Definition: Ground Lease§
A ground lease is a long-term lease agreement where a tenant is allowed to develop, use, and occupy a piece of land, but the ownership of the land remains with the landlord. Typically, these leases run for periods of 50 to 99 years. A salient characteristic of ground leases is that any improvements made by the tenant, such as buildings or infrastructure, usually revert to the landowner at the end of the lease term unless otherwise specified.
Examples§
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Commercial Ground Lease:
- A developer signs a 75-year ground lease with a landowner to build a shopping mall. Throughout the lease term, the developer operates the mall and pays rent for the land. Upon lease termination, ownership of the land and any remaining structures revert to the landowner.
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Subordinated Ground Lease:
- A business agrees to a 50-year subordinated ground lease for a piece of land to construct an office building. This lease is subordinated to a subsequent mortgage, allowing the mortgage lender to have the first claim if the tenant defaults.
Frequently Asked Questions§
Q1: What is the primary benefit of a ground lease for the tenant?
- A1: Ground leases allow tenants to develop and use the land without needing to purchase it outright. This can be financially advantageous for businesses that prefer to allocate capital to their operations or improvements rather than land acquisition.
Q2: What happens to the improvements after the ground lease term ends?
- A2: Generally, any buildings or other improvements made by the tenant revert to the landowner once the lease term concludes, unless there is a specific agreement that states otherwise.
Q3: Can a ground lease include options to renew?
- A3: Yes, many ground leases include options to renew, but the specific terms of renewal must be negotiated between the tenant and the landowner and stated clearly in the lease agreement.
Q4: Is a ground lease considered a real estate property interest?
- A4: Yes, a ground lease is considered a leasehold interest, a particular type of real estate property interest, allowing the tenant rights to use and develop the property for the lease term.
Related Terms§
- Land Lease: Similar to a ground lease but can generally refer to shorter leasing periods or different contexts where full development isn’t emphasized.
- Leasehold Improvements: Changes or additions made to leased property to fit the requirements of the tenant.
- Freehold Estate: Distinct from leasehold estates, this is ownership without any lease’s limitations.
- Subordinated Lease: A lease that puts the leaseholder in a position inferior to another claim on the land, such as a mortgage.
Online Resources§
Suggested Books§
- “Ground Leases and Subordinations - Practical Guide for Developers” by Robert F. Herr
- “Real Estate Investing: Market Analysis, Valuation Techniques, and Risk Management” by David M. Geltner
- “Commercial Leasing: A Transactional Primer” by Geoffrey Turnbull
References§
- Herr, Robert F. Ground Leases and Subordinations - Practical Guide for Developers.
- Investopedia. “Ground Lease.” Accessed October 2023. (www.investopedia.com)
- NAIOP. “Ground Leases 101”. Accessed October 2023. (www.naiop.org)
