When developers want to build on a piece of land, they often purchase the land outright. However, that is not the only option available. In some situations, it may make more sense for a developer to lease a piece of land. When an owner makes a long-term lease of their land, it is referred to as a ground lease.
The real estate attorneys at Shore, McKinley, Conger & Jolley, LLP can help individuals consider the potential benefits of a ground lease. If this option is advantageous to our Stockton, CA, or Walnut Creek, CA, clients, our real estate attorneys can negotiate a ground lease and oversee the process to protect our client’s best interest.
How Does a Ground Lease Work?
A ground lease is a complex contract that contains different elements. While the specifics of a ground lease can vary slightly based on the needs of the land owner and lessee, the basic foundation of each ground lease tends to be the same. A well-structured ground lease should define:
- The terms of the lease
- The rights of the landlord and tenant
- Use provisions
- Financing conditions
- Title insurance
- Default terms
When a land owner and developer enter into a land lease, the owner is agreeing to lease out the land long-term (usually between 50 and 99 years). Under the terms of a land lease, the lessee is required to construct a building or maintain and use any improvements that have already been made to the land.
The expenses that go into developing and maintaining the land are covered by the lessee. The lessee generally pays for all costs associated with the real property, including property taxes, insurance, maintenance, and financing. Once the ground lease expires, the landowner is able to assume all improvements, which may allow that person or party to sell the property at a higher rate.
Who Should Consider a Ground Lease?
A ground lease is not the best option for all of our clients. Generally, a ground lease is appropriate in the following situations:
- When the property is leased to a developer who will make subsidiary leases
- When a government body clears land under an urban renewal program and then leases the land to a developer
- When the land is owned by a non-profit entity that is not able to sell the land
- When the land is leased for estate planning purposes
Pros and Cons of a Ground Lease
There are several advantages and disadvantages that should be considered before entering into a ground lease. For the lessee, the benefits of a ground lease include the ability to build on a prime property location that they cannot purchase, less equity required to acquire a ground lease (no down payment is needed), and federal and state tax deductions.
A ground lease can also be beneficial for a landowner. A ground lease allows the lessor to receive a steady stream of income while maintaining ownership of the property. Depending on the terms of the ground lease, the lessor may also be able to retain some control over how the land is used.
Potential disadvantages of a ground lease include development limitations for the lessee. They may be required to get approval before changes are made to the land. Development costs related to a ground lease can also be high, since the expenses will be their responsibility.
For the lessor, potential disadvantages include losing control of how the land is developed, and a possible increase in tax burdens, depending on how much rent is received.
The best way for our clients to avoid disadvantages of a ground lease and come to an arrangement that is beneficial to all involved parties is by working with a knowledgeable real estate attorney, such as those a Shore, McKinley, Conger & Jolley, LLP.
The real estate attorneys at Shore, McKinley, Conger & Jolley, LLP can answer any additional questions you may have about ground leases. To discuss your situation with our legal team, send us a message at your earliest convenience or call (209) 477-8171 to schedule a consultation.