Enter to open, tab to navigate, enter to select
Ground Leasing Toolkit (NY)
Practical Law Toolkit w-019-4734 (Approx. 7 pages)
Resources to assist landlords, tenants, and lenders in understanding and effectively drafting and negotiating ground leases and related documents in New York. 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 tenant) 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 simple 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.
The landlord may gain several advantages by entering into a ground lease rather than selling the property outright, such as:
- Retaining the fee ownership to and a reversionary interest in the property.
- Providing a lower risk for developing the land because the tenant undertakes responsibility for construction of the improvements.
- Providing a steady rental income over a long term.
- Avoiding a sale that may generate a substantial taxable gain to the landlord.
- Allowing the landlord to keep the land in the family for generations.
- Avoiding subdivision laws.
- Avoiding any restrictions on the sale of the land if the landlord is a governmental entity.
- Retaining 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:
- Having little or no control over the development and use of the land.
- Prohibitions on borrowing against the fee interest in the land during the ground lease term.
- The risk of losing its property during foreclosure if the landlord allowed its fee interest in the land to be secured by the tenant's financing and 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 New York. In addition to the New York-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 New York. For a non-jurisdictional Toolkit on ground leases, see Ground Leasing Toolkit (National and Select States).