When leasing an industrial residential or commercial property, there are a variety of various types of industrial leases one could experience. Sometimes occupants may be searching for a residential or commercial property they can build on and that fit their specific needs. If this is the case, then a ground lease might be the very best option.

A ground lease is a type of lease agreement in which the tenant leases a piece of land and is permitted to establish that residential or commercial property during the period of the lease. During the lease term, the renter owns any structures, developments or enhancements made on the land. Once the lease ends, the land and any building and construction or enhancements on that land become the residential or commercial property owner’s. Usually, ground leases are long-term, with a lease period in between 20 to 99 years, said Scott Miller, Senior Director of Land Services, and Jeff Peden, Executive Managing Director of Land Services at Transwestern. Ground leases are typically net leases, they added, in which the tenant is accountable for paying residential or commercial property taxes, insurance and upkeep.

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

There are two types of ground leases: subordinated and unsubordinated. The distinction between the two relates to what occurs if the tenant is handling financial problem throughout the regard to the lease.

Subordinated Ground Lease

With a subordinated ground lease, the property manager concurs to be a lower priority with concerns to any other financing obtained on the residential or commercial property. If a tenant gets a loan to develop on the land and after that defaults on the loan, the lender can go after the residential or commercial property, including the land, as security. For example, a renter who signs a subordinated ground lease may secure a loan for $400,000 to develop a retail residential or commercial property. However, if that renter faces financial trouble and is unable to make loan payments, the lender can pursue the building and the land.

“Typically, this is done to facilitate debt financing to construct buildings on the residential or commercial property,” Miller and Peden said. In a lot of cases with a subordinated ground lease, the property manager might require greater rent payments because they’re handling some amount of threat.
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Unsubordinated Ground Lease

With an unsubordinated ground lease, the proprietor maintains greater top priority than the lending institution. Lenders are not able to foreclose on the land or use it as security if an occupant is not able to make their loan payments. Rather, if the occupant defaults on the loan, the lender can just pursue their service properties. Some lenders may be reluctant to provide out a mortgage to renters who have signed an unsubordinated ground lease. Because of this added problem for the renters, landlords will typically charge lower rent.

Advantages and disadvantages of Ground Leases for Tenants

Like all leases, ground leases feature their benefits and drawbacks, for both occupants and proprietors. For occupants, the pros and cons may vary depending upon what you’re looking for in an industrial residential or commercial property.

Location: With a ground lease, tenants can build a residential or commercial property in a place of their choosing, without being bound to pre-existing buildings in a location that might not be perfect for their particular service needs.
Lower Taxes: For both federal and state taxes, the rent paid on a ground lease is tax deductible. The tenant is paying less taxes than they would be if they merely acquired the land.
No Deposit: With a land purchase, the renter would be paying a big down payment to purchase the land, after which they would still require to build on that land. However, with a ground lease, there is no downpayment, and more money can approach building on the land instead.
Reduced Lease Payments: If the tenant were renting both the land and the structure, then lease payments would be much higher. With a ground lease, the renter is making lower month-to-month payments.
Building Customization: When leasing a currently existing space, the tenant is not able to personalize the building to fit their particular requirements. However, with a ground lease, occupants are just renting the land and can personalize the residential or commercial property as they choose.


Some Higher Costs: Developing a residential or commercial property is costly, and although tenants are able to tailor their building as they see in shape, sometimes the financial expenses may exceed those advantages.
Doesn’t Retain Ownership After the Lease Expires: After putting money and time into building a residential or commercial property and making enhancements, the occupant will need to provide up ownership of the residential or commercial property once the lease ends, if they choose not to renew the lease. At that point, the landowner stands to benefit from the improvements the tenant made.
Responsible for Fees: The renter has to pay residential or commercial property taxes, insurance and maintenance expenses on the residential or commercial property for the regard to the lease.


Pros and Cons of Ground Leases for Landlords

For proprietors, a ground lease could be helpful for a number of factors, but naturally it features both advantages and downsides.

Lower Taxes: With a ground lease, proprietors do not have to report any capital gains as they would with a land sale. On top of that, the occupant is accountable for residential or commercial property taxes.
Steady Income: Landlords have the benefit of getting regular monthly lease on the land, thereby granting them a steady income stream. In addition, lots of ground leases also include an escalation stipulation, which ensures a lease increase and eviction rights when it comes to a renter defaulting on payments.
Retains Ownership of Improvements: After the lease period ends, the landlord retains ownership of any enhancements made on the land and can therefore sell the residential or commercial property at a profit.


Lack of Control: In the scenario where a landlord doesn’t consist of particular provisions in the lease, they might not have any say in what the renter finishes with the land.
Higher Income Tax: Although a landlord will not need to pay capital gains taxes, the rent they get from the tenant counts as income, and so they will need to pay greater income taxes.


In Houston last June, Peden and Miller negotiated a 20-year, 2.64-acre ground lease for a brand-new automotive car dealership. The land was leased to Grubbs Automotive, with strategies to convert the existing structures into a brand-new Volvo automobile dealership. In this example, Grubbs Automotive is renting the land however has the freedom to develop new residential or commercial properties and make improvements on the land and any existing structures as they please. Once the lease term ends, if they do not renew, then all of those enhancements become the residential or commercial property of the landlord.

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

A leasehold estate is extremely similar to a ground lease, in that with a leasehold estate, the physical structures are owned by the tenant, and the land is owned by another party, from which the occupant is leasing. The party that is renting the land from the landowner deserves to utilize the land for the period of the lease. When the lease ends, the structure and any improvements end up being residential or commercial property of the landowner, comparable to a ground lease. See also appurtenance.

However, according to Miller and Peden, “With a ground lease, you basically have the rights as an owner of the land and the residential or commercial property or structures that are on it for the duration that has been consented to. With a leasehold, there is an arrangement between the owner of the residential or commercial property and the lessee with usually more limitations on the lessee on what can be made with the residential or commercial property.” Essentially, leasehold agreements come with more constraints than ground leases however are otherwise relatively similar.

Is a Ground Lease Right for You?

While a ground lease comes with its advantages and drawbacks for both the occupant and the landlord, it is essential to know what you’re searching for in a rental agreement before deciding on a type of lease. Ground leases are helpful due to the fact that of their longevity and surefire earnings for proprietors. And for tenants, ground leases enable you to construct a residential or commercial property that fits your custom-made requires. However, there are several lease structures. Before selecting what fits your requirements, make certain to do your due diligence and learn more about the different kinds of commercial leases around.