There are numerous issues facing New Yorkers that should be a focus for the Legislature — from quality of life to schools to even more ways of tackling the housing affordability crisis. Instead, some members are focused on fattening the wallets of a handful of wealthy New Yorkers, and in a likely illegal and unconstitutional way.
Albany is considering a bill that would dramatically disregard fundamental principles of contract law and provide certain owners of cooperative apartments with heretofore unimagined benefits in the setting and renewal of ground leases between building and property owners. This legislation is chiefly sponsored by state Sen. Liz Krueger and Assembly Member Linda Rosenthal, who represent wealthy Manhattan neighborhoods filled with co-op owners.
In New York City, around 100 residential cooperatives lease the underlying land directly from the owner pursuant to a ground or land lease. Under a typical ground lease, co-ops lease the land from the property owner for a set period, often spanning 99 years or more. At certain intervals noted in the lease, an appraiser determines the land’s value, which is ultimately used to help fix a new rent.
None of this is a surprise to the residential owners. Indeed, the terms of the ground lease are made clear to every owner when shares in cooperative units are purchased, and such shares typically trade at a lower price than other cooperatives. The average sale price of a ground-leased Manhattan unit is more than $1 million, and although the holders of such units are being characterized by a coalition sponsoring the bill as “co-op owners from diverse socioeconomic, cultural, and ethnic backgrounds,” the vast majority are affluent and not in need of the type of government intervention proposed here.
The bill vitiates the existing legal agreements between the parties as to the calculation of re-setting of the ground lease rent and removes all leverage in negotiations. It would impose a maximum of 3% (or Consumer Price Index) annual increase in ground lease rent; grant co-op owners new rights to automatically renew the ground lease; and to impose a first mortgage on the ground lease if proceeds will be used for rent, repairs, maintenance or capital improvements — ignoring the rights of any existing first-position lenders.
The legislation also grants co-op owners a “right of first refusal” to purchase the ground — after devaluing the fee position via the bill’s other provisions.
This bill would almost certainly be found unconstitutional under both the Contracts Clause of the U.S. Constitution, as a substantial alteration of the central economic terms of longstanding pre-existing contracts between landowners and residential cooperatives, and under the Takings Clause of the 5th Amendment, because they limit a landowner’s ability to use its own property while simultaneously minimizing the return a landowner might receive.
A recent Supreme Court case, Sheetz vs. County of El Dorado, unanimously confirmed that the Takings Clause applies to legislative acts, such as this bill, eliminating any argument that legislation is exempt from scrutiny as a violation of that constitutional provision.
Passing this bill would send a clear and chilling message: contract law is irrelevant in New York. Just imagine the sweeping impact such a policy would have on those looking to do business here, or on banks who lend in New York State.
Moreover, this bill would be terrible public policy, as they seek to protect a class who don’t need it. These are savvy buyers affluent enough to purchase units valued at more than $1 million, who bought units priced well below comparable units in non-ground leased buildings. Now, with this bill, they want to have their very large slice of luxury cake and eat it too.
The bill’s terms not only apply to residential owners of shares in ground lease co-ops, but to all owners of such shares, and will therefore also unjustly benefit wealthy corporate owners of retail space in ground lease buildings, where they’ll be able to pay a lot less in rent, but lease their retail space on Billionaire’s Row and elsewhere for unlimited sums — and profit.
Instead of spending their time working to address myriad meaningful issues New Yorkers are facing, lawmakers are instead looking to reward rich apartment owners and retail barons and lock in exorbitant returns for investors, even if that will cause chaos and chase businesses and lenders from our state.
Lawmakers with wealthy constituents are willing to throw New York State’s contract laws, banking system and ability to do business into chaos in order to paint themselves as affordable housing champions. That can’t be allowed to happen.
Laremont is a partner in the real estate division at the law firm Fried, Frank Harris, Shriver & Jacobson.
