Why Landowners Decide to Ground Leases

Renting a property is fraught with challenges, but landowners choose to ground leases for various reasons. This means that the tenant that rents or leases the land may develop the real estate for the leased periods, but all improvements and additions are given to the owner of the property when the lease ends.

A ground lease is of great benefit for landowners because they are able to retain all improvements to include any buildings that are built during the tenant’s leased time. While this is not the best deal for the person that leases the land, the owner and his or her tenant make the deal long before the person staying on the property moves in. However, there may be certain conditions that are mutually beneficial. These may include lower rent payments, cheaper facilities and similar matters that make the deal too good for someone to pass up. With the agreement struck, the tenant may wait to move in until a building is created so that he or she may live on the land.

Some persons that become tenants do so to avoid the taxation of owning a home. When the property will not be his or hers at the end of the contracted leased time, the person may avoid being taxed for it. For the owner of the land, it is possible to keep the location within the family even at the death of the current possessor. This means that the estate tax may not take effect, and the heir inherits the property without any further issues in most situations. Another possibility is that the person moving into the location could need only a portion of the land. This means that others could lease other portions and a significant income could be accrued.

Complications to Sales

The complications of selling land could be the taxes and government officials becoming uncomfortable. This may be due to large pieces not available for various businesses, parking lots and other commerce driven matters. Additionally, dividing the land for partial sale may be the better route, and this permits the owner to lease other parts through a ground lease simultaneously. This removes the threat, increases revenue for the landowner and consent is given to tenants to live off part of the land while making their own improvements. If the land is owned by the government, a ground lease provides a means of control over projects developed at the location. This could be for commercial matters where the building remains and the tenant practices his or her business on the land during the lease period.

The Rent

Rent for the lease period may need to change over time. However, approximating the amount necessary, the landlord needs to take into account all factors such as taxes, insurance, expenses, operation costs, environmental bills and similar items that the tenant pays. The rent set needs to change through years of time bases on inflation and expectations of investment opportunities. A fair market value should be applied to the situation when including all other elements of this arrangement. If the tenant is a commercial business owner, this amount may be greater than if he or she is a residential property renter or leaseholder.

When the leaseholder or ground tenant is developing the property so that a building or other items are constructed on the land, the landlord may lower the amount of rent expected for this period. Then, the payment may be offset to make up for this time. It may be possible that both parties engage in professional appraisals of the land to determine how much the fair market rent payments should be. Fair market value may include the land’s fair value in the market with the agreement between tenant and landlord as well. Through the years, this amount changes. If an investment is in effect on the property, returns may alter this arrangement as well.

Renewal and Legal Help

When a landlord or owner of a plot of land decides to implement a ground lease, he or she may be investing several years into an arrangement with a business or residential owner. This could be a solitary individual seeking a plot to live, someone to do business on a property he or she does not own or a person seeking to build a residential building for renting units to others. The terms of the arrangement for the two parties could last decades depending on the structure of the lease, the relationship between the tenant and landlord and other factors. A lawyer should be hired to assist with the agreement and conditions within.

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