assignment of a ground lease

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What Is a Ground Lease?

• How It Works
• Subordinated vs. Unsubordinated
• Pros and Cons

The Bottom Line

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• Real Estate Investing

What Is a Ground Lease? How It Works, Advantages, and Example

James Chen, CMT is an expert trader, investment adviser, and global market strategist.

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.

Key Takeaways

• A ground lease is an agreement in which a tenant can develop property during the lease period, after which it is turned over to the property owner.
• Ground leases commonly take place between commercial landlords, who typically lease land for 50 to 99 years to tenants who construct buildings on the property.

Tenants who otherwise can't afford to buy land can build property with a ground lease, while landlords get a steady income and retain control over the use and development of their property.

How a Ground Lease Works

A ground lease indicates that 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. Ground leases are also often called land leases, as landlords lease out the land only.

Although they are used primarily in commercial space, ground leases differ greatly from other types of commercial leases, like those found in shopping complexes and office buildings. These other leases typically don't assign the lessee to take on responsibility for the unit. Instead, these tenants are charged rent in order to operate their businesses. A ground lease involves leasing land for a long-term period—typically for 50 to 99 years—to a tenant who constructs a building on the property.

Tenants generally assume responsibility for all financial aspects of a ground lease, including rent, taxes, construction, insurance, and financing.

A 99-year lease is generally the longest possible lease term for a piece of real estate property. It used to be the longest possible under common law; however, 99-year leases continue to be common but are no longer the longest possible under the law. 

The ground lease defines who owns the land and who owns the building and improvements on the property. Many landlords use ground leases as a way to retain ownership of their property for planning reasons, to avoid any capital gains , and to generate income and revenue. Tenants generally assume responsibility for any and all expenses. This includes construction, repairs, renovations, improvements, taxes, insurance, and any financing costs associated with the property.

Example of a Ground Lease

Ground leases are often used by franchises and big box stores, as well as other commercial entities. The corporate headquarters will normally purchase the land, and allow the tenant/developer to construct and use the facility. There's a good chance that a McDonald's, Starbucks, or Dunkin Donuts near you are bound by a ground lease.

Many of Macy's stores are ground leased. Macy's owns the buildings but still pays rent on the ground the building is on. As of Jan. 28, 2023, Macy's reported long-term lease liabilities of $3 billion. This leased real estate includes small-format stores, distribution centers, office space, and full-line stores.

Some of the fundamentals of any ground lease should include:

• Terms of the lease
• Rights of both the landlord and tenant
• Conditions on financing
• Use provisions
• Title insurance

Subordinated vs. Unsubordinated Ground Leases

Ground lease tenants often finance improvements by taking on debt. 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. In other words, a subordinated ground lease-landlord essentially allows for the property deed to act as collateral in the case of tenant default on any improvement-related loan.

For this type of ground lease, the landlord may negotiate higher rent payments in return for the risk taken on in case of tenant default. This may also benefit the landlord because constructing a building on their land increases the value of their property.

In contrast, an unsubordinated ground lease lets the landlord retain the 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, they typically have to charge the tenant a lower amount of rent.

Advantages and Disadvantages of a Ground Lease

A ground lease can benefit both the tenant and the landlord.

Tenant Benefits

The ground lease lets a tenant build on property in a prime location they could not themselves 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.

Any rent paid on a ground lease may be deductible for state and federal income taxes, meaning a reduction in the tenant's overall tax burden.

Landlord Benefits

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.

There are also tax savings for a landlord who uses ground leases. If they sell a property to a tenant outright, they will realize a gain on the sale. By executing this type of lease, they avoid having to report any gains. But there may be some tax implications on the rent they receive.

Depending on the provisions put into the ground lease, a landlord may also be able to retain some control over the property including its use and how it is developed. This means the landlord can approve or deny any changes to the land.

Tenant Disadvantages

Because landlords may require approval before any changes are made, the tenant may encounter roadblocks in the use or development of the property. As a result, there may be more restrictions and less flexibility for the tenant.

Costs associated with the ground lease process may be higher than if the tenant were to purchase a property outright. Rents, taxes, improvements, permitting, as well as any wait times for landlord approval, can all be costly.

Landlord Disadvantages

Landlords who don't put in the proper provisions and clauses in their leases stand to lose control of tenants whose properties undergo development. This is why it's always important for both parties to have their leases reviewed before signing.

Depending on where the property is located, using a ground lease may have higher tax implications for a landlord. Although they may not realize a gain from a sale, rent is considered income. So rent is taxed at the ordinary rate, which may increase the tax burden.

What Are the Disadvantages of a Ground Lease?

Some of the disadvantages of ground leases include the possibility of property loss, loss of higher income due to market changes if rent increases aren't built into the agreement, and tax drawbacks, such as depreciation and other expenses that can't offset income.

Is a Ground Lease a Good Investment?

It can be. A ground lease lets a tenant build on property in a prime location they could not themselves purchase. They can invest their money in improving the property. On the other hand, a tenant may face restrictions on what they can do with the property.

What Happens When a Ground Lease Expires?

Unless you or your landlord takes specific steps to end the agreement under the lease, it will simply continue on exactly the same terms. You do not need to do anything unless you receive a notice from your landlord.

A ground lease is an agreement in which a tenant can develop property during the lease period, after which it is turned over to the property owner. Ground leases commonly take place between commercial landlords, who typically lease land for 50 years to 99 years to tenants who construct buildings on the property.

Contracts Counsel. " Ground Lease ."

SeekingAlpha. " Macy's: Evaluating The $3.25 Billion of Lease Liabilities ."

U.S. Securities and Exchange Commission. " Macy's, Inc. Reports Fourth Quarter and Full-Year 2022 Results ."

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Protecting an Interest in a Ground Lease – A Lender’s Perspective

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Lenders are often asked to provide financing secured by a leasehold interest in land evidenced by a ground lease. A ground lease is an agreement between the fee owner of real estate (the ground lessor or landlord) and its tenant (the ground lessee) in which the fee owner leases the land to the tenant. Ground leases are typically for a longer term than a basic space lease and allow the tenant to construct improvements on the land and operate the improvements during the term of the ground lease. Because the collateral for leasehold financing typically consists only of the leasehold rights of its borrower under the ground lease, lenders should carefully review the terms of the ground lease to ensure that it contains certain minimum lender protections.

An astute drafter of a ground lease will consider a future mortgage of the ground lease in its initial preparation of the lease, but often, critical lender protections are not included, and this is especially true of older ground leases. While a landlord is generally not interested in amending the terms of the ground lease to satisfy the requirements of a lender providing leasehold financing, a landlord should understand that the tenant’s interest in the ground lease must be financeable.

In addition to the protections in a lender’s leasehold deed of trust, a lender will often need to request that a ground lease be amended or that a separate agreement regarding ground lease be executed to address any lender protections that may have been omitted from the initial ground lease. Below is an overview of the minimum protections that a lender should consider when financing a loan secured by a ground lease.

• Basic Terms. The term of the ground lease should extend well past the maturity of the loan and should specifically address the tenant’s right to mortgage, sublease and assign the lease. A broad list of permitted uses of the property is preferred to give the tenant, the lender and foreclosure sale purchasers the flexibility to change the use of the property should the initial concept fail. To protect the tenant’s interest in the ground lease and put a third party on notice, the ground lease should be evidenced by a short form memorandum thereof recorded in the real estate records.
• Casualty/Condemnation. A key provision of any ground lease is the use of any casualty or condemnation proceeds relating to the property. Since the improvements located on the land generally belong to and have been constructed by the tenant, the ground lease should provide that any insurance proceeds relating to the destruction of any improvements be paid to the tenant. The lender should require that it be named as the “mortgagee” and “lender’s loss payable” on any insurance covering the improvements and the loan documents should require that such proceeds be paid directly to the lender. Similarly, condemnation proceeds attributable to the leasehold estate and the taking of the improvements should be paid directly to the lender. In addition, the lender should have the ability to participate in any condemnation proceedings to sufficiently protect its rights.
• Notice and Right to Cure. The lender should have the ability to cure any tenant defaults under the ground lease after receiving notice from the landlord. This cure period should be in addition to the time allotted to the tenant since the lender may have to foreclose or appoint a receiver prior to curing the default.
• Acquisition by Lender; Entrance into New Lease . Upon the lender’s foreclosure of its leasehold mortgage or taking of a deed-in-lieu of foreclosure, the lender or any party taking title through the lender should have the right to become the tenant under the ground lease without any further consent by landlord. Similarly, if the bankruptcy of the tenant results in a termination of the ground lease, the lender should have the right to compel the landlord to enter into an identical lease with the lender or successor owner as the new tenant.
• Liability . If the lender or another party taking title through the lender takes title to the leasehold interest, such party should only be liable for those obligations of the tenant from the time that the lender or successor owner takes title to the property. The ground lease should also provide that the landlord cannot seek recovery of any losses from the lender beyond its interest in the property. Finally, following an assignment of the ground lease by the lender to a successor owner, the lender should be released from all obligations and liability under the ground lease.
• Amendments; Fee Mortgages . The ground lease should acknowledge that the ground lease may not be amended, modified or terminated without the prior written consent of any leasehold lender that has notified the landlord of its interest. In addition, the ground lease should prohibit the landlord from mortgaging its fee simple interest in the property without the prior written consent of the leasehold lender or, in the alternative, without first getting a non-disturbance agreement in favor of the leasehold lender from the mortgagee of the fee simple interest.
• Waiver/Subordination of Liens . The ground lease should provide that any liens that the landlord has or may acquire against the property during the term of the loan will either be waived or subordinated to the lien of the leasehold lender.
• Repurchase Rights; Rights of First Refusal . Repurchase rights and rights of first refusal in favor of the landlord should be subordinated to the lien of the leasehold mortgage and specifically identified as inapplicable to a foreclosure of the leasehold interest or taking of a deed-in-lieu of foreclosure. Such a clause is helpful in avoiding the impairment or delay of a leasehold lender’s exercise of its rights and remedies following a loan default.
• Environmental Concerns . A lender should treat the financing of the leasehold estate in land like the financing of a fee simple estate for purposes of environmental due diligence. Any environmental reports and questionnaires required by a lender when financing a fee simple interest in property should similarly be required when financing a ground lease. If environmental issues do exist on the property, the ground lease should clearly address the responsibilities of both the landlord and tenant.

In the event that some or all of these provisions are not contained in the ground lease, a leasehold lender should request that either the ground lease be amended to include them or that the landlord execute and record an agreement in favor of the leasehold lender in which the landlord grants the lender with these rights. In addition, it is good practice to have such agreement incorporate, or have the landlord provide an estoppel certificate as of closing, which confirms that (i) the ground lease has not been amended or modified, (ii) the tenant is not then in default under the ground lease, (iii) all agreements between landlord and tenant are contained in the ground lease, (iv) the landlord is not aware of any prior assignment of the tenant’s interest in the ground lease, and (v) that the landlord has no current right to terminate the ground lease. The lender should have the right to request an estoppel certificate from time to time to confirm that the tenant remains in compliance with the ground lease during the term of the loan.

