Alternative
Sources To
Institutional
Lenders...
Land lease arrangements
are common
throughout the
United States for
both commercial and
industrial users and
for farmers,
anything other than
fee ownership of
residential land is
unthinkable in many
areas.
Yet in some
parts of the United
States (for example,
Baltimore, Maryland;
Orange County,
California;
throughout Hawaii;
and in parts of
Florida) homes with
long-term land
leases are an
accepted practice.
Typically, these
leases are from 55
to 99 years in
length and, barring
an agreement to the
contrary, the
improvements to the
land become the
property of the fee
owner at the end of
the lease. Rents may
be fixed in advance
for the life of the
lease, renegotiated
at preset points
during the life of
the lease, or a
combination of
both.
To hedge against
inflation, when
fixed rents are used
in a long-term
lease, it is common
practice to use
step-up rentals. For
example, under a
55-year house-lot
lease, the rent may
be set at $400 per
year for the first
15 years, $600 per
year for the next 10
years, $800 for the
next 10 years, and
so forth. An
alternative is to
renegotiate the rent
at various points
during the life of
the lease so that
the effects of land
value changes are
more closely
equalized between
the lessor and the
lessee. For example,
a 60-year lease may
contain
renegotiation points
at the fifteenth,
thirtieth, and
forty-fifth years.
At those points the
property would be
reappraised and the
lease rent adjusted
to reflect any
changes in the value
of the property.
Finally, if the
lessor is
responsible for
paying the property
taxes on the land,
he will include an
escalation clause in
the lease contract
that permits him to
raise the lease rent
by the amount of any
property tax
increase. The
alternative is for
the lessee to assume
direct
responsibility for
paying property
taxes.
Land
Lease To Home
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