People may lease office, retail or commercial space annually or over a multi-year period. They often have a landlord to fix things and handle maintenance. Ground leases are an entirely different arrangement. They are typically 50 to 99 years. During that time, the tenant will develop the property by erecting a commercial building, making improvements to an existing building, and treating the property as if they own it. The tenant pays taxes on the land and assumes other expenses related to the property. The property (with all the updates done) may then be turned back over to the owner at the end of the lease unless the two sides draft a new lease.
Who uses them?
Also known as land leases, ground leases often are used for commercial spaces. Big box stores, corporations and retail chains often own the land and then lease it to a franchisee, often as part of the franchise agreement. The owner may also lease the land to a developer – examples would be a municipality leasing valuable ocean front, privately owned property in a downtown area, or the U.S. Forest Service leasing mountains to ski areas.
The term of the lease is often an issue
Tenants want long-term land leases to have control over the property long enough to take full advantage of it, creating a profitable operating model. Traditionally, 99 years was the maximum length allowed under common law, but there now are even longer ones. Ninety-nine years remains the norm, and there are few reasons to make it shorter. One important reason for the length is that leases lose value as the contract’s term approaches their end because of the impending possibility of losing the land, assets built on it, and rights entitled by the lease.
Negotiating a new lease
The process may start up to 20 years before the lease is scheduled to end. Those who do not start it this early risk losing the land. Renewals are complicated, and the tenant will not simply update the dates and figures. The large amounts of money required usually involve financing, but there is no down payment. The land must also be appraised, with consideration given to the land’s value over the time of the contract.
What’s in it for the landowner?
The average property owner would not consider ground leases as a viable option. But there are certain benefits to using this approach:
- The owner retains ownership of the land.
- The agreement generates income or revenue while avoiding capital gains.
- The owner can avoid property taxes by having the tenant assume that obligation.
Legal guidance is essential
The unique and lengthy terms pose a certain amount of risk. So, the property owner and potential tenant must consider all potential issues before signing. An attorney will help ensure that the client does not regret it later. They also ensure that the terms are legally binding and help find creative solutions to disputes. Of course, they can also represent the client in court if it becomes the best option for resolving the matter.