By Steven Milstein
There are plenty of people that own or have come into ownership of a large piece of empty or undeveloped land. Unless the owner plans on using the land, having it sit vacant is just a waste of money. The problem is that some landowners don’t have the time, money, or knowledge on how to develop this land. They frankly just don’t know where to start.
On the flip side a person may have the “know-how” and experience in creating large or small development projects, but they don’t have the property in which to instill this knowledge.
For these types of situations, a ground lease may be a good option.
A ground lease is a way for a developer to gain long-term control over the development of land without owning it. Instead of purchasing the property outright, the developer leases the real property from the property owner. The ground lease allows the developer to construct new improvements (or renovate existing ones) on the land at its own expense. This solves the above scenario; the landowner has just generated an income from the vacant land and the developer can now create his brilliant development without ever owning the piece of land.
The term of a ground lease can vary on length, but they are usually for longer periods of time, and it is not uncommon to find a ground lease for as long as 99 years. The length of the term ensures a steady stream of income for the landowner while ensuring that he still remains the owner in fee simple, provides a potential developer with enough time to make a return on his investment, and creates security for a lender financing a development to ensure that the developer will have enough time to pay back a loan.
Developers especially, may seek to enter into a ground lease because they can skirt around the expensive costs in acquiring the land. Developers don’t have to be nervous about having to conform to the owners’ specifications because once the ground lease is entered into, the owner is generally not a factor in how the development gets built or designed. One of the reasons this landowner entered into a ground lease in the first place is because he has no desire to build a development, he just wants a way to generate some sort of income from this otherwise vacant piece of land. The developer will have the autonomy in building this development to his own specifications.
As mentioned above, developments and projects on ground leases often need an external source of funding. Finding a source of funding rests solely on the developer. Often as collateral for a loan entered into relating to a ground lease the financing entity will require the actual ground lease to secure the loan. This creates an incentive to ensure that a tenant is trustworthy and will finish the job. If the tenant defaults on the loan, the financer will take the place of the tenant.
As seen above, ground leases are a great way to maximize profits for both landowners and potential developers. There are many benefits to both sides of a ground lease which makes it a very attractive lease to enter into.
For more information, or for help on your next lease agreement, reach out to the knowledgeable real estate attorneys at KI Legal.
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