When leasing an industrial residential or commercial property, there are a variety of different kinds of business leases one could experience. Sometimes tenants might be trying to find a residential or commercial property they can develop on and create enhancements that fit their particular needs. If this holds true, then a ground lease might be the finest choice.

A ground lease is a kind of lease contract in which the occupant rents a piece of land and is permitted to establish that residential or commercial property during the duration of the lease. During the lease term, the renter owns any structures, advancements or enhancements made on the land. Once the lease ends, the land and any construction or enhancements on that land become the residential or commercial property owner's. Usually, ground leases are long-lasting, with a lease duration in 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 usually net leases, they included, in which the occupant is accountable for paying residential or commercial property taxes, insurance 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 two relates to what occurs if the renter is handling monetary trouble during the term of the lease.

Subordinated Ground Lease

With a subordinated ground lease, the property manager agrees to be a lower top priority with concerns to any other financing obtained on the residential or commercial property. If a tenant takes out a loan to build on the land and then defaults on the loan, the lending institution can go after the residential or commercial property, including the land, as security. For circumstances, an occupant who signs a subordinated ground lease may take out a loan for $400,000 to build a retail residential or commercial property. However, if that renter encounters monetary difficulty and is unable to make loan payments, the lender can go after the building and the land.

"Typically, this is done to help with financial obligation financing to build structures on the residential or commercial property," Miller and Peden stated. Oftentimes with a subordinated ground lease, the property manager may need greater rent payments because they're taking on some quantity of danger.

Unsubordinated Ground Lease

With an unsubordinated ground lease, the proprietor keeps higher top priority than the lender. Lenders are unable to foreclose on the land or use it as collateral if an occupant is not able to make their loan payments. Rather, if the occupant defaults on the loan, the lending institution can just pursue their service assets. Some lenders might be unwilling to offer a mortgage to tenants who have signed an unsubordinated ground lease. Because of this added difficulty for the occupants, proprietors will typically charge lower rent.

Pros and Cons of Ground Leases for Tenants

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

Location: With a ground lease, occupants can construct a residential or commercial property in a location of their choosing, without being bound to pre-existing buildings in an area that may not be perfect for their particular organization requirements.


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 just acquired the land.


No Down Payment: With a land purchase, the renter would be paying a big deposit 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 approach structure on the land rather.


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


Building Customization: When leasing a currently existing area, the tenant is not able to personalize the building to fit their specific requirements. However, with a ground lease, tenants are only leasing 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 occupants are able to customize their structure as they please, often the monetary expenses may exceed those benefits.


Doesn't Retain Ownership After the Lease Expires: After putting cash and time into building a residential or commercial property and making improvements, the renter will have to quit ownership of the residential or commercial property once the lease ends, if they select not to renew the lease. At that point, the landowner stands to profit from the improvements the renter made.


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

Advantages and disadvantages of Ground Leases for Landlords

For property managers, a ground lease could be advantageous for a variety of reasons, but naturally it includes both advantages and disadvantages.

Lower Taxes: With a ground lease, proprietors do not need 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 benefit of receiving month-to-month rent on the land, therefore approving them a consistent income stream. In addition, lots of ground leases also consist of an escalation provision, which ensures a rent increase and eviction rights when it comes to a tenant defaulting on payments.


Retains Ownership of Improvements: After the lease period ends, the property manager maintains ownership of any enhancements made on the land and can therefore sell the residential or commercial property at a profit.

Lack of Control: In the scenario where a property manager doesn't consist of particular provisions in the lease, they might not have any say in what the tenant does with the land.


Higher Income Tax: Although a property owner will not need to pay capital gains taxes, the rent they get from the renter counts as earnings, therefore they will need to pay higher earnings taxes.

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

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

A leasehold estate is extremely similar to a ground lease, in that with a leasehold estate, the physical structures are owned by the tenant, and the land is owned by another celebration, from which the occupant is renting. The party that is renting the land from the landowner deserves to use the land for the duration of the lease. When the lease ends, the building and any improvements become 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 buildings that are on it for the period that has actually been concurred to. With a leasehold, there is an arrangement in between the owner of the residential or commercial property and the lessee with normally more restrictions on the lessee on what can be made with the residential or commercial property." Essentially, leasehold arrangements feature more restrictions than ground leases however are otherwise fairly comparable.

Is a Ground Lease Right for You?

While a ground lease features its benefits and drawbacks for both the renter and the landlord, it's essential to understand what you're trying to find in a rental contract before choosing on a type of lease. Ground leases are advantageous since of their durability and surefire income for proprietors. And for occupants, ground leases enable you to build a residential or commercial property that fits your custom-made requires. However, there are lots of various lease structures. Before picking what fits your requirements, ensure to do your due diligence and find out about the different types of business leases out there.