When leasing an industrial residential or commercial property, there are a variety of various kinds of industrial leases one could come across. Sometimes tenants might be trying to find a residential or commercial property they can build on and develop enhancements that fit their specific needs. If this is the case, then a ground lease may be the best choice.
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A ground lease is a type of lease contract in which the tenant leases a piece of land and is permitted to develop that residential or commercial property throughout the duration 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 construction or enhancements on that land end up being the residential or commercial property owner's. Usually, ground leases are long-term, 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 typically net leases, they included, in which the renter is accountable for paying residential or commercial property taxes, insurance coverage and upkeep.

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

There are 2 types of ground leases: subordinated and unsubordinated. The distinction between the 2 pertains to what happens if the renter is handling financial problem during the regard to 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 acquired on the residential or commercial property. If an occupant secures a loan to build on the land and then defaults on the loan, the loan provider can go after the residential or commercial property, consisting of the land, as collateral. For example, an occupant who signs a subordinated ground lease may secure a loan for $400,000 to build a retail residential or commercial property. However, if that tenant faces monetary trouble and is not able to make loan payments, the lender can go after the structure and the land.

"Typically, this is done to assist in financial obligation funding to build structures on the residential or commercial property," Miller and Peden said. In most cases with a subordinated ground lease, the property manager may require greater rent payments since they're handling some quantity of threat.

Unsubordinated Ground Lease

With an unsubordinated ground lease, the property manager maintains higher top priority than the lending institution. Lenders are unable to foreclose on the land or utilize it as security if a renter is unable to make their loan payments. Rather, if the tenant defaults on the loan, the lender can just go after their service assets. Some lending institutions might hesitate to offer a mortgage to occupants who have actually signed an unsubordinated ground lease. Because of this included problem for the occupants, proprietors will typically charge lower rent.

Pros and Cons of Ground Leases for Tenants

Like all leases, ground leases include their advantages and downsides, for both tenants and property owners. For occupants, the pros and cons might differ depending on what you're looking for in an industrial residential or commercial property.

Location: With a ground lease, occupants can construct a residential or commercial property in an area of their picking, without being bound to pre-existing structures in a location that might not be ideal for their specific service 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 Deposit: With a land purchase, the renter would be paying a big down payment to buy the land, after which they would still require to build on that land. However, with a ground lease, there is no downpayment, and more cash can go toward building on the land instead.
Reduced Lease Payments: If the tenant were leasing both the land and the building, then would be much greater. With a ground lease, the tenant is making lower regular monthly payments.
Building Customization: When leasing a currently existing space, the renter is not able to personalize the structure to fit their particular needs. However, with a ground lease, renters are only renting the land and can personalize the residential or commercial property as they choose.


Some Higher Costs: Developing a residential or commercial property is expensive, and although occupants are able to tailor their building as they please, often the financial costs may outweigh 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 occupant will need to give up ownership of the residential or commercial property once the lease ends, if they choose not to renew the lease. At that point, the landowner stands to benefit from the improvements the tenant made.
Responsible for Fees: The occupant has to pay residential or commercial property taxes, insurance and maintenance expenditures on the residential or commercial property for the term of the lease.


Pros and Cons of Ground Leases for Landlords

For property owners, a ground lease might be helpful for a number of factors, however naturally it features both benefits and downsides.

Lower Taxes: With a ground lease, property managers 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 benefit of receiving regular monthly rent on the land, thereby approving them a steady income stream. In addition, lots of ground leases also include an escalation provision, which ensures a rent increase and eviction rights in the case of an occupant 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 offer the residential or commercial property at a revenue.


Lack of Control: In the situation where a property manager does not consist of certain clauses 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 income, therefore they will need 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 vehicle dealership. The land was leased to Grubbs Automotive, with plans to convert the existing structures into a new Volvo automotive dealer. In this example, Grubbs Automotive is leasing the land but has the flexibility to build 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 restore, then all of those enhancements end up being the residential or commercial property of the proprietor.

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

A leasehold estate is really similar to a ground lease, because with a leasehold estate, the physical structures are owned by the tenant, and the land is owned by another party, from which the tenant is leasing. The celebration that is leasing the land from the landowner has the right to utilize the land throughout 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 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 been accepted. With a leasehold, there is an agreement between the owner of the residential or commercial property and the lessee with generally more restrictions on the lessee on what can be done with the residential or commercial property." Essentially, leasehold agreements come with more constraints than ground leases but are otherwise fairly comparable.
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Is a Ground Lease Right for You?

While a ground lease features its benefits and downsides for both the renter and the property manager, it's essential to understand what you're trying to find in a rental agreement before deciding on a kind of lease. Ground leases are advantageous due to the fact that of their longevity and guaranteed income for property owners. And for tenants, ground leases enable you to build a residential or commercial property that fits your custom requires. However, there are several lease structures. Before choosing on what fits your needs, ensure to do your due diligence and discover the various kinds of business leases in presence.