Need some guidance on setting price for a ground lease

[Ryan Morlino]

I need some advice on pricing rent for a ground lease with a 99 year term.  Let me give a little background info first.

My wife and I recently built and rented two houses on land belonging to my in-laws.  The agreement has been that we would lease the land from them for a percentage of gross income.  We plan on building more houses on this property over the years, so the lease payment would go up as we expand (but fixed percentage).  The houses were rented out on the first of this month, so we are late in getting this ground lease done, but it has all been done in good faith and we have their full support.

Neither party really has a great feeling for what our rent should be and no one is trying to make money off of the other, however, we are all trying to be fair with each other.  The best method I can come up with for pricing a ground lease is estimating the market value of the land, coming up with a reasonable number of years to return 100% of property value (ie. when the cumulative rent payments equal market value), and dividing that out into a monthly payment (which would then be turned into a percentage of gross income).

For example, if the property we are leasing is valued at $50k, using a 10 year break even term, monthly payments would be $417 ($50k / 10 years / 12 months per year).

Does that seem like a reasonable strategy to price a ground lease?  If so, what would a good return period be for the lessor?  7 years, 10 years, 15 years?

Also, I've read about some ground leases having terms where rent is paid up front in a 99 year term (full market value) with the right to purchase the land at a future date for a nominal amount.  Would it be unreasonable to ask for a mix of this and a typical ground lease, where we would pay monthly rent until market value has been reached, at which point rent would go away?  Sort of like a rent-to-own, but ownership would never change, only rent would go away.

Thanks for any insight you can offer!