Ground For Rent

Tradition: Ground rents are as much a part of Baltimore as steamed crabs but as not as simple.

May 02, 2004|By Phillip McGowan | Phillip McGowan,SUN STAFF

The ground underneath the sidewalk has deteriorated, leaving a hole for John Roros to repair in front of his Highlandtown rowhouse. Under normal circumstances, he knows he would be responsible for the work.

But he has paid an annual ground rent of $35 for the past 25 years.

"All I know is that the land belongs to someone else, and I have to pay the rent," said Roros, 62, who had hoped the person who owned the ground rent would be forced to fix the sidewalk.

It's not that simple.

With ground rent, it never is.

Because this real estate peculiarity is so misunderstood, it sometimes creates an unfounded fear of doing business in Maryland among lenders and potential homebuyers, according to several real estate brokers, title agents and attorneys.

Ground rents "can be deal breakers," said Sally Griffin, a Coldwell Banker Residential Brokerage manager.

Historically, ground rent was an annual fee that homeowners paid to live on someone else's land. In Maryland, today's version of ground rent has evolved from its English ancestor into a situation in which homeowners technically own their land but still pay an investor who possesses a right to collect rent from it.

Maryland is one of a few states where residential ground rent exists.

The rents make their most durable imprint on the longstanding rowhouse developments in and around Baltimore. There's no database listing of the state's ground rents, but they number in the tens of thousands.

Several professionals in the real estate industry estimate that up to 50 percent of residential properties in Baltimore are subject to a ground rent.

"I assumed that ground rent didn't exist on my block," said Griffin, who lives in Catonsville. "But then I discovered recently that one of the properties down the street has one. Bad assumption. ... They can exist anywhere."

Ground rent typically ranges from $40 to $200 a year. The rents theoretically never expire because most are governed by 99-year leases that automatically renew. The people who collect payment, known as ground rent owners, value the investment as a commodity because of its inherent stability.

Many real estate professionals consider these payments akin to an interest-only mortgage on the land. And, as with all mortgages that go unpaid, the bank, or in this case the ground rent owner, can retaliate by seizing the land and the property that it rests on, though this rarely occurs.

"You have to treat [ground rent] with respect," said Charles S. Duff, president of Jubilee Baltimore and a real estate instructor at the Johns Hopkins University.

That very thought has deterred out-of-state banks from doing business here, because a lien on an unpaid ground rent supersedes that of an unpaid mortgage.

Ground rents are mysterious because of their history. They also are defined differently in the few other places where they exist.

Land was unaffordable

When the idea originated hundreds of years ago in England, people paid ground rent to live on land they otherwise couldn't afford. This concept took off during Colonial times, first in Philadelphia and later in Baltimore. They were popular among homeowners who had to finance only the cost of the dwelling, not the land. Developers relied on ground rents to reduce their tax liability and gain residual income.

Another reason ground rents rose in popularity was male chauvinism. Before the dowry laws in Maryland were abolished in 1974, a husband could keep his wife from inheriting property by creating a ground rent on property, sometimes for as little as a penny a year.

When it comes to paying ground rent, experts say, never fear: As long as you pay, you are at no risk of losing your property.

That's not the case in California and Hawaii, where residential ground rents act almost identically to those in England or commercial ground rents, which exist everywhere. In those Western states, after the 99-year lease ends, the ground rent owner can reclaim the land and the buildings on it. The lease, as it is phrased in England, "falls in."

At that point, the ground rent owner is free to tear down everything, build improvements and set up a new 99-year lease that reflects modern-day prices.

As these leases get closer to expiration, banks become increasingly reluctant to offer financing on the dwellings.

"Your home becomes a wasting asset," said Michael E. Dean, a real estate lawyer in Northern California.

It's another reason that most out-of-state lenders aren't familiar with how Maryland ground rent is applied. It leads many to think twice about financing a Maryland property with ground rent.

"Half the time, an out-of state bank will think you're moving into a trailer park" rather than a regular neighborhood, said Paul Anderson, a lawyer for the Maryland State Department of Assessments and Taxation who often receives e-mails from skeptical lenders trying grasp the implications of a ground rent.

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