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Business Real Estate

Demands for reform

As they put up houses for sale, some Baltimore entrepreneurs are reviving an old practice to make new profits.

Rehabbers and ground rent holders are creating new rents on the land under those houses, saddling buyers with annual fees of as much as $240. In some cases they tack a new ground rent on top of an existing one, which can increase a homeowner's yearly bill to more than $300.

Dr. Michael Moriarty nearly walked away from buying a $500,000 home in Federal Hill last year when he found out that the seller had created a $120 yearly rent for the land under the house.

"I actually couldn't believe it was legal," said Moriarty, a rheumatologist and a vice president at St. Agnes Hospital. "It was one of those things where you feel like you've been slimed."

A century ago, the creation of new ground rents helped to build Baltimore by making housing affordable for the working class. But today, critics say, it serves only to make ground rent holders money.

"There's no reason in this day and time to create a ground rent," said Shina Parker, president of Integrity Title & Escrow. "It's a trend in the market now, and I think we're going to continue to see it. It's unfortunate."

The ground rent system's tenacious grip on Baltimore illustrates the challenge awaiting those who want to reform it. In recent years, some ground rent holders have increasingly used the system to gain possession of homes or extract substantial fees from their owners, while fending off various reform proposals in the General Assembly.

Tens of thousands of Baltimore residents pay ground rent, a practice that took hold in the city in the 19th century. But since 2000, some ground rent holders have become unusually aggressive, filing nearly 4,000 lawsuits over unpaid rents, an investigation by The Sun found. Most suits were settled with homeowners making payments that typically dwarfed the original debt. In 521 cases, Circuit Court judges have granted rent holders the right to seize houses. Some people regained ownership by paying off their obligations, though court records don't make clear how often that happens.

The newspaper's findings generally took public officials by surprise.

The articles "stirred my blood, and it is still boiling," said state Sen. Brian E. Frosh, who chairs the Judicial Proceedings Committee. "This is a series of outrages that just shouldn't be happening." Frosh, a Montgomery County Democrat, said yesterday that the system has become a "trap for the unwary" and that reforming it must be a "high priority" when legislators convene in January.

Experts in real estate and some public officials suggest several changes to help consumers protect themselves and curtail the extraordinary power of ground rent holders:

--Limit the disproportionate penalties homeowners face. Ground rent holders can take possession of a house for nonpayment of a bill under $100, sell it and pocket all the proceeds. By contrast, mortgage lenders receive only what they are owed when a home is sold through foreclosure.

"The laws really need to be rewritten," said David Pierce, an attorney with King Title Company. "The idea is to get the ground rent, but you're not really supposed to get their $200,000 house."

Delinquent homeowners also face substantial charges on top of the overdue ground rent. Ground rent holders can bill up to $500 before filing suit, $700 in attorney's fees in connection with a suit and $300 for a title search, plus other costs, all of which can add up to thousands of dollars.

--Require more aggressive action to find homeowners before they are sued or lose their houses. Some ground rent holders make minimal attempts to contact property owners, eschewing search technology that makes it relatively easy to find a person.

--Create readily accessible records of all ground rents, and a registry of ground rent holders.

In the absence of centralized information, homeowners and even mortgage lenders may lose track of ground rent holders and have no easy way of identifying or locating them.

"Nobody knows how many are out there," said Paul Anderson, chief legal review officer for the state Department of Assessments and Taxation.

--Improve oversight. No one in the city or state regulates ground rent holders the way Realtors and others in the real estate industry are overseen. Nor does any government office help consumers navigate the often confusing system. Homeowners say they don't know where to turn. Consumers have made 13 complaints, six of them concerning fees, to the Attorney General's office since 2002.

Garrett Power, a professor at the University of Maryland School of Law who has closely studied the ground rent system, says lawmakers can't abolish existing ground rents without compensating their owners because that would be unconstitutional.

But he said the General Assembly can compel ground rent holders to record their rents, giving homeowners and buyers more information to protect themselves. If the rents aren't recorded "within a period of years, maybe three years, then they would be extinguished," Power said.

