Commercial Ground LeasesReal Estate Influence
August 21, 2012 — 1,007 views
There are issues associated with any ground lease transaction, and property owners and tenants alike should be aware of these legal concerns to make sure they don't create insurmountable problems down the line. The characteristics of ground leases vary from case to case, and while Americans may be more aware of the practices involved in the purchase and sale of real property, a significant portion of improved land in the United States is built on ground-leased land.
A ground lease is a long-term tenancy of unimproved land or previously developed property that may require the tenant to construct new improvements over the course of the agreement. The terms of the lease typically last between 50 and 99 years, and often no less than 30 years. The tenant holds ownership of all improvements during the lease, and the renter also has the obligation to pay associated expenses to the property, aside from the mortgage and landlord's fee interest.
There are many reasons why parties may enter a ground-lease transaction, rather than opt for a purchase and sale. However, the advantages differ for the landowner and the tenant.
The owner benefits because he or she retains legal title to the property, meaning he or she is able to sell the land once the ground lease terms are over. Additionally, the owner avoids the risks associated with the development of the real property, and he or she may also miss replatting or subdivision laws.
On the other hand, a tenant may also seek a ground lease for many different reasons. A renter avoids the large up-front cash payment required to purchase property, and the deal allows the tenant to use a line of credit to improve the property. Furthermore, ground rent is deductible as an ordinary business expense.
However, there are also disadvantages to be aware of. For example, long-term agreements prevent landowners from using their property, and tenants are dealt significant financial commitments over an extended period of time. While a ground lease can provide both a tenant and a landowner with significant gains over the course of the agreement, each professional needs to make sure he or she has the right funds in place to afford and maintain such a complicated relationship. Otherwise, legal issues may plague the deal, and the benefits will dwindle exponentially.