A tenant’s leasehold interest in land can serve as a valuable piece of collateral, but leasehold lenders must carefully review the ground lease and take the necessary steps to ensure that certain protections are included in the ground lease or in a separately negotiated agreement between the landlord and lender.

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Article overview.

Do you own land, perhaps with dilapidated property on it? One way to extract value from the land is to sign a ground lease. This will allow you to earn income and possibly capital gains. In this article, we’ll explore,

What is a Ground Lease?

• How to Structure Them
• Examples of Ground Leases
• Pros and Cons
• Commercial Lease Calculator

How Assets America Can Help

Frequently asked questions.

In a ground lease (GL), a tenant develops a piece of land during the lease period. Once the lease expires, the tenant turns over the property improvements to the owner, unless there is an exception.

Importantly, the tenant is responsible for paying all property taxes during the lease period . The inherited improvements allow the owner to sell the property for more money, if so desired.

Common Features

Typically, a ground lease lasts from 35 to 99 years. Normally, the lessee takes a lease on some raw or prepared land and constructs a building on it. Sometimes, the land has a structure already on it that the lessee must demolish.

The GL specifies who owns the land and the improvements, i.e., property that the lessee constructs. Typically, the lessee controls and depreciates the improvements during the lease period. That control reverts to the owner/lessor upon the expiration of the lease.

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Ground lease subordination.

One important aspect of a ground lease is how the lessee will finance improvements to the land. A key arrangement is whether the landlord will agree to subordinate his priority on claims if the lessee defaults on its debt.

That’s precisely what happens in a subordinated ground lease. Thus, the property deed becomes collateral for the lender if the lessee defaults. In return, the landlord asks for higher rent on the property.

Alternatively, an unsubordinated ground lease maintains the landlord’s top priority claims if the leaseholder defaults on his payments. However this might discourage lenders, who wouldn’t be able to take possession in case of default. Accordingly, the landlord will usually charge lower rent on unsubordinated ground leases.

How to Structure a Ground Lease

A ground lease is more complicated than regular commercial leases. Here are some components that go into structuring a ground lease:

The lease must be sufficiently long to allow the lessee to amortize the cost of the improvements it makes. In other words, the lessee must make enough profits during the lease to pay for the lease and the improvements. Furthermore, the lessee must make a reasonable return on its investment after paying all costs.

The biggest driver of the lease term is the financing that the lessee arranges. Normally, the lessee will want a term that is 5 to 10 years longer than the loan amortization schedule .

On a 30-year mortgage, that means a lease term of at least 35 to 40 years. However, fast food ground leases with shorter amortization periods might have a 20-year lease term.

2. Rights and Responsibilities

Beyond the arrangements for paying rent, a ground lease has several unique features.

For example, when the lease expires, what will happen to the improvements? The lease will specify whether they revert to the lessor or the lessee must remove them.

Another feature is for the lessor to assist the lessee in obtaining necessary licenses, permits and zoning variances.

3. Financeability

The lender must have recourse to protect its loan if the lessee defaults. This is difficult in an unsubordinated ground lease because the lessor has first priority in the case of default. The lender only has the right to claim the leasehold.

However, one remedy is a clause that requires the successor lessee to use the lender to finance the new GL. The topic of financeability is complex and your legal experts will need to wade through the various intricacies.

Keep in mind that Assets America can help finance the construction or renovation of commercial property through our network of private investors and banks.

4. Title Insurance

The lessee must arrange title insurance for its leasehold. This requires special endorsements to the regular owner’s policy.

5. Use Provision

Lenders want the broadest use provision in the lease. Basically, the provision would allow any legal purpose for the property. In this way, the lender can more easily sell the leasehold in case of default.

The lessor might have the right to consent in any new purpose for the property. However, the lender will seek to restrict this right. If the lessor feels strongly about prohibiting certain uses for the property, it should specify them in the lease.

6. Casualty and Condemnation

The lender controls insurance proceeds stemming from casualty and condemnation. However, this may conflict with the standard wording of a ground lease, which gives some control to the lessor.

Unsurprisingly, lenders want the insurance proceeds to go toward the loan, not property restoration. Lenders also require that neither lessors nor lessees can terminate ground leases due to a casualty without their permission.

Regarding condemnation, lenders insist upon participating in the proceedings. The lender’s requirements for applying the condemnation proceeds and controlling termination rights mirror those for casualty events.

7. Leasehold Mortgages

These are mortgages financing the lessee’s improvements to the ground lease property. Typically, lenders balk at lessor’s maintaining an unsubordinated position with respect to default.

If there is a preexisting mortgage, the mortgagee must agree to an SNDA agreement . Usually, the GL lender wants first priority regarding subtenant defaults.

Moreover, lenders require that the ground lease remains in force if the lessee defaults. If the lessor sends a notice of default to the lessee, the lender must receive a copy.

Lessees want the right to obtain a leasehold mortgage without the lender’s consent. Lenders want the GL to serve as collateral should the lessee default.

Upon foreclosure of the property, the lender receives the lessee’s leasehold interest in the property. Lessors might want to restrict the type of entity that can hold a leasehold mortgage.

8. Rent Escalation

Lessors want the right to increase rents after specified periods so that it maintains market-level rents. A “ratchet” increase offers the lessee no protection in the face of an economic downturn.

Ground Lease Example

As an example of a ground lease, consider one signed for a Starbucks drive-through shipping container store in Portland.

Starbucks’ concept is to sell decommissioned shipping containers as an environmentally friendly alternative to conventional construction. The first store opened in Seattle, followed by Kansas City, Denver, Chicago, and one in Portland, OR.

It was a rather unusual ground lease, in that it was a 10-year triple-net ground lease with four 5-year options to extend.

This gives the GL a maximum term of 30 years. The rent escalation clause provided for a 10% rent increase every five years. The lease value was just under $1 million with a cap rate of 5.21%.

The initial lease terms , on an annual basis, were:

• 09/01/2014 – 08/31/2019 @ $52,000
• 09/01/2019 – 08/31/2024 @ $57,200
• 09/01/2024 – 08/31/2029 @ $62,920
• 09/01/2029 – 08/31/2034 @ $69,212
• 09/01/2034 – 08/31/2039 @ $76,133
• 09/01/2039 – 08/31/2044 @ $83,747

Ground Lease Pros & Cons

Ground leases have their advantages and disadvantages.

The advantages of a ground lease include:

• Affordability: Ground leases allow tenants to build on property that they can’t afford to buy. Large chain stores like Starbucks and Whole Foods use ground leases to expand their empires. This allows them to grow without saddling the companies with too much debt.
• No Down Payment: Lessees do not have to put any money down to take a lease. This stands in stark contrast to property purchasing, which might require as much as 40% down. The lessee gets to conserve cash it can deploy elsewhere. It also improves its return on the leasehold investment.
• Income: The lessor receives a steady stream of income while retaining ownership of the land. The lessor maintains the value of the income through the use of an escalation clause in the lease. This entitles the lessor to increase rents periodically. Failure to pay rent gives the lessor the right to evict the tenant.

The disadvantages of a ground lease include:

• Foreclosure: In a subordinated ground lease, the owner runs the risk of losing its property if the lessee defaults.
• Taxes: Had the owner simply sold the land, it would have qualified for capital gains treatment. Instead, it will pay ordinary corporate rates on its lease income.
• Control: Without the necessary lease language, the owner might lose control over the land’s development and use.
• Borrowing: Typically, ground leases prohibit the lessor from borrowing against its equity in the land during the ground lease term.

Ground Lease Calculator

This is a great commercial lease calculator. You enter the area, rental rate, and agent’s fee. It does the rest.

Assets America ® will arrange financing for commercial projects starting at $20 million, with no upper limit. We invite you to contact us for more information about our complete financial services.

We can help finance the purchase, construction, or renovation of commercial property through our network of private investors and banks. For the best in commercial real estate financing, Assets America ® is the smart choice.

What are the different types of leases?

They are gross leases, modified gross leases, single net leases, double net leases and triple net leases. The also include absolute leases, percentage leases, and the subject of this article, ground leases. All of these leases provide benefits and drawbacks to the lessor and lessee.

Who pays property taxes on a ground lease?

Typically, ground leases are triple net. That means that the lessee pays the property taxes during the lease term. Once the lease expires, the lessor becomes responsible for paying the property taxes.

What happens at the end of a ground lease?

The land always reverts to the lessor. Beyond that, there are two possibilities for the end of a ground lease. The first is that the lessor takes possession of all improvements that the lessee made during the lease. The second is that the lessee must demolish the improvements it made.

How long do ground leases typically last?

Typically, a ground lease term extends to at lease 5 to 10 years beyond the leasehold mortgage. For example, if the lessee takes a 30-year mortgage on its improvements, the lease term will run for at least 35 to 40 years. Some ground leases extend as far as 99 years.

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Your Guide to the Ground Lease in Commercial Real Estate

What are ground leases in commercial real estate? We'll cover how they work, their types, and the advantages and disadvantages for both tenants and property owners.

Ground leases are gaining traction in the real estate market, with experts projecting a compound annual growth rate (CAGR) of 2.5% through 2029 . For commercial property investors, this real estate niche offers a way to unlock the value of their land while maintaining ownership. For small businesses, ground leases present a way to secure a location to operate with lower up-front costs.

In this guide, we'll provide an overview of ground leases in commercial real estate, cover the key aspects of how ground leases work, the different types of leases available, and the potential advantages and disadvantages for both tenants and landowners. You'll gain a solid understanding of this segment of the real estate market and be able to determine whether a ground lease makes sense for your business. Let's get started!

Understanding the ground lease

A ground lease, also commonly referred to as a land lease, is an agreement between a land owner and a tenant wherein the tenant leases the land and then constructs buildings or makes improvements to it.

The key component of this structure is that the landlord retains ownership of the land, while the tenant has the right to use it for a specified period. Most ground leases range from 30 to 99 years.

Now, you might wonder: why would anyone opt for a ground lease instead of buying the land outright? For businesses, it offers a more affordable way to develop or operate without the high costs of land purchase. Landlords benefit as well, gaining a steady income stream without the responsibilities of development or management.

What's in a ground lease?

