Ground Lease Definition
Ground lease is a kind of lease where the lease agreement is written in such a way that the tenant of the property will be authorized to do all the necessary developments during the lease period and then the property will be handed over to the property owner including the developments and changes the tenant has made during the period of lease.
Ground lease is generally associated with the freehold properties, say a piece of land. In this type of lease, the tenant who uses the property can make changes and improvements for their own benefit, which, after the completion of the lease period, will be handed over to the landlord with all the improvements and changes made.
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 rent. It has been witnessed that this type of ground lease agreement is generally made when the lease period for a long time; for example, 50-60 years or more.
Types of Ground Lease
There are two types of Ground Lease one is Subordinated and unsubordinated.
- Subordinated Ground Lease – It is a type of lease where the owner gets all the benefits derived from the repair and maintenance done by the tenants. The owner of the land will have a less claiming power in this type of lease.
- Unsubordinated Ground Lease – It is a type of lease where the landowner will enjoy maximum claiming power. The claiming power is in regard to 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 for the refund in case the tenants are found, defaulter.
Example of Ground Lease
There are many big corporates who purchase the piece of land in any 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. 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 which is located in some isolated place and Mike is working somewhere in the city and therefore it was very difficult 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 benefits from the leased land at the year-end.
- The ground lease is a good source of return on investment when it comes to the owner of the property. The land which the owner gives on a lease will always be appreciated also if it is located in prime area then the premium appreciation will be there. The owner of the land will be much benefited with this type of lease agreement.
- It helps the tenants from the market fluctuation since the lease payments and the terms are predefined the tenants will not have to rethink according to the market condition. The lease is somewhat fixed and it gets raised according to the agreement which is irrespective of the market condition.
- The biggest advantage is that it has a huge tax advantage for both the owner and the tenants. The tenants don’t have to pay taxes on the lease also they get the deduction for the rent they are paying. On the other hand, the landowner will not have to pay any property tax in some cases if the property is under Municipal Corporation or very less property tax if it is private.
- It is also beneficial for the financial aspect also the tenants can invest in a piece of land to develop for their business and don’t have to invest money to buy the property which is very costly.
- In case of a ground lease, the tenants are not required to make any down payments for confirming the deal the way we used to do in case of purchasing any property. Therefore it has been seen that less equity is involved in the case of a ground lease.
- The biggest and most prominent disadvantage of the ground lease is that the owner of the property may have less control in regard to the improvements and developments which tenants make.
- Sometimes it is also seen that the tenants are required to seek some approvals if they require making any improvements or changes and therefore at times it becomes a roadblock for the tenants to think of the improvements and necessary changes.
- There can be tax complications because the cost of the land and the improvements indexation may vary at the time of computing tax implication.
The ground lease is a typical type of lease in which the piece of land is kept on lease to the tenants and tenants are required to make all the necessary changes they want to incorporate during their lease term. 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 aspect it is beneficial for the tenant and the owner and in some respect it is not. The parties who are 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.
This has been a guide to Ground Lease and its definition. Here we discuss how does ground lease work with its types, example, advantages, and disadvantages. You can more about finance from the following articles –