what does ground lease mean?

In Buying Property - Asked by feng z. - May 31, 2010
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Mary F.
Broker/Agent
Jacksonville, FL
Premium Subscriber

Exactly like it sounds...the lease of the dirt only. The tenant can put their building on the site or use according to zoning and/or agreed use. Usually long term of 10, 20 or more years since the tenant is investing their money into specific improvements. Great for parcels suitable for fast food, etc. due to tenant's kiosk designed structures. Tenants known to ground lease....Walgreen's, Publix, McDonald's, etc.

May 31, 2010
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Jim G.
Broker/Agent
Sacramento, CA
Premium Subscriber

This means that instead of gaining the "fee interest" or the "ownership interest" in the ground you are obtaining a "lease hold interest" in the ground. You will only have a right to the improvements-- buildings and site work -- as long as the term of the ground lease.
It also might make it much more difficult to obtain financing for your building on a ground lease. There are times when a ground lease is beneficial to a developer , to a tenant and to the property owner. But they are not without considerable risk.
If you are contemplating a transaction with a "ground lease" get yourself a experienced commercial real estate broker and a good real estate attorney.

May 31, 2010
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Damon D.
Bala Cynwyd, PA
Premium Subscriber

Only thing I will add is....in today's economic environment, banks are not financing too many ground lease developments. Most retailers are buying the land today. As an example, pharmacies at the height of the market often ground leased properties, but today they are mostly buying. Banks don't want to fund construction projects that the borrower doesn't own the dirt on.

Jun 1, 2010
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David P.
Broker/Agent
Lenexa, KS
Premium Subscriber

Are you referencing a NNN property being offered for sale? A lot of NNN leased properties are now being offered as ground leases when marketed/sold to absentee investors. Previously many triple net leased (NNN) properties included the building and/or other improvements as part of the sale, however there seems to be a movement towards NNN ground leases which are probably more straightforward from a developer/tenant perspective and allows the developer or tenant, etc. The ground lease also allows a developer to retain their interest and rights to the tax depreciation of the improvements. Also, if the building as part of the lease, this sometimes means that the NNN tenant, such as bank or pharmacy will end up providing a structure which might at the end of the lease provide a competitor with an existing facility to compete from. Under the building included scenario, there are potential issues related to the building maintenance. As part of the ground lease, it is important to review who is responsible for site cleanup in the event of contamination, etc especially if the lease involves fuel, etc. Subordination of land to building/mortgage interests could be an additional concern. There are many additional issues that can develop depending upon the property use and lease agreement. As previously noted, please consult an experienced Commercial Realtor(r) AND an experienced attorney.

Jun 2, 2010
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Rob B.
Chandler, AZ

I believe you now have a good definition of a ground lease and some of the "hot-spots" to consider in the purchase property with an underlying ground lease. In my mind there are two fundamental things to really consider if one purchases such an asset.
One is that the property on a ground lease is fully depreciable over the term of the lease, because at the end of the lease you end up with zero, (unless you have a purchase option on the ground itself). If having tax write off is important, one must measure the annual cash flow obtained from the net rental of the asset against the investment made to be certain the ground lease will bring the anticipated return sought.
This leads to the second consideration. Not only are assets built on ground leases hard to leverage, but the shorter the term of the ground lease property the least desirable it is from a leverage view. This factor leads to a greatly reduced purchasing market in any kind of exit plan for the asset.
Therefore, one must be very sure they are a long-term holder of a ground-leased property to gain the greatest value. The faster the cash flow from the property returns the original investment the better it is.
It is not unusual to find 12%+ cap rates in the purchase of ground lease assets. In short it is often better to be the owner of the ground (the Lessor) than the owner of the building (the Lessee).

Jun 3, 2010
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CALVIN J. M.
Broker/Agent
Brandon, FL

Lease that rents the land only. One who plans to develop a structure on land that is ground leased will usually insist on a long-term-lease, such as for 30 or more years

Jun 3, 2010
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lee c.
Broker/Agent
La Puente, CA

what does ground lease mean?

Mar 16, 2013
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alex p.
Owner/Investor
Brooklyn, NY

definition of nnn leases

Sep 9, 2013
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