Correlation Doesn’t Equal Causation, Doggy Racism and Onerous Ground Leases

This week’s screaming headline ‘Dog Racism’ Decried at Co-op That May Use DNA Tests to Ban Breeds was classic New York. It got our (and world’s) attention.

Take millions of people, cram them into a small space and someone is bound to get on your nerves. For context, the world’s population at the density of New York City would fit in the state of Texas.

Take this chart for example. These are the patterns of Manhattan apartment ownership by pet policy. The average sales price was highest in 1Q 2015 for buildings that limited dogs to 50 pounds. Does this mean that employing a weight limit to dogs caused values to rise? No way. It’s merely a measure of what types of price points buildings with these policies seem to fall in to. There are lots of other variables in the mix that prevent this from being anything more than a correlation.


On a personal note, I would love attend the dog weighing-in ceremony if one were to exist. Now THAT would be a first world problem.

I can fantasize the made-for-tv hypothetical scenario during a board approval meeting for a $20 million all-cash Park Avenue co-op apartment purchase. SCENE: Grim-faced board members at a table facing towards a couple with a small dog. The building superintendent is leading the dog to the scale. Breaking the silence of the cold windowless room, the building superintendent reads off the measurement on the scale. He mutters “51” successfully breaking the tension in the room. The couple immediately gasps and exclaims:

“But Fido only weighed 49 pounds last night? We don’t understand how he gained 2 pounds in less than 24 hours? We really want this apartment and we promise to hire a doggie personal trainer immediately to work the weight off.”

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On that note, if you want a chuckle, check out: Spurious Correlations by Tyler Vigen who illustrates silliness of “correlation does not equal causation” He shows the correlation between Nic Cage films versus swimming pool accidents, beef consumption versus people getting struck by lightning and much more. Like the inference taken from my chart above, real estate is a sea of correlation with a tremendous amount of junk statistics vying for your attention to build traffic. Tread carefully.

Ok back to reality.

Let’s Talk Ground Rent Payments


While residential and commercial buildings without ownership of the land get a bad rap, and rightfully so, some are far worse than others. And while a current ground lease payment is a known-entity, the key factor in determining whether the lease is bad or really bad, is the the way the periodic resets to the land value are handled. A re-set in the value of the land and associated payment usually occurs a few times over the typical 99 year lease period.

Trump Plaza, a co-op on the Upper East Side of Manhattan had one of the worst one reset scenarios I’ve ever seen. In the most complicated real estate transaction I’ve witnessed (I was a one of the consultants to the co-op board and spoke to the shareholders) came about last week. The complexity of what the board achieved was very much under appreciated. The shareholders were very lucky to have a board that was so talented. The story is chronicled in The New York Times’ Rising Costs a Concern for Land-Lease Building Owners. This event has been building for a while as covered by the WSJ and Bloomberg.

The short version goes like this. Manhattan land prices are currently at record highs and the Trump Plaza co-op has been making ground lease payments to the land owner since the early 1980s. With the land value significant higher than it was in 1983, the ground lease payment and monthly maintenance charges would skyrocket far more than a typical ground lease reset and time was running out. The already above average monthly maintenance charges would effectively quadruple, rendering the apartments unsaleable. The board pursued a purchase of the land but couldn’t finance it through a mortgage by the co-op corporation because the maintenance charges would still be adversely high. The board was able to work with area lenders and enable individual shareholders to finance the land purchase outside the corporation. I am told that nearly all came up with their prorata share of the purchase which almost equaled the value of their apartment before acquisition of the ground lease.

The shareholders were faced with the choice of lose everything or spend a lot a retain some of their equity. Once the transaction occurred, the monthly maintenance charges were reduced, the reset was eliminated and most importantly it removed the stigma of a ground lease. I’ve heard that the contract prices of current sales have more than doubled on a price per square foot basis. Incredible.

It couldn’t have happened at a better time for the Manhattan market which is in desperate need of more modest priced housing. It’s tough to be a broker without product to sell yet New York City has more brokers (let alone associate brokers and sales persons) than at anytime in the past 15 years. A stigma over studio apartments? Get over it.

Land prices are high in the Hamptons too.


Why is overall inventory not growing?

Manhattan inventory growth has slowed since bottoming in 2013, much like the U.S. situation. Here’s my rationale on Blomberg TV earlier this week. We now have rumors of a possible Manhattan condo combination sale of $250,000,000 and an LA home asking $500,000,000 but little affordable new product for mere mortals.

Like the battle over pet policies, the arguments surrounding the 20 percent down payment as the holy grail of mortgage lending responsibility can be heated. It has become THE symbol for lending sanity. Despite the slow slide in the down payment share being required for conventional loans, the decline does not mean mortgage lending standards are easing in a meaningful way despite the junk statistics that are being created to generate web traffic.

Like my pet policy chart discussion, lenders are relying on borrowers with higher credit scores and those are more likely to be allowed a lower down payment.

Now if I could only lose a few pounds.

See you next week.

Jonathan Miller, CRP, CRE


Miller Samuel Inc.

Real Estate Appraisers & Consultants

ps Please feel free to share.  If you get tired of all the charts, real estate commentary and articles presented in each weekly note, just opt out.  I always appreciate feedback so please email me.

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