A Brief Explanation Of Ground Leases
A ground lease is lease agreement in which a commercial real estate owner agrees to lease square footage of land, together with approval for the lessee to construct improvements on the land and operate a business on the property. Any building and business must, of course, conform to local zoning requirements and obtain all necessary permits. Ground leases are generally for commercial business purposes and typically are for a long period of time, depending on the tax impacts and desires of the parties.
In short, the land owners own only the square footage of land, while the lessee owns all buildings and improvements they make on the property. Such arrangements can be legally tricky and have significant financial impacts on both parties. The language of the agreement must be clear regarding terms and conditions of use for the property, the maintenance and improvements of the property and termination of the lease. For example, the land owner may retain the right to refuse construction of building to be used for adult entertainment or other prohibited uses. Or the lessees may insist on provisions that will not allow future municipal assessments to be pass through to the lessee without lessee’s prior consent.
Who Uses Ground Leases And Why?
Commercial franchise corporations such as McDonalds often enter into ground leases in order to gain access to strategic intersection property, which may not be available for sale. McDonalds leases the square footage of land, then retains ownership of all building construction and improvements made on the property. By doing so, McDonalds has the right to sell a franchise operation to an investor, without requiring a high upfront cash outlay to purchase the land. The cost of the annual ground lease will be amortized into the initial cost of the franchise.
Understand Your Ground Lease Before Signing
If you are considering entering into a ground lease, either as the land owner or a business investor interested in operating a business, it is important to understand the specific terms and conditions you will be agreeing to. Most large tracts of commercial property are owned by property management corporations with their own ground lease provisions. Before you agree to their terms, it makes sense to have a qualified commercial real estate attorney on your side, to help you understand your rights and legal liabilities.
If you are a property owner considering entering into a ground lease agreement with a tenant, be aware that you will be giving up certain rights and access to your property. Make sure you have an experienced commercial real estate law firm draft or review the terms of your lease agreement, to ensure the provisions will stand up in court if a conflict were to arise.
Ariel Bedell is an experienced attorney at The Loftin Firm. For questions relating to this blog or any other California real estate, corporate governance, land use, or estate planning matter, contact Ms. Bedell at 760-814-9649.