Real estate

Ultimate Guide About Ground Lease Financing 2023

Written By Urban Real Estate Center
Last Updated: Dec 06, 2022 •

Ground lease financing is a type of real estate transaction where the tenant leases land from the owner to construct and operate a building or other improvements. The tenant, in turn, pays rent to the owner. This can be an attractive option for businesses that want to own their property but need more capital to purchase it outright. In this blog post, we will discuss ground lease financing in more detail and explain how it can benefit your business!


What is Ground Lease Financing?

Ground lease financing is a type of real estate loan that is typically used to finance the purchase of commercial property. The loan is secured by the property owner's interest in the ground lease, which is an agreement between the property owner and the lender that gives the lender the right to use the property for a specific period of time.


The ground lease financing loan is typically repaid over a period of 20 to 25 years. Ground lease financing can be an attractive option for both buyers and sellers because it allows the buyer to purchase the property without putting down a sizeable down payment, allowing the seller to retain ownership of the asset. Ground lease financing can also be used to finance the construction of new buildings on vacant land.


What is a ground lease?

A ground lease is a contract between a landowner and a tenant for the use of a piece of land. The tenant agrees to pay the landlord a monthly rental fee for the right to use the land, and the landlord agrees to maintain the property and make any necessary repairs.

Ground leases are leases for the ground only without any improvements thereon. The lessee is usually required to build some structure or improvement on the land, such as a commercial retail store, office building, or industrial complex.

The ground lease gives the tenant exclusive use of the ground for the lease's term, typically 99 years. At the end of the lease term, the ground and any improvements revert back to the lessor. Ground leases are often used in ground lease transactions, where the tenant buys the ground lease and then sells the underlying property to another party.

In this way, the tenant can enjoy all the rights and benefits of ownership without actually having to own the property. The ground lease also provides protection for the tenant in that it ensures that they will have use of the ground for the term of the lease, even if the underlying property is sold.


How does ground lease financing work?

Ground lease financing comes in two main types: subordinated and unsubordinated. Subordinated ground leases involve the lender holding a position below other creditors, which means that if the borrower defaults, the lender may not be repaid in full.

On the other hand, unsubordinated ground leases do not involve the lender taking a subordinate position. This type of financing is more common since it is less risky for the lender. However, it is important to note that both types of ground lease financing can benefit borrowers depending on their individual needs and circumstances.


How many types of ground lease financing?

There are typically two types of ground lease financing: equity and debt. Equity financing is when the lessee provides the lessor with a down payment used to purchase the property. The lessee then makes periodic payments to the lessor, which go towards paying off the debt.

Once the debt is paid off, the lessee owns the property outright. Debt financing is when the lessee borrows money from the lessor to purchase the property. The lessee then makes periodic payments to the lessor, which go towards paying off the loan. The lessor will determine the interest rate on the loan.


What is the key Difference Between a Subordinated vs Unsubordinated Ground Lease?

Here is a little explanation if you think about the difference between a subordinate and an unsubordinated ground lease.

A subordinated ground lease is a lease in which the lessee's (tenant's) rights are subordinated to the rights of a lender. In other words, if the property is foreclosed upon, the tenant will lose their lease and will have to vacate the premises. 

A subordinated ground lease is often used when the tenant is a business that is not doing well financially and is at risk of defaulting on their lease. The lender wants to protect their investment and ensure that they can take over the property if the tenant defaults. 

An unsubordinated ground lease is a lease in which the tenant's rights are not subordinate to a lender's rights. This type of lease is more common, as it gives the tenant more security. If the property is foreclosed upon, the tenant will still have their lease and will not have to vacate the premises. However, the property's new owner will be able to evict the tenant if they so choose. 


What are the benefits of using ground lease financing?

