Need some guidance on setting price for a ground lease

6 Replies

I need some advice on pricing rent for a ground lease with a 99 year term.  Let me give a little background info first.

My wife and I recently built and rented two houses on land belonging to my in-laws.  The agreement has been that we would lease the land from them for a percentage of gross income.  We plan on building more houses on this property over the years, so the lease payment would go up as we expand (but fixed percentage).  The houses were rented out on the first of this month, so we are late in getting this ground lease done, but it has all been done in good faith and we have their full support.

Neither party really has a great feeling for what our rent should be and no one is trying to make money off of the other, however, we are all trying to be fair with each other.  The best method I can come up with for pricing a ground lease is estimating the market value of the land, coming up with a reasonable number of years to return 100% of property value (ie. when the cumulative rent payments equal market value), and dividing that out into a monthly payment (which would then be turned into a percentage of gross income).

For example, if the property we are leasing is valued at $50k, using a 10 year break even term, monthly payments would be $417 ($50k / 10 years / 12 months per year).

Does that seem like a reasonable strategy to price a ground lease?  If so, what would a good return period be for the lessor?  7 years, 10 years, 15 years?

Also, I've read about some ground leases having terms where rent is paid up front in a 99 year term (full market value) with the right to purchase the land at a future date for a nominal amount.  Would it be unreasonable to ask for a mix of this and a typical ground lease, where we would pay monthly rent until market value has been reached, at which point rent would go away?  Sort of like a rent-to-own, but ownership would never change, only rent would go away.

Thanks for any insight you can offer!

I would have the lease be for $1 annually, you pay all the annual taxes on the property or partner with them on the entire deal in regards to splitting the profits from the rental income...no land lease agreement.  Determine in advance the financial split at point of sale of property. A partnership would be preferred.

Alternately I would purchase the land from them outright and be out from under their hold on the property.

The land lease arrangement you are considering is not a good idea.

Thanks for the input, Thomas.  I left out some information that might shed more light on the situation.

We would love to purchase the land outright, but my understanding is that the property cannot be subdivided.  That would certainly clear up a lot of this if it were possible.  My in-laws already have several other rent houses on the property.

The property is not going to be sold (it is needed retirement income for my in-laws) and my wife is the heir.

In addition to rent payments, we would also cover paying property taxes on the improvements we have made, and bear 50% of the costs for maintenance/repair of shared use facilities (electric gate, road maintenance, etc.)

Can you explain how leasing for $1 per year and splitting profits through a partnership would be preferred to essentially splitting profits as a form of rent payment?

I would suggest your wife's parents put the property in a trust, similar to what my parents did,, the land ownership is transferred into the name of the trust,, the parents have the right to manage how the trust is divided upon their deaths, your wife's share ( if other siblings are involved) would be stated as a percentage.. all operating costs are paid by the trust,, all income is paid into the trust the trust is a tool for them to use to as a financial plan for the future. Honestly if you don't think this is possible talk to a trust lawyer. 

So the rent you are thinking of paying to them for income isn't important.. why pay them land rent if they have to then claim that income for rent as a taxable income.. 

My parents bought a property for my sister,, the cost of the house, lot rent, taxes, she never paid,, but an accounting was done where those amounts were kept track of and were deducted from her inheritance, they had other properties also but this was one way they could provide for her, have control of that asset for taxes, and still designate it for her after they died. so you could set up something similar maybe if your in-laws knew the benefits of this estate planning. 

You say you own the houses built on their property,, What if you leased those houses to the Family Trust,, the trust would rent the houses out,, and from that income they would pay you for property management of those properties. The trust can take off expenses for your management fees. You can lease the properties to the trust at a break even cost so your not showing a gain, or maybe even better lease to them at a loss so you have a loss for a few years.. 

Otherwise I would have the entire property appraised for land value,, and write up a contract for deed for purchase of the land, make it long term, small payments and balloon due after death of last parent, so the inheritance would cover that cost. So doing that way the value of the property at the time  you took control was already set, you would not have a adjustment either up or down so nobody can contest if property would jump high in value at a later date..

LOTS to consider.. why you built before you had this taken care of is a mystery.. but their is a way to figure it out.. make it tax and estate wise.  Also a trust does not have to go thru probate. which makes things nice. 

@Ryan Morlino  One Question ,, ask yourself right now if both your mother and father in-law were to die in a terrible car accident at the same time...what is the status of the houses you built on that property in ?? What do you actually own?  

Is you wife clearly the heir.. is there a will, does your wife have a copy,,Or... what if one parent dies and then poof the remaining one gets remarried,,, what happens then..  A trust would state how a estate is planned..

Maybe you and your wife should be listed on title of land as a tenant in common, a percentage owner.. then property cannot be sold or mortgaged, or be quested, without your knowledge, and your investment is protected.. but do something,, 

I wouldn't be satisfied with a land lease if I had money into the buildings on that land. OR what would happen if your wife passed unexpectedly,, would your in-laws give you the remaining spouse now the land.. 

Think outside the box your in with your wife right now. and Good luck. 

Thanks, Deanna.  Definitely lots to consider.  I will look into the trust solution.  I also like the idea your sister did with reducing inheritance by a value equal to the property.  Being their son-in-law, I have some reservation in telling them how they should set up their will, but I will try to address some of the issues with them.  They fully understand we have an interest in protecting our investment.  I'll also look into the dead for purchase option if the property could be subdivided in the future.

As for building before an agreement was signed, I agree that is definitely not ideal, but there is some flexibility in dealing with a family where we are all on good terms versus a typical business need.  They want us to succeed.  My father-in-law was self-employed most of his life (dentist) so his retirement plan was building rent houses.  They are happy to see us following in their footsteps and have been supporting us all along (even helped with the construction labor).  Still, we should have figured this out from the get go.

Originally posted by @Deanna McCormick :

@Ryan Morlino  One Question ,, ask yourself right now if both your mother and father in-law were to die in a terrible car accident at the same time...what is the status of the houses you built on that property in ?? What do you actually own?  

Is you wife clearly the heir.. is there a will, does your wife have a copy,,Or... what if one parent dies and then poof the remaining one gets remarried,,, what happens then..  A trust would state how a estate is planned..

Maybe you and your wife should be listed on title of land as a tenant in common, a percentage owner.. then property cannot be sold or mortgaged, or be quested, without your knowledge, and your investment is protected.. but do something,, 

I wouldn't be satisfied with a land lease if I had money into the buildings on that land. OR what would happen if your wife passed unexpectedly,, would your in-laws give you the remaining spouse now the land.. 

Think outside the box your in with your wife right now. and Good luck. 

In regards to the legal issues you brought up, I already have a meeting set up with an attorney next week to address those things.  The concerns you brought up have been on my mind.  The meeting next week was what triggered this thread, so with the legal issues being handled, I was more hoping to talk valuation of a ground lease here.  You've definitely given me a lot of good things to think about.  I really appreciate all your input.

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