An interesting type of asset in commercial real estate is referred to as a land (or ground) lease. In today’s blog, we explore what they are, their benefits, and how they work in the commercial real estate world.
What Are Land Leases?
In most cases, properties are bought and sold with buildings and the land included together.
But with land leases, also referred to as ground leases, it’s possible for one entity to own the land while another entity owns the improvements made to the land. The tenant is able to build their own improvements or grow crops on the rented land while the landowner collects rent each month. The land lease or ground lease lasts generally lasts between 50 and 99 years.
Land leases are beneficial in many commercial real estate deals. Depending on the situation, a commercial agreement may make more sense than selling the land or developing it yourself.
The Benefits for Landowners and Tenants
- Landowners gain a steady source of income
As the landowner, you can gain income from a reliable, long-term tenant without losing your ownership of the land.
- Landowners may become the owner of any improvements when the lease ends
In many cases, there’s a reversionary clause in a commercial land lease agreement. As the landowner, you’ll become the new owner of improvements on your land once the lease expires.
- Tenants can save money because they aren’t buying the land
With this kind of lease, your tenant saves the upfront costs of buying land. That gives them valuable extra liquidity that they can put towards improvements to the land or other projects.
- Tenants gain access to prime locations
They can provide tenants with access to excellent locations that they may otherwise be unable to access. They can get the location they want without actually buying the land.
How They Work
This type of deal is useful for many situations, including:
- farmers who need fertile land for growing crops or raising animals
- businesses that want to construct their own buildings on a rented piece of land
- companies that need space in a certain location for a cell phone tower, windmill, or other structure
Type of Land Leases
There are two basic types: subordinated and unsubordinated.
With a subordinated land lease, the tenant’s construction lender gets superior rights to the land. This is often done if the landowner is using the land as collateral in a transaction to finance improvements. A subordinated ground lease is risky, but the upside is that it allows landowners to charge more and get more favorable terms in compensation for the higher risk.
With an unsubordinated land lease, the landowner retains top priority for all claims on the property. If the tenant defaults, then the landowner retains ownership of the land, not the lender. This type offers more protection to the landowner, but is riskier for lenders, so it may be more difficult to get financing for an unsubordinated land lease.
In most cases, the yield of a land lease is lower than other types of leases because of the restricted cash flow. However, it can provide a safe, steady cash flow. With the right tenant, it can be a mutually-beneficial partnership!
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Tracking your Leases in STRATAFOLIO
Just like any type of lease you have, you want to be able to track your assets in order to account for your portfolio cash flow. However, you also want to be able to account for the asset of the land as well. STRATAFOLIO offers the ability to track both of these important elements. Plus, STRATAFOLIO is designed for more than just land lease management! See what it can do for your commercial real estate business by scheduling a demo today.