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.