Ground Leasing Part 1: Leasing Land Instead of a Building

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If a business cannot purchase or lease all or part of a building for its operations, a ground lease may be a viable alternative. For the land owner, a ground lease produces income and:

  • Eliminates the need to build leasable space
  • Allows the property to stay in the family
  • Avoids adverse tax consequences of a sale

Assuming the prospective tenant is comfortable with the general concept of leasing space, should the notion of leasing the ground cause any particular concern? 

Yes and no.

If the tenant leases land, the building becomes the landlord’s property at the end of the lease. This makes the stakes very high if the tenant defaults early in the term or if the landlord defaults, for example, by declaring bankruptcy in a case where the trustee seeks to reject the lease.

Ground leases magnify the importance of certain considerations, including:

  • Ground lease defaults
  • Long-term rent adjustments
  • Lender’s rights
  • Subleasing
  • Insurance issues including rent insurance

Stay tuned for future tips on ground leasing and its implications for tenants and landlords.

Today’s real estate tip is brought to you by Rick Smith, a LEED Accredited Professional and member of Bernstein Shur’s Real Estate Practice Group and Green Building Team. Stay tuned for more useful tips for real estate professionals.