What is a ground lease? Under a typical ground lease, a landlord owns a parcel of raw land, which it leases to a tenant for an extended period of time (e.g. 30 years, 99 years, etc.). The tenant generally obtains its own financing (either from a third party or the landlord) to construct improvements (e.g. a building) on the property, and the title to those improvements remain with the tenant, rather than becoming part of the real estate. At the end of the term, the improvements become part of the real estate and belong to the landlord.
Why would a property owner choose a ground lease? In an economic environment where land prices have fallen, a ground lease could allow a landowner to delay the sale of the land until a profit (or a larger profit) can be realized from a sale. In other words, the property owner could lease the property now, and sell it later.
Why would a tenant choose a ground lease? Under a ground lease, the tenant does not incur property acquisition costs. In other words, a loan obtained in constructing its building would not need to include the cost of acquiring the property. Also, a tenant in a manufacturing business may only need the use of the property for a finite period of time and may have no desire to make an investment in real estate.
Whether you are a property owner, prospective tenant or lender, a ground lease can be a complicated endeavor, requiring the advice and drafting skill of sophisticated business attorneys in order to address your specific needs.
