What is a 'Ground Lease'

A ground lease is an agreement in which a tenant is permitted to develop a piece of property during the lease period, after which the land and all improvements are turned over to the property owner. A ground lease indicates that the improvements will be owned by the property owner unless an exception is created, and stipulates that all relevant taxes incurred during the lease period will be paid by the tenant. Because a ground lease allows the landlord to assume all improvements once the lease term expires, the landlord may sell the property at a higher rate.

BREAKING DOWN 'Ground Lease'

A ground lease involves leasing land, typically for 50 to 99 years, to a tenant who constructs a building on the property. The ground lease defines who owns the land and who owns the building and improvements on the property.

Subordinated and Unsubordinated Ground Leases

In a subordinated ground lease, the landlord agrees to a lower priority of claims on the property in case the tenant defaults on the loan for improvements. This may benefit the landlord because constructing a building on his land increases the value of his property. The landlord may also negotiate higher rent payments.

In contrast, an unsubordinated ground lease lets the landlord retain top priority of claims on the property in case the tenant defaults on the loan for improvements. Because the lender may not take ownership of the land if the loan goes unpaid, loan professionals may be hesitant to extend a mortgage for improvements. Although the landlord retains ownership of the property, he typically has to charge the tenant a lower amount of rent.

Benefits of a Ground Lease

A ground lease lets a tenant build on property in a prime location that he could not purchase. For this reason, large chain stores such as Whole Foods and Starbucks often utilize ground leases in their corporate expansion plans.

A ground lease also does not require the tenant to have a down payment for securing the land, as purchasing the property would require. Therefore, less equity is involved in acquiring a ground lease, which frees up cash for other purposes and improves the yield on utilizing the land.

In addition, the landowner gains a steady stream of income from the tenant while retaining ownership of the property. A ground lease typically contains an escalation clause that guarantees increases in rent and eviction rights that provide protection in case of default on rent or other expenses.

Example of a Ground Lease

In July 2016, AllianceBernstein, an investment firm based in New York, purchased a 99-year ground lease from BLDG Management for the George Washington Hotel, for $100.4 million. BLDG purchased the hotel when it was in foreclosure in 1994. Although the building was most recently used by the School of Visual Arts as a student dormitory, BLDG filed plans in April with the Department of Buildings to restore the property to a hotel with a restaurant, bar and ground-level stores.

RELATED TERMS
  1. Single Net Lease

    A commercial real estate lease agreement in which the tenant ...
  2. Gross Lease

    A type of commercial lease where the landlord pays for the building's ...
  3. Lease

    A legal document outlining the terms under which one party agrees ...
  4. Double Net Lease

    An agreement in which the tenant is responsible for both property ...
  5. Lease Rate

    The amount of money paid over a specified time period for the ...
  6. Modified Gross Lease

    A type of real estate rental agreement where the tenant pays ...
Related Articles
  1. Investing

    How Does a Modified Gross Lease Work?

    A modified gross lease is a rental agreement where, in addition to their rent, tenants pay a share of other costs associated with the property.
  2. Managing Wealth

    Millennials Guide: How To Read a Lease

    Everything you need to know before you rent a home.
  3. Investing

    How Does an Operating Lease Work?

    Operating lease is a term used mostly in accounting to denote a lease that gives the lessee rights to use and operate an asset without ownership.
  4. Investing

    8 Lease Clauses You Need To Know

    If you're renting an apartment this year, beware of signing contracts with these tricky clauses.
  5. Managing Wealth

    What is a Capital Lease?

    A lease considered to have the economic characteristics of asset ownership.
  6. Managing Wealth

    11 Mistakes Inexperienced Landlords Make

    Avoid these pitfalls if you considering purchasing a rental property.
  7. Personal Finance

    When Is Buying A Car Better Than Leasing?

    People who lease a car are often more concerned with the short-term picture.
  8. Investing

    Uncovering Hidden Debt

    Understand how financing through operating leases, synthetic leases, and securitizations affects companies' image of performance.
  9. Managing Wealth

    4 Things Landlords Aren't Allowed To Do

    Whether you're a landlord or a tenant, you need to know the rules.
RELATED FAQS
  1. What are the differences between single, double and triple-net leases?

    Learn the ins and outs of net lease agreements, including the key differences between single net, double net and triple net ... Read Answer >>
  2. What kinds of real estate transactions use triple net (NNN) leases?

    Learn how a net-net-net or triple net lease works and why it is popular in commercial real estate transactions. It is also ... Read Answer >>
  3. How does the value of the real estate impact the value of a triple net (NNN) lease?

    Understand how the value of the real estate involved in a triple-net lease impacts the value of the lease both positively ... Read Answer >>
  4. Why might a bond agreement limit the amount of assets that the firm can lease?

    Bond covenants can limit the amount of leases a company can have because leasing contracts are a form of debt. Taking on ... Read Answer >>
Hot Definitions
  1. Straddle

    An options strategy in which the investor holds a position in both a call and put with the same strike price and expiration ...
  2. Trickle-Down Theory

    An economic idea which states that decreasing marginal and capital gains tax rates - especially for corporations, investors ...
  3. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that eventually eliminated tariffs to encourage economic activity between the United ...
  4. Agency Theory

    A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving ...
  5. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
  6. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
Trading Center