City officials, told of the newspaper's findings, said they want legislative action, though they haven't spelled out details.

"We've heard horror stories," said David Tillman, a spokesman for the Baltimore Department of Housing and Community Development. "We're very much looking forward to working with elected officials this legislative session to get several bills introduced that would attempt to protect existing and new homebuyers."

Baltimore's Circuit Court also has authority in the ground rent system. The general master for the civil docket reviews "ejectment" lawsuits filed by ground rent holders. Susan M. Marzetta, the general master, and her staff look to see if ground rent lawyers have taken sufficient steps to locate and properly notify homeowners.

Although a Circuit Court judge must approve the final step of taking a property, in most cases there's no hearing unless the property owner contests the action.

Ground rent holders say there's no need for major changes, as consumers have recourse to the courts and can avoid problems by keeping up with their obligations.

"What I'd like to see is the parties [who own homes] be more responsible," said Lawrence Polakoff, whose family holds ground rents. "There's no reason for more laws or regulations."

But many people are ignorant of the law and the penalties for failure to pay ground rent, The Sun found. The state doesn't require formal disclosures in the process leading up to buying a home, nor is the ground rent holder required to inform consumers that they have the ability to buy out the ground rent and end their annual obligation.

Some property owners don't even know when ground rent holders are moving against them.

Bernard Mills, for example, didn't realize he was about to lose a 7,000-square-foot house in the historic Bolton Hill neighborhood over a ground rent debt of $300.

He never received notice of the lawsuit seeking to collect the past-due ground rent at 1810 Eutaw Place, and never knew he had lost the suit for failing to respond, according to court records. Notification letters went to a Virginia address that he and his former partners no longer used.

As a last step, the city sheriff's office posted notice of the court action on a bulletin board tucked away at the downtown Baltimore courthouse. Mills, a Washington car dealer who had bought the property as an investment and didn't live in it, wasn't likely to see that.

Mills died of a heart attack in December 2002 without finding out what had happened.

The events involving the property came to light after Mills' estate sold the property to a new owner, 1810 Eutaw Place LLC, without realizing someone else had already staked a claim. That was Carolyn Class of Lutherville, who had purchased the ground rent lease on the house in 1998.

1810 Eutaw Place LLC sued Class, seeking to invalidate her claim to the house. To support its case, the firm argued that Class' lawyers asked the sheriff's office not to post the official "writ of possession" on the house, where someone might have seen it.

Class' lawyers asserted she had taken appropriate notification steps. Class settled with 1810 Eutaw Place, whose title company paid her $65,000 to end her claim to the building.

"We spend a lot of time and money buying off people like Mrs. Class," said the attorney for 1810 Eutaw Place LLC, Thomas C. Valkenet, explaining that he and other lawyers have filed similar cases to get back property after an ejectment.

Reached at her home, Class declined to comment.

Another notification issue involves whether relatives of deceased homeowners who have been sued over unpaid ground rent have to be informed.

In one lawsuit filed last year, ground rent holder Fringe Benefit Investments LLC submitted a death certificate to the court to prove that Solomon S. Lesane died in 2000 and therefore couldn't be found. On Oct. 18, 2006, the court ruled in favor of the ground rent holder by default.

Yet the death certificate listed the home address of Lesane's daughter, Rosetta Neely, who said she wasn't notified and didn't learn about the lawsuit until reporters for The Sun informed her.

That lawsuit was one of at least nine filed by entities represented by attorney Heidi Kenny that included a death certificate or other evidence that someone had died.

Kenny said in a mid-September interview that a mistake might have been made in Neely's case. But she also conceded that her law firm doesn't always notify relatives to give them a chance to pay off the debt.

Judge Evelyn Omega Cannon, judge in charge of the civil docket of Baltimore City Circuit Court, said in October she would "look into what we're doing" in cases in which she and other judges are told that the owners have died.

On Nov. 27, Circuit Court Judge Martin P. Welch overturned the judgment against Lesane. He said it was a "mistake" to rule against someone who had died. The case remains open.

