There are several ways to own a home or property in America. Acquiring property can be one of the most expensive things to do. One uncommon way you can achieve this at reasonably lower costs is through ground rent arrangements.
Here, landowners can legally give their lands to tenants for use while getting a reasonably small fee at specified intervals. Ground rent arrangements benefit all parties involved, the landowners and tenants alike.
Although the application of ground rent arrangements is limited in some states, it is worth knowing what it entails as an option to own or earn, depending on which end you fall in. (more below)
This comprehensive guide covers all you need to know about ground rent and ground rent arrangements.
Key Takeaways
- Ground rent is the price exchanged for legally using a piece of land based on an agreement made between the landowner and the tenant.
- The land owner sets a certain fee for the land and demands payments on a monthly, quarterly, half-yearly, annual, or biannual basis. This arrangement, however, is subject to review from time to time.
- The foundation of ground rent is laid in English common law. This practice was introduced in the United States during the colonial era. Today, very few states in America apply ground rent arrangements.
- People can easily become homeowners with ground rent arrangements. The ease lies in affordability which is a consequence of not having to buy land.
- Larger structures like hotels and offices can also be set up using ground rent arrangements.
What Is Ground Rent Arrangement?
In the peculiar environment of a ground rent agreement, there exists a circumstance where a person or an organization holds ownership to a property yet does not legally possess the land beneath it.
It’s distinctive in that the occupant compensates the landowner, a fee recognized as ground rent, for the advantage of utilizing the land, despite the fact that the actual land is not transferred.
The particularities of this kind of agreement oblige the tenant to transmit a predefined sum, termed ground rent, to the property owner. Because of this…
A Closer Look At Ground Rent Arrangement and Its Origin
The origin of ground rent arrangements can be attributed to the English common law. Its initial intention was to allow praedial tenants to assume the position of lords over lower tenants. This was prohibited by a 1290 law that made every tenant subject only to the overlord.
When the ground rent system started, although the amounts of ground rent payable under individual leases varied greatly, there was a basic uniformity in the quantities required under the various building agreements.
- It is important to note however that ground rent arrangements have limited use in the United States in recent times and states that permit them have incorporated them into law.
Ground rent, for example, is governed by the Residential Ground Rent Act in Virginia, which describes the rights, duties, and obligations of all parties involved in such an arrangement.
In the United States, only the states of Maryland and Pennsylvania have used ground rent agreements to a good extent.
These agreements reduce the cost of homeownership, allowing low-income purchasers to enter the property market. The courts enforced the agreements, and they were popular among investors who bought and sold shares in ground rent agreements.
A deed establishing a ground rent arrangement may state the duration for which it is to last, but because most agreements can be renewed, ground rents can last indefinitely.
Benefits of a Ground Rent Arrangement
The benefits of a ground rent agreement are ultimately determined by a number of different elements and calculations.
It is subject to the development, the land, and the renter. Before entering into an agreement, all possible outcomes should be analyzed to determine whether the agreement is the best decision for both landlord and tenant.
For Tenants
- A major benefit of a ground rent agreement for renters is that it allows them to access lands or occupy spaces in prime places when purchasing land outright is impractical or where they cannot afford to acquire property.
- Another major benefit is since you don’t own the land, you will save when it comes to property taxes. You likely will pay some local property fees, but some areas restrict the amount that ground rent fees can increase each year.
For Landlords
- While the agreement might give the tenant plenty of freedom, the piece of land is still owned by the landlord.
- The landowner will have a consistent income stream. A consistent tenant guarantees the landlord has a consistent cash flow. If a tenant proves to be dependable, they may be able to supplement the landowner’s income for years, if not decades.
Cons of A Ground Rent Arrangement
While tenants may feel like de facto owners, they are technically on someone else’s land, and this can affect how much control they can exercise on it. And as for the landowners, renting out their land also has its own perks.
For Tenants
- Each ground rent agreement deal may decide on the specific eviction rights a tenant can expect, but the reality is that even the most favorable rent conditions will always include the danger of eviction.
- This sort of agreement requires the tenant to report to their landlords. Even if they are responsible for the expenses, they must obtain permission from the landowner to do whatever they desire.
- The freedom of ground rent for tenants also comes with more responsibilities. Any taxes, costs, construction loans, and so on accrued in developing the rented property will be theirs to bear in addition to the rent they owe to their landlords.
For Landlords
- Because rent payments are considered income, landlords will almost certainly notice a rise in the amount they must pay in income taxes.
- The landlord can only exercise a certain amount of authority over their piece of land as stated in the rent agreement.
Differences Between Ground Rent Arrangement & Ground Lease
While both agreements are similar in nature, they are not the same, and understanding the differences is critical.
A lease agreement is a contract that covers the renting of property for a specified period of time (usually 10 to 15 years) for a specific purpose. The lease period is documented and cannot be amended.
This prevents the landlord from arbitrarily raising the rent and the tenant from leaving the property whenever they choose without consequence.
The lease agreement is valid for the time period specified in the agreement and is then regarded as terminated. If the tenants want to stay in the property, both parties must sign a new lease.
A rental agreement differs from a lease agreement in that it is a lease that is automatically renewable as long as you pay your specified periodic ground rent rather than a long-term commitment.
A rent agreement has all of the same provisions as a conventional lease and a flexible period which can be anything from monthly, quarterly or yearly; however, at the end of the stipulated period, either party can change the terms of the agreement.
