What is a Ground Lease?

Ground leases are a type of long-term lease agreement in which a proprietor can lease their residential or commercial property to a renter who will make enhancements to the land. Ground leases prevail among industrial leases because they enable services to operate on expensive property residential or commercial property that they can't manage to buy out right. In turn, landlords can benefit from improvements to the land and tenants can save cash on realty expenses.

A ground lease is a kind of long-term lease arrangement that enables a renter to build-and briefly own-improvements on the leased land. Ground leases are typical in commercial real estate and can normally last up to 20-99 years. During the lease term, the renter usually builds residential or commercial property for business use. At the end of the term, they'll transfer ownership of the residential or commercial property to the property manager.

A big franchise may make use of a ground lease to broaden its business into city areas with high real estate expenses. This would permit them to construct a branch in a largely populated location without needing to buy costly land upfront.

Because the ground lease process typically consists of development, tenants might need to get loans to cover building and construction and other associated costs.

Two main types of ground lease agreements represent the risks related to loans:

Subordinated ground leases put the loan lending institution's claims to the residential or commercial property above the property owner's. This develops a greater risk of losing the land if the occupant defaults, however allows the property owner to negotiate greater lease payments with the tenant. In turn, the tenant may be able to more easily secure a loan with much better rate of interest.

Unsubordinated ground leases provide the property manager top priority above the loan provider. This is a more stable and common option for landlords, but it may make it harder for tenants to secure a loan. As an incentive, landlords might use lower lease costs to tenants who accept an unsubordinated ground lease.

FAQs

Who owns the building in a ground lease?

Generally, occupants in a ground lease just pay lease on the land itself and maintain ownership of any enhancements they make, such as structures they build on the residential or commercial property. However, ownership of those enhancements transfers to the landlord when the ground lease expires.

What occurs if you default on a ground lease?

That depends upon the context of the lease and which party defaults. In a subordinated ground lease, the property owner risks losing ownership of the land if an occupant defaults on a loan. Conversely, the renter could potentially lose the structure they constructed if the proprietor defaults on debts.

Who pays residential or commercial property taxes in a ground lease arrangement?

While it depends on the lease arrangement, occupants are generally accountable for residential or commercial property taxes, insurance, maintenance, and repairs.

What's the distinction in between ground leases vs. land leases?

Both ground and land leases rent land to an occupant. However, ground leases tend to permit renters to establish the land, while a land lease may not.

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