What Is Ground Lease?

A commercial lease is a type of lease that businesses enter with a landlord. Leasing a property rather than getting it, can be helpful for them since it allows them to deal with capital, while also maintaining the expenses down to a minimum. Commercial leases are different from residential rentals since they allow both parties to enter into the arrangement more flexibility when it comes to the conditions of the lease. Commercial rentals will even have some terms defined beforehand, which specify the duties of both the parties and their expectations.

From time to time, companies may not locate a property that meets their demands. Or sometimes, they may not call for construction but just soil, which they can develop to meet their specific needs. Therefore, there is a particular kind of commercial lease that companies enter into to fulfill these requirements, called a ground lease.

Ground Lease

A ground lease is a lease that involves only leasing ground, also known as property, rather than any actual property. Normally, businesses enter into a ground lease planning to develop the property or build on it. Thus, a ground lease involves a business entering into a commercial lease with a landlord to get undeveloped commercial land. The lease gives tenants the right to make changes and create the land, in accordance with their requirements. When the period of the lease is finished, the renter returns the property, with the growth, to the landlord.

The landlord is going to obtain the legal right to the modifications made into the land, after the period of the rental is finished. It is helpful to the landlord, who can sell the land, with the improvements, at a higher cost later. For the tenant, it means any expense on the property isn’t a capital expenditure but instead a revenue expenditure.

While technically, a property rental is a type of commercial rental, it differs considerably from the other types of commercial leases. Usually, these rentals are common with shopping malls or office buildings where the tenant needs land to build on but doesn’t want to bear the cost related to acquiring property. Ground leases, because of their character, need to be lasting rather than short. Usually, ground rents interval between 50 to 99 years.

Ground leases will also have some conditions that define the rights and responsibilities of both parties to the lease. These will include terms, such as that owns the improvements made to the land, etc..

Kinds of Ground Leases
Ground leases can come in one of two types, subordinated and unsubordinated ground leases.

Subordinated Ground Leases
Subordinated ground leases are if the landlord permits the renters’ construction creditor to have priority rights to the land. Subordinated ground leases are vital when a tenant makes construction on the property through the borrowed funds. The danger of landlords is higher for subordinated ground rentals, but they also get paid for it. In subordinated ground rentals, the landlord essentially makes it possible for the tenant to use the land as security.

Unsubordinated Ground Leases

An unsubordinated ground lease is the opposite of subordinated ground lease. In unsubordinated ground rentals, the landlord retains the right to the claims on the priority once the tenant defaults. Because unsubordinated ground leases are riskier for creditors, they might not give a loan to the renter in any way, or very high expenses. Nonetheless, in the case of unsubordinated ground rentals, the landlord receives lower compensation as compared to subordinated ground leases.

Benefits of Ground Leases

Ground leases are valuable for both tenants and landlords. For tenants, a ground lease allows them to construct on the property without needing to acquire it. In the same way, ground leases allow tenants to get rights to lands in prime locations, which might cost very high if acquired. For landlords, floor leases let them receive regular compensation or rent in exchange for your rental. What’s more, it also allows them to benefit from the improvement made for their property later on. Finally, it gives landowners particular tax benefits.

Disadvantages of Ground Leases

Ground leases can also be disadvantageous for both the parties involved. Likewise, tenants may require approvals from the landlord to make modifications, which may delay the procedure for improvements or construction. For landlords, floor leases may sometimes arrive with some tax implications, which may outweigh the tax benefits. Similarly, if the rent on ground leases is fixed and not corrected for inflation, as a result of the period of ground leases, the lease may not be sufficient for your landlord.

Ground leases are a type of commercial rental, which allows companies to rent land from a landlord. As soon as they lease the land, they can make improvements to it based on their requirements. Ground leases are generally between 50-99 decades. There are two types of ground leases, subordinated and unsubordinated. Ground leases can have advantages and disadvantages for both the renter and the landlord.