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?
To the dismay of many homeowners throughout the years, it's the leaseholder's responsibility to pay the property tax on the lot as well as the house. The argument always has been that the ground rent owner actually owns the lot, so why doesn't he pay the taxes?
But, as explained earlier, this is legally not the case. The logic behind making the leaseholder liable for the taxes is that he, not the ground rent holder, directly benefits from an increase in the value of the property. The ground rent holder's financial stake in the lot is fixed.
Who owns it?
Twice a year, Baltimoreans get a postcard reminding them to send in their semi-annual ground payments. The payments are usually sent to companies that collect the rents for individuals, banks, law firms and trust departments of financial institutions. For all of these ground rent holders, the rent is a long-term investment that can be retained for the income or sold to another investor.
Alone, a $50 ground rent isn't much, but 2,000 ground rents can create a nice income stream. Investors and institutions in Baltimore that own from 200 to 6,000 have to count on companies such as Scherr Realty to collect them.
"I'm the fellow who sends out those postcards," said Donald Scherr, the largest servicer of ground rents in the metropolitan area, who collects 4,000 to 5,000 rents for a wide variety of clients such as estates and financial institutions.
Scherr's collection rate is 85 percent, with the most delinquent accounts coming from the most deteriorated neighborhoods. "There are always "skips," he explained, "the people who I can't find." Although Scherr handles clients with big portfolios, many of his clients are like Leonard Fruman, who owns only a dozen ground rents.
"I inherited [them] from my parents; eventually I plan to liquidate them," Fruman said.
How to buy and sell
The ground rent is still an active investment vehicle today, albeit a very specialized one. If you want to sell ground rents you've inherited or wish to become an investor, you can contact a ground rent broker.
If an owner wants to sell ground rents, George Helfrich of G. W. Helfrich Inc., for example, will find a buyer for them.
"First, I'll find out if they're [the ground rents] current, then I'll call a couple of buyers to see if they're interested, and if they are, then they'll make an offer," said Helfrich.
Once the seller accepts, the transaction takes about 45 days to complete, including a cursory title search. The buyer pays a deposit of 8 percent to 10 percent, the legal expenses and the recording costs. The seller pays a commission to the broker. There is no formal closing as in a typical house sale; the buyer usually never meets the seller.
"In most cases, it's a very smooth process," added Helfrich.
Although not required by law to do so, the seller usually notifies the leaseholder that the ground rent is going to be sold, extending the opportunity to redeem the rent. In most cases, the leaseholder is not interested. While a leaseholder has the legal right to redeem the rent at 6 percent, rents sold on the open market sell for much less, around 12 percent to 15 percent (Remember the capitalization math: 12 percent on the $60 rent is $500).
The key factor in setting the price in a ground rent sale is the stability and condition of the neighborhood where the rents are, Helfrich said. Rents from an area such as Ednor Gardens will fetch higher prices than ones in abandoned blocks in West Baltimore.
What happens if you don't pay?
A buyer of a property subject to a ground rent should never fear that the ground rent owner can arbitrarily yank the property out from under him, but there are consequences for failing to pay.
"The first step is going to small claims court to get payment, but most people don't show up," said Scherr. A judgment is filed against the no-show leaseholder that eventually shows up on his credit report, he said.
If the ground rent holder wishes to pursue the lessee, there's a next step in the legal process that's much more serious.
"A ground rent owner can file an ejectment," said Mitnick. If the rent is technically six months or more in arrears, the owner can send a letter by certified mail to the leaseholder warning him that the owner will start an ejectment.
If there's no response, the owner can go to court and get a judgment of default. Then the owner takes possession of the lot and everything on it. But the leaseholder still has another six months in which to pay.
Even if the leaseholder is five years in arrears, he's liable only for three years' back rent, according to state law.
"If you get a letter threatening an ejectment, see an attorney," said David Cohen of Cohen, Albert, & Foreman, another expert in ground rents.
How do I find out if there's a ground rent on the house I'm buying?
"People don't understand what a leasehold is, they think they're buying in fee simple," said Don Scherr. "[Real estate] agents should explain what a ground rent is."
Most agents do that, according to Cassidy. "It's rarely overlooked; the listing always states whether it's a fee simple or a ground rent transaction." The standard sales contract has a box that has to be checked off, indicating the type of transaction as well, said Cassidy.
The buyer will also find out about the rent at settlement, when the lender will escrow funds for the ground rent as is done for taxes and insurance. If leaseholders in Baltimore or Baltimore County want to know who owns their ground lease, they can go to land records and look up the deed of ground rent. A ground rent owner can do the same to find out who the leaseholder is, especially if the house has recently been sold.
The ground rent has been the foundation of building development in Baltimore for more than 250 years, according to Garrett Power, a University of Maryland law professor who has written extensively about land tenure in the city. Ground rents can be confusing and irritating, but, like them or not, they'll always be under Baltimore's buildings.
Some people have actually found great pleasure in them, said Cassidy. "An attorney who bought a house had a $15 rent under it. She researched the lease herself and photocopied all the original documents, framed them, and lined her new dining room with them. She was delighted."
Pub Date: 6/06/99