Negotiating a Building's Ground Rent Navigating a Contested Land Valuation

 Many co-ops in New York lease, rather than own, the land beneath their apartment  building. For the board of a leasehold co-op, navigating a contested land valuation, in  which the amount of the co-op’s ground rent is determined through arbitration, can be a daunting process. Much of the action plays out seemingly beyond the board’s control, in an extended battle among appraisers, arbitrators and lawyers, with  the outcome dictating the co-op’s financial position for years to come. During the process, the prospect of higher maintenance fees to cover the new  ground rent will generate shareholder anxiety and adversely affect the  marketability of co-op apartments. As a result, the board will feel pressure to reassure shareholders, while  remaining candid about the potential for an unfavorable outcome.  

 To manage these challenges, the board must have a solid understanding of the  valuation process and its context. This article outlines the contested land valuation process and some of the  broader considerations the board should have in mind as it navigates the  process.  

 Approaching a Ground-Rent Reset Date

 Most ground leases run for an initial term of about 30 years, followed by a  series of optional extension or renewal terms that can be exercised by the  co-op. The renewal terms in most ground leases are 15 to 25 years, and the total  duration of the lease if all extension terms are exercised is typically 99  years. To account for changes in economic and market conditions over this long time  frame, the ground lease may contain a rent-escalation clause. Alternatively, as discussed here, the ground lease may provide that the amount  of the rent can be reset based on the fair market value of the land, as  determined through arbitration, usually at intervals of 10 or 15 years. The ground rent will be a straight percentage – normally about 6 percent – of the land’s market value.  

 As a ground-rent reset date approaches, the co-op board will consult with its  counsel and will normally retain an appraiser who is experienced in valuing  commercial real estate. The appraiser will provide the board with a preliminary valuation of the land  (likely a range of potential values), which should enable the board or its  managing agent to estimate the potential increase in the co-op’s ground rent and its effect on shareholder maintenance.  

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