Investing in a Land Lease Co-Op

Lisa Smith of Investopedia explains that, “Co-ops are not considered real property. When you buy into a co-op, you become a shareholder in a corporation that owns the property. As a shareholder, you are entitled to exclusive use of a housing unit in the property.”

This translates into the following:

1. Purchasers of co-ops receive shares instead of deeds.

• Once you purchase a co-op you will receive a proportional number of shares in a corporation in place of a deed.
• The number of shares you obtain depends on the size of the unit in proportion to the size of the building. This grants a stake in the corporation and constitutes the use of the purchased unit.

2. Maintenance fees are paid based on a pro-rata share of ownership interest.

• This means you only pay maintenance fees based on the number of shares you own. Most condo associations base maintenance on total bedrooms in the unit.
• The difference is not all 2-bedroom units are always the same square footage. Paying maintenance fees based on the number of shares owned may provide an advantage.
• Let’s say you own a three-bedroom unit that is smaller than other three-bedroom units in the building. In a co-op this means that you will pay a smaller maintenance fee than those other two-bedroom units. In a condo building, you may be stuck paying the same fees as those larger two-bedroom units.
• *(This all depends on a case-by-case basis as every association will have different rules, regulations, and bylaws)*

Now the interesting part of the deal comes in if the property is a land-lease co-op. Basically this means the land that the building sits on is not owned; it is leased. Standard land-leases are 99 years. At the expiration of the land-lease, the owner of the land may take ownership of the building and all of its corresponding units. Now at first this may seem shocking and deter investment into a co-op. However, with a land-lease co-op, scenarios may occur:

1. The land-lease expires.

• As previously mentioned, if the land-lease continues through expiration then the landowner takes possession of all structures built on the land. Ultimately, shareholders in the co-op may lose their interests if the landowner is unwilling to negotiate. This is extremely important to understand, as it means that you basically lose your property at the end of the land-lease if no agreement is ultimately made.

2. The land-lease gets renewed.

• If the landowner renews the lease, shareholders in the co-op have more time to enjoy the full use of their units. This also promotes property values, as there is still life in the lease.

3. The land is purchased.

• Now this is the most interesting and profitable scenario. If the shareholders of the co-op come to an agreement among themselves and the landowner to purchase the land, all properties in the building will be deeded as real property.
• Property values will skyrocket to prices of comparable condo units in the area. Sometimes this appreciation can amount to over twice the previous co-op value. This substantiates to an impressive return on investment for all existing shareholders turned property owners.
• The building and the land are both owned and the co-op converts to a condominium. Possession of the real estate is granted to the titleholder.

A great investment opportunity occurs when the third scenario is executed. This scenario allows individuals to buy-in when the price is reflective of the co-op status, but allows them to reap the financial and housing benefits once the land is purchased and the unit prices appreciate accordingly. Tread lightly though – this final scenario would need the approval of a large percentage of shareholders (according to the association’s rules and bylaws) and of course the landowners.