A ground lease is a long-term lease of land in which the person who owns the land leases it for a period of time to a tenant. During the time of the lease, the tenant is then responsible for any building construction on the land. The land remains the property of the owner, and the improvements made by the tenant can increase the value of the land for the owner. Tenants may choose a ground lease to start a business to remove the added expense of buying land.
All owners of real estate look for property that has the potential to appreciate in value over time. A ground lease is one such method of achieving this, and it does so in a hands-off way for the owner of the land. In such a lease, the tenant essentially makes all of the changes on the land while the lease is in effect, and the improvements on the property, which help the tenant operate his or her business, also can cause the value of land to surge for the owner.
The typical time period for a ground lease is around 10 years, although it can range from just a few years to as many as 99 years. At the inception of the lease, the landowner and tenant decide on how much rent the tenant must pay to use the land during the span of the lease. When the lease concludes, the land returns to the original owner, along with whatever has been built on the land, unless otherwise stipulated.
In this way, the landowner receives not only the benefit of the tenant's rent, but can also capitalize on the improvements made to the land that have increased its value. This increased value can be realized if the owner chooses to sell the land or pass it on to future generations. For the tenant, the agreement can be beneficial as a relatively low-cost alternative to buying land, especially since most ground leases are purchased by the tenant with the intent of starting a business on the land.
There are some disadvantages to a ground lease that both sides of the agreement should consider. For the landowner, entering into a ground lease would make sale of the land impossible while the lease is in existence. In addition, any increase in value of the land would be reflected on income taxes. The inflexibility of the lease agreement is also an issue for tenants, as well as the fact that they will not realize any financial gain from the improvements made to the land.