24 Nov Land leases in commercial lending FAQs
Commercial lenders will frequently come into contact with land leases (also called ground leases), particularly when dealing with construction loans. Here’s a brief refresher on land leases and commercial lending.
What is a land lease?
A land lease is a way for a land owner to keep title to a piece of land while still being able to lease out the use of the land for an extended period of time, sometimes for many years. Common lease terms are 49 and 99 years but the terms can have any duration. The purpose of the land lease is to separate ownership of the land from any building or improvements added to the property.
Subordinated vs. unsubordinated leases
A landlord might want a subordinated lease when he has a mortgage on the property, but wants to ensure the tenant can stay there even if he sells it. A subordinated lease essentially means the landlord is guaranteeing a tenant’s lease, and typically, the owner can collect higher rent. By contrast, with an unsubordinated lease, a tenant has no assurance the lease will continue if the owner sells or loses the property in a foreclosure.
Benefits of land leases to land owners
A properly drafted land lease can be beneficial to both the land owner and the tenant. The landowner is avoiding capital gains taxes, which he would have to pay on the sale of the property, including the value of any improvements the tenant makes. The owner is also acquiring an income stream without the burden of having to maintain the land.
Benefits of land leases to tenants
You may wonder why someone would choose to build on non-owned land. There are several advantages to building on a lease-owned property. It provides access to land that would otherwise be inaccessible and also saves the tenant from having to come up with a large cash down payment to purchase property. The cash can then be invested back into the business.
Do you have commercial real estate legal questions? We are here to help you find the answers you need. Barsh & Cohen is a boutique law firm with decades of legal experience. Contact us to schedule a consultation. http://www.barsh-cohen.com/