Ground leasing for residential

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Ground leasing for residential

Casey Penland
Investor · Greensboro, NC · Member since 2020 · 11 posts · 4 votes

I wanted to get some people’s thoughts on ground leasing for single family residential homes?

I know ground leasing works well on the commercial side of real estate but I haven’t really seen it on the residential side which is probably because it doesn’t work.

However, could this be an opportunity to make buying a home more affordable? What if there was a private company out there that partnered with first time homebuyers or homeowners to make their home more affordable initially. In doing so, they separate the home and the land as different investments. Allowing for the homebuyer to purchase the home and the private company purchases the land. They have a unique contractual agreement in place where the tenant (homeowner or buyer) pays rent on the land. In doing so, they have reduced their mortgage each month, reduced the down payment, save on total interest paid, and several other payments also.

I know there are several other things that would need to fall into place here like if a lender would lend on something like this, what if the tenant defaults on payments, how long should the contract be, would happens if the tenant wants to sell, etc...

However, could this work. Why or why not? Would love to hear your thoughts

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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
4y
Quote from @Chris Seveney:

@Austin R.

I ran this buy my attorney and in most states it is not legal /allowed by zoning to lease the house and own the land

I had taken back properties in the past as a lender and was thinking “let me just sell the house on a ground lease for 30 years”

After numerous convo with attorney said it’s a no go on residential

Was actually done quite often in NYC on about 100 co ops.  Almost everyone turned into a disaster for the purchasers, as land prices soared and when the land lease ran out 30-50 years the land owner wanted 50X the original rent.  Most co ops with land leases expiring purchased the land at such a high price that it wiped out all equity in the apts.  For example, at a co op at 57th street, the 3400 square foot apartment should be worth around $1,000 per f2, or $3.4 million.  However, because the land lease is up in 4 years, and the anticipated amount it will cost to buy the land, the apartment sold for less than $350,000.  In another land lease situation on 63rd Street off Lexington, the owner of 1100 f2 2 br ended up owing $1,200,000 as his share of the land purchase, and sold his co op for $1!   Anyone who spent the extra couple grand 40 years ago had $1 million in equity; the people saving $2k buy buying into a land lease situation ended up costing themselves $millions.  Kinda sad.

Land leases originated in England when the landed gentry didn’t want to sell their holdings as London developed.  This was exasperated when the socialist Labor Party took power in the 1950s, and raised capital gains to where the tax on ordinary income was, 89.9%.  There are properties in London with 1,000 year leases!, however 100 year leases seem to be the “magic” number.  And quite frankly, until the period where you have to start worrying about what happens when the lease ends, it doesn’t make much difference unless your building a dynasty or worried about your heirs.  

Of course it also all related to time value of money, a concept in which the general public is quite weak on comprehending.  In the U.S. I think Dodd Frank and the CFPB might have killed any residential land lease deals.  

On commercial property it seems to be first cousin of the sale and lease back.  Just another financing mechanisms for companies to lessen real estate capital tied up to be able to spend on their basic business.  Funny story of why I left business and went into full time real estate investing 22 years ago.  When I added up the time spent and money made and divided it between my business (auto service and repair shops) and the real estate I bought and build to house the business it came out like this:  80% of my time was spend on the business and 20% on the real estate, but 80% of my profits came from the real estate and 20% from the business.  I promptly sold 6 of my auto businesses, closed on (release the property to a different auto repair chain) and closed the other. I kept the 4 auto repair facilities I owned and became the landlord to the buyers of the businesses, expanded my real property portfolio, etc., and have not looked back since.  My only regret is that I didn’t do it 20 years sooner.
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  • Austin R.
    Tarzana, CA · Member since 2012 · 10 posts · 1 vote
    4y

    Hey @Casey Penland. Were you able to get your questions answered? I had similar questions and would love to hear about what you learned. Thanks!

    0Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    4y

    @Austin R.

    I ran this buy my attorney and in most states it is not legal /allowed by zoning to lease the house and own the land

    I had taken back properties in the past as a lender and was thinking “let me just sell the house on a ground lease for 30 years”

    After numerous convo with attorney said it’s a no go on residential

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    1Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    4y
    Quote from @Chris Seveney:

    @Austin R.

    I ran this buy my attorney and in most states it is not legal /allowed by zoning to lease the house and own the land

    I had taken back properties in the past as a lender and was thinking “let me just sell the house on a ground lease for 30 years”

    After numerous convo with attorney said it’s a no go on residential

    Was actually done quite often in NYC on about 100 co ops.  Almost everyone turned into a disaster for the purchasers, as land prices soared and when the land lease ran out 30-50 years the land owner wanted 50X the original rent.  Most co ops with land leases expiring purchased the land at such a high price that it wiped out all equity in the apts.  For example, at a co op at 57th street, the 3400 square foot apartment should be worth around $1,000 per f2, or $3.4 million.  However, because the land lease is up in 4 years, and the anticipated amount it will cost to buy the land, the apartment sold for less than $350,000.  In another land lease situation on 63rd Street off Lexington, the owner of 1100 f2 2 br ended up owing $1,200,000 as his share of the land purchase, and sold his co op for $1!   Anyone who spent the extra couple grand 40 years ago had $1 million in equity; the people saving $2k buy buying into a land lease situation ended up costing themselves $millions.  Kinda sad.

