Groundly's Ground-Rent Grift

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Georgists generally don't question whether property managers, developers, or others involved in real estate earn at least part of what they get to keep. Someone who fixes a place up before flipping adds value to the improvements.¹  Similarly, someone who rents out a property (and isn't just a slumlord) adds value by being attentive, actively managing the property, and maintaining it.² It’s the other part we scrutinize—namely speculative "investing" in land. A landowner appropriates value that wasn’t created by them. Land rent is thus an unearned income extracted from others.

The production and extraction of value in modern real estate are almost always intertwined. But what happens when we strip away all that "complexity"?  What happens when we push all responsibility downstream to the customer or end-user, just like we've already done in other industries?  What would it look like for landlords to take up the middleman position in its purest form, unobscured by earned income and unfettered by the need to put up appearances?  How much would they be making in purely passive income?

For-Profit Provision of Affordable Housing?

Enter: Groundly, a company which promises to let people buy a home while saving money. Their website is a lot like those single-page websites during the crypto heyday— the ones solely dedicated to functioning as an electronic brochure for "the pitch" with close-to-zero information about the company behind it.³ The implicit message is: Trust us. You don’t need to know who we are because our deal is so good that you should probably just take it.

So here's the Groundly pitch:

• You want affordable housing?  Great!  Just buy the house!

• We currently own the land and the house, so we will sell you just-the-house.

• We will rent you the land so that you don't have to pay the land price up front.⁴

• This saves you money because the minimum down payment percentage applied to a smaller amount of money equals...a smaller amount of money!

• This also saves you money because your monthly mortgage payments will also be lower, especially if you're able to put more toward your down payment.  You can see there are wins everywhere!

• Instead of giving money to the bank at a higher (and more frequently compounding) interest rate, you give us money at an annual capped increase of 2%.⁵⁶

• Your lease is for 99 years.  So stable right?

• Want to sell your house later?  No problem!  Someone can buy your house, on a 55-year land lease, then buy the land for $1.

2023-10-20 Screenshot of Groundly's $1 purchase option … (why is the font so small?)

Here's the catch:

• You are on the hook for property taxes, even the land part which we still own.

• You are on the hook for HOA dues, where applicable.

• You are on the hook for maintenance of the building and the grounds.  We don't provide any property management services whatsoever.

• You are on the hook for insurance, as you normally would be.

• We are on the hook for...basically nothing.

• The payments you make through the land lease will help us recoup the cost of the land within 15-20 years.⁷

• As your asset depreciates, our asset appreciates.  So when you sell, we pocket the profits.⁸

As great as this may sound to someone desperately needing to buy a home, it might be yet another short-term affordable long-term unaffordable setup.

• If you rented both the land and the improvements, rents may rise unaffordably, but the responsibility for maintaining the property rests on the property-lord (at least on paper).

• If you bought both the land and the improvements, a fixed-rate mortgage would ensure that your rents don’t rise, refinancing will be an option as long as the application is supported by a recent history of steady income, and you get to keep whatever windfall gains the government isn’t taxing (unless you’re in an HOA, but you would also at least get a vote on dues).

• If you bought the improvements through a non-profit community land trust which confers voting membership in the trust, you would at least have some voice and access to information about the use of funds in exchange for paying the ground rents (and no additional HOA dues).

• Really, the least Groundly could’ve done was cover the land portion of the property tax bills since they still own the land, and maintain the grounds.  Nope.  Can’t even be bothered with that.  The tenant is responsible for everything.

According to the news article which tipped us off, they've determined Groundly is "a New York-based real estate startup" which has registered different similarly-named entities in various states over the last few months.⁹  It’s essentially taken the mobile home park model and adapted it to not-so-mobile homes.  This isn’t a strictly new idea but even some experienced mortgage originators are unfamiliar with Groundly’s lease terms.¹⁰ With its “innovative” startup branding, the company is all set to take advantage of people unaware of the downsides.¹¹

Can I Get a Loan with That, Please?

As the news article was sure to point out:

“Ground leases are not new, but they’re typically associated with commercial real estate or community land trusts [...] which are dedicated to preserving affordable housing.”

Groundly certainly smells like a REIT masquerading as a CLT.  Surely most would have difficulty obtaining traditional financing to inadvertently bolster this startup's portfolio… yet, Groundly insists:

“Yes, just like any home, you may obtain a mortgage and refinance at any time. The Groundly Lease complies with official guidance issued by both Fannie Mae and Freddie Mac so you should have a wide choice of lenders.”

