Landless Gentry

New homes on rented property

Inflated real estate prices and mortgage rates averaging 16 1/2% have denied hundreds of thousands of Americans the chance to buy their own homes. But some of them may now benefit from the rediscovery of a cost-cutting device that dates back to colonial days: land lease. Rather than buying a house with a modest plot of property, they are purchasing just the house and leasing the ground underneath it.

For buyers, land leasing can reduce the down payment on a house and thus make a purchase possible. In the Woodward Co.'s new Park Lane development in Carlsbad, Calif., for example, a two-bedroom house costs $127,990 when sold conventionally. But with land leasing, the house sells for just $82,990, and the down payment falls from 20% to 10%. The catch: the buyer must agree to pay a monthly ground rental of $450. The total monthly house payments would then be about $1,444 for a land lease, compared with $1,294 for a conventional sale.

Builders across the U.S. report that home buyers have eagerly taken to land leases. After the concept was inaugurated at Park Lane last October, sales rose from an average of less than two houses a month to more than five a week. Says David Carlson of Centurion Co. in Wayzata, Minn.: "We've sold about 300 land-lease homes in the past year and just finished building a 280-unit condominium on the same program."

Developers do not like land leasing since it ties up their capital longer in a housing project, but they are offering the option because the housing market is currently in such sad shape. Says Lynn Krause, a builder in Joliet, Ill.: "I'd rather have people buy on a leased-land basis .than not at all." Part of the reason business is sluggish is that buyers are rebelling at the high price of a plot of land. Says Otto J. Paparazzo, a builder in Woodbury, Conn.: "Land is becoming so difficult to zone and improve that I don't think we can pass the costs on to the buyer any more."

Like roller disco and hot tubs, land leasing is most popular in California, but it was hardly invented there. In 1632, King Charles I of England leased a huge tract of land on Chesapeake Bay to Lord Baltimore. The rent: two Indian arrows annually, plus one-fifth of all the gold and silver found on the property. Lord Baltimore established Maryland Colony on the land and leased out parcels to settlers. Ground rents are still a tradition in Baltimore. More than half of the 50,000 homes in Baltimore's inner city are on leased land. The contracts run for 99 years; the average rent is $72 per year. The landowner is not permitted to raise the rent during the term of the lease. Homeowners cannot be evicted except for failure to pay.

Land leasing has been a necessity in other areas. In Palm Springs, Calif., where about half the land is owned by the Agua Caliente Indians, many home buyers lease their land. Large industrial concerns like Du Pont, Foremost-McKesson and Shell Oil have long rented the ground beneath their buildings to conserve capital for other purposes.

Despite the obvious benefits, land leasing also has some noteworthy disadvantages. Unlike mortgage interest payments, ground rents are not tax deductible. Moreover, developers offering land leases usually include strong incentives to make the homeowner eventually buy the land. Many ground rents increase annually, and after ten to 15 years they can sometimes jump by 50% to 100% per year.

Housing industry experts predict that people who buy new homes with ground-rent arrangements will probably purchase the land within two to five years.

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