When leasing a commercial residential or commercial property, there are a variety of various kinds of business leases one might encounter. In some cases occupants might be trying to find a residential or commercial property they can develop on and create improvements that fit their particular requirements. If this is the case, then a ground lease might be the very best option.

A ground lease is a type of lease arrangement in which the tenant leases a piece of land and is allowed to establish that residential or commercial property throughout the duration of the lease. During the lease term, the occupant owns any buildings, advancements or enhancements made on the land. Once the lease ends, the land and any construction or improvements on that land become the residential or commercial property owner's. Usually, ground leases are long-lasting, with a lease period between 20 to 99 years, said 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 added, in which the renter 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 two kinds of ground leases: subordinated and unsubordinated. The difference in between the 2 has to do with what takes place if the tenant is dealing with financial difficulty during the regard to the lease.

Subordinated Ground Lease

With a subordinated ground lease, the landlord agrees to be a lower concern with concerns to any other financing gotten on the residential or commercial property. If an occupant secures a loan to construct on the land and then defaults on the loan, the lending institution can go after the residential or commercial property, including the land, as collateral. For example, a renter who signs a subordinated ground lease might take out a loan for $400,000 to develop a retail residential or commercial property. However, if that tenant encounters monetary difficulty and is unable to make loan payments, the lending institution can go after the building and the land.

"Typically, this is done to help with financial obligation financing to build buildings on the residential or commercial property," Miller and Peden stated. Oftentimes with a subordinated ground lease, the landlord may require higher lease payments since they're taking on some amount of risk.

Unsubordinated Ground Lease

With an unsubordinated ground lease, the property manager maintains higher concern than the lender. Lenders are not able to foreclose on the land or use it as collateral if a tenant is not able to make their loan payments. Rather, if the renter defaults on the loan, the lending institution can only pursue their service properties. Some loan providers may be reluctant to provide a mortgage to renters who have signed an unsubordinated ground lease. Because of this added problem for the tenants, property managers will typically charge lower rent.

Advantages and disadvantages of Ground Leases for Tenants

Like all leases, ground leases feature their advantages and disadvantages, for both tenants and landlords. For occupants, the benefits and drawbacks might vary depending upon what you're looking for in a business residential or commercial property.

Location: With a ground lease, tenants can build a residential or commercial property in a location of their choosing, without being bound to pre-existing buildings in a place that may not be perfect for their particular business needs.


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


No Down Payment: With a land purchase, the renter would be paying a big down payment to purchase the land, after which they would still need to build on that land. However, with a ground lease, there is no downpayment, and more cash can approach structure on the land rather.


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 renter is making lower month-to-month payments.


Building Customization: When renting an already existing area, the occupant is unable to customize the structure to fit their specific requirements. However, with a ground lease, tenants are just renting the land and can personalize the residential or commercial property as they please.

Some Higher Costs: Developing a residential or commercial property is costly, and although renters have the ability to tailor their building as they choose, sometimes the monetary costs might 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 enhancements, the tenant will need to provide up ownership of the residential or commercial property once the lease ends, if they pick not to renew the lease. At that point, the landowner stands to make money from the enhancements the occupant made.


Responsible for Fees: The occupant needs to pay residential or commercial property taxes, insurance and upkeep costs on the residential or commercial property for the regard to the lease.

Benefits and drawbacks of Ground Leases for Landlords

For landlords, a ground lease might be helpful for a number of factors, however obviously it comes with both benefits and downsides.

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


Steady Income: Landlords have the advantage of getting month-to-month rent on the land, consequently giving them a stable earnings stream. In addition, lots of ground leases also consist of an escalation stipulation, which ensures a rent boost and expulsion rights when it comes to a tenant defaulting on payments.


Retains Ownership of Improvements: After the lease period ends, the proprietor keeps ownership of any improvements made on the land and can therefore sell the residential or commercial property at a revenue.

Lack of Control: In the circumstance where a proprietor doesn't consist of specific stipulations in the lease, they might not have any say in what the tenant makes with the land.


Higher Income Tax: Although a landlord will not have to pay capital gains taxes, the lease they get from the occupant counts as earnings, therefore they will need to pay higher earnings taxes.

In Houston last June, Peden and Miller negotiated a 20-year, 2.64-acre ground lease for a brand-new automotive dealership. The land was rented to Grubbs Automotive, with plans to convert the existing structures into a brand-new Volvo vehicle dealership. In this example, Grubbs Automotive is renting the land however has the freedom to construct brand-new residential or commercial properties and make enhancements on the land and any existing structures as they choose. Once the lease term ends, if they do not renew, then all of those improvements end up being the residential or commercial property of the property owner.

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

A leasehold estate is very 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 deserves to use the land throughout of the lease. When the lease ends, the structure and any improvements become residential or commercial property of the landowner, similar to a ground lease. See likewise appurtenance.

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

Is a Ground Lease Right for You?

While a ground lease comes with its benefits and drawbacks for both the tenant and the property manager, it is essential to know what you're looking for in a rental arrangement before deciding on a kind of lease. Ground leases are useful since of their durability and guaranteed income for proprietors. And for tenants, ground leases enable you to develop a residential or commercial property that fits your custom needs. However, there are various lease structures. Before picking what fits your requirements, make certain to do your due diligence and discover the different kinds of business leases in presence.