Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. create, and receipt does not constitute, an attorney-client relationship. There are many reasons why this might be beneficial. During the ground lease term, the tenant will typically own and depreciate the improvements. For this reason, large chain stores such as Whole Foods and Starbucks often utilize ground leases in their corporate expansion plans. But it takes plenty of money and time to plan and execute a move. Unlimited access to Lorman's Learning Library for your personal Are you sure you want to rest your choices? Jeffrey L. Beal, president of Real Estate Solutions, has 40 years' experience in multiple phases of the real estate industry. The improvements on the real property will belong to and be under the control of the ground lessee during the term of the ground lease, but they will either belong to the ground lessor or will be required to be removed by the terms of the ground lease upon the expiration of the ground lease. At a minimum, the use provision should he broad enough to allow for most (if not all) uses that could be reasonably anticipated given the size, location and nature of the land. A ground lease is an agreement in which a tenant is permitted to develop a piece of property during the lease period, after which the land and all improvements are turned over to the property owner. When you login first time using a Social Login button, we collect your account public profile information shared by Social Login provider, based on your privacy settings. Leasable Area A typical net lease is for a particular space in a commercial property. In the simplest terms, for a ground lease the landlord is "hands off". Past performance is not indicative of future results. Triple Net Leases: What's the Difference? The material appearing in this web site is for informational purposes only and is not legal advice. Depending on the situation, a commercial land lease agreement may make more sense than selling the land or developing it yourself. Its also possible you could avoid paying the full property tax bill each year, but it depends on how much the property owner wants to charge you for that expense. With that in mind, real estate developers and owners considering the pros and cons of ground leasing must realize that the successful development of commercial property under a ground lease structure depends in large part on whether the ground lease meets the lender's expectations vis--vis the underwriting of ground lease risk. Land leases can provide tenants with access to excellent locations that they may otherwise be unable to access. Our mortgage reporters and editors focus on the points consumers care about most the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more so you can feel confident when you make decisions as a homebuyer and a homeowner. A ground rent can be redeemed at any time by the owner of the building and the land will belong to the owner of the building. This right should be assigned by ground lessee to ground lease lender in the loan documents. When a construction loan or a permanent loan is used to finance improvements, the senior lender will requirea first position in the hierarchy of claims on the asset, which is collateral for the loan. After the lease period, the land and all improvements the tenant makes return to the property owner. However, see the discussion of the Qualitech case, below, for more on this topic. A land lease, also known as a ground lease, is an arrangement in which a landowner the lessor, in legal terminology rents out the land to a tenant, or the lessee. However, 99-year leases continue to be common but are no longer the longest possible under the law. The land lease or ground lease lasts generally lasts between 50 and 99 years. There are some cons to land-lease agreements, however. Answer some questions to get offerswith no impact to your credit score. It used to be the longest possible under common law. This website uses cookies. Ground Lease: What Is It? Pros and Cons - ContractsCounsel Hiring a lawyer on ContractsCounsel is easy, transparent and affordable. In this case, a lender would not have the right to take back the land in the case of a default by the tenant. From retirement communities in California to high-rise buildings in New York City, leased-land living arrangements exist across the country. The corporate headquarters will normally purchase the land, and allow the tenant/developer to construct and use the facility. Their ground leases generally contain certain commonly used features. In its simplest form, a ground lease is an agreement between the landlord and tenant in which the tenant leases the land from the landlord for a specific lease period, a ground lease is usually between 50 and 99 years, or more. We also get your email address to automatically create an account for you in our website. "With a ground lease, you essentially have the rights as an owner of the land and the property or buildings that are on it for the period that you have it, whereas with a leasehold you are. The lender may also require that the ground lease provide that neither the ground lessor nor the ground lessee will have the right to terminate the ground lease in the event of a casualty except with the consent of the lender. intended only as general information which Summary of Unsubordinated Ground Leases. Rather than shift such risks to a borrower, lenders must rely solely on a lien against the ground lessee's interest in the leasehold estate. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Importantly, the tenant is responsible for paying all property taxes during the lease period. The ground lease lender should have the first priority interest in income from subtenants of the ground lessee. While we adhere to strict Another benefit to land owners is thatground leases normally have a reversionary clause, which transfers ownership of the improvements to the landlord at the end of the lease. One resource for information about this is Fannie Mae form 4326 (ground lease requirements). A landlord may choose to use a ground lease in order to: Ground leases are primarily used in commercial agreements. Get Forbes Advisors ratings of the best mortgage lenders, advice on where to find the lowest mortgage or refinance rates, and other tips for buying and selling real estate. However, these types of leases are very different from other leases that you might find for office buildings and shopping complexes. If the lessor has a consent right, it should be highly restricted and narrowly applicable (in other words, the lessor should only be able to withhold consent for a narrow category of items). In the event of a default, the lender will want to sell the ground leasehold to yield money to pay down the outstanding balance. Please see our. process and giving people confidence in which actions to take next. document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); Ground lease valuation is not unlike the valuation ofany other lease or cash flow stream. Rents, taxes, improvements, permitting, as well as any wait times for landlord approval, can all be costly. Purchasers of property subject to existing ground leases, in particular convenience food or shopping center leases with national or regional franchise occupants, should expect that the ground lease probably contains these features and should review title carefully to determine if they exist. Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters. The goal with a typical home purchase is to enjoy the existing home and surrounding property, or improve it, so that that the overall value can appreciate for years to come. The lease agreement will spell out the tenant's rights and obligations, as well as the landlord's. Drew has deep experience counseling clients in healthcare, medical device, pharmaceuticals, information technology, manufacturing, and services. learning. A ground lease can benefit both the tenant and the landlord. However, under the law of many states, an option is not a vested real estate right unless and until it has been duly and properly executed by the ground lessee. Which certificate of deposit account is best? With the credit crunch, lenders of commercial mortgage-backed securities (CMBS) had pulled back generally in the market. Ground leases are also often called land leases, as landlords lease out the land only. Though this is an underwriting issue more than a business issue, there should be no restrictions on the ground lessees ability to refinance its ground lease issue based on the value of the underlying fee. A residential land-lease arrangement might seem more ideal for a mobile home, as you could move the home when the lease is up. Why would an ownersubordinate its interest in a ground lease? The tenant does everything, including finding his own construction team, buying supplies and materials, etc. I. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Working with an expert contract lawyer Generally, a lender taking a ground lease as security will require the term of the ground lease to extend 5 or perhaps 10 years beyond the maturity of the financing. However, one ubiquitous feature of ground leases is a mechanism giving the lender the ability to keep the ground lease in full force and effect if the ground lessee defaults. Costs associated with the ground lease process may be higher than if the tenant were to purchase a property outright. Often, lenders will rely on language requiring notice from the ground lessor before the ground lessor terminates the lease. Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Ground leases, often called land leases, are simply a lease of the land only. A ground lease is an agreement in which a tenant can develop property during the lease period, after which it is turned over to the property owner. How much does it cost to draft a contract? 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. ENROLLED Disadvantages of a land lease. It should be expected that the lender will require the ground lease to expressly grant the lender the right to participate in the adjustment of losses and settlement due to a casualty. A modified gross lease is a combination of a gross and net lease wherein the operating expenses are both the landlord and tenant's responsibility. The basic concept is that it must be impossible to lose the lease due to inadvertence or mistake. A 99-year lease is generally the longest. Land leases are much more common with commercial properties, but there are some situations in which theyre used for residential homes as well. Any rents paid on a ground lease may be deductible for state and federal income taxes, meaning a reduction in the tenant's overall tax burden. A ground lessee who anticipates seeking leasehold financing would be well-served by at least obtaining a provision requiring the ground lessor to provide an estoppel certificate to a leasehold mortgagee from time to time. BR Tech Services, Inc. NMLS ID #1743443 | NMLS Consumer Access. In Maryland, this is a legal type of ownership. An attorney who specializes in ground leases should review the paperwork. Ground Lease vs. Build-to-suit - What's better for me? Ground Lease Real Estate Agreement Explained - Point Acquisitions Generally, the ground lessee is solely responsible for all due diligence on the property, including applying for and obtaining permits and other approvals from applicable governmental authorities to develop its improvements. professionals, they should not be used as a substitute What happens if the land is sold to another party? What Distinguishes A Ground Lease and Why - Lorman Right to Mortgage the Leasehold Estate. provided are maintained by the respective We are excited to share we have a new opportunity to offer QuickBooks Onlineat a discount for USA and Canadian residents. The difference between these two types deals with what happens if a tenant has financial difficulties during the term of the lease. At Bankrate, we take the accuracy of our content seriously. Term Depending on the situation, a commercial land lease agreement may make more sense than selling the land or developing it yourself. Get in contact with Suzanne De Vita via Email. editorial policy, so you can trust that our content is honest and accurate. This type of land lease offers more protection to the landowner, but is riskier for lenders, so it may be more difficult to get financing for an unsubordinated land lease. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence. A ground lease involves leasing land for a long-term periodtypically for 50 to 99 yearsto a tenant who constructs a building on the property. so you can trust that were putting your interests first. A lower purchase price might be enticing, but the potential for unexpected increases in the cost of the land can quickly erase any financial gain. What Is a Ground Lease? Pros & Cons Explained - SuperMoney Best Practices for Invoicing Real Estate Tenants, Why You Need a Central Location for Your Real Estate Documents, The Key to Debt Management for Real Estate Owners, The Key to Managing Your Real Estate Portfolio Cash Flow Like a Pro, Landowners gain a steady source of income, Landowners may become the owner of any improvements when the lease ends, Tenants can save money because they arent buying the land, farmers who need fertile land for growing crops or raising animals, businesses that want to construct their own buildings on a rented piece of land, companies that need space in a certain location for a cell phone tower, windmill, or other structure. Fee Simple vs. Ground Lease | FNRP - First National Realty Partners Another risk is if the lease is up, the owners can kick you off the property. A ground lease is a lease. What Is a Ground Lease? | The Motley Fool Ground Lease: Definition, Pros, and Cons - Broker in Insurance We continually strive to provide consumers with the expert advice and tools needed to succeed throughout lifes financial journey. This field is for validation purposes and should be left unchanged. who ensure everything we publish is objective, accurate and trustworthy. Instead, ground leases involve undeveloped commercial land. We maintain a firewall between our advertisers and our editorial team. The relationship between users and ContractsCounsel are not protected as attorney-client privilege or as legal work product. Here is a typical cooperation clause: In order to aid Tenant in meeting governmental requirements for construction and operation of the retail improvements contemplated by Tenant, Landlord shall execute and submit such applications, variances or requests as may be necessary for or required by the owner of the Demised Premises and shall provide any information privy to, known by, or in the possession of Landlord which may be necessary or useful in completing applications, submittals or requests to governmental authorities having jurisdiction over the Demised Premises. Landlords who don't put in the proper provisions and clauses in their leases stand to lose control to tenants whose properties undergo development. Though the preferred structure is that the lease term will survive the maturity of the financing, if the ground lease expires prior to the maturity of the ground lease financing, the lender may require the existence of renewal/extension options coupled with some level of ground lessor protection, such as notice from the landlord to trigger a requirement for exercise, or automatic exercise absent a non-exercise notice from tenant. Because a ground lease allows the landlord to assume all improvements once the lease term expires, the landlord may sell the property at a higher rate. Ground leases are an importantcomponent of many commercial real estate deal structures. The two main types of land leases are subordinated and unsubordinated, although unsubordinated leases are much more common because they provide more rights to the owner of the land. You also might not know whether there are environmental issues with the land, or where the potential property encroachments are, as an example. Usually land is leased for a relatively long period of time (50-99 years) to a tenant that constructs a building on the property. Also, if youre going to live in a property thats on the land and possibly improve it, you could try to get a deal on the cost of the lease. Some land-lease properties are part of homeowners associations, which means youre responsible for paying dues, for instance. Rachel, located in Washington, DC, has more than a decade of experience covering financial news at outlets including American Banker, The Wall Street Journal and Bankrate. But there may be some tax implications on the rent they receive. In general this should not be a concern because Section 365(h) allows the lessee of a debtor to choose between the termination of the lease and the continuation of the leasehold if the debtor rejects its unexpired lease of real property. If there is an existing fee mortgage, the mortgagee will often agree to enter into a subordination, nondisturbance and attornment agreement (SNDA) under which the leasehold mortgagee agrees not to disturb the ground lessee if the fee mortgage is foreclosed. In my practice, I have used the ground lessor SNDA/estoppel process to modify the ground lease, with modifications to apply only while the financing is outstanding. In a nutshell, a ground lease (also sometimes called a land lease) is an agreement between a person who owns the land and a person who wants to build a property. Fill out the quick form below and we'll email you our free eBook on What You Should Know About Commercial Real Estate Leases. What is the Difference Between a Triple Net Lease and a Ground Lease Stepping back from the individual details, the over-arching aspect that sets a ground lease apart is a structure that puts the ground lessee in a position similar to that of a property owner in many respects. James Chen, CMT is an expert trader, investment adviser, and global market strategist. 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. Online training solutions to support your employees' needs and Learn how your comment data is processed. In this article well shed some light on how ground leases work, explain what typical ground lease structures look like, and well also clear up some common misconceptions about the ground lease. This unsuborninated position is considered much safer for the landowner (superior even to the mortgage) and as such this usually comes with a lower lease rate. Ground Lease Explained: Pros and Cons of Ground Leases There's a good chance that a McDonald's, Starbucks, or Dunkin Donuts near you are bound by a ground lease. Yet for a lot commercial real estate professionals ground leases are rarely encountered and are poorly understood. We value your trust. Lenders may be more willing to finance ground leases containing rent escalators if index increases are capped and limited to five year periods. A land lease can benefit both the landowner and the tenants and can be a great alternative to a more . Transmission of this information is not intended to Long-term ground leases of publicly owned property have also become a primary tool of governmental and quasi-governmental entities to generate operating income while preserving ownership of valuable assets. As with financing secured by fee title, the lender will maintain direct control over the borrowers insurance proceeds. Thus, no matter what, to be financeable a ground lease must contain protective provisions designed to place the lender in a position to prevent or cure the defaults and otherwise preserve the value of the leasehold for sale to a third party. In many cases, theres a reversionary clause in a commercial land lease agreement. Depending on where the property is located, using a ground lease may have higher tax implications for a landlord. Many landlords use ground leases as a way to retain ownership of their property for planning reasons, to avoid any capital gains, and to generate income and revenue. If legal or other professional advice is required, the services of a professional