The landlord can raise the rent or ask the tenant to vacate the premises without violating the rental agreement. However, before requesting that a renter leave the property, the landlord must provide a legal notice to quit.
Any Tax Considerations to Be Aware of?
The Internal Revenue System (IRS) lets you deduct the cost of periodic ground rent payments as mortgage interest under certain conditions.
- For example, the length of your arrangement must be greater than 15 years, and you must have the right to purchase the landlord’s whole interest in the land for a certain amount.
In essence, a tax deduction entails the possibility of reducing a person’s total taxable income for a given year by the total amount of rent paid, which would result in smaller tax payments.
However, people who already have or are thinking about getting a ground-rent arrangement should speak with a tax expert to determine if any tax breaks would apply to their specific financial circumstances.
Land Lease vs Ground Rent
Imagine embarking on a journey into the sphere of property investment and real estate, navigating through a sea of terms such as ‘land lease’ and ‘ground rent’.
Comprehending the contrasts between these terms is fundamental. Take the term land lease or, as some prefer to call it, a ground lease.
This denotes a contractual agreement where you secure the rights to utilize a stretch of land, not as the owner but as a tenant, often for an extended period, 99 years, for instance.
Traversing to the term ground rent, it represents an annual fee you owe the landowner.
This fee is for the privilege of using the land beneath your property and is commonly found in a leasehold settlement.
While the two terms might appear analogous on the surface, digging deeper reveals uniquely distinctive implications.
Conclusion
Ground rent arrangements can be very beneficial to both the landowner and the tenant. If both parties keep to their end of the deal, it can be a smooth transaction for as long as possible.
From a tenant’s perspective, it is essential to understand the rights you have over the land where your property is situated.
Also, always pay the rent and any associated fees based on your agreement with the landowner.
Timely rent payments can keep the ugliness of ejection away, and you can safely avoid any other legal consequences of delayed ground payments.
FAQs About Ground Rent Arrangements
1.Is Ground Rent Monthly or Yearly?
Payments for ground rent are often made annually, but they may also be made quarterly, half-yearly, bi-annually, or in any other way that the parties agree on.
No rules or laws state when ground rents should be paid. The arrangement is usually whatever the landlord and tenant agree on. Even that is susceptible to change from time to time.
In the event of a land dispute, timely payment of ground rent to your lessor may serve as solid proof that you have ownership of the property.
2. How Is Ground Rent Calculated?
The amount for ground rent that a landlord can demand is technically up to them. Though, this is usually a small amount.
Ground rent can be easily calculated as an annual fee based on the property’s square footage.
To determine the ground rent, the landowner must measure the size of the land or pay others to do the measurements. Then, you should sketch out the parcel with all its dimensions noted.
Get the total square footage of the land by adding the dimensions. Then choose a rental price per square foot that you think is reasonable.
Multiply whatever you decide as the rental fee per square foot by the total square footage of the land to get an annual ground rent rate.
Usually, ground rent in the markets is $0.01 per square foot of land. If you have 10,000 square feet of land, you can multiply 10,000 by 0.01 to get a total of $100 as the annual ground rent you charge your tenant.
3. What Happens if I Don’t Pay Ground Rent?
You may be ejected from the property if you fail to pay the required amount agreed upon under a ground rent arrangement.
Basically, if the landowner can prove that you have not been faithful in paying ground rent, they can legally have you removed (ejection) regardless of whether you own property on the land or not.
4. Are Ground-Rent Arrangements Common?
It’s often notable that ground-rent arrangements primarily surface in regions where the land holds substantial value, a defining feature of popular urban centers.
A leading example is the United Kingdom, notable for a rich historical record of implementing ground-rent arrangements, especially in certain areas..
These bustling urban domains frequently witness the use of ground-rent arrangements by commercial properties. In such mechanisms, the land ownership resides with one component although the lease is allocated to another party for a fixed period.
This approach affords businesses the opportunity to operate on the location without the financial obligations associated with an outright purchase.
5. States That Limited Application of Ground-Rent Arrangements
As you delve into the topic of ground-rent arrangements or leasehold arrangements, understand that the applicability and constraints vary widely across the United States. Notably, you’ll find the states of Maryland, Hawaii, and New York have each put distinctive restrictions on these arrangements, each backed by valid reasons unique to their regional circumstances.
Ground-rent arrangements are subject to a remarkable range of local regulations which highlight the practical challenges states face in creating fair and sustainable housing economic structures.
In the case of Maryland, the state responded to harmful ground-rent practices by implementing legislation in 2007.
Enhanced with mandatory requirements, this law includes provisions such as the enforced registration of interests of ground-rent holders, along with the introduction of increased protections.
These safeguards involve the right of homeowners to buy out ground rent and regulations restricting foreclosure.
On the other hand, Hawaii passed a law in 2019 to directly address its unique housing challenges and promote sustainable affordability, outlawing the creation of new residential ground leases.
One of the aims of this law is to curb the monopoly of ground rents by a limited number of people, promoting widespread homeownership instead.
New York has opted for a more restrictive policy regarding ground-rents. A law established in 2015 explicitly prohibits the creation of new ground leases for residential properties.
The motivation behind this stern regulation is to guard homeowners against unethical ground-rent practices, uphold residents’ rights and interests, and preserve stability within residential communities.