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Ground Lease

DEFINITION

Lease agreement where the tenant has the right to develop the property with the approval of the landlord at which point after the expiration of the lease the landlord is entitled to property including the newly developed structures. Ground leases can range and vary from anywhere between a time frame as low as 10 years to as high as a 99 year lease due to the substantial expense required to develop a structure on the property. Unlike other forms of leasing, one of the key primary differences of a ground lease that makes it quite unique is that such an agreement generally requires a long term commitment from the parties trying to obtain this specific type of lease.

EXPLANATION

A ground lease will permit the owner of the property to take over and bear responsibility for all advancements such as construction and any property additions related to the property as soon as the tenure of the lease comes to an end. From then on the property owner has the right to sell the property at a higher value.

The ground lease will also determine who possesses the land as well as who owns the building on the property along with any additions that may come along.

Ground Leases are generally intended for public use, which is also one primary reason why many government agencies enter into such an agreement. This agreement provides flexibility and affordability when constructing structures designed for public use.

Furthermore, with the massive decline of public space being available particularly in urban cities, this specific type of leasing agreement is viewed by many as being best suited for such specific scenarios. Whether it be government or an individual wanting to develop an area with the purpose of using such space for commercial use, it only makes sense to enter into a Ground Leasing agreement when one may be short on capital, as well as avoiding any hassle of having to locate a property in a precise location which may not always be available.

Ground Lease Risk

Ground Lease tenants tend to cover any additions and improvements made to the property by route of loans which would generally lead to debt.

Such a scenario will certainly come with risk, for nothing is guaranteed in terms of the tenant being able to fulfill their end of repaying loans related to property improvements. If payments are not made accordingly, there may be a possibility where the tenant could well indeed default, which would cause complications for the landlord.

With this being the case, many landlords tend to explore a few options in order to avoid any liability claims. One example includes the landlord not holding onto and having full authority on certain claims in the scenario where the tenant chooses to default. The other commonly used option is to increase rent as a measure to offset any risk of default.

The Landlord also bears no income tax when granting a ground lease, as the tenant will be the one who will accommodate such fees.

Ground Lease Advantages

Although this whole process comes at risk, the reason some landlords may go along with the idea of permitting tenants to make improvements to the property with a loan risk attachment is if the repayments are made accordingly, the value of the property and land would go up significantly as a result.

The tenant also has a lot to gain, as a ground lease does not require huge amounts of investment financing in areas ranging from down payments to high levels of equity when obtaining a ground lease. This leaves room for flexibility and better use of investing into the property itself.

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