Agreements for ground leases commonly include:

• Rent amounts and payment schedules: Defines the precise amount of rent and the schedule for payments. It may include specifics about payment methods and any penalties for late payments .
• Escalation clauses: Describe the conditions under which the rent will increase, such as through a fixed percentage, linkage to an index like the Consumer Price Index , or predetermined amounts at specific intervals.
• Lease term: Specifies the start and end dates of the lease agreement , indicating the total duration of the tenant's right to occupy and use the land.
• Responsibilities for taxes, insurance, and maintenance: Identifies if the tenant or landlord pays for property taxes, insurance, and maintenance. Divides these financial and operational responsibilities clearly.
• Use provisions: Specifies what the tenant can do on the leased land. Lists allowed activities and banned ones to confirm compliance with zoning laws and the landlord's preferences.
• Improvement clauses: Detail how tenants can alter or improve the property. Includes the need for landlord approval, code compliance, and end-of-lease improvement terms.
• Default and termination conditions: Explains what constitutes a default, such as failure to pay rent or comply with lease terms. It outlines how to notify and remedy defaults, and under what circumstances either party can terminate the lease .
• Renewal options: Provide terms under which the tenant may extend the lease beyond the original term. Includes conditions to exercise the renewal option and allows renegotiation of lease terms for the renewal period.

Benefits of a commercial ground lease

Let's take a closer look at the advantages that a land lease has to offer for tenants and landlords.

For landlords

• Steady income: Ground leases provide property owners with a consistent stream of income over the course of the lease term . Since the tenant is responsible for making rent payments, it can be a reliable source of revenue without the uncertainties of market fluctuations.
• Minimal risk: With a ground lease, property owners transfer the responsibility of property development and management to the tenant. This reduces the owner's exposure to risks associated with construction costs, property maintenance, and market changes.
• Long-term value: A ground lease's long-term nature enhances the property's value and provides the owner with a predictable income stream for an extended period.
• Asset preservation: By leasing the land rather than selling it outright, property owners retain ownership of a valuable asset. This allows them to preserve the land's value and potentially benefit from any future appreciation.
• Flexibility: Ground leases offer property owners flexibility in how they use their land. They can tailor the lease agreement to suit their financial goals and investment strategy. Additionally, they have the option to renegotiate terms or sell the leasehold interest if desired.

For tenants

• Access to valuable land: Ground leases provide tenants with access to prime real estate locations without the need for a significant upfront investment. This allows businesses to establish themselves in desirable areas where purchasing land outright may be financially prohibitive.
• Conservation of capital: Instead of tying up capital in land acquisition, tenants can save their financial resources for other business needs, such as operations, marketing, or expansion. This flexibility is especially helpful for startups and small enterprises with limited capital.
• Long-term stability: The longer terms in ground leases provide tenants with the confidence to make substantial investments in property improvements, knowing they have access to the land for an extended period.
• Control over improvements: Tenants have the freedom to develop and customize the property to suit their specific business needs. This control allows businesses to design and construct buildings or infrastructure tailored to their operations, branding, and customer experience.
• Predictable costs: The rent paid under a ground lease is typically fixed or tied to predetermined formulas, providing tenants with predictable costs over the lease term. This predictability provides better financial planning and budgeting for the business.

Disadvantages of ground leases

Ground leases naturally come with some downsides. Here are the major ones to consider:

• Control limitations: Both landlords and tenants may have restricted authority over property decisions, which can impact their ability to manage or utilize the property effectively.
• Fixed costs: Ground leases often involve predetermined rental expenses, constraining potential profitability for landlords and limiting financial flexibility for tenants.
• Property constraints: Changes or improvements to the property may be restricted, affecting the property's value and usability for both the property owner and tenant.
• Financial risks: Tenant default can cause financial losses and legal issues for landlords. Tenants may face penalties and eviction for lease breaches.
• Long-term commitments: Lease terms restrict flexibility, affecting stability and profitability for landlords and tenants.
• Uncertainty: Factors like regulatory changes and market fluctuations can cause unknown future outlooks.

Types of ground leases

There are two common types of ground leases:

1. Subordinated ground lease

In a subordinated ground lease agreement, the tenant's rights come after other interests, like a lender's lien. If there's a default or foreclosure, the lender's claim is more important than the tenant's rights. This can mean a higher risk for tenants.

2. Unsubordinated ground lease

Unsubordinated ground leases prioritize the tenant's rights over any mortgage or liens on the property. Even if the property owner defaults or faces foreclosure, the tenant's rights stay protected. This type of lease offers tenants more security, as their occupancy isn't easily affected by the property owner's financial situation.

Completion of a ground lease

At the end of a lease, landlords retain ownership of the land along with any improvements made by the tenant during the lease term. The land owner may choose to renew the lease with the existing tenant, negotiate a new lease with different terms, or explore other options for the property.

Depending on lease terms, tenants may have to remove or compensate the landlord for improvements made to the property.

Ground lease leasehold

Ground leases have emerged as an increasingly popular and versatile option in the commercial real estate market. They offer an opportunity for landowners to generate a reliable income stream while retaining long-term control of their property. For tenants, this arrangement provides access to prime locations and the ability to develop the land according to their needs without the substantial upfront costs of purchasing the property.

As with any real estate transaction, consider the terms of the agreement and the options available before signing any papers. By understanding the potential risks and rewards, you can structure an agreement that aligns with your long-term goals and maximize the value of your property.

The growing interest in ground leases is likely to continue as market conditions evolve and more stakeholders recognize the benefits of this arrangement. With careful planning and due diligence, land leases can provide a foundation for successful partnerships and thriving businesses.

Ground lease real estate FAQs

Why are ground leases 99 years.

The 99-year term for ground leases is a common practice, not a legal requirement. It balances the landowner's interest in retaining long-term ownership with the lessee's need for stability and investment justification. While this duration has become customary, lease terms can vary based on mutual agreements between the parties involved.

What is the difference between NNN and a ground lease?

A NNN lease involves tenants paying all property expenses: property taxes, insurance, and maintenance. A ground lease is renting land to develop or improve. NNN is about operational costs of an existing property while ground leases focus on land use.

Important note: This post is for informational and educational purposes only. This post should not be taken as legal advice or used as a substitute for such. You should always speak to your own legal counsel before taking action.

Important Note: This post is for informational and educational purposes only. It should not be taken as legal, accounting, or tax advice, nor should it be used as a substitute for such services. Always consult your own legal, accounting, or tax counsel before taking any action based on this information.

Nichole co-founded Gateway Private Equity Group, with a history of investments in single-family and multi-family properties, and now a specialization in hotel real estate investments. She is also the creator of NicsGuide.com, a blog dedicated to real estate investing.

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• What Is A Ground Lease? Benefits And Risks
• Leasing Questions

by Stephen Michael White

February 27, 2024

Forbes once recognized ground leases as an often-overlooked development solution, but what advantages do they offer to businesses and property owners alike?

With a ground lease, the landlord leases their property for an extended period, usually 49-99 years. But it’s not a standard lease where the landowner manages the property and must approve any developments made by the tenant. The tenant is free to develop the land and is responsible for maintenance. But when the lease is up, everything on the property reverts to the landlord.

This benefits businesses, which can take control of prime pieces of real estate without the need to find equity to purchase the land. This leaves the business with more resources to develop. Land leases usually involve larger and more expensive pieces of land. Many supermarkets, restaurants, hotels , and factories are built on ground leases.

Landlords with prime real estate can also benefit from long-term, secure rental income with minimal management responsibilities. Plus, a good development can see the property value increase significantly by the end of the lease.

But ground leases are complex legal arrangements that require careful consideration. So, whether you are a large property owner or a company looking for a place to develop your business, this article will cover everything you need to know about ground leases, including the different types, tax implications, plus pros and cons.

Table Of Contents: Ground Lease

While ground leases are usually complex contracts, they’re more common in the real estate world than many people may imagine.

What Is A Ground Lease?

Who uses ground leases.

• Subordinated vs Unsubordinated Ground Leases

Ground Lease Tax Considerations

Pros and cons of ground leases for landlords, pros and cons of ground leases for tenants, what is a ground lease, how long do ground leases last, who pays taxes, insurance, and maintenance on a ground lease, what happens to the buildings at the end of a ground lease, can a ground lease be terminated early, are ground lease payments tax deductible, is a ground lease right for you.

How is this different from a traditional lease? With a ground lease, the landlord is not responsible for any buildings or other structures on the property. Instead, this responsibility lies with the tenant.

The idea of the ground lease is that the landlord retains actual ownership, but the tenant assumes responsibility for the property almost as though they had purchased it. They can build on the land and make any improvements to existing structures. As an extension of this agreement, the tenant is also responsible for property taxes , insurance, and liability.

To make this type of lease attractive for the tenant, the land lease is typically granted for an extended period, usually 50 to 99 years, so that they can make a return on their investment. This is because, when the lease is up, ownership of the land and anything constructed on it returns to the landlord.

Whether a tenant can sublet a ground lease depends on the contract’s specific terms and conditions.

If a tenant wants to break a lease early, a clause in the contract usually allows for this to happen with penalties. It’s harder for landlords to break a ground lease, but conditions for this can also be included in the agreement.

Ground leases are closely related to leasehold estates.

Ground leases are usually commercial and allow businesses to develop without buying pieces of land that are typically large and expensive. For example, real estate development companies that want to build high-rent-generating structures, such as shopping centers, office buildings, or restaurants, on desirable premises can do so without having the capital to purchase.

Ground leases are also relatively common in the agriculture industry, with farmers and ranchers looking for large tracts of land, especially for seasonal operations.

Often, the landowners who enter into ground leases are government entities or non-profit organizations with property they can’t or don’t want to sell but also don’t have the capacity or capital to develop themselves. A ground lease can provide a source of stable income and encourage development in certain areas without selling public land.

Subordinated vs. Unsubordinated Ground Leases

Ground leases come in two types: subordinated and unsubordinated. This choice of which to use can significantly affect the risks involved.

Subordinated Ground Lease

In this arrangement, the landowner willingly places their land interest below, or subordinate to, that of the tenant’s mortgage lender. This means that if a foreclosure occurs , the lender’s claim takes precedence over the landlord’s.

While this benefits tenants with improved financing and terms, landlords may face a higher risk of property loss if the tenant’s business falters.

Landlords may embrace subordination for potential positive development and higher rents. However, it demands vigilance, as tenant negligence could jeopardize the property.

Unsubordinated Ground Lease

Contrastingly, an unsubordinated ground lease prioritizes the landlord’s interest, shielding it from seizure if the tenant defaults. Though lower risk for landlords, an unsubordinated ground lease can pose challenges in attracting quality tenants, as securing funding becomes more difficult for them.

Expect lower rents and diminished potential for increased property value as tenants’ investments are restricted.

Understanding the nuances of subordination is key for landlords seeking the right balance between risk and reward in ground leases.

For Landlords: Primary income from a ground lease, typically taxed as regular income , comes from rental income. Lease terms must specify property tax responsibility, usually borne by the tenant, unless stated otherwise.

Importantly, leasing doesn’t trigger capital gains tax for landlords; this applies only in the future, with anticipated appreciation.

For Tenants: Tenants are often responsible for property tax, yet they can usually deduct ground rent as a business cost.

Substantial depreciation deductions are feasible for any property improvements the tenant makes as buildings begin depreciating as soon as they are put into active use.

