Some Lease Ideas

Dan Sullivan

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One possible system is a perpetually renewable lease that expires (if not renewed) in about ten years, but can be renewed every year. The original lease might have conservative rent escalators in it, but needn't adhere precisely to assessed market value. Each year, when a reassessment has been made, the lessor can sign the new lease, which is good for ten years from that date, or stick with the old lease, which is good for only the remaining nine years. Of course, if several years down the road he wants to renew after all, he will to take on a lease that incorporates the previously uncollected rent, plus interest.

Another idea I have had is to offer leaseholders a "protected assessment" and a "market assessment." The protected assessment, under specified conditions [below], cannot exceed some percentage increase over the prior year's protected assessment. Let us say the lease says that the protected rent cannot increase by more than 6% per year.

To qualify for a fully protected rent assessment, one must have improvements on the land with an amortized value in excess of the difference between the protected rent and the market rent.

For example, let us suppose that a person takes up a plot of land that rents for $5,000 per year, and builds a house on it worth $100,000. For the sake of simplicity, we will assume that the house is maintained and upgraded, and so maintians its value as a structure. Let us also suppose, for simplicity, that the structure yeilds a return or imputed return of $10,000 per year.

Now, let us suppose that the community is spectacularly successful, and market rents for his parcel go up by 15% per year. At the end of 10 years, rents have slightly more than quadrupled. (1.15^10=4.05). Thus, the market rent for that parcel would be $20,250.

However, his fully protected rent, limited by a 6% annual increase (if he qualifies), is only about $9,000. The difference, or savings to him, is $11,250.

However, he does not qualify for full protection, since his improvements have an annual value of only $10,000. In this situation he has five (or maybe six) options:

1. He can pay the market land rent less the annual value of the house.

2. He can improve the house, increasing its annual value, and so get more or even all of the rent protection.

3. He can tear down his house and build something more suitable to the new market value. Of course, until the new structure goes up he must pay the full market rent on the essentially vacant lot. This is to prevent dawdling. Perhaps we can base the protection on the highest structural value during the assessment year.

4. He can negotiate with the leaseholding community to buy the lease and the structure as a package. Then the community can offer a new lease at the full market rate.

5. He can walk away with impunity.

6. (Maybe) If there is a non-renewal provision, like the one I described at the beginning, he can let his lease run out at the protected rate.

Now, I do not think government, as currently constituted, can manage such a lease system very well. I see this as a model for an entrepreneurial land trust community, where the trustees have a vested interest in collecting the rent that is due them.

Also, the land trust can only protect the rent it collects for its own purposes. If government institutes a land value tax, and land rents to the government go up by more than the protected rent, the trust cannot fail to collect that which it must pay.

Suppose then that the land rents for $5000, from which $1,000 in land value taxes are paid to various governments. This means that the actual net rent to the land trust is $4,000. Now, suppose in one year the land assessment goes up 20%, both for tax purposes and for lease purposes. The $1,000 to the government would go up to $1,200 and the remaining $4,000, under 6% protection, would only go up to $4240 (instead of $4800).

Now, from that lease, half the rent, after LVT, would go to profit for the owners of the entrepreneurial trust, and the other half into a community fund to pay for tax rebates and/or community improvements as desired by a governing mechanism that represents residents and/or the leaseholders. I have concepts for that as well, but one aspect at a time is plenty.