Ground Lease

Ground Lease Definition

A 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. Then the property will be handed over to the property owner, including the developments and changes the tenant has made during the period of the lease.

Explanation

A ground lease is generally associated with the 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, 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.

Ground Lease

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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 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 for the refund in case the tenants are found, defaulter.

Example of Ground Lease

Many big corporates 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. Mike is working somewhere in the city and therefore 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 benefits from the leased land at the year-end.

Advantages

Disadvantages

  • The most significant 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 indexation may vary at the time of computing tax implication.

Conclusion

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 aspects, 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 article has been a guide to Ground Lease and its definition. Here we discuss how does ground lease work with its types, for example, advantages and disadvantages. You can more about finance from the following articles –