Transfer Tax Considerations: Temporary transfer of legal interest to the tenant might trigger transfer tax in certain jurisdictions, contingent on the laws of the state where the property is located. For instance, New York exempts transfer taxes for land leases.

Understanding these nuances is vital for both parties to effectively navigate the tax implications of ground leases.

While a landlord will charge a lower rent on a ground lease than a standard lease, the arrangement comes with various benefits for landlords.

• It’s a steady passive income stream with few landlord and active property management responsibilities. Overheads are typically low.
• Landlords retain ownership of the land, which usually increases in value over time, especially as they also take ownership of any improvements made to the property by the tenant at the end of the lease.
• Because ground lease agreements are long-term, they often include rent escalation to account for inflation over the lease term, allowing landlords to hedge against that inflation.
• The tenant pays property taxes, while the landlord’s rental income from ground leases is often subject to favorable tax treatment.

However, landlords should also be aware that they’re sacrificing significant control of their property and will have little say over how the tenant develops and uses it. If the tenant develops the property poorly or underutilizes it, there is very little the landlord can do.

While the landlord can benefit if the property is developed well, they can incur costs if it’s developed poorly and later requires significant renovation or demolition.

The long-term commitment to a ground lease can limit a landlord’s options when it comes to selling property since many potential buyers will not want to purchase land they cannot use right away.

For tenants, there are various benefits to choosing a ground lease over purchasing property or more traditional rental options.

• You can access prime property locations that might otherwise be too expensive to purchase. This is particularly important for industries such as retail.
• When starting a new business or development, signing a land lease can significantly reduce outlay costs, allowing more investment in other activities, such as construction.
• Unlike standard rentals, where the tenant has little control over the property and must rely on the landlord for a variety of services, with a ground lease, you have broad control of the property to develop it how you see fit.
• Rental payments on ground leases are often tax-deductible as a business expense.

However, tenants should be aware of their future plans, as signing a land lease requires a long-term commitment that can be expensive to break if circumstances change.

While rents are typically lower with ground leases than other types of leases, tenants should also factor in that rent does increase over time with inflation.

It can be challenging for some tenants with ground leases to find funding for projects since not owning the land can make investment seem less desirable and higher risk to lenders.

Also, what you invest in property development ultimately reverts to the landlord, so tenants need a strategy to generate a return on their investment while the property is in their hands.

Ground Lease FAQs

Below are answers to some of the most frequently asked landlord questions about ground leases.

A ground lease is a long-term lease agreement where a tenant rents land from the landlord and is permitted to develop or improve the land. The landlord retains ownership of the land, but the tenant owns the buildings or improvements for the duration of the lease.

Ground leases are typically long-term arrangements, often spanning 50 to 99 years. The long duration allows tenants to make significant investments in the property, such as constructing buildings.

With most ground leases, the tenant is responsible for all costs associated with the property, including property taxes, insurance, and maintenance for both the land and any structures on it.

At the end of a ground lease, ownership of the buildings and improvements usually reverts to the landowner unless the lease is renewed or specific terms are set for the removal of the buildings.

Ground lease agreements can include early termination clauses. Typically, however, these leases are binding until the end of the term unless both parties agree to terminate early or specific conditions for termination are met.

For tenants, ground lease payments are often tax-deductible as a business expense. However, tenants should consult a tax professional for advice based on their specific circumstances.

Ground leases are more common than many people realize. Chances are, for example, that your local McDonald’s sits on a property controlled by a ground lease. Many Macy’s department stores also operate on ground leases. In January 2023, the company reported that it had $3 billion tied up in long-term lease liability.

For landlords, a ground lease can make sense to earn a return on investment on property they don’t want to, or are unable to, develop themselves but don’t want to sell. That said, choosing the right tenant is essential as you’re trusting them to develop your land, and if you agree to a subordinated ground lease, your ownership depends on them running their business successfully.

For tenants, ground leases make sense for businesses that need large or expensive pieces of land in prime locations for business success. However, they need to have a plan in place to realize their return on investment during the lifetime of the lease.

Ground leases can be complex agreements and typically require the assistance of an experienced property lawyer. But done right, they can be very beneficial to both the landlord and the tenant.

Note: RentPrep does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, or accounting advisors.

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What Is a Ground Lease? Definition & FAQs Explained

What is a ground lease?

Ground lease example

Subordinated vs. unsubordinated

Ground lease pros & cons

In the world of commercial real estate , there are several types of leases. The most common type, triple-net leases , require tenants to pay most of the costs of ownership, such as insurance, property taxes, and maintenance. Single- and double-net leases limit this liability. And in a gross lease, the tenant pays nothing more than their monthly rent.

But all of these leases undergird a particular type of relationship; the landlord owns the commercial building, and the tenant is merely paying for the right to use the space.

A ground lease , on the other hand, is entirely different. Under the terms of a ground lease, the tenant actually owns their building, but the landlord owns the ground it’s built on. Sound confusing? It’s actually pretty straightforward. Here’s everything you need to know about being a tenant or a landlord in a ground lease.

What Is a Ground Lease?

A ground lease is exactly what it sounds like – a lease on the ground itself, not on any developed properties. Instead, ground leases involve undeveloped commercial land. When a tenant rents out the land, they also rent the right to develop it, subject to any local zoning restrictions.

The tenant maintains ownership rights to any improvements for the entire term of the lease. This is particularly popular for big box stores, who will take out a long-term lease, build a store, and lay down a parking lot. Over the long term, the tenant saves money, because they don’t have to pay rent on the building – only on the land itself. However, when the lease is over, the landlord obtains ownership of any improvements, including any buildings.

That said, there are some things a ground lease has in common with other lease types. For one thing, the tenant still has to make monthly payments. For another thing, these are typically triple-net leases, which means the tenant is also responsible for paying property taxes and maintenance, and for insuring the property.

Because of their very nature, ground leases are a long-term investment. After all, why would a tenant make any improvements if they’re not getting to see the benefit? You’d only want to sign a ground lease if you expect to see a return on your initial investment. The shortest term you’ll see is around 20 years, with 30 and 40-year leases being even more common. And leases of 99 years or even longer are not unheard-of.

Here are the basic things you need to remember about a ground lease:

The tenant only pays rent for the land. They own any buildings or improvements they have made.

The lease term will last for several decades.

The tenant is typically responsible for taxes and other expenses.

At the end of the lease term, any buildings or improvements become the property of the landlord.

Example of a Ground Lease

This is all well and good, but how common are ground leases, and where do they make sense? The most common type of ground lease is for low-density commercial space. Think of properties like big box stores, fast food franchises, and other similar spaces. For example, a developer might take out a ground lease on a piece of land, build a strip mall, then lease spaces in the building to individual businesses.

That said, ground leases can be used for just about any commercial property . Forget about low-density space; let’s talk about Manhattan, one of the most densely-populated areas in the US.

In 1994, BLDG Management purchased the George Washington Hotel in a foreclosure sale. For the next 22 years, the building served as a dormitory for the School of Visual Arts. But in April, 2016, BLDG filed plans with the city to convert the building into a hotel.

In July of that year, AllianceBernstein, a major investment firm, signed a 99-year ground lease for the building and began to undertake the proposed conversion. The building is now home to the five-star Freehand Hotel and two five-star restaurants. AllianceBernstein stands to profit from these businesses, while BLDG collects far more rent than they could demand from the School of Visual Arts.

Subordinated Vs. Unsubordinated Ground Lease

Now that we understand how a ground lease works, let’s talk about the two main types of ground lease: subordinated and unsubordinated. The difference is what happens if the tenant cannot meet their financial obligations.

Subordinated ground leases. In this type of lease, the landlord has a lower priority if the tenant defaults. For example, the tenant signs a lease, then takes a loan of $1 million to build a big box store. After 10 years, they go into default on the loan. The lender can then sue for the property, including the land itself.

Unsubordinated ground leases. In this type of lease, the landlord has a higher priority than other lenders. If the tenant goes into default on their loan, their lender may be able to go after other assets. For example, they might seize any inventory and equipment that are kept on site. But regardless of the tenant’s level of debt, the landlord retains ownership of the land itself.

As you might imagine, both of these lease types have their own trade-offs. On the one hand, subordinated ground leases provide a better value for tenants. Since they can use the property as collateral , they can borrow more money with less interest than they could with an unsubordinated lease. At the same time, they present a risk for the landlord, since they could lose their property.

With an unsubordinated ground lease, the issue is reversed. Tenants are less likely to get favorable loan terms, since their lender can’t seize the property if they default. On the other hand, landlords don’t risk losing their ownership of the land.

For these reasons, subordinated leases tend to cost more than unsubordinated leases.

Pros of Ground Leases

So, why would a tenant want to invest in a ground lease? And why would a landlord want to sign one? Here are a few good reasons.

Advantages for Tenants

As a tenant, you can gain immediate access to locations that would otherwise be prohibitively expensive. This is why a lot of big box stores and other chains use ground leases as part of their expansion strategies.

Another benefit, particularly for smaller companies, is the reduced upfront investment. Even if you were to finance a real estate purchase, you’d still have to put down a substantial down payment . By comparison, your monthly rent is a relatively small sum. This allows you to invest your capital in buildings and other improvements rather than on the land itself.

Finally, as long as your business is actively using the land, you can most likely deduct your rent payments on your taxes, and this can save you a substantial sum over the duration of the lease.

Advantages for Landlords

From the landlord’s perspective, you get the benefit of a steady long-term income. Instead of having to renegotiate a lease every few years, you get the peace of mind of knowing that your land is rented out for at least the next few decades. Most leases will even contain an escalation clause, which provides for guaranteed rent increases over the term of the lease.

Depending on your tax situation, you may also save money on your taxes. If you were to sell the property, you’d have to pay tax on any gains. Since there’s no sale involved here, your gains remain safe from taxation. That said, your rent income will still be taxable.

Cons of Ground Leases

No financial agreement is perfect. Here are some reasons you might want to think twice about entering into a ground lease.

Disadvantages for Tenants

Depending on the nature of the rental agreement, landlords may still have input on certain changes. This can present obstacles which wouldn’t be present if you had purchased the property outright. At the very least, it can result in delays while you’re waiting for landlord approval.

Along the same lines, your other costs can also go up. Taxes and permitting immediately become more complicated when you’re renting instead of owning. And if you’re planning to lease out any building space, that too can become more complicated

Disadvantages for Landlords

From the landlord’s perspective, you may want to maintain some control of how your land is developed . For example, you might want to leave some small portion undeveloped, or you might not want the property to be used for a certain type of business. If you don’t structure your lease correctly, you might find that you have no say in the matter.

For the right property and the right tenant, a ground lease can be a mutually-beneficial arrangement. Landlords are able to earn a consistent income over the long term, while the tenant pays less than they would to lease a fully-developed property. Over the long term, this can provide an excellent value for both parties.

