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How does a ground lease work?

On Behalf of | Jan 10, 2023 | Real Estate |

Instead of buying a piece of land to establish a business location, companies may choose to rent a property instead. Different kinds of rental or leasing arrangements are available. Some businesses decide to lease a property through a ground lease.

According to The Motley Fool, a ground lease is a usually long-term arrangement in which a business only leases the ground and not any buildings.

Tenants may build on leased ground

A ground lease typically involves a business leasing undeveloped land. The tenant has the right to construct and own buildings on the property. As long as the lease lasts, the tenant can use the building and the property as a whole. However, the tenant is also responsible for insurance, maintenance and tax payments.

The fate of tenant property constructions

Once the lease expires, any buildings constructed on the property belong to the landlord. The same goes for any improvements done to the property by the tenant. While the landlord may preserve the building and property modifications, it could also ask the tenant to destroy them before departing.

The length of a ground lease

An initial lease term may go up to 20 or 40 years. However, some ground leases extend to 99 years. Under this arrangement, a business may construct a building and make use of it for decades, allowing the company to make back its investment and generate profits over many years.

Some businesses prefer a ground lease because they can construct a building without purchasing the land itself. Ground leases can also be less expensive than leasing an entire building along with the land. Still, since tenants may eventually lose a building to a landlord, it is important to weigh these considerations before committing to a lease.


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