Ground rents helped underwrite Baltimore's explosive growth in the 19th and early 20th centuries. They subtracted land from the cost of buying new rowhouses by having homeowners pay investors small annual rents for the ground beneath the bricks. The 99-year, renewable leases kept the system going into the 21st century, long after their original purpose had ended.

No one complained much when savings & loans, banks, other institutions and individuals owned ground rents as investments that provided a safe, if modest, return of about 6 percent. Typically, bills went out twice a year, and those that couldn't be collected were written off.

But practices changed in the past several years, The Sun found, analyzing court records and interviewing homeowners, ground rent holders and a variety of experts. Old laws did not keep pace with the aggressive tactics of some ground rent holders. They bought up large numbers of ground rents as real estate values surged in the city, and filed thousands of "ejectment" lawsuits.

Mortgage lenders say they're affected, too, because ground rent holders have first claim on a property. "That means that the home can be foreclosed on and the mortgage company would have to resort to a title insurance claim" to protect its investment, said Rich Leffler, a consultant with Wachovia Mortgage Corp. in Pikesville.

Ground rent owners and Realtors - some of whom own ground rents - dispute the need for reform. In their view, consumers receive ample legal protection, provided they pay their bills.

"I think the system works very well," said R. Marc Goldberg, a lawyer who speaks for a coalition of ground rent owners, including some of the most frequent filers of ejectment suits.

"At the least expensive point in the procedure," before fees mount and suits are filed, "everyone gets a chance," he said. "If they don't take advantage of it, they don't take advantage of it. It wouldn't be fair if the ground rent owners didn't get reimbursed for the expenses involved.

"Anytime someone's got a problem," Goldberg said, that person can "take it to a judge."

The Greater Baltimore Board of Realtors sided with ground rent holders in opposing some state reform bills in recent years. Today, they say, consumers have sufficient protection.

Arming prospective home buyers with information spelling out their ground rent rights and responsibilities probably won't help, said Carolyn Cook, the Board of Realtors' deputy executive vice president. "My sense is that people are so inundated with paper now that they can't comprehend what they've got," she said. "So I don't know if throwing on more paper will help."

The General Assembly's most significant recent action on ground rent took place in 2003, when legislators approved some changes.

One set the current ceiling on attorney fees that can be charged for ejectments. Another created a mechanism for homeowners to redeem ground rents - buy them out - when they haven't heard from ground rent holders in three years.

A third change, supported by ground rent holders, requires them to warn property owners that they will owe collection fees if an overdue bill isn't paid within 30 days. Before filing suit, ground rent holders also must send another notice of their intent to take legal action.

Ground rent holders and Realtors pointed to these changes in persuading legislators not to approve other reforms proposed since 2003. Yet critics of the system say fundamental flaws remain. Fees are still too high, they say, and fewer than 200 people have taken advantage of the little-known state mechanism for redeeming ground rent whose owners haven't communicated in years.

More important, according to one legislative critic, is ground rent holders' power to seize and sell homes over relatively small debts.

"Some of the things that have happened with ground rent have been so egregious that justice cries out for change," said Del. Clarence Davis, a Baltimore Democrat, who is retiring this year after a long career in the Assembly. "What we want to do is make it more difficult for someone to take people's homes because of ground rent."

Davis and Senate Majority Leader Nathaniel J. McFadden sponsored bills this year to shore up what many see as a major weakness in the system. Ground rent holders, they said, need to take more effective action to notify homeowners at risk of losing their houses.

They introduced the legislation in the aftermath of news reports about a family that lost a Washington Village home to a ground rent holder.

Such actions rarely come to the public's attention. Occasionally, neighbors witness an ejectment play out on the street as workers protected by armed sheriff's deputies change locks on a house and flush out the occupants and their possessions. The seizure of the house belonging to Phong P.T. Mai briefly opened a window into the world of ground rents.

The family contended that they didn't learn they had lost the property for failure to pay ground rent until the building was scheduled for auction. The ground rent holder disputed their contention, and the court agreed that the holder had made sufficient effort to find them, including posting notice of legal action on the house. The house was sold at auction for $98,000 in June 2005. Later, Mai's family received a confidential settlement.

