Ground Leasing for State and Local Government Toolkit

Practical Law Toolkit w-006-9545 (Approx. 5 pages)

Ground Leasing for State and Local Government Toolkit

by Practical Law Government Practice

Maintained • USA (National/Federal)

Resources to assist government landlords and tenants in effectively drafting and negotiating ground leases and related documents.

A ground lease is typically a long-term lease agreement of unimproved land or previously developed property where the tenant constructs new improvements. Lease terms customarily run from 30 to 100 years or longer and are generally not less than 20 years. The tenant usually holds ownership of the improvements during the ground lease term and the tenant is obligated to pay all expenses attributable to the property.

A tenant may have several advantages by entering into a ground lease rather than purchasing the fee interest in the real property, including:

A ground lease substantially reduces the tenant's front-end development costs because it eliminates land acquisition costs.
Rental payments are often deductible by the tenant for federal and state income tax purposes.

There are, however, also disadvantages for a tenant in a ground lease transaction, including:

The total costs for ground leasing property are usually higher in the long term than if the tenant purchases the property outright.
The tenant often has less flexibility over the development, use, and operation of the property because of restrictions contained in the ground lease.
The tenant may have difficulty financing or refinancing the ground lease because of limitations contained in the ground lease. This prevents the tenant from taking equity out of the project.
The tenant's leasehold interest under the ground lease is a "diminishing asset" because the value and marketability of the project diminishes as the end of the lease term nears.

A landowner may have several advantages by entering into a ground lease rather than selling the property outright, such as:

The landlord retains the fee ownership to and a reversionary interest in the property.
A ground lease provides the landlord with a low risk development of the land that results in steady rental income to the landlord over a long term.
The landlord avoids replatting or subdivision laws.
Governmental landlords may be restricted in selling the land but can instead lease the land for development.
A carefully drafted ground lease allows the landlord to keep control over the development and permitted uses of the land.

There are also, however, disadvantages for a landlord in a ground lease transaction, such as:

The landlord may have little or no control over the development and use of the land.
The ground lease may contain restrictions that prohibit the landlord from borrowing against its fee interest in the land during the ground lease term.
If a landlord allows its fee interest in the land to be secured by the tenant's financing, the landlord may lose its property during foreclosure if the tenant defaults under its financing.

A ground tenant usually needs financing to help fund its development costs. A ground tenant typically gets a construction loan for the construction phase of the development. After the construction is completed, the ground tenant gets take-out financing from a term lender to pay off the construction loan. Lenders of the construction loan and the permanent take-out loan want assurances that the ground lease contains clauses that protect the lenders' interests.

This Toolkit contains continuously maintained practices notes, standard documents, standard clauses and state-specific laws and customs guidance to help counsel for government landlords and tenants manage the process of drafting and negotiating ground leases and related documents.

Ground Leasing for State and Local Government Toolkit | Practical Law