For those unaware, Fannie Mae (Federal National Mortgage Association or FNMA) and Freddie Mac (Federal Home Loan Mortgage Corporation or FHLMC) are government-sponsored enterprises (GSEs).  These two companies were created by Congress and are (now) overseen by the Federal Housing Finance Agency (FHFA).  When banks issue “conventional” loans, they are following the requirements set out by these two companies to maximize their chances of being able to sell those loans in the future.  Conventional loans provide the funding for nearly ¾ of all new home sales (so not refinancing) – the rest being paid for with FHA loans, VA loans, or cash.  While only Ginnie Mae (Government National Mortgage Association or GNMA) loans are explicitly guaranteed by the government (i.e. FHA and VA loans), Fannie Mae and Freddie Mac loans are considered implicitly guaranteed by the government.¹²

So what did that mortgage guy in that article say again?

“Technically, it’s allowable for conventional loans under the government-backed Freddie Mac and Fannie Mae, which supports around 70% of the mortgage market, [the senior loan officer] says. “But there’s not really a precedent. We had trouble figuring out if the ground lease itself was usable. We still don’t really have a definitive answer on that.”

Well now that's interesting!  What is causing this lack of definitiveness?

While we don’t have a copy of Groundly’s lease terms, we do have access to Fannie Mae and Freddie Mac’s loan standards. Fannie Mae seems to be much more strict with the types of entities they deem qualified to be "Program Providers".¹³  However, both Fannie Mae and Freddie Mac documentation point to Grounded Solutions Network for model contracts.  Fannie Mae points specifically to the 2011 Model Ground Lease, which establishes the Lessee as a regular voting member of the CLT (Section 14.1) and gives the Lessee a 25% share of the increase in market value of the Improvements, if any (Section 10.10).  Meanwhile, Freddie Mac points to both the 2011 Model Ground Lease and the 2021 Model Deed Restriction which contains Commentary explaining that:

“The 2021 Model Declaration of Affordability Covenants with Refinance and Resale Restriction and Purchase Option (the “Declaration”) is meant to be used by shared equity homeownership programs. Shared equity homeownership programs -- as used in this Commentary and the Declaration -- are affordable housing programs, managed by a government or a nonprofit, that intend to keep properties permanently affordable by restricting the prices for which properties may be sold to subsequent homeowners.”

So clearly the guidance was written with government or nonprofits in mind as "Program Managers".  But is it reflected in the Model Contract?

Yes, but also no.

“Section 3.06 Program Manager’s Successors and Assigns. The Program Manager may from time to time designate a successor or assign to its rights and obligations under this Declaration, provided that such successor or assign is a governmental body, governmental agency, or non-profit entity with a charitable purpose consistent with the Program. For clarity, the Program Manager may contract with a for-profit person or entity to assist Program Manager in running the Program, but the Program Manager itself shall not be a for-profit person or entity.”

This seems fine except that the 2021 version has a color key.

“No Color = Recommended and customary language; edit if needed to satisfy the laws of your state or reflect details of your particular program.”

A look at the Program Manager requirements confirms that these are indeed only "recommended and customary" and not "required" because all requirements for CLTs were removed effective 2021-04-07.

2023-10-31 Screenshot of Freddie Mac’s Community Land Trust eligibility requirements, Effective April 7, 2021, Section 4502.9 is deleted.

Wow!  This must've been quite an achievement for someone.

If Groundly were a legitimate community land trust, co-op, or non-profit (under Fannie Mae requirements), I'm certain they would've plastered it all over their website.  We can contrast Groundly’s presentation with those of the CLTs being endorsed by Freddie Mac and those of the Shared Equity Homeownership Programs endorsed by Grounded Solutions Network.  (There is considerable overlap between the two lists.)  Here's one with six Donate buttons on their homepage and a funky membership dues & benefits structure.  A Georgist CLT would probably at least pay the property taxes and HOA dues.¹⁴

Groundly is the one of these things that’s not like the others.  To say that the Groundly lease complies with official guidance issued by Freddie Mac is believable, but to say that the Groundly lease complies with official guidance issued by Fannie Mae is a much harder sell.¹⁵  Given that Freddie Mac’s standards are roughly a decade more up-to-date, perhaps the intention is for Fannie Mae to eventually modify their standards in a similar manner, but the support for Groundly’s assertion is yet to materialize based on publicly accessible information.  The resulting lack of definitiveness, in turn, hurts Groundly’s claim of being “the better way to buy a home” and their ability to fulfill their mission “to make the American Dream of homeownership more affordable.”

