Ground Lease

A ground lease is a type of 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. The tenant generally constructs a building on the land that they can then utilize throughout the lease term. This type of lease is common for commercial real estate and, in some cases, residential properties.

A few important characteristics of ground leases include:

Long-term: Because the tenant often constructs a building on the leased land, ground leases typically have long terms, often 50 to 99 years.

Rent: The tenant pays rent to the property owner. This rent may be fixed, or it could increase over time, depending on the terms of the lease.

Improvements: At the end of the lease term, any buildings or improvements made on the land by the tenant are typically owned by the property owner. This should be clearly stated in the lease agreement.

Financing: Financing a building on leased land can be complex and typically requires the lender to acknowledge that their collateral is a leasehold interest in the property, not the property itself.

Land Use: Ground leases may include terms about how the tenant can use the land, what type of building can be built, and how the land must be maintained.

Reversion: At the end of the lease term, the property and all improvements revert back to the landowner, unless the lease is renewed.

Ground leases offer a way for tenants to develop and use a piece of land without having to purchase it outright, which can be especially beneficial in areas with high real estate costs. However, the complexities and potential pitfalls of ground leases make it essential for both tenants and landlords to thoroughly review the lease agreement with legal and real estate professionals.