When leasing a commercial residential or commercial property, there are a variety of different types of industrial leases one could experience. In many cases occupants might be searching for a residential or commercial property they can build on and create improvements that fit their specific needs. If this is the case, then a ground lease might be the best option.

A ground lease is a type of lease contract in which the renter rents a piece of land and is permitted to develop that residential or commercial property throughout the period of the lease. During the lease term, the renter owns any buildings, developments or improvements made on the land. Once the lease ends, the land and any construction or enhancements on that land end up being the residential or commercial property owner's. Usually, ground leases are long-lasting, with a lease duration between 20 to 99 years, stated Scott Miller, Senior Director of Land Services, and Jeff Peden, Executive Managing Director of Land Services at Transwestern. Ground leases are generally net leases, they included, in which the tenant is accountable for paying residential or commercial property taxes, insurance coverage and maintenance.

What's the Difference Between a Subordinated vs Unsubordinated Ground Lease?

There are 2 kinds of ground leases: subordinated and unsubordinated. The distinction in between the two pertains to what happens if the occupant is dealing with financial difficulty during the term of the lease.

Subordinated Ground Lease

With a subordinated ground lease, the proprietor consents to be a lower concern with regards to any other funding acquired on the residential or commercial property. If a tenant takes out a loan to build on the land and after that defaults on the loan, the loan provider can pursue the residential or commercial property, including the land, as security. For circumstances, a tenant who signs a subordinated ground lease may take out a loan for $400,000 to construct a retail residential or commercial property. However, if that tenant faces monetary problem and is not able to make loan payments, the lending institution can go after the building and the land.

"Typically, this is done to help with financial obligation funding to construct buildings on the residential or commercial property," Miller and Peden said. In many cases with a subordinated ground lease, the landlord may require higher lease payments because they're taking on some quantity of danger.

Unsubordinated Ground Lease

With an unsubordinated ground lease, the landlord retains higher priority than the loan provider. Lenders are not able to foreclose on the land or use it as security if an occupant is not able to make their loan payments. Rather, if the occupant defaults on the loan, the lending institution can only pursue their service assets. Some lenders may hesitate to offer a mortgage to tenants who have actually signed an unsubordinated ground lease. Because of this added trouble for the tenants, property owners will normally charge lower lease.

Benefits and drawbacks of Ground Leases for Tenants

Like all leases, ground leases feature their benefits and downsides, for both tenants and property owners. For tenants, the benefits and drawbacks might differ depending on what you're looking for in a commercial residential or commercial property.

Location: With a ground lease, renters can develop a residential or commercial property in a place of their picking, without being bound to pre-existing structures in an area that may not be perfect for their specific business needs.


Lower Taxes: For both federal and state taxes, the lease paid on a ground lease is tax deductible. The tenant is paying less taxes than they would be if they just purchased the land.


No Deposit: With a land purchase, the renter would be paying a large down payment to purchase the land, after which they would still require to construct on that land. However, with a ground lease, there is no downpayment, and more cash can go towards building on the land instead.


Reduced Lease Payments: If the renter were renting both the land and the structure, then lease payments would be much higher. With a ground lease, the tenant is making lower regular monthly payments.


Building Customization: When renting an already existing space, the tenant is not able to tailor the structure to fit their specific needs. However, with a ground lease, renters are only leasing the land and can customize the residential or commercial property as they choose.

Some Higher Costs: Developing a residential or commercial property is costly, and although occupants are able to personalize their structure as they please, sometimes the monetary costs may exceed those advantages.


Doesn't Retain Ownership After the Lease Expires: After putting money and time into developing a residential or commercial property and making improvements, the tenant will need to give up ownership of the residential or commercial property once the lease expires, if they pick not to restore the lease. At that point, the landowner stands to profit from the enhancements the renter made.


Responsible for Fees: The renter has to pay residential or commercial property taxes, insurance coverage and maintenance expenses on the residential or commercial property for the term of the lease.

Benefits and drawbacks of Ground Leases for Landlords

For proprietors, a ground lease might be advantageous for a variety of factors, but of course it features both advantages and disadvantages.

Lower Taxes: With a ground lease, landlords do not need to report any capital gains as they would with a land sale. On top of that, the tenant is accountable for residential or commercial property taxes.


Steady Income: Landlords have the advantage of receiving regular monthly rent on the land, thus giving them a constant income stream. In addition, numerous ground leases likewise include an escalation clause, which ensures a lease increase and eviction rights in the case of a renter defaulting on payments.


Retains Ownership of Improvements: After the lease duration ends, the property owner keeps ownership of any improvements made on the land and can therefore offer the residential or commercial property at a profit.

Lack of Control: In the situation where a landlord does not include particular stipulations in the lease, they may not have any say in what the occupant finishes with the land.


Higher Income Tax: Although a property owner will not need to pay capital gains taxes, the lease they receive from the occupant counts as income, therefore they will have to pay higher income taxes.

In Houston last June, Peden and Miller worked out a 20-year, 2.64-acre ground lease for a new automobile dealer. The land was leased to Grubbs Automotive, with strategies to convert the existing structures into a brand-new Volvo automotive dealer. In this example, Grubbs Automotive is renting the land however has the liberty to construct brand-new residential or commercial properties and make improvements on the land and any existing structures as they see fit. Once the lease term ends, if they do not restore, then all of those enhancements end up being the residential or commercial property of the property manager.

What's the Difference Between a Ground Lease vs Leasehold?

A leasehold estate is extremely comparable to a ground lease, in that with a leasehold estate, the physical structures are owned by the renter, and the land is owned by another party, from which the occupant is renting. The party that is leasing the land from the landowner can utilize the land throughout of the lease. When the lease ends, the structure and any improvements end up being residential or commercial property of the landowner, comparable to a ground lease. See likewise appurtenance.

However, according to Miller and Peden, "With a ground lease, you essentially have the rights as an owner of the land and the residential or commercial property or structures that are on it for the period that has been accepted. With a leasehold, there is an arrangement between the owner of the residential or commercial property and the lessee with typically more restrictions on the lessee on what can be made with the residential or commercial property." Essentially, leasehold arrangements include more limitations than ground leases however are otherwise relatively comparable.

Is a Ground Lease Right for You?

While a ground lease features its benefits and disadvantages for both the renter and the property manager, it is essential to understand what you're looking for in a rental arrangement before selecting a kind of lease. Ground leases are beneficial since of their durability and guaranteed earnings for property managers. And for occupants, ground leases permit you to construct a residential or commercial property that fits your customized needs. However, there are numerous different lease structures. Before picking what fits your requirements, make sure to do your due diligence and discover about the different types of business leases in presence.