Ground rent - lease holder

16 Replies

Dear All,

I am purchasing a Baltimore city property from an owner. We will close in next Friday, but today, we realized it's a leasehold property (subject to ground rent) instead of fee simple. However, the owner has no information about the leaseholder. The property is also not registered to the city as leasehold. It seems there is no knowledge of the leaseholder for many years. The property was built in 1941. From the website, https://livebaltimore.com/city-living-essentials/g... 

it looks like if I can't locate the leaseholder, I can redeem the lease through the city.  The leasehold property seems not a big deal but I would like to confirm with experienced investors that it is not a deal killer, such as potential legal issue ...etc. Appreciate your insight!

Sincerely,

Ken

@Ken Wang it is not in any way a deal killer.  A ground rent holder can only collect three years back rent.. Since a typical ground rent is only $120 a year the risk is under $500. However a ground rent owner cannot collect if it is not registered. So you have nothing to worry about unless and until the ground rent owner wakes up and registers the property.  They just pay your $120 a year or whatever. 

Just as important the title company should escrow 3 years back ground rent from the former owner. So if the ground rent owner does show up, the title company will have funds to pay the back ground rent. About 1/2 of my rentals have ground rents. it's a minor annoyance but not a big issue.

Thank you so much @Ned Carey ! It's super helpful. Yes, the title will escrow 3 years back ground rent. My wife and I are thinking about this question but seems couldn't find answer. Say the ground rent owner wakes up and registers the property, can they take the land back even we pay the ground rent??, and who decide the rent? is there a cap say how high it can go.

@Ken Wang the amount of the ground rent is fixed. It can never go up. The ground rent owner can take the property only if you DO NOT pay. As long as you are paying they cannot do anything.

Originally posted by @Ned Carey :

@Ken Wang the amount of the ground rent is fixed. It can never go up. The ground rent owner can take the property only if you DO NOT pay. As long as you are paying they cannot do anything.

 Thanks a lot Ned, I save your this post to my computer. It is very important knowledge to me!

@Charlene Hammond no it will not affect the value in any significant way. The value of a ground rent is generally under $1500. So theoretically an appraiser could adjust the value downwards $1500. The difference is insignificant. 

If I bought a property that was, according to the land records, subject to ground rent ... but the ground rent was unregistered and was not being collected, I would absolutely not redeem it. 

Waste of money.

After 20 years without demand the rent is conclusively presumed to be extinguished. So if you are selling after that point, convey your interest in fee and cite that information in the deed. If, on the other hand, you're holding the property and the ground rent owner suddenly appears to claim rent (unlikely), only 3 years are collectible. Even the 3 years is arguable, depending upon when the ground rent is registered.

Fully aware that some lenders will not lend on leasehold properties. Shop around.

I was in a similar position when I purchased my first home in Baltimore and had never heard of ground rent. I initially thought it was a scam when the leaseholder showed up 2 years after I had closed on the house. He only collected the current year and I've been paying every year since. I considered redeeming it but the numbers don't make any sense so I just send a check every year. 

Originally posted by @Charlene Hammond :


I am purchasing a property using the BRRRR method. Will having ground rent affect my ARV for the refinance?

I agree with Ned that the ground rent won't significantly impact ARV (I wouldn't even bother to include its impact in my deal analysis), however keep in mind that some banks (particularly out of state banks) are skeptical of the Ground Rent system and will either give you a hard time about it, or refuse to lend on it entirely. Make sure you have this conversation up front with your bank. Good luck!

 

Had this just happen on a refi, the lender would not do the loan because of the ground rent. We redeemed the ground rent and proceeded with the refi. All ground rents are redeemable.

Thanks, everyone to respond to my post :p Just something FYI, my appraiser also told me at least for my case, the ground rent is collected by Baltimore city which is part of property tax.  

@Ken Wang That doesn’t make much sense. Property taxes are based upon a set percentage of taxable assessed value. Sometimes there are credits, but surcharges for ground rent collected for a third party? Not likely. Your appraiser likely meant the city has a redemption program, which is administered by the State Department of Assessments and Taxation (SDAT).

Thanks Tom. Yes I am aware of the redemption plan and the appraiser also mentioned this. There could be something I am not aware of. I think for my case, the ground rent holder never shows up and previous owner was not even aware of ground rent for at least more than 13 years.