Wondering what is a ground lease? Generally, a ground lease is an agreement that provides a tenant the freedom to use a piece of property. Even though other people or parties are using the land, the property owner will be beneficial after all. That’s because all the improvements will be turned back to the owner.
In this article, we are going to cover what is a ground lease, the pros and cons of the ground lease to everything in between. So let’s read on together.
Table of Contents
Ground Lease Definition
The simple ground lease definition is when a tenant or lessee pays rent for using a piece of land while he can modify the property is known as a ground lease. Both parties go through an agreement and use the property for a certain period of time.
Meanwhile, if the lessee has done any modification to the property will be turned to the owner.
Anyhow, the specific agreements vary for both time frame and value. Whereas depending on the interests of both parties, the outcome can go several ways. It was the answer to what is a ground lease.
Nevertheless, the ground lease involves the following essential aspects. Such as:-
- Use provisions
- Financing conditions
- Default conditions
- Rights of the landlord
- Rights of the tenant
- Terms of the lease
- Title insurance
When an agreement includes these things, both parties can go for the lease contract. Hopefully, you get a clear idea of the ground lease definition. Now, let’s discuss the types of the ground lease.
Types Of Ground Lease
As you already know, “what is a ground lease”; here are the types of the ground lease. Ground lease comes in two main types, subordinated and unsubordinated.
1. Subordinated Lease
When it comes to subordinated leases, it is very effortless to plan the permission plus other necessary financings. First, however, the landlord agrees in the subordinated lease that the bank could have the first claim.
That means they can take the lower priority in terms of the chain. And if anything goes wrong, the owner can claim a case against the lessee or tenant.
2. Unsubordinated Lease
This is a less risky agreement for the landowner, but it could be more difficult for the tenant when it comes to obtaining financing. That’s because the owner does not gain full control of their property since the tenants have a higher priority to claim the property.
The land owner cannot take full control of the property until the lease contract ends.
Pros Of Ground Lease
When you are thinking about what is a ground lease, you should also consider its pros. Here are the pros of a ground lease.
- Long-term leases: Usually, the ground lease is a long-term investment. It could last for 25 to 99 years, depending on the agreement.
- Prime locations: A tenant has the ability to build a property in a prime location which is a great advantage of the ground lease. You may often notice large chain stores are utilizing the ground lease to incorporate expansion plans.
- Ownership of the improvements: As a tenant, you can develop the property as if you owned the property. Usually, you would have the total ownership if the land required any improvements.
- Tax-deductible lease payments: The ground rent payments are deductible even though the lessee may be hooked for property taxes. And the contract will determine the unique terms for each lease.
Cons Of Ground Lease
For the landlords, the ground lease can pose certain risks also for the lessee. Here are the most common cons:-
- Less control: In the case of subordinated leases, the landowners have less power over the financial control. And on the implicit assumptions, most of the endeavor’s success depends.
- Higher income taxes: In the ground lease, the tenants must pay income tax since the rent payments count as income. So, this is a downside of the ground lease.
- Potential for failure: Ground leases could risk failure to lessors as with the financial endeavor. At some point, to pay off the lessor, the tenants cannot yield enough returns. The potential failure is for long-term contracts.
- Lower priority than lenders: In some cases, the lessor has a lower priority than the lenders. Even the leasehold mortgage lender may lose their land.
Since you know the pros and cons of the ground lease, let’s discuss two other factors, like what is lease abatement and what is a net lease in detail.
What Is Lease Abatement?
When you start to know “what is a ground lease”, other terms come thoroughly. You may also want to know what is lease abatement? Well, it is an agreement between the tenant and landlord that lets the tenant use the space without any rent. Sometimes, this is fantastic since the tenant does not need to pay rent to use the space.
And it’s an incredible idea if you can get a rent abatement when you negotiate any commercial real estate lease.
Still, if you are thinking of what is lease abatement, in short, the answer is; that until the landlord completes the property repairs, a tenant is suspended to rent payments.
What Is A Net Lease?
Now that you know what is a ground lease and what is lease abatement, let’s talk about the net lease.
So, what is a net lease? It is a contractual arrangement where the lessee pays a portion of insurance fees, maintenance costs, or taxes, including the rent. Usually, the term net lease is mostly used in commercial real estate.
Typically net lease comes in three types. These are single net lease, double net lease, and triple net lease.
Single net lease: When the tenant pays one expense category is known as a single net lease.
Double net lease: When a tenant pays two of the three expenses is called a double net lease or net-net lease.
Triple net lease: The tenant who pays all three expense categories is a triple net lease.
For both landowners and investors, the ground lease has many benefits. When the agreements are planned well and reviewed properly, both parties can be benefited.
Due to the rock solid income stream, the ground lease comes with a very low yield. Also, the income stream is very safe in the unsubordinated leases, plus they are superior to even the mortgage.
Hopefully, you have a clear definition of the ground lease, and if someone asks you the question “what is a ground lease,” you can explain it properly.