There are a handful of reliably hazardous red flags in New York City: an empty subway car at rush hour, an empty restaurant on a Saturday night, and a-little-too-reasonably-priced apartments. Some of these warning signs may have shifted over the past few months (that empty subway car is suddenly welcome, for one) but the too-reasonably-priced apartment is tough to shake — so when we saw 23 units, including $99,900 studio apartments and $299,000 two-bedrooms, available for sale in Carnegie House, a high-rise co-op on the “Billionaires’ Row” of 57th Street just below Central Park, our first thought was: Where’s the catch?
In the case of Carnegie House — a nondescript gray-brick 21-story, 324 unit building at 100 West 57th Street — it turns out it’s straightforward: It’s a land-lease building, meaning that the building doesn’t own the ground beneath its foundation. This arrangement is fairly rare — there are only about 100 land-lease buildings in the city — and means that the building’s owners have to pay rent to the developers. Which in a co-op building, of course, means the share-holding residents, who pay ground rent in addition to their typical monthly maintenance fees, real-estate tax, and any operational costs. If the ground lease expires and is renewed at a much higher rate, the monthlies can double or triple. Land leases can reset as often as every five, ten, or 15 years, and the property underneath the building is reappraised when they do. Since land values in New York almost always go up, a spike is almost inevitable.
Land-lease buildings come with their own share of “quirks,” as a broker we spoke to diplomatically put it. If you’d like to purchase one of the 23 apartments available in Carnegie House, for instance, you’ll have to pay the full amount in cash: “Everybody is cash in the building right now, at every level, whether it’s a $110,000 apartment or the three bedrooms that are $599,000,” says the Brown Harris Stevens agent Steven Fishman, one of many who have handled sales in the building. That, too, is typical. Most banks are reluctant to lend to buyers in these buildings, anticipating that when the monthly costs jump way up, owners may suddenly find it difficult to keep up with the mortgage. So: cash.
The ground-rent fees paid to the owner of the land underneath Carnegie House are currently $4.1 million annually, and are due to reset in 2025 — for the first time in 21 years. There’s no anticipating exactly how much the rent will rise when they do, but it’s likely to be a lot. In 2014, owners were given a hint when the land was purchased by real estate investors David Werner and Rubin Schron, for $261 million. That’s because this humble brick co-op now finds itself in the middle of “Billionaire’s Row,” the stretch of 57th Street that a 2019 report from Douglas Elliman and Knight Frank determined was the most expensive street in the world. The building, which is filled with a mix of younger families and older residents who have lived there for decades, finds itself in an unpredictable situation. “No one in the building could ever imagine that they would value the land that high,” says resident owner and attorney James David Adelman. “The building is so wonderful in every way — the staff is amazing, the community is great, it’s really one of the best places I’ve ever lived in New York, but [Werner and Schron] have thrown the building into a chaotic state, and they’ve added uncertainty.” Investors don’t like that, and that has depressed prices by a lot.
Of course, uncertainty has taken on a whole new meaning in 2020, and how things will look in 2025 is unknown. But if the land under Carnegie House is still appraised at $260 million in 2025, it will likely boost the annual land rent to over $21 million— about five times the current amount. For the risk-averse, the uncertainty of vastly higher fees in 2025 has led to selling their apartments — or at least trying to. There are currently 23 on the market, for staggeringly low prices, offered by owners who are trying to get out before the reset. Dharm Sharma, the manager of a wholesale seafood distributor, bought his two-bedroom apartment in Carnegie House in 2017, and says that he learned about the land-lease situation only after his purchase. “My lawyer and my realtor didn’t tell me,” he says. “When I found out I was going crazy. I couldn’t sleep for months.” (According to several brokers we spoke to, tenants are supposed to be made aware of the land lease before moving in.) Sharma put his two-bedroom, two-bathroom apartment on the market last year, listing it at $550,000. “I told my Realtor that you really have to tell the truth, you can’t keep people in the dark, but by the time I put it out there, most of the people were aware of the situation.” Sharma’s apartment didn’t sell, and he continues to live in the building. Another resident recalls a neighbor down the hall who was trying to sell her mother’s apartment in the building. “She was just pulling her hair out, and was just like, get me out of here, because of the uncertainty and the hassle,” they say. “It was a struggle even back then, because of the damn ground-lease shit.”
For more bullish co-op members, the 2025 reset presents an opportunity: They want to buy the land on which their building sits, aiming to convert their co-op units into more valuable condos. Some, like Adelman and his partner, are now explicitly hoping for this outcome. “When we bought the apartment, I understood that the rent would reset every 25 years,” he says, “and it was a pretty straightforward opportunity to live in a co-op in midtown — but we also knew there was a possibility that we would purchase the land under the building at some point, which would be wonderful,” he says.
But the likelihood of the most expensive street in the world becoming (relatively) affordable — or, at least, affordable enough for those shareholders who settled here years before the idea of buying the land was on the table — seems small. “Appraisals could definitely change from today to five years from now,” says Fishman. “I would think based on the city’s resiliency and in general how well appreciation happens in New York that New York will come back, and so will real estate.” Whether Carnegie House continues with its land lease and ground rent fees rise, or the co-op votes to buy the land, the only thing for certain now is that its future — and how much that $99,900 studio will actually cost — is itself uncertain.
Which means that many of the current shareholders are stuck. “There are a lot of older people in the building, and you can see how emotionally and physically stressed they become when they talk about it,” says Michael Landon, who lived at Carnegie House with Sharma for three years. “Werner and Schron made a lot of things impossible,” says Adelman. “Now, we’re basically attempting to untangle ourselves from a situation we didn’t choose to be in.”
Still, the lure of (seemingly) undermarket Manhattan apartments is hard to resist. “I can’t begin to tell you how many calls I get about these apartments,” says Fishman. So has Kristi Ambrosetti, who works at Sotheby’s. “At this price point, I’ve been completely inundated from morning until all times of night, with phone calls, text messages, and emails from people all over the world — we’ve had people from Hawaii, Israel, Paris, and the Middle East.” Ambrosetti’s listing is one of eight currently in contract, and, according to StreetEasy, eight apartments have sold since the beginning of the pandemic in March. Most of the buyers, according to agents, are people who are wealthy enough to afford the monthly hit no matter what happens to the land. “It’s an inexpensive apartment for a wealthy apartment owner,” says broker Harry DiOrio, who has sold several units in the building. “I’ve sold apartments in that building to people with over $100 million in assets.” DiOrio closed on two units there during the pandemic, both to owners who could afford to take the long-term bet. In other words: even though the units at Carnegie House may seem like some of the cheapest apartments in midtown (if not the entire city), they still have to be purchased by those wealthy enough to afford Billionaires’ Row. Finding someone who fits this exact profile, though, can be challenging — and some shareholders fear they won’t be able to offload their apartments in time for the reset. “I’ve had people come to me and say, ‘Sell my apartment tomorrow,’” says DiOrio.