What is Ground Lease
A ground lease is a long-term lease in which a tenant is permitted to develop a piece of property during the lease period, after which the land and all improvements are returned to the property owner. All the improvements made on the land will be owned by the property owner unless an exception is made in the agreement. A ground lease stipulates that all relevant taxes incurred during the lease time will be paid by the tenant. Ground leases may typically range from10 years to 99 years. They are often commercial real estate products permitting the tenants to build business without the expenses of buying a land. They allow tenants to make improvements like building a restaurant, supermarket, store or any other commercial structure.
Subordinated & Unsubordinated Ground Leases
When it comes to ground leases, you may enter into an unsubordinated or a subordinated lease. In a subordinated lease, the owner of the property becomes a kind of partner in the land development by helping you obtain the necessary financing. He/she allows the mortgage on the property to be in a primary position to the lender and the land to be in a subordinated position. But this may be a bit risky for the landlord, because it means if the bank has to foreclose, they can take away the land in addition to the building. On the other hand, if you enter into an insubordinate lease, you have to offer the financed improvements, such as his business structure, as collateral for the loan. In this type of lease, a lender may claim the ownership of the tenant’s project only if he defaults on an in subordinated ground lease, but he cannot take the ground upon which the business complex exists. So, the owner cannot lose his/her property, even if the bank forecloses.
Major Benefits of Ground Leases
- Free capital that would be paid for land acquisition- there is no need to finance the land. The developer /lessee have enough capital available for construction works on the land.
- Offer a tax advantage-lease fees can be deducted as a business operating expense on taxes, thus reducing the tax burden on the tenant or lessee.
- Lessee is protected from downturns in the real estate market- a lessee is not dependent on the increasing value of the land, because his/her retail or commercial activities provide added value.
- Improvements on the leased property help tenant to run business and at the same time they increase the value of the land for owner.
- Ground lease allows the owner to retain ownership, while giving stable income without the expense of developing land.
- The landlord can benefit from the rent from the lease as well as capitalize on improvements made to the property
When & Why Businesses Buy Ground Lease Properties
When a business requires expanding and adding a new building, the logical option may seem to buy land on which a structure can be developed. However, owning a land comes with so many responsibilities. You will need capital to buy the land or you must take debt. Then there are property taxes and expenses for repair and maintenance of the building on land. Therefore, a better option is to choose a long-term ground lease. Ground leases properties allow investors to develop a piece of property without buying land. They enable businesses to avoid paying property taxes on land, thus saving thousands of dollars for the lessee/tenant (businesses). One common reason for investing in commercial ground leases is that they protect business from downturns in the real estate market. A ground lease is a long-term lease and allows investor to run business for a pretty long time of 10 to 99 years without any hassles. This type of real estate asset offers many benefits to the landlord. It provides long-term stream of income while retaining the ownership of the land. It also protects the landowner from the cost of developing the land. This is why most people now are considering ground lease as alternative strategy to 1031 exchanges and other investment options in the commercial real estate.
Who Can Invest in Ground Leases
A ground lease property is an ideal option for a company looking to develop a parcel of land and operate its business for a fairly long time without having to buy the land outright. Unlike traditional commercial leases, a ground lease typically runs at least 10 years and more. This type of investment is a great idea for national retail and restaurant chains that want to run business in prime locations without investing in real estate. It allows investors avoid heavy tax burden and frees the capital required to improve the land.
Who Sells Ground Lease Properties
The seller of such properties are mostly property developers and owners. They lease the property to a national tenants ( institutional investors, corporations or franchise firms) who build the site for their own use for raising capital to expand business, paying debt or investing money in other projects. The main reason, why companies enter into these transactions is to avoid paying tax on the land, using the developed site for running long term business and earn stable income. These real properties are loved by buyers, because they know, if the tenant leaves, it is windfall for the owner. All improvements made on the land will go back to owner.
Things to Consider Before Investing in Ground Lease Deals?
Over the years, ground lease transactions have become very popular for the sole reason that they help the owner to retain ownership, earn stable income and get back his/her property with all improvements made on the land. However, there might be some pitfalls for new investors.
It is therefore advisable to consult an experienced commercial real estate advisor. Make sure to check out tenant’s credit history. Do a background check on tenants (corporations, businesses etc) to be sure about their credit rating and income. Be sure to get the property in a prime location for its fair market value. Always negotiate price through a reliable broker to get an asset at reasonable price. For advice on ground lease opportunities, just talk to our expert consultants at Triple Net Investment Group Inc, one of the most trusted commercial investment firms in Washington DC area specializing in acquisition and disposition of the commercial real estate properties.