Should one buy a ground rent? Often the answer is subjective

Mailbag

November 24, 1996|By Michael Gisriel's

Dear Mr. Gisriel:

I would like to know, as a layman, should I buy the ground rent to my house? Do I need a lawyer? How do I go about it?

Norman Armandt

Baltimore

Dear Mr. Armandt:

I would suggest that you have a lawyer handle the negotiation, deed preparation and recording to purchase your ground rent.

Most lawyers will handle these matters for $395 or less. Call several lawyers until you find one you are comfortable with.

In a Maryland ground rent lease (which has been used in Maryland since Colonial days), the owner of the land leases it for a renewable period of 99 years, and the owner of the house built on the land (referred to as the lessee or leasehold owner) pays a specified annual rent, usually on a semiannual basis.

If the ground rent payment is in default, the owner of the land (also known as the lessor or fee simple owner) may, after giving the appropriate notice and a chance to pay the overdue rent, file suit to eject the homeowner or his tenants and take title to the house and possession.

Unlike ordinary leases, the leasehold interest (ownership of the house) is almost always more valuable than the perpetual ground rent lease. Thus, the practical effect is that the leasehold owner controls and manages the improvements, i.e. the house, while the fee simple owner (who technically owns the land under the house) only has the right to collect the yearly rent for the land, the ground rent.

The yearly ground rent is in actuality based on a percentage interest (usually 6 percent) of the ground's total value (called par value). For example, a ground rent having a $1,500 par value would yield an annual ground rent of $90 (payable as $45 every six months), based on a 6 percent interest rate.

Under Maryland law, ground rents are usually redeemable by the leasehold owner upon the payment of the par value of the ground plus any accrued rent to the fee simple owner.

When interest rates were greater than 6 percent, the redemption value of ground rents was often less than par; however, recent low interest rates have resulted in the redemption value of

ground rents approaching full par value.

The decision to redeem a ground rent is a personal one, often subjective in nature. Some leasehold owners want to "own their land," while others feel that the often nominal yearly ground rent of $90 to $150 does not justify the one-time expenditure of $1,500 to $3,000 to purchase the ground.

You must decide which situation makes the most economic sense to you and which scenario makes you the most comfortable.

Pub Date: 11/24/96

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