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What Is a Ground Lease?
A ground lease is an agreement that permits a tenant to develop a piece of property during the period of the lease. After the lease period, the land and all improvements the tenant makes return to the property owner. Ground leases may also be referred to as land leases since the landlord is leasing out only the land.
Ground leases should include the following essential aspects:
- Default conditions
- Fees
- Financing conditions
- Rights of the landlord
- Rights of the tenant
- Terms of the lease
- Title insurance
- Use provisions
How a Ground Lease Works
Ground leases involve leasing land for a long-term period to a tenant who then constructs a structure on that property. A typical ground lease covers a period from 50 to 99 years.
- Who owns the building
- Who owns the land
- Improvements to the property
A ground lease stipulates that the property owner will own any improvements unless the parties create an exception. This type of contract also stipulates that the tenant will pay relevant taxes during the period of the lease. Landlords may be able to sell the property on the land at a higher rate once the term of the lease expires because they can assume all improvements at that point.
Image via Unsplash by seanpollock
A landlord may choose to use a ground lease in order to:
- Avoid capital gains
- Generate revenue and income
- Retain property ownership for planning reasons
Ground leases are primarily used in commercial agreements. However, these types of leases are very different from other leases that you might find for office buildings and shopping complexes. Other commercial leases do not usually assign the lessee to take responsibility for the unit, charging tenants rent so they can operate their business instead.
When using a ground lease, however, a tenant will usually assume responsibility for any kind of expenses. Expenses that would be the responsibility of the tenant on a ground lease include:
- Construction
- Financing costs
- Improvements
- Insurance
- Renovations
- Repairs
- Taxes
Types of Ground Leases: Subordinated vs. Unsubordinated
You'll find two main kinds of ground leases: subordinated and unsubordinated. The difference between these two types deals with what happens if a tenant has financial difficulties during the term of the lease. Many times, tenants will take on debt to finance projects on the land they lease.
Subordinated Ground Lease
A landlord will agree to be a lower priority in terms of any other financing obtained on the property when signing a subordinated ground lease. If the tenant signs a subordinated ground lease on a plot of land, borrows money to build on that land, then defaults on the loan, the lender can go after the property (including the land itself) as collateral.
In other words, the landlord in a subordinated ground lease allows the property deed to act as collateral should the tenant default on a loan used to make improvements. The landlord can negotiate higher rent payments since they are taking on additional risk with subordinated leases. A landlord may also choose to create a subordinated ground lease since constructing the building on their land can increase the property's value.
Unsubordinated Ground Lease
A landlord who signs an unsubordinated ground lease retains top priority if there are claims on the property. This means that tenant's lenders cannot foreclose on the land if the tenant defaults on the loan. If the tenant defaults, the lender could go after the tenant's business assets . However, the lenders cannot gain full control of the property as they could do with a subordinated ground lease.
Because the lender cannot take ownership of the land in an unsubordinated ground lease should a tenant not pay their loan, prospective lenders may hesitate to extend a mortgage so a tenant can make improvements. As a result, landlords usually have to charge lower rent to the tenant.
Advantages of a Ground Lease
Ground leases can offer benefits to both landlords and tenants.
Landlords
Landlords can look forward to certain advantages when signing a ground lease, including:
- Steady income: While still retaining ownership of their property, a landlord can access a steady income stream. Ground leases usually also have an escalation clause. This clause guarantees rent increases as well as eviction rights, which offers protection if a tenant should default on rent or other types of expenses.
- Tax savings: If a landlord sells property outright to a tenant, they realize a gain on that sale. On the other hand, when they execute a ground lease, they don't need to report any gains. However, there still may be tax implications in regard to the rent they receive.
- Retain control: Some ground leases may include provisions that allow a landlord to keep a certain degree of control over their property. This can include how the property is developed and how it is used. In these cases, the landlord will be able to deny or approve changes to their land.
Tenants
Tenants enjoy a few advantages when signing a ground lease as well:
- Building in a prime location: Tenants gain the ability to build property in a prime location they might not otherwise be able to purchase. That's why you'll often find large chain stores utilizing ground leases in corporate expansion plans.
- No required down payment: As the tenant does not need to have a down payment to secure land (they would if they were purchasing the property), less equity is involved. This, in turn, frees cash for other uses. It also improves the yield on utilizing that land.
- Reduction to tax burden: As rents that are paid on a ground lease can be deductible for income taxes (both federal and state), the overall tax burden of the tenant is reduced.
Disadvantages of a Ground Lease
Certain disadvantages also exist for both landlords and tenants when choosing to use a ground lease.
Landlords
Landlords looking to execute a ground lease should be wary of potential drawbacks:
- Loss of control: If a landlord doesn't include the proper clauses and provisions in their lease, they can end up losing control of the property.
- Higher tax implications: This varies based on the location of the property, but a ground lease can come with higher tax implications for the landlord. Though landlords don't realize a gain from selling the property, the rent they charge is considered income. That means rent will be taxed at the ordinary rate, and this can increase the landlord's tax burden.
Tenants
Tenants also should be aware of drawbacks to a ground lease, including:
- Reduced flexibility: Tenants may encounter obstacles in using or developing the property if the landlord requires approval before they make any changes. A tenant may therefore experience more restrictions than they would if they had purchased the property.
- Higher costs: Costs that come along with the ground lease process may end up higher than the costs of just purchasing a property outright. A tenant should be prepared for various costs adding up, which can get expensive, especially when waiting for approval for certain projects. Costs can include improvements, permits, and taxes.
It's very important that both the landlord and tenant review the lease with expert support before they sign it. Working with an expert contract lawyer when creating a ground lease can ensure both parties are protected.
