A ground lease or ground rental is relatively rare in Iowa, whereas in large metropolitan areas, particularly on the East Coast, these arrangements are not uncommon. There are two parties to ground rentals; the party that owns the dirt, typically known as the ground lessor or ground landlord, and the party who has the rights to anything built on that tract of land, known as the ground lessee or ground tenant. This party has what is known as the leasehold interest in the ‘dirt.’ That leasehold interest give the ground tenant the right to build on the land for their own business, or build income-producing structures they can lease to other businesses. The ground tenant can make improvements or change the uses of the buildings, rezone, etc. The ground tenant typically is responsible for all expenses associated with both the land and the buildings thereon, including property taxes (land and buildings), insurance, etc., but they also get the benefit of all the IRS depreciation allowed for the property.
The terms of the ground lease between the two parties establishes the length of the lease and any options, and the payment schedule; inasmuch as the ground landlord is entitled to payment for granting the use and any income the property might generate to the ground tenant. It is common for ground leases to be 30 years or more in length, for a couple of reasons: 1) the ground tenant often is planning to spend a lot of money to build or redevelop the land into its highest and best use, 2) their mortgage lenders want to be sure that the ground lease doesn’t expire before their loan is repaid, and 3) upon the expiration of a ground lease, any buildings or other improvements revert to the ground landlord; i.e. the ground landlord owns not only the dirt, but also ‘inherits’ anything build on it, including the income that it produces. So obviously the ground tenant wants as long as possible to recoup their investment and profits.
So what are the reasons for ground leases and who benefits most from them? Sometimes a developer or user identifies a location they feel is ideal for a specific client or use, but the owner is not willing to sell for various reasons. A ground lease can sometimes be the solution. Recently various brick and mortar businesses (Chic-fil-A, AutoZone and others) have adopted strategies where they (almost) always will lease vs buy a site, because they want to save the cost of buying the dirt, and they want the depreciation tax benefits. On the flip side, ground landlords enjoy reliable and management free income, though usually at cap rates that are lower than other real estate investments.
Article written by Scott G. Byers of Q4 Real Estate.
Our team has extensive experience in the commercial real estate market and is available to answer your questions and show you available commercial real estate for lease in the Cedar Rapids metro area. Contact Craig Byers or Jason Rogers at 319-294-3339, to help you find the perfect location for your business today!
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