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Assignment of Lease

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What is an assignment of lease.

The assignment of lease is a title document that transfers all rights possessed by a lessee or tenant to a property to another party. The assignee takes the assignor’s place in the landlord-tenant relationship.

You can view an example of a lease assignment here .

How Lease Assignment Works

In cases where a tenant wants to or needs to get out of their lease before it expires, lease assignment provides a legal option to assign or transfer rights of the lease to someone else. For instance, if in a commercial lease a business leases a place for 12 months but the business moves or shuts down after 10 months, the person can transfer the lease to someone else through an assignment of the lease. In this case, they will not have to pay rent for the last two months as the new assigned tenant will be responsible for that.

However, before the original tenant can be released of any responsibilities associated with the lease, other requirements need to be satisfied. The landlord needs to consent to the lease transfer through a “License to Assign” document. It is crucial to complete this document before moving on to the assignment of lease as the landlord may refuse to approve the assignment.

Difference Between Assignment of Lease and Subletting

A transfer of the remaining interest in a lease, also known as assignment, is possible when implied rights to assign exist. Some leases do not allow assignment or sharing of possessions or property under a lease. An assignment ensures the complete transfer of the rights to the property from one tenant to another.

The assignor is no longer responsible for rent or utilities and other costs that they might have had under the lease. Here, the assignee becomes the tenant and takes over all responsibilities such as rent. However, unless the assignee is released of all liabilities by the landlord, they remain responsible if the new tenant defaults.

A sublease is a new lease agreement between the tenant (or the sublessor) and a third-party (or the sublessee) for a portion of the lease. The original lease agreement between the landlord and the sublessor (or original tenant) still remains in place. The original tenant still remains responsible for all duties set under the lease.

Here are some key differences between subletting and assigning a lease:

• Under a sublease, the original lease agreement still remains in place.
• The original tenant retains all responsibilities under a sublease agreement.
• A sublease can be for less than all of the property, such as for a room, general area, portion of the leased premises, etc.
• Subleasing can be for a portion of the lease term. For instance, a tenant can sublease the property for a month and then retain it after the third-party completes their month-long sublet.
• Since the sublease agreement is between the tenant and the third-party, rent is often negotiable, based on the term of the sublease and other circumstances.
• The third-party in a sublease agreement does not have a direct relationship with the landlord.
• The subtenant will need to seek consent of both the tenant and the landlord to make any repairs or changes to the property during their sublease.

Here is more on an assignment of lease here .

Parties Involved in Lease Assignment

There are three parties involved in a lease assignment – the landlord or owner of the property, the assignor and the assignee. The original lease agreement is between the landlord and the tenant, or the assignor. The lease agreement outlines the duties and responsibilities of both parties when it comes to renting the property. Now, when the tenant decides to assign the lease to a third-party, the third-party is known as the assignee. The assignee takes on the responsibilities laid under the original lease agreement between the assignor and the landlord. The landlord must consent to the assignment of the lease prior to the assignment.

For example, Jake is renting a commercial property for his business from Paul for two years beginning January 2013 up until January 2015. In January 2014, Jake suffers a financial crisis and has to close down his business to move to a different city. Jake doesn’t want to continue paying rent on the property as he will not be using it for a year left of the lease. Jake’s friend, John would soon be turning his digital business into a brick-and-mortar store. John has been looking for a space to kick start his venture. Jake can assign his space for the rest of the lease term to John through an assignment of lease. Jake will need to seek the approval of his landlord and then begin the assignment process. Here, Jake will be the assignor who transfers all his lease related duties and responsibilities to John, who will be the assignee.

You can read more on lease agreements here .

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Assignment of Lease From Seller to Buyer

In case of a residential property, a landlord can assign his leases to the new buyer of the building. The landlord will assign the right to collect rent to the buyer. This will allow the buyer to collect any and all rent from existing tenants in that property. This assignment can also include the assignment of security deposits, if the parties agree to it. This type of assignment provides protection to the buyer so they can collect rent on the property.

The assignment of a lease from the seller to a buyer also requires that all tenants are made aware of the sale of the property. The buyer-seller should give proper notice to the tenants along with a notice of assignment of lease signed by both the buyer and the seller. Tenants should also be informed about the contact information of the new landlord and the payment methods to be used to pay rent to the new landlord.

You can read more on buyer-seller lease assignments here .

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Do you have any questions about a lease assignment and want to speak to an expert? Post a project today on ContractsCounsel and receive bids from real estate lawyers who specialize in lease assignment.

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I am an attorney admitted in NY, with over 6 years of experience drafting, reviewing and negotiating a wide array of contracts and agreements. I have experience in Sports and Entertainment, Real Estate, Healthcare, Estate Planning and with Startup Companies. I am confident I can assist you with all of your legal needs.

Rishma D. Eckert, Esq. is a business law attorney who primarily represents domestic and international companies and entrepreneurs. A native of both Belize and Guyana, she remains engaged with the Caribbean community in South Florida: as a Board Member and General Counsel for the Belize American Chamber of Commerce of Florida, and Member of the Guyanese American Chamber of Commerce. She holds a Bachelor of Laws degree (LL.B.) from the University of Guyana in South America, a Master’s degree in International and Comparative Law (LL.M.) from Stetson University College of Law in Gulfport, Florida, and earned a Juris Doctor degree (J.D.) from St. Thomas University School of Law in Miami, Florida. Licensed to practice in the State of Florida and the Federal Court in the Southern District of Florida, Mrs. Eckert focuses her passion and practice on domestic and international corporate structuring and incorporation, corporate governance, contract negotiation and drafting, and trademark and copyright registrations.

Founder and Managing partner of Emerald Law, PLLC, a business law firm specializing in contract drafting and corporate transactions. Kiel worked as in house counsel for a variety of companies before launching his own firm, and most recently served as the Chief Legal Officer for an international private equity firm.

I work with early stage startups (in Georgia and internationally) with their formation, contract, patent and investment needs.

Skilled in the details of complex corporate transactions, I have 15 years experience working with entrepreneurs and businesses to plan and grow for the future. Clients trust me because of the practical guided advice I provide. No deal is too small or complex for me to handle.

Mark A. Addington focuses his practice primarily on employment litigation, including contractual disputes, restrictive covenants (such as non-competition, non-solicitation, or confidential information restrictions), defense of wage and hour, harassment, retaliatory discharge, disability, age, religion, race, and sex discrimination.

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Experienced Attorney focused on transactional law, payments processing, banking and finance law, and working with fintech companies with a demonstrated history of driving successful negotiations in technology sourcing and transactions and strong understanding of government contracts and the procurement process

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Contract to lease land from a church.

I’m planning on leasing land from a church. Putting a gym on the property. And leasing it back to the school.

Ok; first step is that you will need a leasing contract with the church. Ask them to prepare one for you so you would just need an attorney to review the agreement and that should cost less than if you had to be the party to pay a lawyer to draft it from scratch. You need to ensure that the purpose of the lease is clearly stated - that you plan to put a gym on the land so that there are no issues if the church leadership changes. Step 2 - you will need a lease agreement with the school that your leasing it do (hopefully one that is similar to the original one your received from the church). Again, please ensure that all the terms that you discuss and agree to are in the document; including length of time, price and how to resolve disputes if you have one. I hope this is helpful. If you would like me to assist you further, you can contact me on Contracts Counsel and we can discuss a fee for my services. Regards, Donya Ramsay (Gordon)

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Contracts Counsel was incredibly helpful and easy to use. I submitted a project for a lawyer's help within a day I had received over 6 proposals from qualified lawyers. I submitted a bid that works best for my business and we went forward with the project.

I never knew how difficult it was to obtain representation or a lawyer, and ContractsCounsel was EXACTLY the type of service I was hoping for when I was in a pinch. Working with their service was efficient, effective and made me feel in control. Thank you so much and should I ever need attorney services down the road, I'll certainly be a repeat customer.

I got 5 bids within 24h of posting my project. I choose the person who provided the most detailed and relevant intro letter, highlighting their experience relevant to my project. I am very satisfied with the outcome and quality of the two agreements that were produced, they actually far exceed my expectations.

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Ground Lease in Commercial Real Estate

A ground lease is a type of long-term lease agreement that allows the tenant to build on and make significant improvements to the leased property. Ground leases usually last between 50-99 years, and generally stipulate that the property and all improvements made during the lease will revert to the landlord after the termination of the lease.

• What is a Ground Lease?
• Who Benefits From Ground Leases?
• Types of Ground Leases
• Lease Assignment and Ground Leases
• Leasehold Financing for Ground Lease Tenants
• Ground Leases and Escalation Clauses
• Questions? Fill out the form below to speak with a commercial real estate loan specialist.
• Related Questions
• Get Financing

What is a ground lease in commercial real estate?

A ground lease is a type of long-term lease agreement that allows the tenant to build on and make significant improvements to the leased property. Ground leases usually last between 50-99 years, and generally stipulate that the property and all improvements made during the lease will revert to the landlord after the termination of the lease. In general, ground leases are the most similar to triple net leases , or bond leases, as they require a tenant to pay for property taxes, insurance, maintenance, building repairs, and all other associated costs with operating the property.

Most traditional lease agreements provide some ability for a tenant to assign— or transfer, their lease obligation to another tenant. This is also the case in most ground lease agreements, but, since these leases are much longer term and usually involve significantly larger amounts of money, stipulations may be complex. Unlike subleasing, in which the original tenant typically still collects rent from the new tenant, in a lease assignment , a direct relationship is created between the new tenant and the landlord. However, original tenant may still carry some liability should the new tenant default on their lease.

What are the advantages of a ground lease in commercial real estate?

Ground leases provide significant financial flexibility for larger organizations, as they do not require a down payment and can help free up capital for further expansion plans. Additionally, ground leases allow landlords to generate a certain degree of income/profit while still keeping the rights to the land, and potentially selling the property for a profit when the tenant’s ground lease is up.

Ground leases are also similar to triple net leases, as they require a tenant to pay for property taxes, insurance, maintenance, building repairs, and all other associated costs with operating the property.

What are the disadvantages of a ground lease in commercial real estate?

What are the common terms of a ground lease in commercial real estate.

Ground leases usually last between 50-99 years, and generally stipulate that the property and all improvements made during the lease will revert to the landlord after the termination of the lease. In general, ground leases are the most similar to triple net leases , or bond leases, as they require a tenant to pay for property taxes, insurance, maintenance, building repairs, and all other associated costs with operating the property. Most traditional ground lease agreements also provide some ability for a tenant to assign— or transfer, their lease obligation to another tenant. This is also the case in most ground lease agreements, but, since these leases are much longer term and usually involve significantly larger amounts of money, stipulations may be complex. Unlike subleasing, in which the original tenant typically still collects rent from the new tenant, in a lease assignment , a direct relationship is created between the new tenant and the landlord. However, original tenant may still carry some liability should the new tenant default on their lease.

