Ground leases are typically 99-year property leases between the tenant and property owner. During the lease, the tenant or lessee typically develops a site by erecting a commercial building or taking over an existing site and making it their own. At the end of the lease, ownership of the building or improvements reverts to the landowner unless a contract stipulates otherwise. As the lease comes to an end, the owner and lessee usually renegotiate a contract, but the owner can sell or lease the site to another entity.
Unlike shorter commercial leases, the tenant holding a land lease pays all applicable property taxes and assumes the expenses of owning the land, including the construction, improvements, maintenance, and insurance.
Who are the owners?
They come in a variety of properties that we come across in our daily lives:
- Municipalities or institutions that own land in the heart of a city that features a new or historic structure.
- Ski areas leasing land from the National Forest Service
- Corporations that sell franchises but keep the land the franchise occupies
- .Vacant land that descendants of the original deed holder own.
Landowners can find land leases desirable for many reasons. Most notably, it allows the owner to keep the land they do not have to maintain. At the same time, the lease generates passive income.
The longer, the better
There are few good reasons to make a land lease shorter than 99 years and even longer is better. Regardless of the length, leases generally become less valuable over time because of the increasingly shorter length of the contract. Those who plan to renew a land lease should begin negotiations years or decades before the lease ends to ensure plenty of time for these complex negotiations.
Each lease reflects the unique character or location of the property, but some standard details include the following:
- The length of the lease
- Usage provisions
- Rights of the landlord and tenant
- Title insurance obligations
- A lease default clause
Potential problems for the lessee
While the tenant may be able to develop a prime property that they usually would not have access to, they still need to weigh the following concerns:
- The landholder still has some input or control over the land.
- An escalation clause may not reflect the current or future market.
- Lessees are responsible for nearly all the burdens of ownership without actual ownership.
- There may be a risk of eviction from a property they consider their own.
Potential issues for owners
Some landowners are uncomfortable with their limited control over the property. While land leases avoid capital gains because the owner does not sell the property, the rental income may also be an issue unless tax breaks offset the tax burden. The length of the contract means a higher likelihood of default since businesses often fail or go bankrupt at some point.
Legal guidance is essential
This short blog only scratches the surface of this topic. The terms of these leases and their unique nature require both sides to be very careful before signing. An attorney with the right skill set can better ensure that the lease is fair and equitable for the lessee and lessor.