The Risks of a Ground Lease

A ground lease allows a tenant of the land to build and develop on the property. Essentially, the tenant leases the land for a period of time. He or she then develops on the land during that period, perhaps building a home or another structure. At the end of the time frame on the lease, the original owner reclaims the land and any improvements made to it. The risks of a ground lease will be different for a tenant than for a lease holder.

Risks to Tenant

A tenant will typically take this loan option if he or she cannot afford to purchase the land in full. Land is usually the most expensive part of any property, so many borrowers will be unable to fully afford a parcel of land sufficient for his or her needs. Renting the land allows the borrower to then concentrate all efforts on the development of a property. This means the person becomes a tenant of the land, paying a marginal amount each year, and can afford to develop a better structure on the land as a result. However, there are many risks:

  • The ground owner may restrict the types of changes that can be made to a property. For example, the owner may say a foundation may not be built underground. This will limit how large the structure can be. The landowner may have other requirements, like burying power lines or meeting minimum drainage requirements, that can alter the plans for a structure.
  • Ultimately, the tenant has little to show for the amount spent on the land once the lease is up. Instead of building an asset, the person or business has drained money into a piece of land or a building that they no longer own.

Risks to Owner

A landowner can stand to make a lot of money through a ground lease. Furthermore, since the person receives the improvements as an asset in full at the end of the lease, the owner will then bring in more equity. The owner never remits ownership of the property, meaning he or she has some control over the process and developments occurring on the land even when the tenant occupies it. However, there are also risks to an owner:

  • The tenant may not care for the land as if he or she owns it, meaning there may be damage done without sufficient repairs made. If you are leasing your property, be sure to keep a watchful eye on changes and approve all building plans before they commence.
  • You do not retain full rights of an owner of any property you are leasing. Instead, state laws do protect the rights of tenants as well. There are boundaries to when and how you can come onto the property. There are also limits to what you can stop your tenant from doing. Basically, even though you oversee the property, the tenant acts as an owner while occupying the land. If the tenant has a legal right to do something, you cannot stop it, even though you rightfully own the property.