What on Earth is ground rent?

Oddity: That's how people think of ground rent, a Baltimore thing that is easier to collect than to understand.

June 06, 1999|By Charles Belfoure | Charles Belfoure,SPECIAL TO THE SUN

Kelsey Kruse, raised in the Midwest, had never heard of a ground rent.

"What the heck is this thing?" she recalled saying when she started house hunting in Baltimore. Although Kruse had rented in the city, she had not been exposed to this real estate oddity. She asked her friends about the impact of a ground rent on buying a house and was reassured that it was no big deal. Just an arcane practice from the old days, they explained.

Kruse bought a house on Beech Avenue in Wyman Park in 1989 and has since been paying her $65 yearly ground rent to someone named Mabel on Joppa Road. "It's fun to tell my friends in California about it, they think it's really weird."

Unless they're from New Orleans, St. Louis or Hawaii where ground rents also exist, most out-of-towners such as Kruse, as well as a fair number of native Baltimoreans, are puzzled by this mysterious animal.

Ground rents have never been an easy thing to grasp. The following might be of some help.

What's a ground rent?

In Maryland, a ground rent is established on a lot and all of the improvements on it for a lease of 99 years. The rent is usually payable semi-annually with the lease renewable forever.

The most important thing to know when you buy a house subject to a ground rent is that you are not buying the property in fee simple, which is the most absolute and unconditional form of private property ownership.

"There's a misconception that the lessee [the homeowner] owns the house separately and the lessor [the ground rent owner] owns the land under the house separately," said John Mitnick, an attorney with Mitnick and Mitnick, one of the few law firms in the city that concentrate on ground rent matters. "You are actually buying a leasehold interest in the lot and everything on it, not just the house," he explained. "The deed that you get is called an assignment, giving you legal ownership of the property on the condition you pay the ground rent."

The ground rent owner has a deed of ground rent, giving him an interest in both the house and lot. This is called a reversionary interest in the property, which means he has no claim on the property as long as the rent is paid.

If it's not paid, the property -- including the house -- "reverts" back to the owner of the ground rent, but only after a lengthy legal process. This rarely happens, since few leaseholders would risk losing a house over nonpayment of an annual ground rent of less than $100.

Residential ground rents in Baltimore average from $15 to $240; commercial ground rents, while much less common, average from $500 to $1,000. A $60 ground rent seems paltry, but you have to remember it was created 100 to 200 years ago when a rowhouse cost less than $1,000.

The ground rent was set by the owner of the land, usually a building developer or an estate owner, according to the prevailing rates of the day. From 1910 to 1914, for example, a $50 rent was typical for a 14-foot-wide rowhouse lot in a working-class neighborhood.

Pay it or redeem it?

The homeowner has the choice of paying the ground rent forever or redeeming it and getting rid of the ground rent. The owner of the ground rent can never force a homeowner to redeem it or refuse the homeowner the right to redeem.

To calculate the redemption price of the ground rent, you divide the rent by a capitalization rate. In the case of most ground rents in the city, the rate is 6 percent. If a ground rent is $60, you divide by 0.06 and come up with a $1,000 value. To know exactly what your cap rate is, you must find out when your lease was created. Maryland law stipulates what the rate is according to when the lease was created, unless a specific rate is stated in your deed.

The ground rent owner cannot force you to redeem at a lower capitalization rate unless it's specified in the lease. The lower the capitalization rate, the higher the value of the ground rent. At 4 percent, the $60 rent redemption price would be $1,500.

Before 1884, all ground rent leases were irredeemable, meaning that you could never pay them off, which in effect gave the owner an investment forever. But in 1884, the first of many laws affecting ground rents allowed leaseholders to redeem post-1884 leases after a waiting period. Today, a lease created before 1969 can be immediately redeemed. The waiting period varies for those created after 1969.

Relatively few ground rents were redeemed after the laws were passed. A $60 payment per year seemed more palatable than coming up with $1,000 in one lump sum, especially for a working man in the late 19th century.

The same is true today, according to Bill Cassidy, manager of Long & Foster's Fells Point office. "I've rarely seen buyers redeem ground rents; they'd rather put the $1,000 toward storm windows or some other improvement at that moment," he said.

Who pays the property taxes?

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