Ground Lease

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

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.
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.

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)

Real Estate Basics: Ground Lease Fundamentals Quiz

### What is the primary feature distinguishing a ground lease from other types of leases? - [x] The tenant leases the land only and can develop it. - [ ] The tenant owns the land at the end of the lease. - [ ] The tenant leases both land and existing structures. - [ ] The lease term is always less than 10 years. > **Explanation:** A ground lease allows the tenant to lease the land exclusively, usually for a long-term period, and involve the right to develop it, while the landownership remains with the landlord. ### What typically happens to improvements made by the tenant at the end of the ground lease? - [x] They revert to the landowner. - [ ] They remain with the tenant indefinitely. - [ ] They are removed by the tenant. - [ ] They are sold to a third party. > **Explanation:** At the end of the lease term, any improvements made by the tenant, such as buildings, generally revert to the landowner. ### What is a subordinated ground lease? - [ ] A lease with an option to buy. - [ ] A lease that includes residential as well as commercial properties. - [x] A lease subordinated to a mortgage. - [ ] An automatically renewable lease. > **Explanation:** A subordinated ground lease is one in which the ground lease is placed subordinate to a mortgage, meaning the mortgage takes priority in claims against the property. ### For how long are ground leases typically structured? - [ ] Generally under 10 years - [ ] 12-24 months - [ ] Typically 25 years - [x] 50-99 years > **Explanation:** Ground leases are usually structured for long periods, often ranging from 50 to 99 years, to facilitate significant developments and investments by the tenant. ### Why might a business opt for a ground lease instead of purchasing land? - [x] To allocate capital elsewhere - [ ] To gain tax benefits of ownership - [ ] To ensure total control over the land - [ ] To maintain flexibility in relocation > **Explanation:** Businesses might prefer ground leases to conserve capital for other operational uses or improvements instead of tying up resources in land acquisition. ### Can a ground lease be used to build residential properties? - [x] Yes, if the lease agreement permits it. - [ ] No, ground leases are only for commercial properties. - [ ] Yes, but only for single-family homes. - [ ] No, residential zoning laws prohibit it. > **Explanation:** While ground leases are commonly associated with commercial leases, they can also be used to construct residential properties if the lease terms and zoning laws permit it. ### What must be included in a ground lease agreement to ensure lease validity? - [ ] Only the signatures of both parties - [ ] Duration less than 25 years - [x] Specific terms and conditions, including lease duration, rent, and permitted land uses - [ ] Provision for automatic renewal > **Explanation:** A valid and enforceable ground lease agreement must detail specific terms and conditions, including the lease duration, rent agreed, and permitted uses of the land. ### Which party retains ownership of the land during a ground lease? - [ ] The tenant - [x] The landlord - [ ] A third-party trustee - [ ] The government > **Explanation:** During a ground lease, the land's ownership always remains with the landlord. ### In the event of a default, who holds the priority claim if a ground lease is subordinated to a mortgage? - [ ] The tenant - [ ] The local municipality - [x] The mortgage holder - [ ] The landowner > **Explanation:** In a subordinated ground lease, the mortgage holder has the priority claim in the event of a tenant default. ### What is a potential downside for tenants in a ground lease? - [x] Losing improvements upon lease end - [ ] Low upfront costs - [ ] Long-term stability - [ ] Flexibility of use > **Explanation:** A potential downside for tenants in a ground lease is that they might lose the legal rights to any improvements made to the property upon lease expiration, which then revert to the landowner.