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When renting an industrial residential or commercial property, there are a number of different types of commercial leases one might experience. Sometimes occupants may be looking for a residential or commercial property they can construct on and create improvements that fit their particular needs. If this is the case, then a ground lease may be the very best option.

A ground lease is a kind of lease arrangement in which the renter leases a piece of land and is permitted to develop that residential or commercial property throughout the period of the lease. During the lease term, the renter owns any structures, developments or enhancements made on the land. Once the lease ends, the land and any construction or improvements on that land end up being the residential or commercial property owner's. Usually, ground leases are long-term, with a lease period 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 generally net leases, they included, in which the occupant is accountable for paying residential or commercial property taxes, insurance and upkeep.
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What's the Difference Between a Subordinated vs Unsubordinated Ground Lease?

There are two kinds of ground leases: subordinated and unsubordinated. The distinction between the 2 involves what occurs if the tenant is handling financial trouble throughout the regard to the lease.

Subordinated Ground Lease

With a subordinated ground lease, the proprietor consents to be a lower concern with concerns to any other funding gotten on the residential or commercial property. If a renter secures a loan to construct on the land and after that defaults on the loan, the lender can go after the residential or commercial property, including the land, as collateral. For example, a renter who signs a subordinated ground lease might secure a loan for $400,000 to build a retail residential or commercial property. However, if that renter encounters monetary problem and is not able to make loan payments, the lending institution can go after the structure and the land.

"Typically, this is done to help with financial obligation financing to construct structures on the residential or commercial property," Miller and Peden stated. In many cases with a subordinated ground lease, the property manager may require greater lease payments due to the fact that they're taking on some quantity of risk.

Unsubordinated Ground Lease

With an unsubordinated ground lease, the landlord keeps greater concern than the lender. Lenders are not able to foreclose on the land or utilize it as security if an occupant is unable to make their loan payments. Rather, if the occupant defaults on the loan, the lending institution can just go after their company assets. Some lenders might be reluctant to provide a mortgage to occupants who have signed an unsubordinated ground lease. Because of this included difficulty for the renters, property managers will generally charge lower lease.

Benefits and drawbacks of Ground Leases for Tenants

Like all leases, ground leases come with their benefits and disadvantages, for both occupants and landlords. For occupants, the benefits and drawbacks may differ depending on what you're trying to find 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 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 just the land.
No Deposit: With a land purchase, the renter would be paying a large deposit to buy the land, after which they would still need to develop on that land. However, with a ground lease, there is no downpayment, and more cash can go towards building on the land rather.
Reduced Lease Payments: If the tenant were leasing both the land and the structure, then lease payments would be much greater. With a ground lease, the renter is making lower month-to-month payments.
Building Customization: When leasing a currently existing space, the occupant is not able to tailor the building to fit their particular needs. However, with a ground lease, tenants are just leasing the land and can tailor 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 tailor their structure as they see healthy, sometimes the monetary costs may outweigh those advantages.
Doesn't Retain Ownership After the Lease Expires: After putting cash and time into developing a residential or commercial property and making improvements, the occupant will have to give up ownership of the residential or commercial property once the lease expires, if they select not to renew the lease. At that point, the landowner stands to benefit from the enhancements the renter made.
Responsible for Fees: The occupant needs to pay residential or commercial property taxes, insurance and maintenance expenditures on the residential or commercial property for the regard to the lease.

Benefits and drawbacks of Ground Leases for Landlords

For property owners, a ground lease might be advantageous for a variety of factors, but of course it features both benefits and disadvantages.

Lower Taxes: With a ground lease, property managers do not have to report any capital gains as they would with a land sale. On top of that, the tenant is responsible for residential or commercial property taxes.
Steady Income: Landlords have the benefit of getting regular monthly rent on the land, thereby giving them a stable earnings stream. In addition, lots of ground leases also consist of an escalation stipulation, which ensures a lease boost and expulsion rights when it comes to an occupant defaulting on payments.
Retains Ownership of Improvements: After the lease duration ends, the property owner keeps ownership of any enhancements made on the land and can for that reason sell the residential or commercial property at a revenue.

Lack of Control: In the scenario where a landlord does not include specific clauses in the lease, they might not have any say in what the renter does with the land.
Higher Income Tax: Although a property manager won't need to pay capital gains taxes, the rent they get from the tenant counts as earnings, and so they will have to pay greater income taxes.

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

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 renter, and the land is owned by another party, from which the tenant is leasing. The party that is renting the land from the landowner has the right to use the land for the period 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 been accepted. With a leasehold, there is an agreement 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 arrangements come with more restrictions than ground leases but are otherwise relatively similar.

Is a Ground Lease Right for You?

While a ground lease features its benefits and drawbacks for both the occupant and the proprietor, it is very important to understand what you're looking for in a rental contract before selecting a kind of lease. Ground leases are beneficial because of their durability and surefire income for landlords. And for tenants, ground leases enable you to build a residential or commercial property that fits your custom-made requires. However, there are various lease structures. Before choosing on what fits your requirements, make sure to do your due diligence and find out about the various types of industrial leases in presence.
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