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How Does a Ground Lease Work?





Definition Of Ground Lease -

The Ground lease is an agreement in which a tenant is given permission to develop a property during the lease time, after which the land and all the improvements done are turned over to the property owner. Learn more about ground lease definition in the following paragraphs.


How Does A Ground Lease Work?


A ground lease shows that improvements will be owned by the property owner unless an exception is created and stipulates that all the possible taxes incurred during the lease period will be paid by the tenant. As a ground lease allows the landlord to assume all improvements once the lease term is over, the landlord can sell the property at a higher rate. Ground leases are also called land leases, as only the land is leased out by the landlord.


Primarily ground leases are used in commercial space, they differ from other types of commercial leases like those in office buildings and shopping complexes. Other leases don't assign the lessee to take the responsibility for the unit. The tenants are charged rent in order to operate their businesses. In ground leases the land is leased for a long time period nearly for 50 - 99 years to a rentee who constructs a building on the land.


The longest lease term is generally a 99 year lease for a piece of real estate property. It is the longest possible under common law. However 99 year leases continue to be common but now are no longer the longest possible under the law.


The ground lease means who owns the land and the building and improvements on the property. Landlords, to retain ownership of the property for planning reasons use ground leases to avoid any capital gains and to generate revenue and income. Tenants assume responsibility for all the expenses. It includes repairs, improvements, Constructions, renovations, insurance and taxes and any financing costs associated with the property.


Examples - Ground leases are mostly used by franchises and big box stores and also other commercial entities. The corporate headquarters will purchase the land and allow the tenant or developer to construct and use the facility.


Fundamentals Of Ground Lease Include -


● Terms of the lease

● Use provisions

● Both the landlord and the tenant's rights

● Title insurance

● Conditions on financing

● Fees

● Default


Subordinate Vs Un-subordinate Leases


Tenants

finance improvements by taking debt.In a subordinate ground lease the landlord agrees to a lower priority of claims on the property in case the tenant fails on the loan for improvement. Subordinated ground lease landlord allows the property deed to act as collateral in the case of tenant default. The landlord may negotiate higher rent payments for the risk taken on in such a case. This is beneficial for the landlord because constructing a building on his land increases his property value.


An unsubordinated ground lease let's the landlord retain the top priority of claims on the property in case the tenant defaults. As the lender may not take ownership of the land if the loan is unpaid, loan professionals hesitate to extend a mortgage for improvements. Although the landlord has the ownership of the property, they have to charge a low amount of rent from the tenant.