What are the tax implications of a ground lease in commercial real estate?

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Demystifying Assignment of Lease: Your Go-To Guide

LegalGPS : July 29, 2023 at 8:17 AM

When you’re talking about property leasing, it’s important to understand that there are a lot of terms and concepts that you may have never heard before. One of them is the assignment of lease, which refers to a situation where a tenant transfers their rights and responsibilities under the lease agreement to another party.

What is an Assignment of Lease, and why is it so crucial?

An Assignment of Lease is a term you may have heard thrown around, especially if you're involved in rental properties. It’s a pretty important document. But what exactly is it? Well, in simple terms, an Assignment of Lease is an agreement where the original tenant of a property transfers their leases and all of its rights and obligations to a new tenant. Now, you might be wondering, "When would this scenario ever occur?"

Let's imagine you're a tenant who signed a three-year lease for an office space. However, two years in, you need to relocate due to unprecedented growth of your business. Instead of breaking the lease, you might choose to assign your lease to another business looking for office space. This means that you, as the original tenant, no longer have any obligations under the lease. The new tenant is now responsible for paying rent and complying with all of the terms of the previously signed agreement.

Now that you understand, let's get into the step-to-step guide on how to create an Assignment of Lease!

Steps to Write an Assignment of Lease

Creating a thorough Assignment of Lease agreement doesn't need to be an overwhelming task. Simply follow these steps to ensure your agreement is both comprehensive and legally binding:

Step 1: Identify the Parties

The information of each party should be included. For the existing tenant (the assignor), make sure to include:

Full legal name or business name

Postal mailing address

Phone number and email address

Do the same for the new tenant (the assignee). Make sure all the information is up-to-date and accurate to avoid any unnecessary confusion or disputes. For example, if the assignor is a business, make sure they have updated their mailing address with the post office to reflect their new building location. If a party has multiple addresses, be sure to list them all.

Step 2: Specify the Lease

This section requires exact information from the original lease agreement, including:

Property address and description

Lease start and end date

A reference to the original lease agreement (for instance, a sentence like "the lease agreement dated...")

Remember to include a copy of the original lease as an attachment to ensure the assignee understands the terms they're adhering to. If not already included in the original lease agreement, be sure to add the following information: Description of rental property, Lease term (how long the lease is good for), Rent amount, and Security deposit amount.

Step 3: Detail the Assignment

State that the assignor is transferring all their interests and obligations in the lease to the assignee. Here, write something like:

"The Assignor hereby assigns, transfers, and conveys to the Assignee all of the Assignor's rights, title, and interest in and to the Lease, together with all the Assignor's obligations, liabilities, and duties under the Lease."

This means that the assignor is transferring all of their interests and obligations in the lease to the assignee. This includes any future rent payments, repairs and maintenance responsibilities, notices of default by either party, and so on.

Step 4: Landlord's Consent

Many leases require the landlord's consent to assign the lease. The assignor should request written consent from the landlord and include a clause like:

"The assignment of the lease is not valid unless and until the landlord provides written consent."

This is followed by a place for the landlord to affirm consent by signing or initialing. This is important because the landlord can elect to withhold consent and the assignment will not be valid. If this is the case, you may need to provide additional consideration for your landlord's assent (for example, an increase in rent).

Step 5: Assignee Acceptance

Include a statement in which the new tenant agrees to the assignment and the terms of the lease. It may look like:

"The Assignee hereby accepts this assignment, assumes all duties and responsibilities under the Lease, and agrees to perform all of the Assignor's obligations under the Lease."

You need to do this because the new tenant needs to have an affirmative acceptance of the assignment in order for it to be valid. This is typically done through a letter from the assignee stating that they agree to perform all of your obligations under the lease.

Step 6: Signature and Date

Every binding legal document needs a date and a signature. Make sure that there is a proper place for the assignor and the assignee to sign and print their names, with a line for the date.

By following these clear, actionable steps, you'll be able to construct an effective Assignment of Lease agreement. Remember, every situation is unique, so adjust the template as necessary, being sure to include all relevant details.

Clear so far? Great! Now, let's focus on the tips to draft a perfect Assignment of Lease.

Tips to Draft a Perfect Assignment of Lease

Accurate Dates: Be sure to include the date when this agreement will take effect. Precision avoids any confusion about durations, when the assignee takes over, or when the assignor's obligations end.

Clear Terms: This document should restate the terms of the original lease. The assignee needs a clear understanding of what they're stepping into. Bit ambiguous? Think of it like this: the assignee should be able to step into the assignor's shoes comfortably.

Specify Rent Terms: Stating the rent amount, due dates, and method of payment in the assignment helps create a record of the agreed-upon rent terms, ensuring no misunderstanding arises in the future.

Specify the Term: The assignment should state how long the new lease lasts. For example, if the original lease is for one year, then the assignee will assume only a one-year term.

Specify Other Conditions: If there are other conditions in place—such as tenant improvements or utility allowances—then specify these too.

An assignment of lease doesn't have to be a formidable task to overcome. With a cautious and considered approach, these documents can be a smooth and seamless part of managing a successful lease transition.

Our contract templates can offer you even more support, empowering you towards crafting an excellent and individualised Assignment of Lease ready for your task. So why not take your next step towards leasing success and check them out today? Click here to get started!

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GROUND LEASES by Kimberly M. Reed, ATG Law Clerk

When an owner makes a long-term lease of land only, the lessee is said to have obtained a ground lease. Also called a land lease, a ground lease is commonly for a term of 50 to 99 years. The tenant usually is required to construct a building or maintain and use current improvements on the land as specified in the lease. Specific circumstances and the negotiations between the lessor and lessee significantly determine the make-up and contents of a ground lease instrument, but there are several elements that are typically present. In most cases, the lessee pays all expenses of the real property such as property taxes, insurance, maintenance and financing costs. Operating and related maintenance expenses are often called "pass-throughs" because they are costs that pass through from the owner to the tenant. As a result, the owner-lessor receives payment subject to no deductions. The lease also will likely include provisions regarding any improvements made to the property. For example if the lessee constructs an apartment building on the land, if agreed, at the end of the lease period both the land and the apartment building may revert back to the lessor.

Advantages and Disadvantages

There are several advantages that may motivate a prospective developer or tenant to seek a ground lease rather than a different form of ownership. First, the price of the property should be less than the purchase price of similar properties because the land is not being bought. Second, initial development costs should be drastically reduced, especially during the construction period. With a ground lease, the monthly expenses are fixed at the cost of the rent payment. The developer could also negotiate a rent abatement provision in the agreement that would suspend the requirement of rent payments during the construction period of the project. If the landlord provided a decorating allowance, a specific portion of the rent would be deducted allowing more funds to make improvements to the property. Finally, a ground lease may be the only method to attain a piece of property. The developer may be dealing with a party, such as a non-profit entity, that generally is not disposed to or even permitted to sell the land.

Certain disadvantages tag along with ground leases that otherwise would not be incurred; the importance of successful negotiations is evidenced here. Monthly rent payments may be higher than potential monthly mortgage and interest payments. The shorter the ground lease term, the more difficult it may be to obtain financing. If the lessee was not successful in negotiating the terms and restrictions of the agreement, the lessee may have less flexibility in the development and operation of the property because of the landowner's control. Finally, the lessee may experience difficulties or delay if the lessee later has to negotiate with the lessor's heirs or successors of interest.

Who Uses a Ground Lease?

A ground lease is most often used in the following situations: (1) when the property is leased to a developer who subsequently will make multiple subsidiary leases; (2) when a governmental body, e.g., a town or county, clears land under an urban renewal program and leases the cleared land to a developer; (3) when a non-profit entity, such as a church or charity, cannot sell the property and leases the land; (4) in sale and leaseback transactions, which are a form of financing; and (5) for estate planning purposes. Illinois Real Property Service §4:3 (1988).

Types of Ground Leases

The character of a ground lease varies depending on the needs and negotiations of the parties to the lease agreement. For example, the ground lease may involve a plot of land upon which there currently is no structure and the lessee intends to build one and lease space back to the lessor-owner. In this agreement, the lessor has a more active involvement with the lessee because instead of simply receiving payment on the leased land, the lessor has a substantial interest in the design planning of the building as well as in the future users or occupants of the building. IRPS § 4:1 (1988). The instrument would need to be drafted in a way to stipulate the extent of influence that the lessor would have on the tenant's development plans.

The three most common types of ground leases are single, multiple, and divisible ground leases. These variations are accomplished by rewording or adding provisions to the document. Depending on the circumstances of the specific project, the ground lease may vary in its autonomy from other adjoining ground leases. In cases such as department or grocery stores, office buildings or shopping centers, the best type of ground lease would be a single ground lease with no subsidiary ground leases on the land. This design contains a single leased parcel of land, and the lease does not overlap onto another adjoining fee or other ground lease parcels. In the simplest case, there would be no easements with adjoining parcels. If the lessee at a later point needs to acquire additional adjoining land for expansion purposes, some lessors would require the lessee to purchase the new parcel, convey it to the owner and allow the lessee to lease it back. The benefit of this arrangement is obvious if and when the lease is terminated. At the end of the lease, the lessor-owner acquires the entire developed project and will not have to negotiate additional arrangements for the remaining parcel or continuation of the project. IRPS § 4:6 (1988).

In some instances, a more problematic situation exists where the lessee, usually a developer, is forced to negotiate multiple ground leases to acquire enough property. This happens most often in situations where the developer cannot acquire the entire parcel or when the developer acquires pieces of the parcel at different times. The lessee then must obtain multiple ground leases that may be contingent upon one another. Multiple ground leases may cause many difficulties. First, and most importantly, multiple lease parcels are harder to finance. The lender will want to be absolutely certain that none of the other leases can be terminated, to prevent it from losing its security on the loan. Other problems include resolving the effect of multiple leases upon all of the sublessees, and obtaining appropriate cross-easements and reciprocal agreements between the various parties.

The vast majority of lenders will only approve financing when the mortgaged parcel has a single status or position. As an example, assume the construction of a development will be done in stages as three separate projects. In this case, it will be easier for the developer to obtain financing if the ground lease is divided into separate leases. Each lease would cover a different stage of the development. In this situation, rent is usually apportioned to the underlying land according to size, per square-foot for example, and it is practical for all the ground leases to have identical terms. In this case, divisible ground leases would be appropriate. In a divisible ground lease, none of the individual divided leases can have cross-default provisions. A cross-default clause provides that if the lessee defaults on or terminates the lease containing that provision, that default will trigger a default or termination on some or all of the other leases of the development. Linking the termination of a single lease to the termination of some or the rest of the leases destroys the purpose of having separate leases. At the same time that the separate ground leases are executed the lessor-owner should be required to enter into cross-easements or reciprocal agreements, such that the project will be operated as one unit in spite of the separate leasing and financing. This agreement will provide parking, access, or the operation and management of the entire development. For example, assume that a project involves four adjacent parcels of land that are leased via four separate ground leases. The four parcels of land all share one access road and common parking facilities. There should be a provision in each lease that identifies the access and parking arrangement and provides that default or termination of any of the other ground leases will not affect the right to use the easements or rely upon the reciprocal agreements. This way in the event of the termination of even one ground lease, the entire project may still be a single integrated real estate project. IRPS § 4:8 (1988).

