Benefits of Commercial Groundlease

A ground lease, also known as a land lease, is an agreement between a property owner and tenant where the latter is allowed to develop the property during the lease period. It’s important to point out that the landowner only leases the land. The land and all the improvements made by the tenant return to the landowner after the lease period.

Through the lease agreement, the tenant agrees to pay the property owner a monthly rent for using the land and the right to develop it. Unlike a standard real estate lease which is usually shorter, a ground lease can cover between 50 and 99 years. A land lease has several benefits for both the landowner and the developer.

A typical ground lease involves a piece of land located in a prime area or one with some distinguishing feature that would be hard to find or replicate elsewhere, such as a ready market or physical infrastructure. For a property owner, a land lease allows for the monetization of land while retaining ownership. In addition, if the land has other properties close to the leased plot, such holdings may also rise in value due to the new development of the newly leased parcel.

For landlords, another advantage is the tenant’s security for the long-term and future property appreciation because of subsequent development. Land improvements and buildings completed by the developer tenants become the landlord’s property unless the lease agreement states otherwise. If the landlord lacks the capital or expertise to develop the parcel of land on their own, a lease agreement helps increase the property value.

Ground leases are mostly structured as net leases, which means that besides the monthly rent, the tenant can be responsible for meeting expenses related to property insurance, taxes, and maintenance. The landlord will unlikely incur any capital expenses associated with the heavy infrastructure development.

For the developer, a key land lease benefit is access to a piece of prime real estate without meeting the high upfront costs of an outright property purchase. The investor or tenant can develop a parcel of land for commercial use without owning the property.

Tenants might also prefer a land lease because it’s significantly less costly to construct a building than buying land first and then erecting structures. By renting, tenants can use their money for construction or meeting other business investments, such as equipment, instead of channeling it to property purchases.

In addition, the tenant won’t need to make a down payment to secure a property which means fewer equity requirements. In turn, this frees more cash for other uses, potentially improving the yield on land utilization. A ground lease can, in some cases, allow lets tenants to develop a choice property that a landowner is unable or unwilling to sell.

Also, for federal and state income tax purposes, the rents paid on a ground lease can be tax deductible. They can be considered as business operating expenses. This reduces the tenant’s overall tax burden.

Finally, for both parties, it’s very important to review the lease agreement with a ground lease expert before they sign it. This ensures both the landlord and the tenant are protected.