Does A Ground Lease Fit Your Commercial Residential Or Commercial Property Needs

When leasing a business residential or commercial property, there are a variety of different kinds of business leases one might encounter. Sometimes tenants might be searching for a residential or commercial property they can develop on and create improvements that fit their specific needs. If this is the case, then a ground lease might be the finest alternative.
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A ground lease is a type of in which the tenant rents a piece of land and is allowed to establish that residential or commercial property during the period of the lease. During the lease term, the occupant owns any structures, advancements or enhancements made on the land. Once the lease ends, the land and any construction or improvements on that land become the residential or commercial property owner's. Usually, ground leases are long-lasting, with a lease duration 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 occupant is accountable for paying residential or commercial property taxes, insurance coverage and maintenance.


What's the Difference Between a Subordinated vs Unsubordinated Ground Lease?


There are two kinds of ground leases: subordinated and unsubordinated. The difference between the 2 involves what takes place if the tenant is dealing with financial difficulty throughout the term of the lease.
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Subordinated Ground Lease


With a subordinated ground lease, the landlord concurs to be a lower concern with regards to any other financing acquired on the residential or commercial property. If an occupant gets a loan to develop on the land and then defaults on the loan, the loan provider can go after the residential or commercial property, consisting of the land, as security. For example, a renter who signs a subordinated ground lease may secure a loan for $400,000 to develop a retail residential or commercial property. However, if that renter runs into monetary trouble and is unable to make loan payments, the lender can go after the structure and the land.


"Typically, this is done to facilitate financial obligation financing to build structures on the residential or commercial property," Miller and Peden said. In lots of cases with a subordinated ground lease, the landlord may need greater rent payments because they're taking on some amount of risk.


Unsubordinated Ground Lease


With an unsubordinated ground lease, the property manager maintains greater concern than the lending institution. Lenders are not able to foreclose on the land or use it as collateral if a tenant is unable to make their loan payments. Rather, if the tenant defaults on the loan, the lending institution can only go after their organization possessions. Some lenders might hesitate to provide out a mortgage to tenants who have actually signed an unsubordinated ground lease. Because of this included trouble for the occupants, property owners will generally charge lower rent.


Pros and Cons of Ground Leases for Tenants


Like all leases, ground leases include their benefits and drawbacks, for both tenants and property managers. For renters, the advantages and disadvantages may differ depending upon what you're looking for in an industrial residential or commercial property.


Location: With a ground lease, tenants can build a residential or commercial property in a location of their picking, without being bound to pre-existing buildings in an area that may not be perfect for their specific organization requirements.


Lower Taxes: For both federal and state taxes, the rent paid on a ground lease is tax deductible. The renter is paying less taxes than they would be if they merely purchased the land.


No Down Payment: With a land purchase, the tenant would be paying a big down payment to buy the land, after which they would still require to construct on that land. However, with a ground lease, there is no downpayment, and more cash can approach building on the land instead.


Reduced Lease Payments: If the tenant were renting both the land and the building, then lease payments would be much higher. With a ground lease, the tenant is making lower monthly payments.


Building Customization: When leasing a currently existing space, the occupant is unable to customize the structure to fit their specific needs. However, with a ground lease, tenants are just leasing the land and can personalize the residential or commercial property as they choose.




Some Higher Costs: Developing a residential or commercial property is expensive, and although renters are able to tailor their structure as they see fit, sometimes the monetary expenses might exceed those benefits.


Doesn't Retain Ownership After the Lease Expires: After putting money and time into developing a residential or commercial property and making enhancements, the tenant will need to quit ownership of the residential or commercial property once the lease expires, if they pick not to restore the lease. At that point, the landowner stands to make money from the enhancements the renter made.


Responsible for Fees: The tenant has to pay residential or commercial property taxes, insurance and maintenance expenditures on the residential or commercial property for the regard to the lease.




Benefits and drawbacks of Ground Leases for Landlords


For property managers, a ground lease might be useful for a number of reasons, but naturally it includes both benefits and disadvantages.


Lower Taxes: With a ground lease, proprietors do not have to report any capital gains as they would with a land sale. On top of that, the occupant is accountable for residential or commercial property taxes.


Steady Income: Landlords have the benefit of getting regular monthly rent on the land, thereby approving them a consistent income stream. In addition, lots of ground leases likewise consist of an escalation clause, which ensures a lease boost and expulsion rights when it comes to a renter defaulting on payments.


Retains Ownership of Improvements: After the lease duration ends, the property owner keeps 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 doesn't include specific provisions in the lease, they may not have any say in what the renter finishes with the land.


Higher Income Tax: Although a landlord won't have to pay capital gains taxes, the rent they get from the tenant counts as income, therefore they will need to pay greater earnings taxes.




In Houston last June, Peden and Miller worked out a 20-year, 2.64-acre ground lease for a new automotive dealership. The land was leased to Grubbs Automotive, with strategies to transform the existing structures into a brand-new Volvo automobile car dealership. In this example, Grubbs Automotive is leasing the land however has the freedom to construct brand-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 end up being the residential or commercial property of the property owner.


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


A leasehold estate is extremely comparable 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 renter is leasing. The celebration that is leasing the land from the landowner can use the land throughout of the lease. When the lease ends, the building and any enhancements become residential or commercial property of the landowner, similar to a ground lease. See likewise 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 buildings that are on it for the duration that has actually been consented to. With a leasehold, there is a contract in between the owner of the residential or commercial property and the lessee with normally more constraints on the lessee on what can be made with the residential or commercial property." Essentially, leasehold arrangements feature more limitations than ground leases but are otherwise relatively comparable.


Is a Ground Lease Right for You?


While a ground lease features its benefits and downsides for both the occupant and the property manager, it is very important to know what you're looking for in a rental contract before picking a type of lease. Ground leases are advantageous due to the fact that of their durability and surefire earnings for landlords. And for renters, ground leases allow you to build a residential or commercial property that fits your custom needs. However, there are several lease structures. Before deciding on what fits your needs, ensure to do your due diligence and discover the various kinds of industrial leases around.