In Baltimore, you may own your own home, but the ground beneath your feet may well be another story, thanks to an arcane, and archaic, real estate practice that harks back to medieval times.
"Ground rent" is an institution still in effect in a very few pockets of the country; in Baltimore, where it is most widespread, a 1988 estimate in a newspaper article had it as high as 50 percent.
For many modern-day city homeowners the result is a mysterious, almost quaint fee, often less than $100 a year, that homeowners pay to the owner of the ground rent. In effect, homeowners are leasing the land that the house sits on. They are said to hold a "leasehold" as opposed to the customary "fee simple" ownership.
Conventional wisdom has it that ground rents were responsible for turning Baltimore into a city of row houses. "Baltimore boosters have been saying that for a hundred years," said Garrett Power, a professor at the University of Maryland School of Law in Baltimore. "I even said that in print a couple times myself."
But after going back to examine census data from cities with a similar housing stock, Power has concluded that there's not much evidence to support that contention, or that it's at least overstated. "I haven't been able to prove it," he concedes.
What is sure is that ground rents made homeownership a less daunting financial drain, since the land was not being bought outright but was instead being rented.
Ground rents were an outgrowth of "quit-rents," a practice put into place by the second Lord Baltimore when he was trying to populate his colony of Maryland. Land was granted outright to immigrant settlers on the condition that they pay him a yearly "quit-rent" in wheat or tobacco, later in cash.
Lord Baltimore was himself indebted to the crown for a payment: two Indian arrows, to be presented at Windsor Castle on Tuesday of Easter week, and one-fifth of any gold and silver found in the colony, which apparently turned out to be a fifth of nothing.
Quite a deal for Lord Baltimore and his successors, but the Revolution put an end to any English claim to Colonial money, and landowners quickly put the "quit" in quit-rent.
"The first thing the aristocrats did was tell Lord Baltimore to get lost," Power said. The idea of land beholden to another, however, had firmly taken root on this side of the Atlantic.
Baltimore's population grew by leaps and bounds after the Revolution, and a few families that had been jockeying for position for generations ended up with large lots in their control. One of these was the Fells family, a clan of Quakers who hailed from England and from whom Fells Point takes its name. They successfully carved out lots for rent on the condition that a suitable dwelling be built on the land. The dwelling was security for the loan of the land, and could be claimed by the landowner if rent were not paid; if a house never was built, the land could be taken back.
Ground rents were generally for 99 years, a term fashioned on another practice of England's landed aristocracy but with some crucial, distinctly American differences, which eventually resulted in the "redeemable" ground rent. By 1884, a law was passed that ensured all ground rents created thereafter were "redeemable" 10 years after being drawn up. (Later laws shortened the wait time.)
This meant homeowners could buy the land if so inclined, or could continue paying rent. The decision was theirs--landowners could not evict homeowners when the 99-year term was up, and would have to forfeit their interest in the land if the homeowner decided to redeem. Either way, the land was the homeowners' to do with as they would--so long as they kept their houses in good shape.
For the ground rent's owner, the arrangement was satisfactory for a variety of reasons: It was a very secure investment, as homeowners had a vested interest in paying rent and not losing their dwellings; and it yielded a guaranteed rate of return--usually 6 percent. If homeowners failed to pony up, the land and property would revert to the investor.
Indeed, a thriving secondary market in ground rents developed, luring investors looking for exceptionally safe returns. Even today, you'll find newspaper ads "ISO" ground rents.
Ground rents financed developments well into the 20th century but have clearly outlived their usefulness. "I think they have already lost almost all of their economic significance," Power said, "but there's no incentive to get rid of them." He predicts it'll be 100 to 200 years before they fade away.
This "last remaining vestige of medieval feudalism in America," as one Samuel H. Feldstein Esq., wrote in the Real Estate Reporter of August 1945, may well go the way of the horse and buggy. But in Baltimore, horse-drawn carriages are still used, by "arabbers" to sell fruit, and there likely will be ground rents paid and traded well into the millennium.