The Benefits of a Ground Lease
One commonly overlooked way to develop real estate is with the use of the ground lease. A ground lease is common with large institutions such as schools, universities and public buildings. However, many developers overlook them, thinking instead that they have to own the land they build on. There are several advantages to using a ground lease for your development projects.
Using a commercial ground lease actually will save you a lot of money up front. Traditionally, you have to go out and acquire land before you can begin building. In many developed areas, land can be very expensive. When you avoid this cost completely, you can save the price of acquisition and use it for other things. More cash in your pocket to run a business is definitely an advantage over other development methods. This will allow you more money for construction and business costs.
The commercial ground lease offers an advantage over traditional methods of building. When you own the land, you can deduct the interest on the loan for the land. When you have a commercial ground lease, you can actually deduct the entire lease payment for the land. In most cases, a lease payment will be much more than the interest portion of your mortgage payment. Instead of deducting a portion of your land payment, you get to deduct the whole thing.
Additionally, lessees do not pay taxes on the land that they occupy. Even though they own the building itself, the land is still someone else's property. When you build a building on land that you own, you will need to pay the tax on it every year. The tax advantages differences alone make ground leases very attractive.
Real Estate Values
The real estate market can fluctuate drastically over the years. The value of your property one year could be quite a bit different from the next. When you purchase real estate, you are subject to the value of the property. When you buy property, you hope that the value goes up, but during an economic downturn, it may not. If the value goes down, there is really nothing you can do about it. If you need to sell the property, you may lose money on your investment.
On the other hand, leasing is not subject to these economic factors. If you are leasing a piece of land, you really do not care what the value of it is after the lease is signed. You can hedge against inflation or depreciation with this method. The value of your property comes from the business that you do. You are only concerned about the amount of business that is generated. If the property goes down in value it does not affect you at all.
Prime Real Estate
Sometimes you may not be able to afford a prime piece of real estate by purchasing it. When you need prime real estate but do not want to spend as much as it sells for, leasing is an option. It may fit into your land budget better than a purchase.