Ground Leases and What to Watch For

Ground lease also known as a Land Lease, Lease Hold, Ground Hold, Land Lean, ext.; call it what you will these can throw a monkey wrench into a mortgage deal.  For this article we will just call them ground lease(s).  The most simplistic way to describe what a ground lease is to picture a house;  In mortgages where there is a ground lease one person owns the house on top of the land and another person or entity owns the ground under the structure.  However most of these leases are long term usually 99 years.  Although I have seen some worded as, “For all Eternity” and “Forever and ever”.   A more in-depth description may be found on http://www.investopedia.com/terms/g/ground-lease.asp

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This article is just a general look at ground lease reviews and what investors and buyers should know to make an informed decision.  For further information please speak with your underwriter.  Now that we have covered the fine print CYOB information let’s dig into this topic.

One of the main guidelines is that the ground lease must last five years after the life of the loan.  So if you have a 30 year loan the lease has to at least last 35 years from the loans funding.  However, that leaves the investor/ borrower with the potential issue of needing to renegotiate their ground lease.  So, investors/ borrowers should do some research prior to signing the sales contract and going through with a loan that has ground leases.

  • First find out IF your house, condo ext, has a ground lease.

The preliminary title which is normally ordered prior to the appraisal and provided to the appraiser will tell you if it is a ground lease or not.  As noted above there are a multitude of names for this sort of lease agreement (I could do a whole article on that topic alone).   That being said if the prelim doesn’t say fee simple on it checks with your title company.  IF you have access to it check the Deed of trust which will have a rider or section of the document noting ground lease.

  • Be sure that all ground lease docs are gathered ahead of time.

Many ground leases have multiple leases on the land known as master and sub leases.  A great example of this is the California University system actually owns a lot of land around their various campuses which have sub leases that are assigned to developers or Home Owners Associations (HOA’s).  When attempting to obtain a loan on a ground lease property be sure to have all these items are accounted for.

  • Find out who the lease is with

This brings us to our next tip which is to find out who the ground lease is with.  Often on the east coast many ground leases are dated to the civil war or founding of our nation.  I have to say personally I enjoy reading those ground leases.  Mostly, because; how many of us in the mortgage industry get to work with a bit of American history as part of the mandatory documentation?  However, these leases have a chain of family that follows a blood line until sold.  So, these you will have to negotiate with an owner as apposed to an individual person.

However, some ground leases are with entities like the one noted above or the US government, Bureau of Indian Affairs (BIA), or a company owner.  Those usually have a process for extensions on the ground lease.   The BIA has a great site showing the steps and what to expect when trying to negotiate those things.  https://www.iltf.org/resources/leasing-indian-land

  • Find out how long the lease is for?

This can be a key factor for your decision.  If this lease is for a significant amount of time past the life of the loan it may or may not affect you directly.  Such as if a person is buying a home with a 30 year mortgage and purchase; the home at 30 years of age.  Let’s say that the ground lease in this case the lease expires 40 or more years after the life of the loan.  Statistically speaking in this case the expiration will not be a factor for the buyer in this case.  However, this scenario is extraordinarily rare!

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  • Does the lease have the opportunity for you to purchase the lease?

The above scenario’s rarity leads us to the next thing to research.  Does the lease have an option to buy the land?  If it does and the buyer can afford it that would solve a great deal of the short falls with this sort of investment.  Although if purchasing isn’t an option then the case well…. that is a discussion to have with your underwriter and financial advisor.

 

  • How much per month additionally will be charged for the lease?

If the amount on the lease isn’t tacked onto the monthly mortgage and is a separate charge and even if it is tacked on you should find out how much additionally it will cost you.

Don’t get me wrong ground leases can be a beneficial arrangement for all parties involved it is just a matter of additional planning.  As most buyers/ investors know planning is one of the keys to wealth creation and maintenance.  Though the main idea pushed as most important in the real estate industry is location, location, location I would argue; that it is Research, location, planning.

Check out these additional sites for additional information on the topic of ground leases:

http://homeguides.sfgate.com/ground-lease-1793.html

http://homeguides.sfgate.com/rules-land-lease-8216.html

http://www.bia.gov/WhoWeAre/BIA/OTS/RealEstate/

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