What is a Ground-Rent Arrangement

A ground-rent arrangement is a situation in which someone owns a structure, but not the land on which the structure is located, requiring monthly land-rental payments. Hotels and office buildings sometimes become subject to ground-rent arrangements. Homeowners also use ground-rent arrangements in certain situations. For example, it is common in trailer parks and seasonal camper-park resorts.

BREAKING DOWN Ground-Rent Arrangement

Ground-rent arrangements require less upfront capital, compared with buying both a building and the underlying land on which to build the structure. However, renters must understand the terms of such agreements, as they often restrict the rights and options of the building owner.

Consider a ground-rent arrangement at a trailer park. Such an agreement typically requires one of the parties to handle specified grounds maintenance and sets standards for the structure’s appearance. More importantly, such arrangements often restrict the rights of leaseholders to build additional properties on a given plot of land, or to expand existing buildings.

Say a given ground lease arrangement allows only a structure as large as a double-wide trailer. The building owner, therefore, breaks the ground-rent arrangement by removing the existing trailer and replacing it with a triple-wide unit. Building a detached garage or carport on the premises also breaks the arrangement. Similarly, remodeling the existing building sometimes runs afoul of such an arrangement.

A ground-rent arrangement encourages home affordability in some cases. In other cases, a ground-rent arrangement is the only way to build a structure on a desirable or rare property. Of note, the Internal Revenue Service allows ground-rent payments to be deducted as mortgage interest under certain conditions.

Ground Rent Arrangement vs. Ground Lease

A ground-rent arrangement should not be confused with a ground lease. The latter allows a tenant to develop a piece of land for a specific period of time, after which the land and all improvements reverts back to the property owner. These types of agreements often involve 50-year or 99-year leases.

For example, the U.S. government once offered 99-year leases to encourage the development of cabins on national forest land, as part of an effort to spur the use these areas for recreation. Such agreements became widely used beginning in 1915. This practice lasted until 1960, when the U.S. Forest Service stopped issuing new 99-year leases. These 99-year agreements typically forbade year-round use of the land and the renting out of cabins. Many also restricted the building of fences. Some also stipulated the type of roofing and other building materials, and disallowed the cutting of trees or the diversion of water.