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When renting a business residential or commercial property, there are a variety of different types of business leases one could come across. In many cases tenants might be trying to find a residential or commercial property they can build on and produce enhancements that fit their particular needs. If this holds true, then a ground lease may be the best option.
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A ground lease is a kind of lease agreement in which the tenant leases a piece of land and is allowed to develop that residential or commercial property during the period of the lease. During the lease term, the tenant owns any buildings, advancements or enhancements made on the land. Once the lease ends, the land and any building and construction or improvements on that land become the residential or commercial property owner's. Usually, ground leases are long-lasting, with a lease period between 20 to 99 years, stated Scott Miller, Senior Director of Land Services, and Jeff Peden, Executive Managing Director of Land Services at Transwestern. Ground leases are normally net leases, they included, in which the occupant is accountable for paying residential or commercial property taxes, insurance coverage and maintenance.
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What's the Difference Between a Subordinated vs Unsubordinated Ground Lease?

There are two types of ground leases: subordinated and unsubordinated. The difference between the two has to do with what happens if the renter is handling financial difficulty throughout the term of the lease.

Subordinated Ground Lease

With a subordinated ground lease, the proprietor accepts be a lower concern with concerns to any other financing obtained on the residential or commercial property. If a renter secures a loan to build on the land and then defaults on the loan, the lender can go after the residential or commercial property, consisting of the land, as security. For example, an occupant who signs a subordinated ground lease may get a loan for $400,000 to construct a retail residential or commercial property. However, if that tenant faces monetary difficulty and is not able to make loan payments, the lender can go after the building and the land.

"Typically, this is done to assist in financial obligation funding to construct buildings on the residential or commercial property," Miller and Peden stated. In a lot of cases with a subordinated ground lease, the landlord might need higher rent payments since they're taking on some quantity of danger.

Unsubordinated Ground Lease

With an unsubordinated ground lease, the proprietor keeps greater priority than the lending institution. Lenders are not able to foreclose on the land or utilize it as security if a tenant is not able to make their loan payments. Rather, if the tenant defaults on the loan, the loan provider can only pursue their company properties. Some lending institutions may hesitate to offer out a mortgage to tenants who have actually signed an unsubordinated ground lease. Because of this included difficulty for the renters, landlords will normally charge lower lease.

Advantages and disadvantages of Ground Leases for Tenants

Like all leases, ground leases feature their benefits and downsides, for both tenants and proprietors. For occupants, the advantages and disadvantages may differ depending on what you're looking for in a commercial residential or commercial property.

Location: With a ground lease, occupants can develop a residential or commercial property in a place of their picking, without being bound to pre-existing structures in a location that might not be perfect for their particular company needs.
Lower Taxes: For both federal and state taxes, the lease paid on a ground lease is tax deductible. The occupant is paying less taxes than they would be if they simply acquired the land.
No Down Payment: With a land purchase, the renter would be paying a big deposit to purchase the land, after which they would still require to develop on that land. However, with a ground lease, there is no downpayment, and more money can go toward building on the land instead.
Reduced Lease Payments: If the tenant were leasing both the land and the building, then lease payments would be much greater. With a ground lease, the occupant is making lower monthly payments.
Building Customization: When leasing a currently existing area, the occupant is not able to customize the structure to fit their specific requirements. However, with a ground lease, tenants are just leasing the land and can tailor the residential or commercial property as they choose.


Some Higher Costs: Developing a residential or commercial property is pricey, and although tenants have the ability to customize their structure as they please, in some cases the monetary expenses may surpass those advantages.
Doesn't Retain Ownership After the Lease Expires: After putting money and time into constructing a residential or commercial property and making improvements, the tenant will need to quit ownership of the residential or once the lease ends, if they select not to restore the lease. At that point, the landowner stands to benefit from the improvements the renter made.
Responsible for Fees: The renter has to pay residential or commercial property taxes, insurance coverage and maintenance costs on the residential or commercial property for the regard to the lease.


Advantages and disadvantages of Ground Leases for Landlords

For property owners, a ground lease could be useful for a variety of factors, but of course it includes both benefits and downsides.

Lower Taxes: With a ground lease, property managers do not have to report any capital gains as they would with a land sale. On top of that, the tenant is accountable for residential or commercial property taxes.
Steady Income: Landlords have the advantage of receiving monthly lease on the land, therefore giving them a stable income stream. In addition, numerous ground leases likewise include an escalation stipulation, which ensures a rent increase and eviction rights when it comes to a renter defaulting on payments.
Retains Ownership of Improvements: After the lease period ends, the property manager retains ownership of any improvements made on the land and can therefore sell the residential or commercial property at a profit.


Lack of Control: In the scenario where a proprietor doesn't include certain stipulations in the lease, they may not have any say in what the occupant does with the land.
Higher Income Tax: Although a landlord will not have to pay capital gains taxes, the rent they get from the renter counts as income, and so they will need to pay greater income taxes.


In Houston last June, Peden and Miller worked out a 20-year, 2.64-acre ground lease for a brand-new automobile car dealership. The land was rented to Grubbs Automotive, with strategies to convert the existing structures into a new Volvo vehicle dealer. In this example, Grubbs Automotive is leasing the land but has the liberty to develop new residential or commercial properties and make enhancements on the land and any existing structures as they see fit. Once the lease term ends, if they do not renew, then all of those enhancements become the residential or commercial property of the property manager.

What's the Difference Between a Ground Lease vs Leasehold?

A leasehold estate is very similar to a ground lease, in that with a leasehold estate, the physical structures are owned by the occupant, and the land is owned by another party, from which the tenant is leasing. The celebration that is leasing the land from the landowner has the right to utilize the land throughout of the lease. When the lease ends, the building and any improvements end up being residential or commercial property of the landowner, comparable to a ground lease. See also appurtenance.

However, according to Miller and Peden, "With a ground lease, you essentially have the rights as an owner of the land and the residential or commercial property or structures that are on it for the duration that has been consented to. With a leasehold, there is an agreement in between the owner of the residential or commercial property and the lessee with usually more constraints on the lessee on what can be finished with the residential or commercial property." Essentially, leasehold arrangements come with more limitations than ground leases but are otherwise relatively similar.

Is a Ground Lease Right for You?

While a ground lease includes its advantages and disadvantages for both the occupant and the property owner, it's crucial to understand what you're looking for in a rental agreement before picking a type of lease. Ground leases are useful because of their durability and surefire earnings for property owners. And for tenants, ground leases permit you to construct a residential or commercial property that fits your custom requires. However, there are numerous different lease structures. Before choosing on what fits your requirements, make certain to do your due diligence and find out about the various kinds of business leases out there.