What Is a Land Lease Option?
A land lease option is a clause in a real estate contract that grants the renter or lessee the right, but not the obligation, to extend his or her use of a property beyond the term specified in the contract. Usually, the renter or lessee is required to pay a premium for the option, such as a small amount of money in each year of the original contract.
Another term for this might be a lease extension.
A land lease option is not the same as a lease to own contract, which gives the lessee the right to purchase the property, rather than simply extend the lease.
A land lease option is also not the same as a lease purchase contract, which binds both parties to the sale of the property at the end of the contact period. With a land lease option, only the lessee has an option to act or not act.
How a Land Lease Option Works
As with all options contracts, the land lease option allows its holder to act on favorable future market conditions. The lessee may want an option for many reasons. If the future market value of the land is uncertain, an option will allow the lessee to extend a relatively cheap lease in a rising price environment. For corporations, lease options allow them to reevaluate operations based on leased land in the future, before locking themselves into very long-term contracts.
Example of a Land Lease Option
If the property owner leases their property to the lessee, they might agree to a $5,000 per month rate for a term of 10 years. However, if the lessee believes that real estate prices will rise over that period of time and further believes they will require use of the property beyond the term of the contract, they might ask for a land lease option written into the contract. In this way, they know that the property will not only be available but will cost the same rate for an additional period of time.
The premium or extra fee for this option might be $200 per month for the 10-year period, bringing the total cost to $5,200 per month. If the lessee exercises the option at the end of the original 10-year term, the lease payment will remain at $5,000 per month.
The lessee avoids the risk of renegotiating the contract in 10 years or even having to find a similar property to lease.
The property owner gives up the ability to charge more money later but receives and extra $200 per month for 10-years, or $24,000, which is theoretically above the going market rate.