Ground leases are much longer than other real estate leases; they can last up to 99 years, depending on the arrangement. The minimum length of time for such an arrangement is 30 years. The timing allows the ground lease tenant enough time to build a structure or renovate an existing one and earn enough revenue to break even and eventually make a profit. Additionally, lenders might require a longer lease; oftentimes the terms of a lease can be longer than the loan terms.
During the lease, the tenant typically owns the structure on the land, and can depreciate its improvements. But what happens at the end of a ground lease?
Depending on the terms of the agreement, when a ground lease ends, everything goes back to the landowner when the lease concludes. This means the landowner ends up with the original acreage and improvements that the tenant made, which can include the structure, upkeep, infrastructure (such as plumbing and electricity), and anything else.
In fact, this is one benefit a landowner realizes with a ground lease. The tenant pays for improvements, which could increase the property’s value. And when that lease expires, the landowner can sell the property, potentially obtaining a higher sale price than what otherwise might have been gotten for the sale of just the land. Or if the landowner wants to keep the income stream going, they might find another long-term tenant to occupy the space, either through a building lease or ground lease.
However, there are times during which the tenant involved with a long-term lease might require that the improvements be demolished or destroyed when the lease ends. This can be the case if the tenant’s buildings, structures, or improvements have unique, specific visible features connected to a specific business or corporation, a concept known as brand architecture. Think McDonald’s “Golden Arches,” or KFC’s red-and-white buildings, complete with a visual of Colonel Saunders. These are brand-specific improvements.
In this case, tenants want to be sure that any future businesses entering into a ground lease with the landowner don’t benefit from those brand-specific improvements.
There are also times during which a ground lease might be terminated because of a tenant’s bankruptcy. If the tenant relied on financing to make improvements and can’t pay back the lender, land and on-site improvements and buildings could end up in the lender’s hands (in the case of a subordinated lease).
While a ground lease’s conclusion generally puts the acreage and its improvements back into the hands of the landowner, this might not always be the case. What can actually happen is based on the lease structure, terms, and requirements.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure. Programs that depend on tenants for their revenue or income may suffer adverse consequences as a result of any financial difficulties, bankruptcies or insolvency of their tenants.