Drafting a Ground Lease

A ground lease, like any other lease, must meet the requirements of a contract. Ground leases, being long-term agreements, always have a term longer than one year. Therefore they must be in writing to satisfy the statute of frauds. 740 ILCS 80/2. Even if a lease meets all the contract requirements, the landlord cannot include provisions that violate another body of law or are contrary to public policy. For example, a lease provision that indemnifies the lessor for any and all damages to the property, even those arising from the lessor's own negligence, is void on public policy grounds regardless if brought under tort or contract theory. 765 ILCS 705/1; Economy Mechanical Industries Inc v T J Higgins Co , 294 Ill App 3d 150, 689 NE2d 199, 228 Ill Dec 327 (1st D 1997). Although ground leases typically run from 50 to 99 years, shorter lease terms of 10-25 years have been successfully negotiated. Citizens National Bank of Downers Grove v Mormon , 78 Ill App 3d 1037, 398 NE2d 49, 34 Ill Dec 374 (1st D 1979). Financing is harder to obtain, however, for leases that have terms of fewer than 50 years.

As mentioned above, there is no typical or traditional form of ground lease instrument. The inclusion or exclusion of specific lease provisions ultimately depends on the needs of the transaction and the negotiations by the parties to the document. A commercial ground lease instrument should always be drafted with the needs of actual or potential lenders in mind. At some point the lessee will probably use the property as security for a loan, for example if intending to make improvements to the property. The opinion of the lender is so important that, if possible, the lender should participate in the lease negotiation process or approve the form of the lease before it is executed.

Guidelines and sample ground lease instruments are available on the websites of many lending institutions, organizations such as the American Land Title Association (ALTA), and in form books. For an example of a ground lease for a condominium project, see Illinois Forms , § 7:46 (2000).

Financing a Ground Lease

Many competing interests must be balanced to finance a ground lease: the needs of the owner-lessor, the owner-lessor's lender, the tenant and the leasehold lender. As mentioned above, if agreed, the leasehold lender should participate in the lease negotiation to ensure that its needs are met. In reality, the leasehold lender is often presented with an executed ground lease and is forced to try to negotiate changes and amendments. Eugene A DiPrinzio, Leasehold Financing and Mortgagee Protections , Probate & Property (July/August 2000).

There are three important lender concerns: (1) the status of the title to the fee underlying the ground lease; (2) that ground leasing is permitted on the property; and (3) determining the rights that the owner's lender might have in relation to the tenants. The lender's primary goal is to secure payment in the event of default or termination of the ground lease. Id . The leasehold lender "will usually insist on subordination of the ground lease to the leasehold mortgage." Id.

An extreme example of the results that can arise because of the failure of a leasehold lender to insist on a minimum amount of protection in the ground lease is a California case, Glendale Federal Bank v Hadden , 73 Cal App 4th 1150 (Cal App Ct, 1999). In Hadden , the leasehold mortgagee did not negotiate a right to cure a tenant's default in the ground lease. The tenant defaulted and the landlord terminated the lease and failed to join the leasehold lender in his unlawful detainer action. The lender claimed that it maintained interest in the terminated leasehold. The court ruled in favor of the landlord and the lender appealed. On appeal, the court held that the mortgagee was not an indispensable party to the unlawful detainer action. The court stated that the mortgagee could have avoided this result by protecting itself against termination of the lease with an agreement with the landlord or an amendment to the lease.

If a ground lease is already negotiated and executed, the lender usually will require a collateral agreement or a collateral assignment of the ground lease to provide certain minimal protections to the lender in case of a default under the lease. These protections may include "the lender's right to cure any tenant default under the ground lease, appropriate notice provisions, exculpation of the lender from liability to the landlord and the exercise of the lender's possessory rights." DiPrinzio, Probate & Property (July/August 2000). Additional protections may be required if the collateral includes items other than real estate interests, such as personal property or equipment. Id.

Title Insurance on a Ground Lease

The majority of leasehold lenders do not require title insurance as a condition for making the loan. However, many of the same reasons for acquiring title insurance for a fee interest carry over to a leasehold interest and make title insurance a worthwhile investment for lessees.

"A title search, and the subsequent issuance of a policy, offers answers to as well as insurance against questions that are important to someone contemplating a lease of real property:

Is the landlord named in the lease the true owner of the premises? Is the consent of a mortgagee needed to lease the premises? Are there any covenants or restrictions of record that prohibit or limit the tenant's intended use, such as might be found in prior leases? Will the tenant's possession of the premises be at risk due to foreclosure of a mortgage? Who are necessary parties to nondisturbance agreements? Are the leased premises subject to any easements or restrictions that may limit development or use of the leased premises?" Matthew J Cholewa, Leasehold Policies: Title Insurance's Neglected Child , ALTA Title News (March/April 1999).

Answers to the above questions will eliminate many of the risks that otherwise would be overlooked until after the agreement and signing of the lease when the leasehold lender makes an investigation into the property and decides whether to approve the financing. Title insurance will provide these answers in advance and provide additional protection for the leasehold lender.

The leasehold policy will contain all of the same Insuring Provisions, Exclusions from Coverage, and Conditions and Stipulations that are contained in a fee owner's title insurance policy but there are two notable additions. A leasehold policy redefines the value of the insured property and adds several items of loss that are not found in a fee owner's policy. The value of a leasehold estate is computed as the difference between the fair market value (undiminished by claimed title defects) and the rent reserved to the lease, all brought to present value. The leasehold is valued at the time of loss, not at the time of entering into the lease. Second, a leasehold estate will include the following items of loss in addition to the lost value of the leasehold estate:

• The cost of removing, relocating, and repairing the insured's personal property within a 25 mile radius;
• Rent or use and occupancy payments that the insured may be obligated to pay a party having paramount title to that of the landlord;
• Post-eviction rent that the insured may be obligated to continue to pay the landlord for the land from which the insured has been evicted;
• Fair market value of the insured's interest in any subleases; and
• Damages that the insured may be obligated to pay a sublessee for breach of a sublease.

Coverage of these costs resulting from an unlawful termination of the lease can be comforting to the leasehold lender as well as to the terminated tenant.

Ground leases provide a long term and often less costly alternative to ownership; however the extent of the benefits directly stems from well-planned and well-executed negotiations between all of the parties involved. One of the major benefits of a ground lease is its flexibility in meeting the needs and requirements of each leasing situation. Just as in a mortgage for a fee interest, the interests of leasehold lenders must be taken into consideration in the planning and drafting of the lease instrument. Lender's counsel, just as lessor and lessee's counsel, must go into negotiations knowledgeable of which needs must be protected above others. Finally, having a title insurance policy on the leasehold proves to be beneficial to the prospective ground lease tenant as well as for a potential lender. The tenant now can enter into a long-term relationship with better security and knowledge about the status of the property, and the lender has a large portion of the background research for its financing decision made without additional expense and hassle.

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What cre lenders should know about a ground lease (4 tips).

Leasing the ground. Sounds a little strange, right?

As it turns out, ground leases are an increasingly popular option for commercial real estate (CRE) developers. For CRE lenders, that means it’s important to understand how a ground lease works, and how it can impact a project’s financing.

In this article, we cover the information and tips CRE lenders need to know about them, including:

• What is a ground lease?
• Tips for lending with a ground lease in place

What Is A Ground Lease?

A ground lease, also known as a land lease, is basically what its name suggests. Rather than purchasing the land outright, it allows a developer or other interested party (also known as the lessee or tenant) to lease the rights to a piece of land, while the land’s owner (also known as the lessor or landlord) retains the ownership interest. Similar to any other lease, the lessee is obligated to pay a recurring fee for the right to use the land, and is restricted by certain guidelines outlined in the lease.

Since most ground leases are created with the intention of pursuing a new development, they are typically long-term leases that can range anywhere from 10 to 20 years to upwards of 99 years. Once the lease term is over, the lessor regains control over the land and will own anything constructed on it.

Typically the lessor of a ground lease is an institution or group that plans to be around long enough to see the end of the lease, such as state institutions, government entities and religious organizations. However, there is nothing restricting an individual from leasing their land if they choose.

One way to think of a ground lease is that it’s a form of interest-only debt. The lessee is typically not obligated to make a down payment like they would if they purchased the land outright, and since no principal payments are being made the lessee will not own the property at the end of the term.

Tips For Lending With A Ground Lease In Place

Lending on a project involving a ground lease is a potentially profitable endeavor for CRE lenders, but there are a few differences and potential risks compared to traditional lending that lenders should keep in mind. We’ve outlined four tips for navigating those differences and risks below.

1. Look For A Subordinated Ground Lease

Unlike a typical development loan that would use the borrower’s ownership in the land as collateral, a loan involving a ground lease uses the ground lease itself as collateral. Because of this, lenders need to understand the difference between an unsubordinated and subordinated ground lease.

In an unsubordinated ground lease, the lender is not allowed to foreclose on the land itself in the event of default by the borrower because the landowner maintains a superior position. This means the only recourse available to the lender is to attempt to take ownership of any improvements performed by the borrower. If the borrower has not performed any improvements or the improvements are not completed, the lender could be stuck with an asset of little to no value. As you might guess, an unsubordinated ground lease is not an ideal situation from the lender’s perspective.

On the other hand, a subordinated ground lease puts the lender in a superior position to the landowner and allows the lender to foreclose on both the improvements and the land itself in the event of the borrower’s default. This puts the lender in an ideal position, giving them a higher level of recourse and lessening the reliance on the borrower’s improvements. Although the landowner would prefer an unsubordinated lease, a subordinated lease is the best option for the lender.

If a lender wishes to make a loan on a project involving a ground lease, they should ask that it be subordinated, if possible. While loans could still be made with an unsubordinated one in place, it puts the lender at a disadvantage and creates a higher level of risk.

2. Understand The Lease Provisions

As with any lending decision, lenders should thoroughly review the provisions outlined in the ground lease prior to lending any money to the borrower.

Are there any restrictions on the type of property that can be constructed? Are there size limitations? Does the borrower have to meet certain construction timelines? Once the property is built, who has the final say on setting the rental rate and selecting tenants?

The answers to these questions and others like them will all be outlined in the ground lease documents. It is vital that the lender understand the answers to these questions and their impact on the overall risk of the project.

3. Limit Opportunities For Changes Or Termination

As mentioned earlier, the primary form of collateral available in a transaction involving a ground lease is the lease itself. Because of this, lenders should make every effort to limit the potential for it to be changed or terminated.