Ground lease financing is a type of real estate investment in which the owner of a piece of a property agrees to lease it to another party for a set period of time. The benefits of this arrangement are numerous, but they can be summarized as follows:

  1. Ground lease financing can provide a source of income for the property owner. In most cases, the lessee will be responsible for paying all taxes and other expenses associated with the property, freeing up the owner's cash flow. Additionally, the owner will typically have the right to terminate the lease if the lessee defaults on their payments.
  2. Ground lease financing can finance significant improvements to the property. If the lessee needs to make any changes or additions to the property, they will typically be required to obtain the owner's permission first. This gives the owner some control over how their property is used and helps to ensure that it remains in good condition.
  3. Ground lease financing can give the property owner some security in knowing that their investment is protected. If the lessee decides to sell the property or otherwise transfer its ownership, the owner's interest in the property will typically be transferred along with it. This means that the owner can rest assured knowing that their investment is safe even if the lessee defaults on their payments.


How to find a good ground lease financing company?

Before developers can start construction on a project, they need to find a good ground lease financing company. There are many factors to consider when looking for a financing company, such as the contract's provisions and the company's reputation. Developers should also consider the needs of their investors when choosing a financing company.

A good ground lease financing company will be able to provide the necessary financing for the project and will have a good reputation in the industry. The company should also be able to work with the developer to find the best way to finance the project. When choosing a ground company for lease funding, developers should make sure that they find a company that can meet their needs and that of their investors.


Frequently Asked Questions

Is a Ground Lease Right for You?

A ground lease is a great way to lease a piece of property without worrying about the building.

Here are a few things to consider before signing a ground lease:

1. The length of the lease should be appropriate for your needs. A shorter lease may be better if you're still determining how long you'll need the property, while a longer lease can give you more stability.

2. Make sure you understand the terms of the lease. Who is responsible for maintaining the property, and what happens if you need to terminate the lease early?

3. Consider the location of the property. Is it in an area that is likely to appreciate, or is it in an area that may decline in value?

4. Make sure you are comfortable with the landlord. Do you feel like they are trustworthy and easy to work with?

Are ground leases operating or financing?

The terms "operating" and "financing" are often used interchangeably in the real estate industry; however, they have different meanings. An operating lease is a contract that gives the tenant the right to use a property for a specified period of time, usually in exchange for monthly payments.

On the other hand, a financing lease is a contract that allows the tenant to purchase the property at the end of the lease term.

So, which one is better? It depends on your situation. An operating lease might be the best option if you need flexibility and want to avoid owning a property. On the other hand, if you plan on staying in one place for a long time and would like to own the property eventually, a financing lease could be a better fit.

What is the difference between a ground lease and a leasehold?

Most individuals need to concentrate on the difference between leaseholds and ground privileges. Here is a short explanation:

A ground lease is when someone leases land from a landlord. The lessee does not own the land but has the right to use it for a specific purpose for a set period of time. Ground leases are common in commercial real estate, where businesses build their storefronts or office buildings on leased land.

A leasehold is when someone leases property that they do own, such as an apartment or store. The lessee pays rent to the landlord but still owns the property. Leaseholds are more common in residential real estate.

Is leasing land a good idea?

Regarding leasing land, some pros and cons must be considered. On the one hand, leasing land can be a great way to start farming or ranching without having to make a significant investment, and this can be especially helpful if you're unsure if farming is the right fit.

On the other hand, leasing land can be risky because you don't have the same level of control as you would if you owned the land outright. You may also have to deal with issues like crop damage, which can be costly. Whether or not leasing land is a good idea depends on your situation.

So what is ground lease financing? It's simply a way for businesses to get the space they need without having to commit to a long-term lease or mortgage. Ground lease financing can be a beneficial option for businesses that are expanding or starting up because it gives them the time to grow and stabilize without being locked into a large financial commitment. Contact us today if you're interested in learning more about ground lease financing. We would be happy to discuss this option with you and see if it might be a good fit for your business. Thanks for reading!

Urban Real Estate Center

Ground lease financing is a way for tenants to own their space while the landlord owns the ground on which the property is built. It's a popular financing option for commercial real estate.