QI own a cooperative apartment, and it has increased significantly in value in the past several years. This is a leasehold cooperative, and the lease on the land will expire in 2052. What happens to a co-op when the land lease expires? Do I lose my entire investment?
AThis question applies equally to leasehold cooperatives and leasehold condominiums. Fortunately, there are not too many of these in the Washington area, but leasehold properties do exist around the country. Indeed, it is my understanding that a majority of condominiums in Hawaii are, in fact, on a lease.
Lawyers refer to true ownership as holding title in "fee simple." Under the old common law in England, when the lord granted an estate in land to the people who worked for him, this grant was conditioned on homage and continued service. The grant of land was called a conveyance "in fee."
We lawyers have continued to hold on to this legal (old English) jargon, and thus most real property is owned in fee simple. In a cooperative, the co-op association owns the building -- again usually in fee simple -- and enters into long-term lease arrangements with each member owner for the unit he occupies.
However, there are some community associations in which the initial landowner retains the land, and grants a long-term lease to a developer. That developer creates either a condominium or a cooperative association, and in both cases the association is subject to the time limits in the developer's lease.
Most of these leases are for at least 99 years.
A friend of mine is a lawyer who has assisted in the development of many such leasehold condominiums. I once asked him: What happens at the end of the 99-year lease? His response: "I won't be around to worry about that possibility."
That's a rather glib answer. But what really happens at the end of the lease term? You should read all of your association documents carefully. They may be able to give you guidance.
Some documents will allow the association to extend the lease -- for a price, of course. Other documents will allow the association to purchase the land, again for a price. And some state laws require that the landlord allow the "tenant" the right to purchase at the end of a period of time. In some cases, though, the land and the building that sits on it simply revert back to the landowner.
Let's look at the distinctions between leasehold cooperatives and leasehold condominiums. But even before we do, let me say that I believe that both of these concepts pose a potential economic threat to anyone who buys into such a complex:
* Leasehold condominiums. Here, the landlord owns the land and either creates a number of leasehold condominiums or grants a lease to a developer who creates those entities. The occupants do not own in fee simple; instead, they only have a lease, for the number of years spelled out in the developer's lease.
In such a condominium, unless there is a law protecting the rights of the owners, it is possible that if the monthly rent is not paid, the landlord can take the property back by filing suit in the appropriate landlord-tenant court where the property is located. Obviously, this is unfair. If, for example, one owner does not pay his monthly rent, the remaining owners in the complex should not be penalized and lose their investments.
The National Conference of Commissioners on Uniform State Laws -- an organization of lawyers, legislators and judges from every U.S. state -- has drafted a proposal that has been enacted in a number of states to cover such problems, for the protection of the condominium owner.
The Uniform Condominium Act, or the Uniform Common Interest Ownership Act, permits a limited form of leasehold condominium. The leasehold can be for all or part of the condominium. Under these laws, a leasehold condominium is permitted, but only if the lessor (the landlord) joins in the declaration, and the declaration and the statute thereupon provide that the failure of any unit owner to pay his share of the underlying leasehold rent will not affect the right of the other unit owners. Thus the law effectively prohibits the formation of a condominium on a leasehold where the ground lessor will not join.
However, in those states without such consumer protection laws, the resident of a leasehold condominium buys with a lot of risk. First, the landlord can take the property back if the rent is not paid. And more important, at the end of the ground lease, the condominium unit will no longer exist.
This, obviously, is not a good deal.
* Leasehold cooperatives. Except for some details, the arrangement is similar. Here, the cooperative association, not the individual owner, is the tenant. Each member is, in effect, a subtenant of the association, and both are subject to the terms and conditions of the ground lease.
Your lease will expire in the year 2052. That's a long time away. But unless your legal documents -- or the law in your state -- give you or your association the necessary protections, I strongly recommend that you sell as soon as possible, take your profit and invest in fee simple property instead.
Incidentally, because your cooperative apartment is an investment property, to avoid having to pay capital gains tax when the unit is sold, you may want to consider a like-kind (Starker) exchange. Section 1031 of the Internal Revenue Code permits cooperatives to be exchanged as if they were real property, even though they technically are association stock.
Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.