When leasing an industrial residential or commercial property, there are a number of various kinds of commercial leases one might come across. Sometimes renters might be looking for a residential or commercial property they can construct on and create enhancements that fit their specific requirements. If this is the case, then a ground lease might be the very best alternative.

A ground lease is a kind of lease contract in which the occupant leases a piece of land and is allowed to develop that residential or commercial property throughout the period of the lease. During the lease term, the occupant owns any buildings, advancements or enhancements made on the land. Once the lease ends, the land and any building 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 between 20 to 99 years, stated 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 renter 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 two kinds of ground leases: subordinated and unsubordinated. The distinction between the two relates to what occurs if the renter is dealing with financial difficulty throughout the term of 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 takes out a loan to develop on the land and after that defaults on the loan, the lending institution can go after the residential or commercial property, consisting of the land, as security. For example, a tenant who signs a subordinated ground lease might get a loan for $400,000 to develop a retail residential or commercial property. However, if that renter faces monetary problem and is unable to make loan payments, the lending institution can pursue the building and the land.

"Typically, this is done to assist in financial obligation funding to construct buildings on the residential or commercial property," Miller and Peden stated. In a lot of cases with a subordinated ground lease, the landlord may require higher lease payments since they're taking on some amount of danger.

Unsubordinated Ground Lease

With an unsubordinated ground lease, the property manager retains higher concern than the lender. Lenders are not able to foreclose on the land or utilize it as collateral if a renter is not able to make their loan payments. Rather, if the tenant defaults on the loan, the loan provider can just pursue their service assets. Some loan providers may hesitate to give out a mortgage to tenants who have signed an unsubordinated ground lease. Because of this added trouble for the occupants, property owners will usually charge lower rent.

Benefits and drawbacks of Ground Leases for Tenants

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

Location: With a ground lease, tenants can construct a residential or commercial property in a location of their picking, without being bound to pre-existing structures in a location that might not be ideal for their particular company 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 bought the land.


No Down Payment: With a land purchase, the occupant would be paying a big down payment to purchase the land, after which they would still require to develop on that land. However, with a ground lease, there is no downpayment, and more cash can go towards building on the land instead.


Reduced Lease Payments: If the renter 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 space, the tenant is unable to personalize the structure to fit their specific requirements. However, with a ground lease, occupants are only leasing the land and can tailor the residential or commercial property as they choose.

Some Higher Costs: Developing a residential or commercial property is pricey, and although tenants have the ability to tailor their structure as they please, sometimes the monetary costs may exceed those advantages.


Doesn't Retain Ownership After the Lease Expires: After putting money and time into building 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 expires, if they pick not to renew the lease. At that point, the landowner stands to benefit from the enhancements the occupant made.


Responsible for Fees: The occupant needs to pay residential or commercial property taxes, insurance coverage and upkeep costs on the residential or commercial property for the term of the lease.

Advantages and disadvantages of Ground Leases for Landlords

For landlords, a ground lease could be beneficial for a number of factors, however obviously it features 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 renter is accountable for residential or commercial property taxes.


Steady Income: Landlords have the advantage of receiving monthly rent on the land, therefore approving them a consistent earnings stream. In addition, numerous ground leases also consist of an escalation provision, which guarantees a rent boost and expulsion rights in the case of an occupant defaulting on payments.


Retains Ownership of Improvements: After the lease period ends, the landlord retains ownership of any enhancements 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 include certain provisions in the lease, they may not have any say in what the occupant does with the land.


Higher Income Tax: Although a property manager won't need to pay capital gains taxes, the lease they receive from the renter counts as earnings, therefore they will need to pay higher earnings taxes.

In Houston last June, Peden and Miller negotiated a 20-year, 2.64-acre ground lease for a brand-new vehicle car dealership. The land was leased to Grubbs Automotive, with strategies to convert the existing structures into a brand-new Volvo automobile car dealership. In this example, Grubbs Automotive is renting the land but has the freedom to develop brand-new residential or commercial properties and make enhancements on the land and any existing buildings as they choose. Once the lease term ends, if they do not restore, then all of those enhancements 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 comparable to a ground lease, in that with a leasehold estate, the physical structures are owned by the occupant, and the land is owned by another party, from which the renter is leasing. The celebration that is renting the land from the landowner can utilize the land throughout of the lease. When the lease ends, the building and any enhancements become residential or commercial property of the landowner, similar to a ground lease. See also 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 buildings that are on it for the duration that has been agreed to. With a leasehold, there is a contract in between the owner of the residential or commercial property and the lessee with generally more restrictions on the lessee on what can be finished with the residential or commercial property." Essentially, leasehold agreements feature more limitations than ground leases however are otherwise fairly similar.

Is a Ground Lease Right for You?

While a ground lease includes its advantages and disadvantages for both the occupant and the property owner, it is very important to understand what you're looking for in a rental agreement before picking a kind of lease. Ground leases are beneficial since of their longevity and guaranteed income for proprietors. And for renters, ground leases enable you to construct a residential or commercial property that fits your customized requires. However, there are various lease structures. Before choosing what fits your needs, make certain to do your due diligence and discover about the various types of industrial leases in presence.