This article can be used with Land and Freedom Economics Lesson 16, on Taxation, and 12, on the Business Cycle.

A 20-YEAR saga came to a close last month when the co-op owners at 2 Fifth Avenue paid $29.25 million for the land under their building, a short distance from Washington Square Park. The Rudin family, the New York real estate clan, built 2 Fifth Avenue in 1952, and when it was converted to a co-op in 1986 -- after a [long] battle with the residents -- the Rudins kept the land underneath and leased it to the new owners.

Only a handful of Manhattan co-ops have such a ground lease arrangement, and the residents of 2 Fifth Avenue have been eager to buy the land from the Rudins ever since. Over the years, they made intermittent offers for the property, but the issue was becoming more urgent as the co-op approached its 20th year. The lease called for annual rent increases of 4 percent, and a market rate increase of up to 30 percent every 20 years.

Last year, the co-op paid the Rudins about $1 million in rent, but by next year the payment was due to jump to close to $1.3 million, according to Adelaide Polsinelli, the president of the co-op board, who is a real estate broker with Besen & Associates.

"We'd been trying for 20 years to buy it and they always said, 'No, no, no,' " Ms. Polsinelli said. "A year and a half ago we said, 'We'd like to ask you again.' " The board did not get a reply, she said, until last September, when Rudin family members called her to a meeting and said they were finally willing to sell.

Ms. Polsinelli said the Rudins gave the co-op just one month to agree to the purchase - or face the prospect of the land's being sold on the open market.

Under the best of circumstances, it can take just this side of forever for a group of co-op owners to agree on something as mundane as how to decorate a lobby. But after hashing out the details with real estate consultants, lawyers and bankers, the eight-member board voted in October to go ahead with the purchase. In November they presented the deal to the owners of the building's 300 or so apartments.

What's The Deal With Land? This story shows many facts about land's role in our economy which are usually much harder to see. Most of the time, land and buildings are sold together as a single piece of real estate -- and we think of property taxes being applied to the value of land and building together. However, land and buildings are very different in terms of their economic role. Cities routinely assess land and building values separately, because of the entirely different factors that affect their value. Land goes up in value with increases in population and overall production. Buildings go down in value (they depreciate) unless labor is applied to maintain them. Although the piece of land described in this article just sold for $29.25 million, according to the New York City Assessor's office -- which supposedly assesses the market value of real estate -- the value of this land in 2004 was only $9.7 million! That means that after the Rudins paid their property tax on the land, they realized an annual profit of at least $570,000 on that land.

"While there were some people who were nervous about it, I would say there was remarkably little resistance," said the co-op's lawyer, Elliott Meisel.

Still, the co-op needed money to get the deal done. Working with the National Cooperative Bank, which specializes in financing co-ops, they got an unsecured loan to make a $2 million down payment. The bank then provided 100 percent financing for the rest of the deal, which ended up costing about $30.5 million, including closing costs.

The whole deal was done with no cash up front from the co-op owners. "It cost us nothing out of pocket," Ms. Polsinelli said.

Finally, they closed in mid-March, and now the co-op owners at 2 Fifth Avenue are land owners, too.

There are many advantages.

Rent paid to the Rudins was not tax-deductible, but the interest payments on the new mortgage are. Also, taxes paid on the land can now be counted as a deduction by the co-op owners.

While common charges have increased 16 percent to pay for the loan, a much greater portion of the common charges is now tax-deductible - so, after taxes, the co-op owners will see their carrying costs drop, Ms. Polsinelli said.

"It ends up being free to the shareholders," she said.

But more than that, the co-op has freed itself from the uncertainty represented by its lease. Ms. Polsinelli said that the steadily increasing rents would have one day ballooned into an unwieldy figure. Because of the lease arrangement, she said, apartments in the 20-story building -- former Mayor Edward I. Koch is one of the residents -- tended to sell for less than similar units elsewhere in the neighborhood. Now that has changed.

"There's a very large marketing and psychological advantage," Mr. Meisel said. "Partially due to the uncertainty and partially due to the psychology of ownership, owning the fee title to the land will enhance the market value of the apartments substantially."

If apartment values get a boost from the land deal, the Rudins will gain a double benefit -- the family still owns about 70 units in the building. Bill Rudin, the president of Rudin Management, declined to comment.

Questions for Discussion

1. Why did the Rudins not sell the land to the co-op owners before now?

2. Why was the co-op board eager to buy the land before it was placed on the open market?

3. What is the relationship between the city's under-assessment of the land and the rent that its owners can collect?

4. Do you think that landowners should collect rent on the land under a building? Explain your answer.

5. How was this deal a win-win situation for the Rudin family?

6. What are some of the advantages to co-op owners of owning the land themselves?