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Definition

Ground Lease

What is Ground Lease?

A Ground Lease, sometimes known as ground rent, is a sort of commercial real estate contract in which the lessee builds the land they are renting. The lender or the landlord/real property owner, as well as the tenant or the leaseholder, are both parties to the lease. The lessee is responsible for paying the landowner's rent on a regular basis. In terms of non-payment, the landlord has the right to evict the renter.

Understanding Ground Lease

This sort of leasehold arrangement also saves money on property taxes for both the lender and the renter. When opposed to a lease contract, land buying necessitates greater real estate taxes and other fees. 

Unlike a traditional property purchase, there are no immediate cash payments required. This may reduce the amount of upfront capital necessary to fund the investment. As a response, the tenant may be able to save more money, which they can put toward another investment. In addition, the landowner would obtain a consistent stream of revenue from rent payments while still owning the real estate.

Types of Ground Lease

There are two types in this type of lease agreement –

  1. Subordinated and
  2. Unsubordinated

The key distinction between the two is the tenant's loan funding for real estate property renovations. Land reclamation is an element of real estate property enhancement. A tenant would often borrow capital to subsidize the development of modifications on the leased land. As a result, the renter may form a construction financing partnership with a land developer.

Practical Example 

Many of Macy's (NYSE: M) showrooms are leased from the ground up. This means that while Macy's possesses the property and any other additions to the site (i.e. parking structures etc.), it nevertheless pays the rent on the property underlying the shop. That is a ground lease arrangement.

In a Sentence

  • The term ground lease is used to indicate a legal agreement between a landlord and a stockholder in which the stockholder agrees to pay a subscription in exchange for a promise to establish a project on a rental basis. 
  • A project with a ground lease is sometimes a good investment if organized appropriately, but the costs and rewards must be carefully assessed.

 

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