Carnegie House co-op owner suit highlights ground reset pain

A Carnegie House co-op unit owner filed suit earlier this month, seeking to alter an anticipated soaring of maintenance costs in 2025 following a long-expected rent reset.

The plaintiff, an apartment owner in the 324-unit cooperative Carnegie House at 100 West 57th Street, alleges the co-op board is “conspiring” with the ground lease owners, David Werner Real Estate and Cammeby’s International Group, to raise the ground rent in an “unconscionable” way. A scheduled ground rent reset in 2025 that is expected to lead maintenance payments to soar, has slashed the value of the apartments in the building. Werner and Rubin Schron’s Cammeby’s bought the fee under the co-op in 2014 for a reported $286 million, and financed it was a $180 million loan that was securitized. The complaint includes several examples of naive real estate analysis, including that the sale price was “$10,500 per square foot,” which would be an astronomical price for land. But that figure was derived by dividing the sale price (the Acris figure of $261 million) by the 25,000-square-foot land parcel, as if Manhattan buildable square feet were Kansas farmland. The defendants have not yet responded in court papers. Court filings are the positions of one party and are not necessarily accurate or complete.

Excerpts from the complaint include: “The Cooperative’s Lease for Carnegie House was originally entered into in 1959. By a Second Amendment of Lease, dated March 15, 1974 (the “Second Amendment”), it was agreed that the original term of the Lease would expire on March 14, 2004, after which the Cooperative would have three successive options to renew for 21 years each, such that if all options were exercised, the Lease would run until 2067… On October 8, 2002, following negotiations between the Cooperative and then landlord, C/S 56th Street LLC (“C/S”), the Cooperative exercised its first option to renew the Lease for the 21-year period commencing March 15, 2004, and ending March 14, 2025. As reflected in the Third Amendment to Lease (the “Third Amendment”) executed on that date, it was agreed that the renewal rent would be $3.8 million for the first year of the renewal term and would increase over the course of the renewal term such that it would be $4.4 million for the final year of the term… On November 5, 2014, the Werner Group purchased the land underneath Carnegie House for [$286 million]… According to the Board, the situation was even more dire than it had reported only two weeks earlier. An FAQ circulated by the Board in connection with the meeting stated that the price paid by the Werner Group for the land underneath Carnegie House was not $261 million as reported in the land records, nor $286 million as initially reported in the Board’s June 4, 2019, letter, but $310 million. Further, the Board explained that, accepting $310 million as the baseline, the value of the land come Lease renewal in 2025 would be $385 million, more than seven times the agreed value the Cooperative had negotiated with C/S for purposes of calculating the rent for the Lease year preceding the 2025 renewal date. Specifically, the Board has informed the shareholders that they can expect the annual rent to increase from $4.4 million to $31.4 million in 2025 if the Lease is renewed, representing an increase of $26 million per year… It is justified that the Court should declare the renewal rent provision unconscionable and reform it to limit any increase in the rent to an amount that is fair and reasonable and consistent with the parties’ course of performance under the Lease. Securitized loan LINK. Complaint LINK

Direct link to Acris document. link