo, who has worked at the co-op for 15 years.
“This is a building where neighbors look out for each other,” Gallardo said.
Feel like hostages
For a long time ground leases were rare under apartment buildings. That started to change in 1982, after an Upper East Side building prevailed in a lawsuit against the state attorney general’s office, which is responsible for approving co-op financial plans. Condominiums are governed by a different state law and prohibited from leasing their land.
For leaseholders, separating the land from the building above was a useful way to raise cash while keeping a stake in the property. And developers with a 99-year ground lease in their pocket can use it as collateral to borrow and build a lot taller than they otherwise could.
Even though the ground rent would rise over time, the risk of the lease causing problems was understood to be too small to matter. Carnegie House resident Anthony Santiago said his bank didn’t raise any issues when he refinanced his mortgage in 2012.
“No one mentioned the ground lease,” he said.
Now, in recognition that the odds of a co-op defaulting and reverting to a rental property are higher, banks are refusing to write mortgages at buildings whose ground lease renews in 30 years or less, said Robert Cecere, a lawyer at Daniels Norelli Cecere & Tavel. At such buildings apartments sell for cash or not at all.
“You’ve got apartments that can’t be sold and can’t be bought,” Cecere said. “How crazy is that?”
Santiago, 69, had planned to retire a few years ago, sell his two-bedroom apartment and live somewhere else. But because of his co-op’s rent problem, no buyer will pay him close to market rate. So he’s still working in elevator construction and still in the apartment he’s ready to part with.
“My wife and I feel like hostages,” he said.
Carnegie House has joined a group called the Ground Lease Co-op Coalition to lobby Albany for relief. Sen. Krueger sponsored a bill that would limit rent increases in ground-lease co-ops to 3% a year, the same rate typically charged to office buildings. The bill was approved by the Senate Judiciary Committee in a 10-8 vote last session but didn’t go further due to opposition from the Real Estate Board of New York. The powerful trade group argued the bill would violate the U.S. Consitution’s “takings” clause because it’s unlawful government interference with privately negotiated contracts.
“These are agreements between, as a general matter, sophisticated parties,” said Anita Laremont, a partner at Fried Frank Harris Shriver & Jacobson who represents REBNY. “We don’t believe there’s a legitimate public purpose here.”
After years of fruitless back-and-forth haggling with Schron and Werner, what Carnegie House described in its lawsuit as formal negotiations began in March. Schron and Werner waited until the last day of the negotiating period, Sept. 13, before proposing to raise the ground rent to $25 million from $4 million, according to the lawsuit brought by the co-op and building retail-space owner Georgetown 57. The complaint accused the landlords of failing to negotiate in good faith and making “a thinly veiled attempt to force Carnegie House into insolvency.”
Schron said Carnegie’s House’s offer to pay $5.6 million in rent is inadequate and amounts to just 60 cents a share per unit on a per-square-foot basis.
“You can’t offer 60 cents for a suit that costs 200 or 300 dollars,” he said.
Attorneys say the co-op’s lawsuit will likely be dismissed because its rent hasn’t been raised yet and no harm has yet taken place.
“This lawsuit is premature,” said James Catterson, a partner at Pillsbury Winthrop Shaw Pittman and a former New York state judge.
A spokesperson for the ground lease owners said: “By filing this complaint, the co-op has tacitly conceded that it believes its proposal is meritless.” Nevertheless, this week the co-op secured a procedural victory when a state judge, Arthur Engoron, granted its request to postpone arbitration proceedings until a preliminary hearing is held in his courtroom on Nov. 13. And on Sept. 27 Gov. Hochul signed into law legislation allowing co-ops to initiate renewals or extensions before their ground leases expire, granting some of the relief sought from Albany by ground-lease co-ops.
Carnegie House is represented by Tim Collins, who has sparred on behalf of Stuyvesant Town-Peter Cooper Village, Manhattan’s largest apartment complex, over rent protections and improvement costs with landlords such as Blackstone Group and CW Capital.
In the meantime, Carnegie House residents are left to stress over how much the rent will rise for the dirt below – and whether they’ll be wiped out financially and lose their homes.
“I fear that sooner or later our health will snap,” said Santiago’s wife, Yolanda, a retired hospital administrator, “and that we will have to go through life without each other.”