You may have found the perfect property for your business – but it doesn’t have all of the structures that you need. The owner isn’t selling, but they are willing to give you a long-term commercial lease with a ground lease.
Typically, ground leases come with a rental agreement for the property that ranges from 50 to 99 years, and it gives the tenant the right to basically develop the land according to their specific needs. They can build what they want – but ownership of any improvements (including buildings and roads) revert to the landlord once the lease is over (unless, of course, the lease is renewed).
Is a ground lease a good idea?
Ground leases can be attractive to both tenants and landlords for different reasons. Tenants get access to prime real estate without high upfront costs, and that allows them to allocate their working capital more efficiently. Without all the money tied up in acquisition, they have more available for development and operation expansion. The cost of building can also often be written off as operating expenses, reducing their tax liabilities significantly.
From the landlord’s perspective, a ground lease gives them a reliable source of income for years to come, while the equity in their property continues to grow. They also get to reap the rewards of the land’s development without putting money into it themselves. They also get to preserve their ownership rights for future generations, which may be a significant factor.
Ground leases are particularly common in urban areas – where property values can be high and acquiring the land outright can be cost-prohibitive. They’re just one option of many that you may want to explore with legal guidance for your commercial rental.