When leasing a business residential or commercial property, there are a variety of different kinds of industrial leases one might come across. Sometimes tenants may be looking for a residential or commercial property they can construct on and create enhancements that fit their specific needs. If this holds true, then a ground lease may be the finest choice.

A ground lease is a kind of lease agreement in which the renter leases a piece of land and is permitted to develop that residential or commercial property throughout the period of the lease. During the lease term, the renter owns any structures, advancements or enhancements made on the land. Once the lease ends, the land and any building or improvements on that land end up being the residential or commercial property owner’s. Usually, ground leases are long-lasting, with a lease period between 20 to 99 years, stated Scott Miller, Senior Director of Land Services, and Jeff Peden, Executive Managing Director of Land Services at Transwestern. Ground leases are normally net leases, they added, in which the occupant is responsible for paying residential or commercial property taxes, insurance and maintenance.

What’s the Difference Between a Subordinated vs Unsubordinated Ground Lease?

There are two types of ground leases: subordinated and unsubordinated. The difference between the two has to do with what happens if the occupant is handling monetary problem during the term of the lease.

Subordinated Ground Lease

With a subordinated ground lease, the proprietor agrees to be a lower top priority with regards to any other financing obtained on the residential or commercial property. If a tenant secures a loan to construct on the land and after that defaults on the loan, the lender can pursue the residential or commercial property, including the land, as collateral. For instance, a tenant who signs a subordinated ground lease might secure a loan for $400,000 to build a retail residential or commercial property. However, if that renter runs into monetary difficulty and is unable to make loan payments, the lender can pursue the building and the land.

“Typically, this is done to facilitate debt financing to construct structures on the residential or commercial property,” Miller and Peden said. In numerous cases with a subordinated ground lease, the property manager might require greater rent payments since they’re handling some amount of danger.

Unsubordinated Ground Lease

With an unsubordinated ground lease, the landlord retains higher concern than the lender. Lenders are not able to foreclose on the land or use it as collateral if a renter is not able to make their loan payments. Rather, if the occupant defaults on the loan, the lending institution can just pursue their company assets. Some lending institutions might be reluctant to provide a mortgage to tenants who have actually signed an unsubordinated ground lease. Because of this added difficulty for the tenants, property managers will normally charge lower lease.

and disadvantages of Ground Leases for Tenants

Like all leases, ground leases come with their advantages and drawbacks, for both renters and property owners. For occupants, the advantages and disadvantages might vary depending upon what you’re trying to find in a business residential or commercial property.

Location: With a ground lease, renters can develop a residential or commercial property in an area of their choosing, without being bound to pre-existing buildings in a location that may not be ideal for their particular business requirements.
Lower Taxes: For both federal and state taxes, the rent paid on a ground lease is tax deductible. The renter is paying less taxes than they would be if they simply bought the land.
No Down Payment: With a land purchase, the tenant would be paying a large deposit to buy the land, after which they would still require to develop on that land. However, with a ground lease, there is no downpayment, and more cash can approach building on the land rather.
Reduced Lease Payments: If the renter were renting both the land and the structure, then lease payments would be much greater. With a ground lease, the renter is making lower monthly payments.
Building Customization: When renting a currently existing space, the occupant is unable to tailor the structure to fit their particular requirements. However, with a ground lease, occupants are just leasing the land and can personalize the residential or commercial property as they see fit.


Some Higher Costs: Developing a residential or commercial property is pricey, and although renters are able to customize their building as they please, in some cases the monetary costs may outweigh those benefits.
Doesn’t Retain Ownership After the Lease Expires: After putting money and time into building a residential or commercial property and making improvements, the tenant will need to offer up ownership of the residential or commercial property once the lease ends, if they select not to renew the lease. At that point, the landowner stands to profit from the enhancements the tenant made.
Responsible for Fees: The tenant needs to pay residential or commercial property taxes, insurance and upkeep expenses on the residential or commercial property for the term of the lease.


Pros and Cons of Ground Leases for Landlords

For landlords, a ground lease might be helpful for a number of factors, but of course it features both benefits and drawbacks.

Lower Taxes: With a ground lease, proprietors do not have to report any capital gains as they would with a land sale. On top of that, the tenant is accountable for residential or commercial property taxes.
Steady Income: Landlords have the benefit of getting regular monthly rent on the land, consequently giving them a stable income stream. In addition, numerous ground leases likewise include an escalation stipulation, which ensures a lease increase and expulsion rights when it comes to a renter defaulting on payments.
Retains Ownership of Improvements: After the lease period ends, the proprietor maintains ownership of any improvements made on the land and can for that reason sell the residential or commercial property at an earnings.


Lack of Control: In the circumstance where a property owner doesn’t consist of certain clauses in the lease, they may not have any say in what the tenant does with the land.
Higher Income Tax: Although a proprietor won’t need to pay capital gains taxes, the lease they receive from the tenant counts as earnings, therefore they will need to pay greater income taxes.


In Houston last June, Peden and Miller worked out a 20-year, 2.64-acre ground lease for a brand-new automobile dealership. The land was leased to Grubbs Automotive, with strategies to convert the existing structures into a new Volvo automobile dealership. In this example, Grubbs Automotive is renting the land however has the liberty to develop new residential or commercial properties and make enhancements on the land and any existing buildings as they choose. Once the lease term ends, if they do not restore, then all of those enhancements end up being the residential or commercial property of the property manager.

What’s the Difference Between a Ground Lease vs Leasehold?

A leasehold estate is extremely comparable to a ground lease, in that with a leasehold estate, the physical structures are owned by the tenant, and the land is owned by another celebration, from which the occupant is leasing. The celebration that is renting the land from the landowner has the right to use the land throughout of the lease. When the lease ends, the structure and any improvements become residential or commercial property of the landowner, comparable to a ground lease. See also appurtenance.

However, according to Miller and Peden, “With a ground lease, you basically have the rights as an owner of the land and the residential or commercial property or structures that are on it for the duration that has actually been accepted. With a leasehold, there is an arrangement between the owner of the residential or commercial property and the lessee with normally more restrictions on the lessee on what can be done with the residential or commercial property.” Essentially, leasehold contracts include more constraints than ground leases however are otherwise relatively comparable.

Is a Ground Lease Right for You?

While a ground lease comes with its advantages and drawbacks for both the tenant and the proprietor, it is very important to understand what you’re looking for in a rental agreement before selecting a type of lease. Ground leases are advantageous due to the fact that of their durability and surefire earnings for landlords. And for tenants, ground leases permit you to construct a residential or commercial property that fits your custom needs. However, there are several lease structures. Before picking what fits your needs, make certain to do your due diligence and find out about the different kinds of industrial leases around.