What is a ground lease?
Prime pieces of property are often rare and very expensive. Ground leases make it easier for tenants to develop land they might not have access to otherwise.
Unlike triple net investments, which consist of both land and buildings, ground leases consist of land only. Landlords can lease undeveloped commercial land to tenants, who are granted full rights to construct and operate on the property.
Here’s how this works. During the beginning stages of a ground lease, the landowner and future tenant create an agreement allowing the tenant to begin leasing land for their new build. Typically, these leases are long-term, lasting anywhere between 50 to 99 years and once the lease expires, the landowner is generally given ownership to the building. The same goes if the tenant ever fails to pay rent.
The benefits of a ground lease
Ground leases allow landlords to retain control over their land while simultaneously receiving a steady income. If executed properly, they can be a win-win scenario for both parties.
Land leasing also allows for flexibility and specialized financing mechanisms. They do not require down payments on often-expensive land, so tenants can free up cash and focus on improving the development instead.
Caliber properties on leased land
One example of a Caliber property located on leased land is the DoubleTree by Hilton – Tucson Convention Center. Currently under construction in downtown Tucson, this parcel of land is owned by Rio Nuevo, a tax increment finance district. The project is eligible for a Government Property Lease Excise Tax (GPLET) agreement, meaning that all real property taxes during the 25-year agreement can be replaced with a lease excise tax. For Caliber, this provides a tax incentive while simultaneously stimulating development for the City of Tucson. Otherwise unusable land for Caliber, the ground lease offers prime real estate with added benefits.
What are the pros & cons of a ground lease?
Pros for tenants:
- Access to prime real estate
- Tenant does not have to pay for land upfront — reduces equity requirement
- In some rare cases, rent payments on ground leases are eligible for tax reductions (state and federal income)
Cons for tenants:
- The market typically devalues properties on a land lease
- Financing a loan for a ground lease can be difficult.
- Rent may increase over the term of the agreement, depending on the viability and success of the business.
- Ground leases often restrict what can be done with the land, meaning a property cannot be converted to another use without the landlord’s approval.
Ultimately, benefits of a land lease depend on a variety of different factors and calculations. What will produce the best outcome? It depends on the development, the land and the tenant. Before creating an agreement, all parties must weigh in all possible outcomes and consider if a ground lease is the overall best option for all involved parties.