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Ground Leasing Toolkit (IL)
Practical Law Toolkit w-020-6325 (Approx. 7 pages)
Resources to assist landlords, tenants, and lenders in understanding and effectively drafting and negotiating ground leases in Illinois and documents related to ground leases in Illinois. This Toolkit includes links to commonly used forms, such as ground leases, memoranda, and estoppels. These resources provide analyses of common ground leasing concerns including tenant rights, landlord remedies, rent determination, and financing.
A ground lease is typically a long-term lease of land. The leased land may be either:
- Unimproved land where the tenant (also called a ground lessee) constructs new improvements.
- Previously developed property that contains existing improvements, such as buildings and roads.
Ground lease terms customarily run from 25 to 99 years and are generally at least 20 years.
The landlord (also called a ground lessor) continues to hold the fee ownership interest in the land. The tenant:
- Leases the real property from the landlord.
- During the term of the ground lease:
- owns the improvements; and
- pays all expenses attributable to the real property and the improvements.
A tenant may gain 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 purchased 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 gain 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 may provide the landlord with:
- a lower risk for developing the land because the tenant undertakes responsibility for construction of the improvements; and
- a steady rental income over a long term.
- The landlord avoids a sale that may generate a substantial taxable gain to the landlord.
- A ground lease allows the landlord to keep the land in the family for generations.
- If the landlord is a governmental entity, it 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 Practice Notes, Standard Documents, Standard Clauses, and State Q&As to help counsel for landlords, tenants, and lenders manage the process of drafting and negotiating ground leases and related documents in Illinois. In addition to the Illinois-specific resources and guidance, this Toolkit also includes several jurisdictionally neutral ground leasing resources. These resources include forms and discuss issues that are useful and relevant to landlords and tenants in every state, including Illinois. For a non-jurisdictional Toolkit on ground leases, see Ground Leasing Toolkit (National and Select States).