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What is a land lease

What Is a Land Lease?

A land lease, or ground lease, is a agreement in which a lessee owns entities or improvements in a designated area, but doesn’t own the actual land. This is popular in commercial properties, beach-front properties and mobile home parks. A land lease can benefit both the landowner and the tenants and can be a great alternative to a more traditional lease. Most land leases range between 50 and 99 years and are passed down through families.

What Is a Ground Lease?

There are two main types of land leases, subordinated and unsubordinated. Unsubordinated ground leases are the more common of the two.

In a subordinated ground lease, the construction company or lender has rights to the land. This is typical when a landowner is using land as collateral to finance improvements. Since this is risky to the landowner, it allows them to charge more for rent.

In an unsubordinated ground lease, the landowner has rights to the land, and everything built on it. If a tenant defaults, the landowner retains ownership (not the lender). This type of ground lease is harder to secure since it’s riskier for lenders.

The terms of each individual lease will vary but will always include a fixed lease amount per year. The lease agreement may include a clause for increase every few years. There may be additional provisions, like the landlord will get a percentage of profits from the project or the landlord can invest land or cash in the project. The “project” can be construction or a rental property situation.

Examples of Ground Leases

Investment properties – Many individuals who purchase or lease beach-front, ocean-front, seasonal or summer property do so with a ground lease. The purchasing price of these properties is more affordable than purchasing the land. Depending on their specific lease agreements, they may rent out the properties for income.

Mobile home communities – Most mobile home communities are on leased lands and are more affordable since the land isn’t included. Mobile home financing is a specialized product, usually done by a local bank or financer.

Franchises and big box stores – A corporate office will typically purchase the land and allow a tenant/franchisee to construct a building.

Farms – Farmers may lease land to grow crops or raise animals in a specific location.

Should You Buy a Home on Leased Land?

Questions for Considerations:

  • What are the rights and responsibilities of the tenants compared to the landlord?
  • How much is the financing? Are there any specific financing conditions?
  • Are there any use provisions, such as when a land is only for residential property and cannot be rented out?
  • Are there any fees, and if so, how much do they total?
  • Are there any taxes on the land, and are they likely to increase?
  • How many years remain on the lease and when does it expire?

Pros and Cons of a Land Lease

Landlord Tenant
Pros
  • Steady source of income
  • Long-term tenant without losing ownership of the land
  • Not responsible for improvements to the land
  • Landlord may be entitled get property back with amendments after lease period is over
  • More affordable than traditional options
  • Lower property taxes
  • Access to great locations without buying the land
  • Don’t need to worry about cost of land
  • Can claim deductions on rent payments
Cons
  • If not specified in the terms of the lease agreement, they may not have control over improvements on land
  • Contract may restrict landlord’s ability to deny land improvements
  • Lease agreement is harder to get out of
  • Getting a mortgage can be difficult
  • Responsible for paying insurance, taxes, repairs and maintenance costs
  • Not building home equity

Blue Water Mortgage has over 150 years of experience in the mortgage industry. We’re an independent, owner-operated company and pride ourselves on timely communication and expert advice. If you’re interested in a land lease loan or have any questions, reach out today.

Roger is an owner and licensed Loan Officer at Blue Water Mortgage. He graduated from the University of New Hampshire’s Whittemore School of Business and has been a leader in the mortgage industry for over 20 years. Roger has personally originated over 2500 residential loans and is considered to be in the top 1% of NH Loan Officers by leading national lender United Wholesale Mortgage.