Condominium on Ground Lease
Q. Hi Professor, I’m looking to buy a condominium and the property is on a 99-year ground lease. The lease has 76 years left to go, so I’m not too worried about it; but what do you think? Michael B., San Francisco
A. Any time you purchase a property outside of “fee simple” interest ownership, you own the property in full – the land and building. You need to think through the ramifications of those issues. A ground lease allows you to own the property like whole ownership, except when the ground lease is up, so is your ownership.
The first, and most important question to consider, is if the price is commensurate with the fact that you lose the property at the end of the lease – so is it discounted enough compared to a fee simple ownership. Did you check any comparable property pricing? How much it is discounted is really contingent upon the length of the remaining term of the lease.
You note there is 76 years left on the lease. That sounds like a long time, but the devaluation of the property will probably start around year 50 – only 26 years from today. So you’ll have the property mortgage almost paid off, but the value will start to decrease. This is because new buyers at that time will know there is only 50 years left on the lease and that’s not such a long time; especially if they would like to give the property to a child or grandchild.
Last item, although no one ever does this, I would have a ground lease knowledgeable attorney review the ground lease. Without adequate review, you don’t know what provisions are in the lease and how they could impact you, or the homeowners association, due to unfavorable lease clauses.
To wrap it up, make sure the price of the property is adequately discounted for the fact that it is on a ground lease. As to how much it should be discounted, that’s a much tougher question to answer. But I’d suggest most ground lease property buyers purchase properties at prices that do not adequately reflect the discounted value at which they should sell. Try not to be one of those buyers!
Title to Property
Q. I’m buying an apartment building with a friend and there are several options for taking title, Tenants in Common, Rights of Survivorship, Joint Tenants, LLCs, a Trust. What is the best way to do this? Robbie H., Fairfax, Va.
A. Talk to your title insurance officer and maybe the title insurance company lawyer, and maybe with your own lawyer before you get moving forward.
State laws can differ on how ownership can be impacted in treatment of property issues based upon if one partner dies, if one gets into financial trouble or files bankruptcy or if a lawsuit judgment against one of the partners occurs. So you need to make sure to get good competent advice and think this through.
There can also be issues related to simply making decisions about the property. A friend of mine inherited a property with seven other people. Due to the titling of the property, every single owner had to agree to any decisions, changes and financings on the property or nothing could be done. It was a real pain and many legal fees have been paid by each party fighting over decisions over the years … and it still isn’t resolved after decades!
My only advice is get good legal advice, and determine with your partner how to handle the title issues. Do this before you move too far along in the process. Good luck.
Leonard Baron, MBA, is America’s Real Estate Professor® - his unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a San Diego State University Lecturer, blogs at Zillow.com, and loves kicking the tires of a good piece of dirt! More at ProfessorBaron.com. Email your questions to: Leonard@ProfessorBaron.com