Ground rent remains quirk that goes with territory

September 11, 1994|By Maryalice Yakutchik | Maryalice Yakutchik,Special to The Sun

For 34 years, Dolores Woolford has owned a rowhouse in the city; now, she wants to buy the North Dennison Street property on which her home sits.

Simply, she's tired of paying $96 a year in ground rent.

Ground rent. That strange vestige of Colonial days still befuddles homeowners and homebuyers throughout Maryland, especially those in the city. How can you buy your house but not the land? And even if you can, why would you?

The theory behind leasing the ground on which one owns a home was to keep the price of housing down; simply, it was a way for people to finance property without having to pay for the land.

Although ground rent probably no longer serves its original purpose, homebuyers ought not automatically dismiss the notion becoming "tenants" on leased property. One reason: at least one-third of the housing in the city is subject to ground rent. Also, Maryland law allows those who pay ground rent to buy the ground; only a rare few rents from the 1800s are irredeemable.

L Ground rent is more quirky than complex, the experts assure.

Although it exists in pockets across the nation, in Boston and St. Louis, and from Pennsylvania to Hawaii, it's really as Baltimore as crabs -- and as initially perplexing and unappealing to handle by uninitiated buyers and lenders.

"If they're born, reared and raised here in Baltimore, like I am, they're not put off by ground rent," said Howard Perlow, vice president of the Residential Title & Escrow Co.

But for those hailing from places as foreign as the Midwest, or even as familiar as Prince George's County, Mr. Perlow needs to spell out the particulars.

"I get out-of-town lenders that call and say: We won't settle this loan because it has a ground rent; what is it?" he said.

He tells them that those paying ground rent do own their own homes and are considered property owners in every respect -- even down to paying taxes on both the land and buildings. But, in fact, they do not own the land; they lease it.

Ground rents can be of any amount. But they need to be reasonable to be competitive in the market. Usually created to last for 99 years, they are renewable forever at the tenant's option. Unlike most rents -- which are due in advance -- ground rents are payable in arrears, or at the end of the period that they cover. They are fixed, annual charges but usually are paid semiannually.

Although several dozen local investors actively trade ground rents, not many are created these days. But anyone who owns a "fee simple" property -- that is, owns the land and the buildings on the property -- can do so by drawing up a ground lease. The lease gives a tenant the right to live on land; possession is retained by the owner.

Maryland law allows the tenant to buy, or redeem, ground rents on residential land, as long as the lease is longer than 15 years.

What makes ground rent so confusing is that it has nothing to do with the value of the land.

First the ground rent is set, let's say, at $120 a year. Then the "capitalized value" of the ground rent is calculated -- or the amount of money it would cost for the homeowner to redeem the ground rent so he or she would no longer have to pay the rent.

This value is set by state law. Before 1888, ground rents were 4 percent of the value; 6 percent from 1889 to 1982; 12 percent today. In Baltimore, most ground rents were created from the 1920s through the 1960s.

For example, if a $120 ground rent is created today, then the value of the ground rent is $1,000 (12 percent of $1,000 is $120.)

"I don't think we've had a whole lot [of ground rents] created in the past 10 or 20 years," said Al Monshower, a real estate attorney and partner in the Columbia firm of Monshower and Miller.

Ground rent in Maryland benefited the early colonists, enabling them to purchase homes inexpensively without having to purchase the land.

In 1632, King Charles I of England, in granting the Charter of Maryland, created the original rent here by leasing land in the region of the Chesapeake Bay to Lord Baltimore for an annual rent of two Indian arrows plus one-fifth of all the gold discovered, according to a brochure distributed by the Residential Title & Escrow Co.

The laws governing ground rents are determined by the state; and ground rents are recorded by the individual counties, according to Elizabeth Trimble, deputy counsel for the Department of Licensing and Regulation.

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