The term “ground lease” refers to an arrangement where a tenant is allowed to develop a portion of property over the lease time, and after that the property and the improvements will be transferred to the owner of the property.
How does a Ground Lease works
A ground lease stipulates that improvements will be held by the owner of the property unless an exception is made and states that all taxes that are incurred during the lease period must pay for by the tenant. Because a lease on ground permits the landlord to take over all improvements after the lease expires it is possible that the landlord could decide to decide to sell his property for a greater cost. Ground leases are often called land leasesbecause landlords lease the land for only.
Although they’re used mostly in commercial spaces they differ from other kinds of commercial leases such as those used in office buildings. The leases in these other types typically don’t give the lessee the authority the responsibility of the property. Instead, tenants pay rent to run their business. Ground leases involve leasing land for a longer period, usually for between 50 and 99 years to the tenant who builds the building on the land.
An agreement for 99 years is usually the longest lease period that can be negotiated for real property. It was once the longest lease that could be legally possible under the common law. But 99-year leases are still to be popular, but they are not the longest that can be legally granted under law.
The ground lease establishes who owns the land and who is the owner of the building, as well as improvements to the property. A lot of landlords utilize ground leases in order for them to keep their the property’s ownership for planning purposes to prevent profits from capital as well as to earn revenue and revenues. Tenants are generally responsible for the entire cost of expenses. This includes repairs, construction, renovations, improvements taxes as well as insurance and cost of financing that are associated with the property.
An example of a ground Lease
Ground leases are typically used by franchises as well as big box stores, and other commercial enterprises. Corporate headquarters usually acquire the land, and permit the developer or tenant to construct and run the building. There’s a high likelihood that there’s a McDonald’s, Starbucks, or Dunkin Donuts near you are legally bound by a lease.
In July of 2016, New York-based investment company AllianceBernstein bought 99-year-old ground lease BLDG Management of New York City’s George Washington Hotel for $100.4 million. BLDG initially purchased the hotel after it went into bankruptcy in the year 1994. While the hotel was operated by the New York-based School of Visual Arts as dormitories for students, BLDG filed plans in April 2016 to renovate the hotel, which includes a restaurant bar, and stores on the ground level. The hotel is currently operated in the form of the Freehand Hotel Boutique hotel located situated in the city’s Flatiron District.
The fundamentals of any ground lease comprise:
- The terms of the lease
- Rights of both landlord and the tenant
- Conditions of the financing
- Use and use provisions
- Fees
- Title insurance
- In default
Subordinated with. Subordinated Ground Leases
The ground lease tenants usually finance improvements through contracting debt. In a subordinated lease, the landlord is bound by less priority in claims against the property in the event that the tenant fails to pay the loan to finance improvements. This means that the subordinated ground lease-landlord permits the deed to be used as collateral in case in the event of a tenant’s default on an improvement-related loan. In this kind in ground leases, the tenant could agree to higher rent in exchange for the risk that is taken in the event of a tenant’s default. This could also benefit the landlord as building an addition on his property can increase the value of the property.
A subordinated ground lease allows the landlord to keep the first priority claims against the property in the event that the tenant fails to pay the loan for improvement. Since the lender is not able to be able to take possession of the land in the event that the loan is not paid and loan specialists may be reluctant to grant an investment loan to finance improvements. Even though the landlord is still the owner to the house, they generally need to pay the tenant a lesser rate of rent.
Benefits and disadvantages of the ground lease
A ground lease is beneficial to both the tenant and landlord.
Tenant Benefits
The ground lease allows tenants build on land in an ideal location that they cannot buy. Because of this, big chain stores like Whole Foods and Starbucks often employ ground leases in their plans for corporate expansion.
A ground lease does not need the tenant to make an down amount to secure the land, which buying the property requires. Thus, there is less equity needed to acquire the ground lease, which allows cash to be used for other reasons and boosts the return on the land.
The rents you pay on the ground lease can be deducted for federal and state income taxes that means a reduction in the total tax burden.
Landlord Benefits
The landowner receives a regular stream of rent from the tenant while still owning the property. A ground lease usually includes an an escalation clause which guarantees an increase in rent, as well as Eviction rights that offer protection in the event of non-payment of rent or other costs.
Tax savings are also available for landlords using ground leases. If they decide to sell their the property they own to tenants in full they can get a profit from the sale. When they sign this kind contract, the tenant will do not have to worry about needing to declare any gains. There could be tax consequences on the rent they get.
In accordance with the provisions incorporated in the ground lease the landlord could also have the ability to maintain an amount of control on the properties, including the way it is used and the way in which it is constructed. This means that the landlord will be able to accept or deny any modifications to the property.
Tenant Disadvantages
As landlords can require permission prior to any changes being made tenants may face difficulties in the usage or improvement on the premises. In the end, there could be more restrictions, and less flexibility for tenants.
The costs that are incurred through the process of obtaining a ground lease could be more expensive as compared to if the tenant was to buy the property. Costs for rent, taxes and improvements, as well as permits and any wait time for approval from the landlord are all costly.
Landlord disadvantages
Landlords who fail to include the correct clauses and provisions in their leases are likely to lose control over tenants whose properties are subject to the process of development. This is the reason it’s crucial for both parties examine their leases before signing.
The location of the property is situated, having a lease on a ground may result in higher tax consequences for landlords. While they might not make gains from selling the rent is considered to be income. Therefore, rent is taxed at an ordinary rate, which could make it more tax-efficient.
