What Is a Land Lease? The Complete Guide

Land leases come in two main types: subordinated and unsubordinated.

In a subordinated ground lease, the lender or construction company has rights to the land because the property is being used as collateral to finance improvements. This setup is riskier for the landowner, which is why rent is often higher.

An unsubordinated ground lease gives the landowner rights to both the land and anything built on it. If a tenant defaults, the landowner retains full ownership, not the lender. This lease type is harder to secure since it’s riskier for lenders.

The terms of leased land vary but typically include a fixed yearly rent, sometimes with scheduled increases. Some agreements may also allow the landowner to share in project profits or invest land or cash in the project, whether that project is a new build or a rental property.

At Blue Water Mortgage, we help you understand the ins and outs of a land lease contract, so you can choose the best path forward.

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Examples of Ground Leases

• Investment properties: Many people choose a ground lease when purchasing beachfront or seasonal property. This option is often more affordable than buying the land outright, and depending on the lease terms, the property can even be sublet for extra income.

• Mobile home communities: Most mobile home communities are located on leased land, making them more affordable because residents pay for the home itself rather than the cost of purchasing the land. Financing for mobile homes is a specialized product, typically offered through local banks or lenders.

• Franchises and big-box stores: It’s common for corporate offices to own land and allow a tenant or franchisee to build on it.

• Farms: Farmers often lease land to grow crops or raise livestock without taking on the cost of land ownership.

In the right circumstances, a land lease can be the best option. But it’s not for everyone. Before you commit, take the time to weigh long-term implications of a land lease contract by asking yourself these key questions:

• What rights and responsibilities will you have?
  It’s important to understand what you’re responsible for versus the landowner. In many land leases, tenants handle property maintenance, taxes, insurance, and improvements. The lease agreement should spell out these responsibilities clearly in writing.
• What are the financing options?
  Financing a property on leased land can be more complex than a traditional mortgage. Some lenders view leased land as higher risk, which may mean larger down payments or stricter terms.

• Are there use restrictions?
  Some leases specify what the land can and can’t be used for. For example, a property might be limited to residential use only or forbid subleasing. Make sure the terms fit your plans for the property.
• What fees are involved?
  Land leases typically come with annual rent, which may increase over time. There may also be HOA fees, maintenance fees or shared infrastructure costs. Understand the full cost picture upfront so you’re not surprised later.
• How long is the lease, and when does it expire?
  Lease length is crucial, especially if you plan to pass the property down or resell it. A lease with fewer than 30 years remaining can make financing difficult and reduce resale value.

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It’s vital to look at the bigger picture before committing to a land lease. Both tenants and landlords can benefit from these agreements, but there are trade-offs to consider. The chart below breaks down the pros and cons for each side so you can make an informed decision about what’s best for you.

Blue Water Mortgage brings over 150 years of combined experience to every client. As an independent, owner-operated company, we focus on providing expert guidance to make financing easier. Have questions about land lease loans? Our team is here to help.

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What is a land lease?

This is an arrangement in which you lease a piece of land instead of purchasing it outright. You may own the home or improvements on the property, but the land itself remains under the landlord’s ownership.

The terms vary by agreement but often include a fixed yearly rent with scheduled increases. Some agreements also allow the landowner to share in project profits or invest land or cash in the project, whether that’s a new build or a rental property.

How does a land lease work?

Your land lease contract will outline exactly what you’re responsible for, such as upkeep, insurance and property taxes. In some cases, the landowner may also have the right to share in profits from improvement projects or invest cash or land toward your build. Because these agreements can get complicated, especially when financing or future resale is involved, it’s smart to go over every detail with a mortgage broker before you sign an agreement.

What should a land lease contract include?

A land lease contract should clearly spell out the lease length, rent and payment terms and each party’s responsibilities for maintenance, insurance and taxes. It should also cover any use restrictions, ownership details and extra provisions such as profit-sharing or renewal options. Reviewing these details with a trusted professional ensures there are no surprises later.