In response, the Baltimore City Council passed a resolution asking the General Assembly to abolish all ground rents, calling them "draconian" and "ripe for abuse."

The bills sponsored by Davis and McFadden, also a city Democrat, would have required ground rent holders to use readily available technology such as a "skip-trace" service that taps databases to track down people. Baltimore City uses this tool before condemning a property. Other branches of government, businesses and law firms use it, too.

William N. Burgee, director of property acquisition and relocation with the city Department of Housing and Community Development, told legislators that he and his staff tested the technique by using an online "people finder" to see if Mai could be found that way.

"We located him within four minutes," Burgee said.

McFadden drove home the point: "With a minimum effort, you can now sit at your desk and locate your high school classmates, your first love, your old Uncle Charlie. Why wouldn't you do the same thing to find a defendant before you can take away his house?"

But the GRO Coalition, the group Goldberg is associated with, dismissed the need for changes in the law as "costly, inefficient and unnecessary."

"The landlord should be allowed to rely on the mailing address provided in the public records of the Department of Assessment and Taxation and not be required to expend additional funds attempting to locate the tenant through a national skip-trace database that may or may not yield any usable information as to the tenant's whereabouts," the group's statement said.

The coalition, represented by one of Annapolis' most prominent lobbying firms, Rifkin, Livingston, Levitan and Silver LLC, said the skip-trace requirement would only add to the cost of ejectments - a cost typically passed on to the homeowner.

Both bills died in committee.

City officials said they may try again when the legislature convenes next month.

"Skip-trace?" said Kurt Sommer, special assistant for policy and legislation in the Department of Housing and Community Development. "I don't know what happened and why it went down. It seemed like a very common sense, due diligence thing. We're looking at remedies to that."

Title company executives and others in the real estate industry said they began to notice new ground rents crop up in the past year. There's no way to even estimate their number, as the law doesn't require ground rents to be recorded in an accessible way.

Those creating the new ground rents acknowledge their purpose: to make money.

"You would have thought it would have been eliminated by now," said Tom Atkins, who owns Tomcat Enterprises and has generated a few new ground rents. "I'm not selling my houses any cheaper by having a ground rent on it. I don't think that's been done for decades. I do it because I'm able to do it."

The person who created the new ground rent on Michael Moriarty's Federal Hill home defended the practice.

"Most of the renovators and rehabbers in Federal Hill, Canton and Locust Point pretty much are putting on a new ground rent," said Chris Reda, a local Realtor. "Most people are doing $240."

"It's an additional income, and for me it gives me an emotional attachment," Reda added. "You put a lot of time and effort into these houses, and so you hold onto a piece."

No one knows how many new - or old - ground rents exist. But word of new ones is getting around, and this year state Sen. George W. Della Jr. proposed to ban them.

His bill died in committee, opposed by Realtors and advocates for affordable housing who said they might prove useful one day.

"To the extent that land values are skyrocketing across the state of Maryland," said Cook of the Board of Realtors, "it's very conceivable that the using of a ground rent as an affordability mechanism may come back."

But Sommer, the city official, disagrees. He says ground rent only complicates Baltimore's mammoth efforts to gain control of thousands of decrepit or abandoned properties and rebuild neighborhoods.

"The city is built out," Sommer said. "This is not an affordable housing tool. It is really a hindrance to effective redevelopment and attracting new homeowners to Baltimore."

Della, a Baltimore Democrat, also takes issue with Cook.

"The people interested in affordable housing are not seeing what's happening," he said. "They don't realize that people are being taken advantage of."

Twana Adams says homeowners need more help.

An unpaid ground rent bill on a house she owns on West Lafayette Avenue spiraled from $300 into a debt of $1,645. She paid, and kept the property.

The lessons gleaned from the experience would benefit other homeowners, she says.

"I think they should know what happens if you don't pay the ground rent - what kind of costs you can incur when you don't pay," said Adams, 44, a chemistry teacher. "I was really ignorant about the process. I couldn't figure out what my rights were. It was only when I started doing research that I figured it out."

Sun staff researchers Paul McCardell and Doris Johnson contributed to this article.

Copyright © 2014, The Baltimore Sun
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