In an uncertain real estate market, owners of property may not be willing to enter into a long-term rental or current sale at current prices. If this occurs, the ground lease may be an alternative. In such an arrangement, the tenant agrees to pay all taxes and maintain the property in good condition. Ground leases usually run for 10 or more years and can run upwards of 99 years. This permits the lessee, such as a supermarket, restaurant or other retail properties, the incentive to make major improvements. The ground lease can also specify that at the end of the lease term, the ground lessee has an opportunity to purchase the property at a price set by the current market value for the specific property.
The ground lease tenant usually is required to pay all expenses, such as taxes, insurance, maintenance and necessary repairs, during the term of the lease and is referred to as a net lease. The actual conditions of the
lease can vary, depending on the agreement between the property owner and lessee. The terms of the lease dictate what happens to the improvements at the end of the lease term, which might give the landowner rights to the buildings, allow the tenant to remove the improvements or give the landowner the option to purchase the improvements.
The major benefit for the property owner is the ability to retain ownership of the land and earn revenue from the property, without the expense of developing the land. Since it is typically a long-term lease, the property owner has a tenant locked into a commitment for a long period. At the end of the lease term, the property owner may reap the benefits of whatever
improvements the tenant made to the land.
Ground leases are often commercial leases, giving lessees a way to build a business without the expense of purchasing land. Governments sometimes enter into ground leases when constructing public buildings.
This allows them to construct buildings, such as libraries, when public land is not available and purchasing real estate is unaffordable.
An entity that owns land, yet is not in a position to sell the property, often uses ground leases as a way to generate income from a property. This might be public land or tribal lands. For example, the Federal Bureau of Land Management often enters into ground leases with concessions to develop resort areas.
For more information on ground leases or other real estate industry accounting services, please contact Skoda Minotti's Real Estate & Construction Group by calling 440-449-6800 or leave a message below.
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By John Tax, Audit Director, BDO USA, LLP
This article originally appeared in BDO USA, LLP's "Real Estate Monitor" newsletter (Winter 2014). Copyright © 2014 BDO USA, LLP. All rights reserved. www.bdo.com
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