As you may have guessed, a ground lease – otherwise known as a “land lease” is simply a lease on a plot undeveloped commercial land, with the tenant on the ground lease responsible for the development and use of property on the premises.
Ground leases are typically the longest in the industry: sometimes decades long, and sometimes as long as a century or more. A ground lease is less costly for a tenant than leasing land with ready-made property already built on it, but can constitute an added monthly cost in perpetuity for the borrower. During the term of a ground lease, the tenant owns all property constructed on the land and improvements made thereto. If a ground lease expires and is not renewed, however, all construction and improvements on the land may become property of the leaseholder on the ground lease, which can increase the leaseholder’s leverage in renewal negotiations.
A ground lease can reduce barriers to entry for developers – especially in expensive gateway markets – by allowing them to begin construction without the added cost of purchasing land (or the even greater cost of purchasing land with existing, obsolete structures that must be torn down). However, a lingering ground lease can seriously detract from the value of a property many years later, once value of the property itself is established – the Chrysler Building in New York City is an iconic example of this issue.
Ground leases require tenants to make regular rent payments (usually monthly), like any other lease, and are typically net leases, meaning the tenant is responsible for paying property taxes, insurance, and maintenance expenses throughout the term of the lease.Back to Glossary