Affordable Housing Advocates Beware

If the ability to pervert well-intended affordable housing programs weren't apparent before, hopefully this opens some eyes and encourages affordable housing advocates to remain vigilant against wolves in sheep's clothing by studying Georgist principles.  To a Georgist, Groundly is a company which is, in a sense, boldly proclaiming, "If the government is unwilling to fully tax ground rents, we will.  We will be the ones to take the kernel through the shell—and we will do so with increasing impunity."¹⁶

Time will tell if this experiment will work out for Groundly.¹⁷  None of the six properties in the Triangle area identified in the news article have been sold yet, so they're not getting snapped up, per se (though all six are now listed).  It's possible that acquiring financing is slower for this type of "product", but it's also possible that it's just a slow market – maybe both.  Redfin says the average number of days on the market in Durham is 40 days, so they've still got some time before these listings feel stale, and we’re getting closer to winter, which is typically a slower time for real estate.  If everyone is able to remain more skeptical than desperate, then perhaps this startup of theirs won't take off and there's no need for worry.

On the other hand—knowing how we tend to do things here in the US—land title holders will collude (some directly but most indirectly) to keep the squeeze on the productive members of society and drive up rents through perpetuating false scarcity.²¹  Banks and government(s) will lower underwriting standards so that Groundly-type leasebacks will eventually be able to obtain more financing and Groundly-type leasebacks will be rolled into some kind of derivative (ground-rent-backed securities?) just like mortgages were before the Great Recession and rents are now.  So we should nip this in the bud while we still have time.

Conclusion

In the end, Groundly is just land rentierism taken to its logical conclusion. Its business model could only ever work because we allow private landowners to appropriate land value. Attempts to regulate or ban Groundly-type businesses that don’t address this underlying issue are band-aids at best. Luckily we can solve this problem at its root with one just policy: land value tax. With land value taken for the community that created it, no business model based around private profit from it can exist. Hopefully we can implement this cure before things get worse.

1. On the other hand, a person who flips a property without substantially improving it (i.e. buys low, sells high), is a speculator.  I won’t lump all arbitrageurs in this category, since some actually do provide some “price discovery” service when they buy in one quantity and sell in a different quantity (repackage), whether that’s converting from bulk to individual units or individual units to bulk.  However, if the front-running drives prices up past what the buyer was originally posting their bid for; then the arbitrageur is in a position to do more harm in the market than good.

2. Many absentee landlords outsource this functionality to a property management agency for a percentage of the rents collected to minimize (if not completely remove themselves from) the "active" part of generating income.

3. This website is constantly changing, so here are the archived snapshots:

• 2023-05-31: “Ground rent payments increase by 2% annually, with an inflation catchup adjustment once every five years based on the Consumer Price Index with an annual cap of 3.0% per year” & “Initial ground rent equal to 3.5% of land price.”

• 2023-10-17: Catchup payments removed, “Groundly does not share in your sale proceeds. Once sold, you have no obligations under the Groundly Lease and the purchaser will then enjoy the right to purchase the land after the 55th lease year for $1.” & “Initial ground rent equal to 5% of land price.”

• 2023-10-28: $1 land purchase option removed.

4. I'm not exactly sure why the Groundly website says the following if Groundly owned the land beforehand and the entire pitch assumes that buyers either don't have the money to buy the land with the improvements or buyers want to save money by not buying the land:

“Groundly purchases the land underneath your home and leases it back to you at a low monthly rate, so that you only need a mortgage on the home itself.”

After much digging around, my best guess is that the contract pairs Groundly sets up ignores the true chronology between the seller of the improvements (Groundly) and the buyer of the improvements and is instead speaking from the relative chronology of the sale-leaseback mechanism between the two contracts.  (i.e. A then B, C replaces A, therefore C then B).

5. With the exception of the moratorium during the pandemic, US Rents Percent Change Annual haven't been below 2% since the 1960s.

6. 2% is well below the interest rate of a fixed-rate mortgage at any point in recent history:

• US Mortgage Interest Rates, 30-Year Fixed

• US Mortgage Interest Rates, 15-Year Fixed

7. This spreadsheet models the maximum 2% increase to ground rents each year based on information from six Groundly listings and their respective assessed values to determine how long it would take Groundly to break even.  It also models Groundly's advertised method of calculating initial ground rents (purportedly based on 5% of land price) and contrasts it with their listed ground rents.

8. From the 2021 Model Declaration of Affordability Covenants with Refinance and Resale Restriction and Purchase Option:

“Section 8.07:  Calculation of Maximum Resale Price. Except as specifically permitted in a Foreclosure Action under Section 8.06(a)(iii), so long as this Declaration remains in effect, in no event may the Home be sold for a price that exceeds the Maximum Resale Price.

Section 8.08:  Repairs and Transfer Procedures.   The following procedures shall apply to all transfers of the Home pursuant to Sections 8.05 and 8.06:

(c)  Distribution  of  Sales  Proceeds.   The proceeds of any sale conducted in accordance with this Article VIII shall be distributed as follows: First to satisfy Permitted Mortgages in order of priority, second to pay the Program Manager’s Unpaid Amounts, third to pay taxes, homeowner association assessments, and any statutory or municipal fees currently due and payable, fourth to pay amounts owed to any other secured lien holders, and fifth to the Homeowner, who may retain the remaining proceeds of sale. Notwithstanding the foregoing, any Excess Proceeds shall be paid to Program Manager.”