One of the biggest risks when lending on a project secured by a ground lease is the borrower defaulting on the lease. If a ground lease is written heavily in favor of the lessor, this situation could lead to the lessor terminating it and leaving the lender with no recourse.

Luckily, there are ways for the lender to avoid this worst-case scenario.

Prior to executing the loan, the lender should require that the lessor provide them with written notice if the borrower defaults on their lease payments. In addition, the lease should give the lender the ability to correct the default themselves. By doing this, the lender will have the advanced notice and power necessary to keep the ground lease from being terminated, even if the borrower defaults.

Aside from being protected against a complete default, lenders should also require that the ground list limits or completely restricts the potential for future changes to the lease terms. If changes are to be made, the lender should be the party to approve those changes. Doing so will decrease the risk of a future change negatively impacting the lender.

4. See It From The Borrower’s Perspective

Lastly, it’s not enough for lenders to understand ground leases solely from their own perspective. To truly become proficient at closing deals with ground leases involved, lenders also need to see them through the eyes of the borrower.

For example, say a developer is planning to pursue a $100 million office project and wants to construct the building on prime parcel of land in a downtown area. The developer can either purchase the land for $10 million, or sign a ground lease with the landowner with a payment of $100,000 per year.

If the developer opts to purchase the land outright without using financing, they will need to pay $10 million in equity. This will reduce the amount of equity they have available to pursue the actual development, which is the ultimate goal of the investment. This scenario also assumes the land is available for purchase to begin with, which isn’t always the case.

Alternatively, the developer could sign a ground lease for the land, which would likely require no down payment and allow the developer to retain $10 million of equity to contribute towards the development of the office building. Not only does this scenario reduce the amount of equity the developer needs to raise, but it could also increase the percentage return on investment for the project since there will be less equity involved. In some situations, the developer could even receive additional financial benefit by deducting the ground lease payments from their tax obligations.

While this scenario is oversimplified, it’s a good example of how and why a ground lease makes sense to developers in some situations. Lenders who are able to understand their financial implications from the borrower’s perspective will be better equipped to make lending decisions when they are involved.

We hope this article gave you a good understanding of what a ground lease is and how CRE lenders should navigate them in their lending decisions. Though they may add an additional level of complexity, ground leases are becoming increasingly popular and could present lenders with additional lending opportunities.

If you’d like to learn more, check out how Finance Lobby’s online marketplace model for the CRE lending industry benefits real estate trends like these.

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Top Ten Basic Terms for a Financeable Ground Lease

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By nancy little , partner, mcguirewoods llp, introduction.

Whether you are a borrower or a lender, if you are considering a loan supported by a ground lease, you need to be sure the ground lease is "financeable." A financeable ground lease includes either (a) "subordination" of the landlord's fee interest in the land or (b) provisions to protect the lender (as leasehold mortgagee) from certain risks that could arise as a result of the borrower having a leasehold interest in the land instead of fee ownership. The so-called "subordinated fee" referred to in clause (a), above, is less common and essentially allows a fee mortgage. According, the top ten considerations below focus on protections needed in a ground lease in order for a leasehold mortgagee to consider the ground lease financeable.

1. Avoid a Sublease.

The lender will prefer (or may require) that the ground lease not be a sublease. A sublease would require additional review associated with the prime lease and can create additional complexities. The lender may impose requirements for additional security and/or protections and assurances if the ground lease is a sublease.

2. Fixed Rent.

The lender will want to be able to quantify its risk if it should face taking back the property in foreclosure. Should it step into the shoes of the borrower as lessee under the ground lease, it will want to know that the rent is fixed or at least predictable, preferably with limited or no escalations.

3. Long Term.

Leasehold lenders prefer that the term of the ground lease be significantly longer than the term of the loan because the lender will want a sufficiently long period of time after foreclosure to try to recover its investment from the property. Accordingly, ground leases with a relatively short remaining term can be problematic.

4. Right to Exercise Renewal and Purchase Options.

Consistent with item 3 above, the lender will want the right to exercise renewal options to be sure that the term will be sufficiently long. The lender will also want the right to exercise any renewal options even if the borrower/ground lessee is in default or has failed to exercise the renewal options. The same applies to any purchase options, which the lender will also want the right to exercise in case it determines that its best course of action is to buy out the fee owner's/ground lessor's interest in the land.

5. Broad Use Clause.

The lender will want broad rights to use the property, without undue restrictions. After foreclosure, the lender may need to change the use of the property to facilitate the sale, lease or other disposition of the property or to enhance revenue. The lender will not want to have to seek consent of the ground lessor for a change in use.

6. No Merger Clause.

The ground lease should include a "no merger" provision that the estates and interests of the ground lessor and the ground lessee do not "merge" if the ground lessee acquires the ground lessor's fee interest in the property. A merger issue could arise, for example, if the ground lessee exercises an option to purchase that may have been granted under the ground lease. The "no merger" clause is intended to prevent such a merger from wiping out the lender's leasehold mortgage that could occur by operation of law if the leasehold interest upon which the mortgage is based disappears if the leasehold estate and fee estate merge.

7. Limited Liability of Lender.

From the lender's perspective, the ground lease should provide that, in the event of foreclosure, the leasehold lender will only have liability during its period of ownership and will not have continuing liability after its sale and/or assignment of its interest in the property.

8. Few Personal Covenants.

The ground lease should contain few, if any, "personal" covenants, that is, provisions that are personal to, or can only be performed by, the borrower/ground lessee. Such covenants, if breached, generally are not capable of cure by the leasehold lender before or after foreclosure and could result in a non-curable default and the risk of termination of the ground lease.

9. Right to Mortgage and Waiver of Landlord's Lien.

The ground lease should include an express right for the ground lessee to enter into a leasehold mortgage, pledging as security its ground lease interest in the land as well as its interest in the improvements. The lender will also want to see a waiver of any landlord's lien that may otherwise be available to the ground lessor under applicable law.

10. Leasehold Mortgage to Control Use of Proceeds.

The leasehold lender will require that the leasehold mortgage controls the use of proceeds of casualty and condemnation, as opposed to any contrary provision in the ground lease. The lender has an interest in the use of such proceeds and whether they are used for restoration or rebuilding or are applied to the loan balance, and the lender will want such proceeds applied as provided in the mortgage. With respect to condemnation, the ground lessor does have a residual interest in the land so the ground lease may provide that an award for a temporary taking is payable to the ground lessee for the temporary loss of use of the property. For a partial taking, the award may be applied to rebuilding or restoration, and for a total taking, the award may be applied first to payment of the loan and then equitably distributed to the ground lessee and ground lessor.

The foregoing is a brief overview of how certain basic terms of a ground lease are viewed from the lender's perspective for a financeable ground lease. The ground lessee would be well served by negotiating for these provisions upfront and not waiting for a leasehold lender to raise these points at the time of loan negotiation. There are other important features of a financeable ground lease, such as cure rights, waivers of certain defaults and no termination of the ground lease pending foreclosure to name a few, that are critical as well. These provisions may be the subject of future articles.

What is Assignment of Lease and How It Differs from Subletting

The assignment of lease (and rent) is a foggy topic that is often confused with subletting. Let's clear the air once and all right now. Learn the differences between a lease assignment and sublease so you can make the right choice.

What is Assignment of Lease? - The Important Basics

Let's begin by introducing the 3 players in a lease assignment - The landlord, the original tenant (assignor) and the new tenant (assignee). The original tenant has an unexpired lease agreement with the landlord and he wants out. Since the original tenant can't just break the agreement and walk off, what he does is to get a new tenant to swap places... and take over all his rights and obligations for the remainder of the lease period. So if the original tenant signs a 1 year commercial lease and the business goes bust after 8 months, the new tenant will be assigned a 4-month commercial lease (with the same terms and conditions as the original agreement). Now here's the big catch: Even though the original tenant has handed over all his duties and obligations to the new tenant, he is not off the hook... unless the landlord agrees to release him from all liabilities. If the new tenant stirs up trouble, our dear original tenant will find himself in hot soup as well. Of course, whether the original tenant is allowed to pull this assignment trick out of his hat is a whole new matter. Knowing for sure is actually simpler than most people think: First, examine your local landlord tenant laws for any lease assignment rules. Most of the time, landlords are given the right to allow or disallow assignments but once in a while, the local law let tenants have the final say instead. If there's no mention of lease assignments in your law text, then your rental lease agreement shall dictate the terms.

Difference Between Lease Assignment and Subletting

When it comes to subletting vs assignment of lease, there's often a massive mix-up. Sometimes even real estate professional get it wrong by assuming them to be one and same thing. However if you dig deeper, you will find that the differences are not just numerous, but important as well. Let's begin by dragging the landlord into the picture. An assignment of lease launches the new tenant into a direct relationship with the landlord - The landlord collects rent straight from the new tenant and deals with the new tenant directly on all lease issues. So in this case, the original tenant gets to take back seat and doesn't have to manage the new tenant actively. On the other hand, there's no direct relationship between the landlord and new tenant (subtenant) in a sublease. Instead the original tenant plays mother goose and is responsible for collecting rent from the subtenant and making sure that he's following the lease rules. When you compare the two, a sublease is a lot more hands-on for the original tenant. No matter which path you take, you will still want a good new tenant who pays the rent on time and follows the lease rules to the agreement. For the golden rules on screening tenants and running credit checks, Click here for our guide to running tenant credit checks. When you have a lease assignment, the terms and conditions of the lease remains largely unchanged - It's almost like taking the original lease agreement and swapping the tenant's name with another. With a sublease, there's more breathing space - The original tenant can decide how much rent to charge, how long the subtenant is going to stay or even collect security deposit... as long as it stays within the boundaries drawn by the original lease agreement between the landlord and original tenant.

Should You Choose Assignment of Lease or Sublease?

You are the Landlord - A lease assignment is recommended in most cases. You will have more control over your new tenant (instead of leaving matters in the original tenant's hands and hoping that he would do a good job)... plus you still have the original tenant to cover your back in case anything goes wrong. You are the Original Tenant - Now this is a tricky one. If you want to someone to take over the entire lease and property for its remaining duration (e.g. your business goes belly-up and you no longer need the office), then help yourself to a lease assignment. If the landlord's consent is required for assignment (and he doesn't give the nod), you can always try offering him a lease assignment fee as a deal sweetener. However, if you are looking for someone to share the place (and rent)... or perhaps you need someone to cover the rent while you are overseas for a few short months, then a sublease would be ideal. You are the New Tenant - An assignment of lease works better for you most of the time. You won't be at the mercy of the original tenant (for example if he screws up and the landlord terminates the original lease agreement, your sublease might also go up in flames). But if you only want to rent part of the property... or don't want to tie yourself down for the remaining lease duration, then you are better off sticking to a sublease. Now that we have covered the topic of assignment vs sublease, go ahead and take your pick - Click here for an assignment of lease form or Click here for a sublet agreement instead.

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