Ground Lease

A ground lease is a kind of lease where the lease agreement is written in such a way that the property's tenant will be authorized to do all the necessary developments during the lease period. Then the property will be handed over to the property owner, including the developments and changes the tenant has made during the lease period.

Thus, in such a case, the tenant, who is using the property can have the authority to do any kind of change. However, in the end of the lease, everything goes back to the property owner. The owner ultimately get the value of all the improvements. This benefits the landlord because they can now dispose off the property at a much higher price due to renovation and changes.

The ground lease agreement is a typical type of lease in which the piece of land is kept on lease to the tenants, and tenants must make all the necessary changes they want to incorporate during their lease term. Then, at the end of the lease period, the entire property is handed over to the owners, along with all the improvements and developments.

In some aspects, it is beneficial for the tenant and the owner, and in some respects, it is not. Therefore, the parties willing to get themselves indulged in this type of agreement must carefully read and understand all the lease terms and its effects in the future.

A ground lease agreement is generally associated with freehold properties, say a piece of land. In this lease, the tenant who uses the property can make changes and improvements for their benefit, which will be handed over to the landlord with all the improvements and changes made after the lease period.

It is a source of income for the landlords since they are getting improved and renovated piece of land, which they have provided earlier to the tenants. It is also known as economic rent. It has been witnessed that this type of long term ground lease agreement is generally made when the lease period is for a long time, for example, 50-60 years or more.

There are two types of real estate ground lease one is Subordinated and unsubordinated.

• Subordinated Ground Lease - It is a type of lease where the owner gets all the benefits from the repair and maintenance done by the tenants. The land owner will have less claiming power in this type of lease.
• Unsubordinated Ground Lease - It is a lease where the landowner will enjoy maximum claiming power. The claiming power is regarding the loan which the tenants usually take to make all the improvements in the property during their stay on the lease period agreed. The owner can easily claim the refund if the tenants are found defaulters

Many big corporations purchase the piece of land in big cities and then push that on lease to the tenant. The tenants, in this case, who are also big brands, come to the owners and finalize one agreement. So the ground lease agreement is done for big property and big businesses.

Mike has received a piece of land on his marriage from his parents, and it was an agricultural land located in some isolated place. Mike is working somewhere in the city, so it was challenging for him to look after the agricultural land. He has decided to put the land on lease for some 10 years and will sit back and enjoy the returns also he will avail the tax benefits from the leased land at the year-end.

• The ground lease is a good source of return on investment  regarding the property's owner. The land which the owner gives on a lease will always be appreciated also if it is located in a prime area, then the premium appreciation will be there. The land owner will benefit greatly from this type of lease agreement.
• It helps the tenants from the market fluctuation since the lease payments, and the terms are predefined. The tenants will not have to rethink according to the market condition. The real estate ground lease is somewhat fixed and gets raised according to the agreement, irrespective of the market condition.
• The most significant advantage is that it has a huge tax advantage for both the owner and the tenants. The tenants don’t have to pay taxes on the lease; also, they get the deduction for the rent they are paying. On the other hand, the landowner will not have to pay any property tax in some cases if the property is under Municipal Corporation or very less property tax if it is private.
• It is also beneficial for the financial aspect; the tenants can invest in a piece of land to develop for their business and don’t have to invest money to buy the property, which is very costly.
• In the case of a long term ground lease, the tenants are not required to make any down payments for confirming the deal the way we used to do in purchasing any property. Therefore it has been seen that less equity is involved in the case of a ground lease.

• The most significant and most prominent disadvantage of the commercial ground lease is that the property owner may have less control regarding the improvements and developments that tenants make.
• Sometimes it is also seen that the tenants are required to seek approvals if they require making any improvements or changes. Therefore, it sometimes becomes a roadblock for the tenants to think of the improvements and necessary changes.
• There can be tax complications because the cost of the land and the indexation may vary at the time of computing tax implication.

1. In commercial ground lease, a rent has to be paid to the lessor, whereas in case of fee simple, no rent is required.
2. For ground lease, the ownership rests with the lessor, but in case of fee simple, the party to whom the property is transfers has the full right on it.

This article has been a guide to what is Ground Lease. We explain its differences with fee simple, along with example, types, advantages and disadvantages. You can more about finance from the following articles –

• Lessor Meaning
• Lessee Meaning
• Calculate Lease Rate 
• Leasehold