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. Gross Lease

    A type of commercial lease where the landlord pays for the building's ...
  2. Triple Net Lease

    A lease agreement that designates the lessee (the tenant) as ...
  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. Graduated Lease

    A type of long-term, typically for commercial property, lease ...
  6. Capitalized Lease Method

    An accounting approach that identifies a company's lease obligation ...
Related Articles
  1. Investing

    Buying a House with Tenants: A Quick Guide

    Before buying a house with tenants, know the risks and responsibilities you're taking on.
  2. 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.
  3. Managing Wealth

    What is a Capital Lease?

    A lease considered to have the economic characteristics of asset ownership.
  4. Personal Finance

    When Is Buying A Car Better Than Leasing?

    People who lease a car are often more concerned with the short-term picture.
  5. Personal Finance

    Is There a Way to Get Out of Your Car Lease Early?

    For those who no longer want their car for whatever reason, transferring the lease to an interested party can be a particularly appealing choice.
  6. Managing Wealth

    Why You Should Buy A Car Instead Of Leasing

    While leasing has certain advantages, buying a car tends to save you money in the long run and offers greater flexibility.
  7. Investing

    Top 4 Nightmares For Real Estate Investors

    Renting out your property is not without risks; the good news is, they don't have to keep you up at night.
  8. Managing Wealth

    Rental Properties: Cash Cow Or Money Pit?

    Create a valuation system to forecast the profitability of an income-producing property.
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. 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 >>
  3. 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 >>
  4. What key requirements must be met for the IRS to classify changes or alterations ...

    Learn the requirements needed to qualify for Internal Revenue Service tax breaks under the qualified lease improvement on ... Read Answer >>
Hot Definitions
  1. Covariance

    A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns ...
  2. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  3. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  4. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  5. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  6. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
Trading Center