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When renting a business residential or commercial property, there are a number of different types of industrial leases one might come across. Sometimes occupants might be trying to find a residential or commercial property they can develop on and create improvements that fit their specific requirements. If this holds true, then a ground lease might be the very best option.

A ground lease is a kind of lease arrangement in which the tenant rents a piece of land and is allowed to develop that residential or commercial property throughout the period of the lease. During the lease term, the renter owns any buildings, advancements or improvements 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 in between 20 to 99 years, said Scott Miller, Senior Director of Land Services, and Jeff Peden, Executive Managing Director of Land Services at Transwestern. Ground leases are usually net leases, they added, in which the tenant is accountable for paying residential or commercial property taxes, insurance and upkeep.
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What's the Difference Between a Subordinated vs Unsubordinated Ground Lease?

There are two kinds of ground leases: subordinated and unsubordinated. The difference in between the 2 has to do with what takes place if the renter is dealing with financial trouble throughout the term of the lease.

Subordinated Ground Lease

With a subordinated ground lease, the proprietor agrees to be a lower top priority with concerns to any other financing obtained on the residential or commercial property. If a renter takes out a loan to develop on the land and after that defaults on the loan, the loan provider can go after the residential or commercial property, including the land, as collateral. For circumstances, an occupant who signs a subordinated ground lease might get a loan for $400,000 to build a retail residential or commercial property. However, if that renter encounters monetary problem and is unable to make loan payments, the loan provider can pursue the structure and the land.

"Typically, this is done to help with financial obligation financing to construct structures on the residential or commercial property," Miller and Peden said. In most cases with a subordinated ground lease, the property owner might require greater rent payments since they're taking on some quantity of danger.

Unsubordinated Ground Lease

With an unsubordinated ground lease, the property manager keeps greater priority than the lender. Lenders are not able to foreclose on the land or use it as security if an occupant is unable to make their loan payments. Rather, if the tenant defaults on the loan, the lending institution can only pursue their business assets. Some lending institutions may be unwilling to offer a mortgage to tenants who have signed an unsubordinated ground lease. Because of this included trouble for the tenants, proprietors will usually charge lower rent.

Advantages and disadvantages of Ground Leases for Tenants

Like all leases, ground leases feature their advantages and disadvantages, for both tenants and proprietors. For occupants, the advantages and disadvantages may vary depending upon what you're trying to find in a business residential or commercial property.

Location: With a ground lease, occupants can construct a residential or commercial property in an area of their picking, without being bound to pre-existing structures in an area that may not be perfect for their specific company needs.
Lower Taxes: For both federal and state taxes, the rent paid on a ground lease is tax deductible. The occupant is paying less taxes than they would be if they merely bought the land.
No Deposit: With a land purchase, the occupant would be paying a big deposit to purchase the land, after which they would still need to develop on that land. However, with a ground lease, there is no downpayment, and more cash can go toward building on the land rather.
Reduced Lease Payments: If the occupant were renting both the land and the building, then lease payments would be much higher. With a ground lease, the tenant is making lower regular monthly payments.
Building Customization: When leasing a currently existing area, the renter is not able to customize the building to fit their specific requirements. However, with a ground lease, renters are just renting the land and can customize 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 tailor their building as they choose, in some cases the monetary expenses may outweigh 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 commercial property once the lease ends, if they pick not to renew the lease. At that point, the landowner stands to make money from the improvements the tenant made.
Responsible for Fees: The occupant needs to pay residential or commercial property taxes, insurance coverage and upkeep costs on the residential or commercial property for the term of the lease.


Pros and Cons of Ground Leases for Landlords

For property owners, a ground lease might be helpful for a number of factors, but naturally it includes both advantages and drawbacks.

Lower Taxes: With a ground lease, property owners do not have to report any capital gains as they would with a land sale. On top of that, the renter is accountable for residential or commercial property taxes.
Steady Income: Landlords have the advantage of receiving monthly rent on the land, consequently granting them a steady earnings stream. In addition, lots of ground leases also include an escalation stipulation, which guarantees a rent boost and expulsion rights in the case of a tenant defaulting on payments.
Retains Ownership of Improvements: After the lease duration ends, the property manager maintains 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 situation where a property manager does not include particular stipulations in the lease, they may not have any say in what the renter makes with the land.
Higher Income Tax: Although a landlord will not have to pay capital gains taxes, the rent they receive from the occupant 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 new automobile car dealership. The land was rented to Grubbs Automotive, with strategies to transform the existing structures into a brand-new Volvo vehicle car dealership. In this example, Grubbs Automotive is leasing the land however has the freedom to build brand-new residential or commercial properties and make on the land and any existing structures as they please. Once the lease term ends, if they do not renew, then all of those enhancements end up being the residential or commercial property of the landlord.

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

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

However, according to Miller and Peden, "With a ground lease, you basically have the rights as an owner of the land and the residential or commercial property or structures that are on it for the period that has been consented to. With a leasehold, there is a contract in between the owner of the residential or commercial property and the lessee with typically more restrictions on the lessee on what can be made with the residential or commercial property." Essentially, leasehold contracts include more limitations than ground leases however are otherwise fairly comparable.

Is a Ground Lease Right for You?

While a ground lease comes with its benefits and drawbacks for both the occupant and the proprietor, it is essential to know what you're searching for in a rental arrangement before picking a kind of lease. Ground leases are useful since of their durability and guaranteed earnings for property managers. And for occupants, ground leases allow you to develop a residential or commercial property that fits your custom-made requires. However, there are lots of different lease structures. Before selecting what fits your needs, make certain to do your due diligence and learn more about the different types of commercial leases out there.