Ground Lease

Updated on January 3, 2024
Article byMilan Jha
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Ground Lease?

A ground lease is a kind of lease where the lease agreement is written in such a way that the property’s tenant will be authorized to do all the necessary developments during the lease period. Then the property will be handed over to the property owner, including the developments and changes the tenant has made during the lease period.

Ground Lease

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Thus, in such a case, the tenant, who is using the property can have the authority to do any kind of change. However, in the end of the lease, everything goes back to the property owner. The owner ultimately get the value of all the improvements. This benefits the landlord because they can now dispose off the property at a much higher price due to renovation and changes.

Ground Lease Explained

The ground lease agreement is a typical type of lease in which the piece of land is kept on lease to the tenants, and tenants must make all the necessary changes they want to incorporate during their lease term. Then, at the end of the lease period, the entire property is handed over to the owners, along with all the improvements and developments.

In some aspects, it is beneficial for the tenant and the owner, and in some respects, it is not. Therefore, the parties willing to get themselves indulged in this type of agreement must carefully read and understand all the lease terms and its effects in the future.

A ground lease agreement is generally associated with freehold properties, say a piece of land. In this leaseLeaseLeasing is an arrangement in which the asset's right is transferred to another person without transferring the ownership. In simple terms, it means giving the asset on hire or rent. The person who gives the asset is “Lessor,” the person who takes the asset on rent is “Lessee.”read more, the tenant who uses the property can make changes and improvements for their benefit, which will be handed over to the landlord with all the improvements and changes made after the lease period.

It is a source of income for the landlords since they are getting improved and renovated piece of land, which they have provided earlier to the tenants. It is also known as economic rentEconomic RentEconomic rent is the amount paid to the owner of a factor of production in excess of the cost that must be incurred in order to use such factors in the production process. It is the amount paid for goods that were not produced.read more. It has been witnessed that this type of long term ground lease agreement is generally made when the lease period is for a long time, for example, 50-60 years or more.

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Types

There are two types of real estate ground lease one is Subordinated and unsubordinated.

  • Subordinated Ground Lease – It is a type of lease where the owner gets all the benefits from the repair and maintenance done by the tenants. The land owner will have less claiming power in this type of lease.
  • Unsubordinated Ground Lease – It is a lease where the landowner will enjoy maximum claiming power. The claiming power is regarding the loan which the tenants usually take to make all the improvements in the property during their stay on the lease period agreed. The owner can easily claim the refund if the tenants are found defaulters

Example

Many big corporations purchase the piece of land in big cities and then push that on lease to the tenant. The tenants, in this case, who are also big brands, come to the owners and finalize one agreement. So the ground lease agreement is done for big property and big businesses.

Mike has received a piece of land on his marriage from his parents, and it was an agricultural land located in some isolated place. Mike is working somewhere in the city, so it was challenging for him to look after the agricultural land. He has decided to put the land on lease for some 10 years and will sit back and enjoy the returns also he will avail the tax benefitsAvail The Tax BenefitsTax benefits refer to the credit that a business receives on its tax liability for complying with a norm proposed by the government. The advantage is either credited back to the company after paying its regular taxation amount or deducted when paying the tax liability in the first place.read more from the leased land at the year-end.

Advantages

Disadvantages

Ground Lease Vs Fee Simple

  1. In commercial ground lease, a rent has to be paid to the lessor, whereas in case of fee simple, no rent is required.
  2. For ground lease, the ownership rests with the lessor, but in case of fee simple, the party to whom the property is transfers has the full right on it.

This article has been a guide to what is Ground Lease. We explain its differences with fee simple, along with example, types, advantages and disadvantages. You can more about finance from the following articles –