Meet some of our Ground Lease Lawyers
Michael M.
www.linkedin/in/michaelbmiller I am an experienced contracts professional having practiced nearly 3 decades in the areas of corporate, mergers and acquisitions, technology, start-up, intellectual property, real estate, employment law as well as informal dispute resolution. I enjoy providing a cost effective, high quality, timely solution with patience and empathy regarding client needs. I graduated from NYU Law School and attended Rutgers College and the London School of Economics as an undergraduate. I have worked at top Wall Street firms, top regional firms and have long term experience in my own practice. I would welcome the opportunity to be of service to you as a trusted fiduciary. In 2022 I was the top ranked attorney on the Contract Counsel site based upon number of clients, quality of work and top reviews.
Anand A.
Anand is an entrepreneur and attorney with a wide-ranging background. In his legal capacity, Anand has represented parties in (i) commercial finance, (ii) corporate, and (iii) real estate matters throughout the country, including New Jersey, Pennsylvania, Delaware, Arizona, and Georgia. He is well-versed in business formation and management, reviewing and negotiating contracts, advising clients on financing strategy, and various other arenas in which individuals and businesses commonly find themselves. As an entrepreneur, Anand is involved in the hospitality industry and commercial real estate. His approach to the legal practice is to treat clients fairly and provide the highest quality representation possible. Anand received his law degree from Rutgers University School of Law in 2013 and his Bachelor of Business Administration from Pace University, Lubin School of Business in 2007.
Daehoon P.
Advised startups and established corporations on a wide range of commercial and corporate matters, including VC funding, technology law, and M&A. Commercial and Corporate Matters • Advised companies on commercial and corporate matters and drafted corporate documents and commercial agreements—including but not limited to —Convertible Note, SAFE, Promissory Note, Terms and Conditions, SaaS Agreement, Employment Agreement, Contractor Agreement, Joint Venture Agreement, Stock Purchase Agreement, Asset Purchase Agreement, Shareholders Agreement, Partnership Agreement, Franchise Agreement, License Agreement, and Financing Agreement. • Drafted and revised internal regulations of joint venture companies (board of directors, employment, office organization, discretional duty, internal control, accounting, fund management, etc.) • Advised JVs on corporate structuring and other legal matters • Advised startups on VC funding Employment Matters • Drafted a wide range of employment agreements, including dental associate agreements, physician employment agreements, startup employment agreements, and executive employment agreements. • Advised clients on complex employment law matters and drafted employment agreements, dispute settlement agreements, and severance agreements. General Counsel • As outside general counsel, I advised startups on ICOs, securities law, business licenses, regulatory compliance, and other commercial and corporate matters. • Drafted or analyzed coin or token sale agreements for global ICOs. • Assisted clients with corporate formations, including filing incorporation documents and foreign corporation registrations, drafting operating and partnership agreements, and creating articles of incorporation and bylaws. Dispute Resolution • Conducted legal research, and document review, and drafted pleadings, motions, and other trial documents. • Advised the client on strategic approaches to discovery proceedings and settlement negotiation. • Advised clients on employment dispute settlements.
Jonathan M.
Owner and operator of Meek Law Firm, PC. Meek Law Firm provides comprehensive business law representation, precise and informed representation for real estate transactions in the commercial and residential markets of North and South Carolina and efficient succession and estate planning for business owners and individuals.
David A.
Graduated UF Law 1977. 40 years experience in Family Law/Divorce and Prenuptial Agreements. Rated "AV Preeminent" By Martindale Hubble, the oldest lawyer rating firm in the USA. Top 5% of attorneys in Florida as reviewed by Judges and other Lawyers (not client reviews). Personal prompt service and easy to contact--available 24/7. Good negotiator and very personable. My clients are my priority.
January 23, 2023
Charles K.
~ Charles Kramer - Technology, Contracts and Intellectual Property Attorney ~ www.linkedin.com/in/charleskramer I am a New York corporate and technology attorney. My experience includes: - representing high-tech companies (including software, military, manufacturing and computer game companies) in connection with negotiating and drafting (1) toolkit, enterprise, Saas, PaaS and other complex agreements and licenses with companies around the world; (2) joint-venture, sales, publishing and distribution agreements; and (3) general corporate agreements. - 5 years as General Counsel of a software company (and many more years representing it as outside counsel); - 3 years as an associate in the Wall Street law firm of Lord, Day & Lord (then the oldest law firm in New York City practicing under the same name); and - speaking at conferences on legal issues including at the annual Game Developers Conference and Miller Freeman's Digital Video Conference. I am comfortable working in areas where the technology -- and the related law -- are new. My recent work includes working as a contract attorney (extended on a month-by-month basis) as American counsel for a publicly traded Swiss industrial corporation with responsibility for drafting form contracts for its planned "industrial internet of things" digital services. Accordingly I am comfortable working in a corporate environment using modern collaboration tools. Charles Kramer (917) 512-2721 (voice, voicemail, text)
January 23, 2023
Joseph M.
Joe provides premium legal services to both individuals and businesses throughout the Commonwealth. Experience litigating civil and criminal matters, as well as drafting/negotiation transactional issues involving contracts, real estate, business formation, estate planning and more. Prior to entering private law practice, Joe worked for two decades in financial industry including regulatory and compliance for both national and regional banks and investment firms.
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ContractsCounsel User
ground lease contract in UTAH?
Location: Utah
Turnaround: Less than a week
Service: Drafting
Doc Type: Ground Lease
Number of Bids: 3
Bid Range: $850 - $999
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Ground Lease Fort Mohave, AZ
Location: Arizona
Turnaround: Less than a week
Service: Drafting
Doc Type: Ground Lease
Number of Bids: 2
Bid Range: $500 - $650
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