Capping Ground Lease Charges for New York Co-Ops Would Be Disastrous

There has been press recently about co-operative buildings on ground leases, where land ownership is separate from building ownership. The co-op does not own its land but “rents” it from the actual landowners, allowing co-ops to lease the land under their buildings for a fixed period, often decades. In cities like New York, where land is scarce and property prices soar,  co-ops built on ground leases have long been a pragmatic solution.

As these leases approach expiration or face substantial rent increases, some co-op owners are looking to politicians for relief. While their concerns are real, proposed political interventions raise serious legal and economic questions, particularly regarding the sanctity of contracts and the ripple effects on the investment community.

A pending New York state bill aims to artificially cap the amount a landowner can charge co-op residents when a ground lease escalation occurs or when a lease expires. It also seeks to sidestep free-market economics and established contracts by giving residents a first right of refusal to buy the land. In Manhattan, an estimated 60 to 84 co-op buildings operate under such leases, with Carnegie House at 100 West 57th Street standing out as the most high-profile example.

A ground lease, like all leases, is a contract. The lease agreement is generally 50 to 99 years, land is owned by one party, and the building above is owned separately. In a co-op structure, the co-operative corporation leases the land and then subleases apartments to shareholders. In exchange for monthly payments to the landowner, tenants get building usage, allowing buyers to access and utilize prime real estate at a lower upfront cost, since they aren’t purchasing the land. 

These contracts have pre-negotiated rent adjustment dates and formulas, and expiration dates, that protect landowners and tenants. Unless both parties agree to amend the contract, it’s the rulebook everybody must follow. If contracts aren’t binding, why have them?

In many instances, landowners have received decades of below-market rental payments, a tradeoff they agreed to in exchange for a consistent and predictable income stream. Landowners also accept lower rent because tenants are responsible for maintenance and upkeep of these buildings, as well as the real estate tax payments, easing the management burden.

Buyers in these co-ops were made fully aware of the existence and terms of the ground lease. The ground lease, including expiration dates and scheduled rent escalations, are disclosed in offering plans, proprietary leases and financial statements. Many also benefit from reduced purchase prices because of the ground lease risk.

To later claim surprise or unfairness undermines personal responsibility and the legal foundation of real estate markets, where predictability and enforceability of contracts are paramount.

Recently, some local and state politicians have proposed measures to limit ground rent increases or allow co-ops to forcibly purchase the land beneath them, sometimes at below-market rates. While framed as efforts to protect middle-class homeowners, these proposals pose significant threats to the very principle of contract enforcement. If lawmakers intervene to rewrite lease terms after the fact, it sets a dangerous precedent for private property rights.

Landowners made the conscious decision to accept the terms of the ground lease as opposed to investing elsewhere. They often sat on low returns for decades in the hopes of a significantly better return in the future. Landowners cannot go back in time and invest elsewhere, so why should politicians have the right to change the rules of the game now? 

These interventions have broader financial implications. Landowners have outside investors such as insurance companies, university endowments and public employee pension funds that were counting on a rental increase to pay future commitments. Undermining their legal rights or expected income streams directly harms retirees, teachers, firefighters and municipal workers who rely on those funds. When political decisions erode investment security and materially reduce the value of the investment, they don’t just impact wealthy real estate investors — they hurt the broader public.

How many politicians want to tell public sector employees that after decades of working for the promise of a pension, the committed payments are going down?

Real estate investors are an easy political target. They are often nameless and faceless companies that are portrayed as taking advantage of the unsuspecting innocent public. It’s important to recognize that among those investors are hardworking employees who keep our streets safe and educate our children.

Landowners and co-ops have successfully renegotiated lease extensions or land purchases on mutually agreeable terms. Governments can and should support transparency, mediation and incentives without undermining contracts. However, what must be avoided is using legislation as a blunt instrument to unfairly shift financial burdens or invalidate agreed-upon contract terms.

As this debate continues, it’s critical to remember that contracts are commitments. Undermining them may offer short-term political gain, but the long-term damage to trust in the system — and to everyday investors — is far more profound.

Ben Tapper is an executive managing director at Lee & Associates.