What is Ground Rent?
Ground rent is often an unfamiliar, but important, topic for homeowners to understand. This simple topic is often misunderstood by many individuals in the industry. As a result, it is critical that all buyers purchasing within jurisdictions with ground rent are aware of what ground rent is and what legislation may prevail over the matter.
Ground rent refers to recurring payments that are made by a tenant to a ground leaseholder, an entity (individual or business) who holds a reversionary interest in the property or the “ground” beneath a home. A property that is subject to a ground rent is referred to as being conveyed with leasehold interest. Whereas a property being sold without the presence of ground rent is conveyed via fee simple ownership.
Fee Simple vs Leasehold
Fee simple ownership is one of the most common forms of ownership to property. A fee simple buyer acquires ownership of the entire property, the land and any improved property. An owner of a property that is in fee simple state is considered to be the freeholder.
Leasehold interest is created when a freeholder, the fee simple landowner, creates a ground rent with a lessee. The lessee, the tenant or person holding the lease to the property (in this case, the ground rent), agrees to buy the property and must pay the ground rent.
Reversionary Interest
Ground rent arrangements different from typical tenant-landlord relationships, since the ground leaseholder only has a reversionary interest. Reversionary interest is a legal term used to refer to the interest a party has in a property. A ground rent holder with reversionary interest reserves the right for the property to reverse ownership back to them upon the occurrence of a specific condition. In this case, the reversionary interest exists when the ground rent lessee (the tenant) is delinquent in their ground rent payments owed to the the ground rent holder (the person owed money for the ground rent).
Essential Understandings
The topic of ground rent can be quite complex, particularly because it is not very common in many regions. However, for most homeowners, the topic can be simplified into two main points of discussion:
- Ground Rent Payments
- Length of Ownership
Ground Rent Payments
For most homeowners that own a property in leasehold status, their main concern is usually ensuring that timely ground rent payments are made. Be sure to be aware of the following:
- When are the ground rent payments due?
- How much money is owed?
- Who do I make the payments payable to?
Length of Ownership
In Maryland, legislation has been passed to make most properties subject to a capitalized redemption amount. For this reason, it may be beneficial to redeem the ground rent at the time of purchase instead of consistently making payments for possibly 20, 30, or 40+ years. The redemption amount can be computed by dividing the annual ground rent amount by the capitalization rate. Capitalization rates vary dependent upon the year the leasehold status was established.
Want to Learn More?
Learning about the history of ground rents can help individuals better understand what ground rent is and how the presence or absence of ground rent may impact the ownership of a property.
Looking to buy a property in Maryland? I would appreciate an opportunity to schedule a time to get together, review your needs, and discuss the home buying process with you.