When leasing a business residential or commercial property, there are a number of various types of business leases one could come across. In many cases renters might be looking for a residential or commercial property they can build on and create improvements that fit their specific needs. If this holds true, then a ground lease might be the very best choice.

A ground lease is a type of lease contract in which the occupant leases a piece of land and is allowed to develop that residential or commercial property during the period of the lease. During the lease term, the tenant owns any buildings, advancements or improvements made on the land. Once the lease ends, the land and any building and construction or improvements on that land become the residential or commercial property owner's. Usually, ground leases are long-lasting, with a lease duration 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 normally net leases, they included, in which the tenant is accountable for paying residential or commercial property taxes, insurance and upkeep.

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 has to do with what happens if the renter is dealing with monetary difficulty during the term of the lease.

Subordinated Ground Lease

With a subordinated ground lease, the property manager accepts be a lower top priority with regards to any other funding gotten on the residential or commercial property. If a tenant secures a loan to develop on the land and then defaults on the loan, the lender can go after the residential or commercial property, consisting of the land, as security. For example, an occupant who signs a subordinated ground lease may take out a loan for $400,000 to develop a retail residential or commercial property. However, if that tenant encounters monetary trouble and is unable to make loan payments, the loan provider can go after the building and the land.

"Typically, this is done to help with debt funding to construct structures on the residential or commercial property," Miller and Peden said. In lots of cases with a subordinated ground lease, the property manager might need greater lease payments since they're handling some amount of risk.

Unsubordinated Ground Lease

With an unsubordinated ground lease, the property manager keeps greater top priority than the lender. Lenders are unable to foreclose on the land or use it as security if an occupant is unable to make their loan payments. Rather, if the tenant defaults on the loan, the lending institution can only go after their company assets. Some lending institutions may be reluctant to provide out a mortgage to occupants who have actually signed an unsubordinated ground lease. Because of this added trouble for the occupants, property owners will typically charge lower lease.

Pros and Cons of Ground Leases for Tenants

Like all leases, ground leases come with their benefits and downsides, for both occupants and landlords. For renters, the advantages and disadvantages might differ depending on what you're trying to find in a commercial residential or commercial property.

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


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 merely acquired the land.


No Down Payment: With a land purchase, the renter would be paying a big deposit to buy 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 toward structure on the land instead.


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


Building Customization: When renting an already existing space, the tenant is not able to customize the building to fit their particular requirements. However, with a ground lease, tenants are just 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 tenants have the ability to personalize their building as they please, in some cases the financial costs may surpass those benefits.


Doesn't Retain Ownership After the Lease Expires: After putting cash and time into developing a residential or commercial property and making enhancements, the occupant will have to give up ownership of the residential or commercial property once the lease ends, if they choose not to restore the lease. At that point, the landowner stands to benefit from the enhancements the occupant made.


Responsible for Fees: The renter has to pay residential or commercial property taxes, insurance and maintenance expenditures on the residential or commercial property for the regard to the lease.

Pros and Cons of Ground Leases for Landlords

For proprietors, a ground lease might be advantageous for a number of reasons, however naturally it includes both advantages and downsides.

Lower Taxes: With a ground lease, proprietors do not have 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 getting monthly rent on the land, consequently giving them a stable earnings stream. In addition, lots of ground leases also consist of an escalation clause, which guarantees a rent increase and expulsion rights in the case of a tenant defaulting on payments.


Retains Ownership of Improvements: After the lease period ends, the property manager retains ownership of any improvements made on the land and can for that reason sell the residential or commercial property at a profit.

Lack of Control: In the circumstance where a proprietor does not consist of certain stipulations in the lease, they may not have any say in what the occupant does with the land.


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

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

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

A leasehold estate is very similar to a ground lease, because with a leasehold estate, the physical structures are owned by the occupant, and the land is owned by another celebration, from which the renter is renting. The party that is renting the land from the landowner deserves to utilize the land for the duration of the lease. When the lease ends, the building and any improvements end up being 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 period 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 finished with the residential or commercial property." Essentially, leasehold agreements come with more restrictions than ground leases however are otherwise relatively comparable.

Is a Ground Lease Right for You?

While a ground lease features its advantages and downsides for both the tenant and the property manager, it's crucial to understand what you're searching for in a rental contract before deciding on a type of lease. Ground leases are beneficial because of their longevity and guaranteed earnings for property owners. And for occupants, ground leases enable you to build a residential or commercial property that fits your custom requires. However, there are lots of different lease structures. Before choosing what fits your requirements, make certain to do your due diligence and learn more about the various kinds of business leases out there.