    Land leases originated in England when the landed gentry didn’t want to sell their holdings as London developed.  This was exasperated when the socialist Labor Party took power in the 1950s, and raised capital gains to where the tax on ordinary income was, 89.9%.  There are properties in London with 1,000 year leases!, however 100 year leases seem to be the “magic” number.  And quite frankly, until the period where you have to start worrying about what happens when the lease ends, it doesn’t make much difference unless your building a dynasty or worried about your heirs.  

    Of course it also all related to time value of money, a concept in which the general public is quite weak on comprehending.  In the U.S. I think Dodd Frank and the CFPB might have killed any residential land lease deals.  

    On commercial property it seems to be first cousin of the sale and lease back.  Just another financing mechanisms for companies to lessen real estate capital tied up to be able to spend on their basic business.  Funny story of why I left business and went into full time real estate investing 22 years ago.  When I added up the time spent and money made and divided it between my business (auto service and repair shops) and the real estate I bought and build to house the business it came out like this:  80% of my time was spend on the business and 20% on the real estate, but 80% of my profits came from the real estate and 20% from the business.  I promptly sold 6 of my auto businesses, closed on (release the property to a different auto repair chain) and closed the other. I kept the 4 auto repair facilities I owned and became the landlord to the buyers of the businesses, expanded my real property portfolio, etc., and have not looked back since.  My only regret is that I didn’t do it 20 years sooner.
    Private Mortgage Financing Partners, LLC
    WebsiteView Page
    2Reply
  • Austin R.
    Tarzana, CA · Member since 2012 · 10 posts · 1 vote
    4y

    @Chris Seveney thank you answering the underlying question. 

    Did your attorney happen to say what types of laws or zoning prevents land leases for residential properties? Given Don’s answer below it seems the reason could have some interesting historical context and now I’m just interested to know. 

    @Don Konipol thank you for the historical background and pointing out the pitfalls of land leases. Outside of @Casey Penland’s original idea of possibly providing more affordable housing, it sounds like land leases are a great way to create generational wealth since the landed gentry in England is still quite wealthy!

    I’m interested though, how has Dodd Frank and the CFPB killed and residential land lease deals? I wonder if it ties into Chris’ points above from what he learned from his attorney.

    0Reply
  • Casey Penland
    OP
    Investor · Greensboro, NC · Member since 2020 · 11 posts · 4 votes
    4y
    Quote from @Austin R.:

    Hey @Casey Penland. Were you able to get your questions answered? I had similar questions and would love to hear about what you learned. Thanks!


    Hey man, this idea/issue is very complex as you can see. I never exactly got all of my questions answered when I was doing my research on this. There is a public company called Safehold Inc that has been very successful doing this on the commercial level. My thought was always if there has been great success on the commercial level could it be transitioned to the residential side of things? I am happy to discuss this some more if you want. Feel free to DM me and we can collab on it. 

    0Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    4y

    @Austin R.

    I do not recall but I believe it was similar to what don had mentioned.

    Also realize a buyer would never be able to get financing for the property nor most likely insurance.

    I think it also has to do with real property vs personal property as well.

    I cannot remember the details after I was told I can’t do it - he explained it but it was several years ago

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  • Austin R.
    Tarzana, CA · Member since 2012 · 10 posts · 1 vote
    4y

    Thank you @Chris Seveney.

    @Casey Penland I’ll DM you

    0Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    4y
    Quote from @Austin R.:

    @Chris Seveney thank you answering the underlying question. 

    Did your attorney happen to say what types of laws or zoning prevents land leases for residential properties? Given Don’s answer below it seems the reason could have some interesting historical context and now I’m just interested to know. 

    @Don Konipol thank you for the historical background and pointing out the pitfalls of land leases. Outside of @Casey Penland’s original idea of possibly providing more affordable housing, it sounds like land leases are a great way to create generational wealth since the landed gentry in England is still quite wealthy!

    I’m interested though, how has Dodd Frank and the CFPB killed and residential land lease deals? I wonder if it ties into Chris’ points above from what he learned from his attorney.

    The simplest explanation I can provide is this: Both Dodd Frank Act, and the regulations issued by the CFPB put very specific restrictions on financing of consumer residential properties.  Loans fall into specific categories, and must meet requirements associated with that category.  If not the restrictions are so severe that almost nobody would make the loan.  Purchasing real estate while having a nothing more than a leasehold interest in the land put any loan made into a “no man’s” land as far as compliance is concerned.  
    There’s a reason this particular strategy has had success in the commercial field but has been a disaster for residential home buyers owner occupants.  To commercial participants it’s just another method of financing, one actually allowing 100% depreciation. But for most owner occupant homeowners, a significant part of not most of their wealth is acquired through 30 years of ho,e ownership.  And this wealth can be totally wiped out if the homeowner chose a land lease arrangement.

    Private Mortgage Financing Partners, LLC
    WebsiteView Page
    0Reply
  • Austin R.
    Tarzana, CA · Member since 2012 · 10 posts · 1 vote
    4y

    Thanks @Don Konipol. That makes sense. I appreciate the insight.

    0Reply
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