Most of Section 8.07 is in green and the rest has no color.  Section 8.08 has no color for the most part except for a few lines in yellow, blue, or green scattered throughout and subsection (c), which is in red:

“Red = Must include exact language to satisfy Government Sponsored Enterprise requirements; do not edit.  Note that red language sometimes appears within yellow language; if the yellow optional language is used, the red language must be included (if the yellow language is deleted, the red language can be deleted along with it)

Green = Must fill in information and/or choose one of the options provided. Language can be edited.”

So the language around calculations can be edited, but Maximum Resale Price seems to be a cap designed to keep housing affordable while Excess Proceeds result from selling at fair market value if that value is above the Maximum Resale Price.  It's probably not far off to say that Excess Proceeds is the speculative gains portion of total gains.

9. Typically purchased by Groundly Home Owner LLC, then a special warranty deed is recorded for the ground lease establishing Groundly Home Lessor LLC as the Landlord (Grantee) and Groundly Home Owner LLC as the Tenant (Grantor).  These are signed by Douglas Heitner in his capacity as Chief Legal Officer for both Delaware LLCs.  

• Document Number 2023073511

• Document Number 2023076213

• Document Number 2023072896

10. From the article: "Nate Haines is a senior loan officer with Chapel Hill-based Robby Oakes Mortgage Team. After reviewing Groundly’s terms, he said he hadn’t seen a ground lease like it before."

11. The good news though is they haven’t sold any of their improvements yet, but they are definitely experimenting with the listings.  Since these listings are getting plenty of views and saves, it’s unclear whether potential buyers are being advised against such purchases or if financing such purchases has presented a substantial hurdle.

12. https://www.consumerfinance.gov/ask-cfpb/what-are-fannie-mae-and-freddie-mac-en-1959/, https://www.fhfa.gov/SupervisionRegulation/FannieMaeandFreddieMac, https://www.fhfa.gov/about-fannie-mae-freddie-mac, https://en.wikipedia.org/wiki/Fannie_Mae#Implicit_guarantee_and_government_support, https://en.wikipedia.org/wiki/Freddie_Mac#No_actual_government_guarantees, https://en.wikipedia.org/wiki/Government_National_Mortgage_Association#History

13. CLT provider eligibility according to the Fannie Mae CLT Checklist:

“The CLT program provider is one of the following, so long as it is not the property seller or other interested party:

• A federal agency, state, county, or similar political subdivision of a state.

• A self-governing city, town, village, or borough of a state.

• A housing finance agency (HFA).

• A nonprofit organization exempt from taxation under Section 501(c)(3) of the Internal Revenue Code.

• A regional Federal Home Loan Bank under one of its affordable housing programs.

• A federally recognized Native American tribe or its Tribally Designated Housing Entity (TDHE).

• An employer, where the borrower is an employee.

• A lender, only in connection with an employer-guaranteed Community Seconds mortgage as part of its affordable housing program”

Similar verbiage in the Fannie Mae CLT FAQs with a note:

“NOTE: Legal entities that are owned exclusively by a nonprofit organization are also considered eligible shared equity providers. For example, an LLC wholly owned by a nonprofit organization is considered an eligible shared equity provider. Shared equity providers are not considered interested parties to the transaction.”

14. Georgist think about land trusts a lot, so they can actually be much more well-fleshed than just paying for property taxes and HOA dues. 

15. In an email to the PnPSubstack, longtime Georgist Ed Dodson wrote that while he was at Fannie Mae; they never accepted loans made under “sell the house but hold the land” terms:

“This is nothing new, in that some developers offered buyers this option in order to get into housing. The house buyer would pay ground rent for some period of time but have an option to purchase the land. At what price would be an issue. While I was at Fannie Mae we never accepted loans made under those terms. The developer would generally have a relationship with a bank that provided the construction financing and then held the end loan to the house buyer in portfolio.”

16. “I do not propose either to purchase or to confiscate private property in land. The first would be unjust; the second, needless. Let the individuals who now hold it still retain, if they want to, possession of what they are pleased to call their land. Let them continue to call it their land. Let them buy and sell, and bequeath and devise it. We may safely leave them the shell, if we take the kernel. It is not necessary to confiscate land; it is only necessary to confiscate rent.” (https://en.wikipedia.org/wiki/Henry_George#cite_ref-51)

17. If it does, we’ll at least have a silver lining: data on how ground rents can be separated from improvement rents. This could be useful in arguing against people who are anti-LVT because they think this separation isn’t practical.