Maryland Ground Rent and How It Affects DSCR Financing

What ground rent is

Ground rent is a centuries-old Maryland arrangement most common in Baltimore City and nearby parts of Baltimore County and Anne Arundel County. Under a ground lease, the owner of the house holds a long-term leasehold interest, typically 99 years and renewable, while another party owns the "fee" interest in the land. The homeowner pays the ground rent holder a fixed annual amount, often a small sum set decades ago.

For most of the property's life, ground rent is a minor line item. But it is a real interest in the property, and the consequences of ignoring it used to be severe. Maryland reformed the system in the late 2000s, adding a state registry, limiting the remedies available to ground rent holders and creating clearer ways for owners to redeem, or buy out, the ground rent.

How ground rent shows up in a transaction

The title search will reveal whether the property is subject to a ground lease. Signs that a property may have one include an older Baltimore rowhouse, a deed that refers to a "leasehold" or an annual rent, or an SDAT record showing a ground rent. Ground rents are also registered with SDAT under the reformed law.

Once title identifies the ground lease, the lender decides how to handle it. Approaches vary by lender. Some require that the ground rent be redeemed at or before closing, some accept it if it is current and properly documented, and some have additional conditions. Because the approach varies, ground rent is one more reason to work with a broker who can compare how several wholesale lenders treat it.

Redemption: buying out the ground rent

Maryland law allows the leasehold owner to redeem a ground rent, generally by paying a sum calculated from the annual rent under a statutory formula, plus related costs. After redemption, the owner holds the property in fee simple and the annual ground rent ends. Redemption is often inexpensive relative to the property value, but it takes coordination with the ground rent holder, the title company and sometimes SDAT, so do not leave it to the last week.

If redemption is required for your DSCR loan, the cost is typically handled at closing. It is a one-time cost, not part of the monthly payment the DSCR uses. Ground rent payments themselves, if the ground rent remains in place, are small and are generally not a significant factor in the ratio, though some lenders may include them in housing expenses.

Ground rent on a DSCR purchase

• Ask the seller or listing agent early whether the property is subject to ground rent.
• Ask the title company to confirm the ground rent holder, the annual amount and whether payments are current.
• Tell your broker about the ground rent when you submit the scenario, so lenders that require redemption can price that step into the timeline.
• Confirm in the contract who pays redemption costs if the lender requires them.

See DSCR purchase loans for the rest of the purchase checklist and the rowhouse DSCR page for other rowhouse-specific issues.

Ground rent on a DSCR refinance

If you bought a rowhouse with short-term money and are now refinancing into a DSCR loan, the ground rent may already have been addressed. If it was not, the new lender's title search will find it. Check your original closing documents and the SDAT record before you apply so there are no surprises. A cash-out refinance or rate-term refinance can usually proceed once the ground rent is handled the way the lender requires.

Other old-property title items to check

Ground rent is not the only historical wrinkle in older Maryland property. Title may also turn up unpaid water bills (which in Baltimore City can become liens), open permits, old code violations or vacant building notices, unreleased prior mortgages and boundary questions with shared party walls. None of these is unusual, and most can be resolved, but each takes time. Combine this guide with the Baltimore rental license guide and the lead-paint guide for a complete pre-closing checklist.

This guide is general information, not legal advice. For questions about a specific ground lease or redemption, consult a Maryland real estate attorney or your title company.