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By Belinda D. Schuster, CCIM, Northwest Indiana Commercial Real Estate

Ground lease agreements make up a sizable portion of commercial real estate transactions, especially in the retail sector.  A ground lease is simply a long-term lease on land. The tenant is allowed to implement improvements on the land without holding ownership. While most associated the retail industry, ground lease agreements can apply to any type of property, including hotels, office, industrial, storage, healthcare facilities, and residential apartment buildings.

Ground leases came about due to the unwillingness of landowners to sell valuable parcels of land. Retailers and other potential lessees were interested in the potential of these sites, without wanting to become burdened with maintaining ownership.

However, despite the mutually beneficial framework, negotiation for ground leases can be complex, due to many possible variables involved. Ground leases are not for the faint of heart; however with the right team they can provide opportunity for great returns.

Whether or not a ground lease is subordinated can have a big impact on the outcome of the deal.  Subordination refers to the hierarchy of claims on the asset and associated with the collateral for a construction loan or permanent financing of the improvements.   Rent rates and their adjustments over time are also another major factor.  Keep focused on balancing the competing interests between landowner, tenant and developer to gain steady momentum.  A comprehensive ground lease can provide substantial benefits for all parties involved. Listed below are some but not all characteristics, advantages and disadvantage for each of the parties involved:

Key Influencing characteristics of a ground lease are:

Landowner Advantages:

Landowner Disadvantages

Developer/Tenant Advantages

Developer/Tenant Disadvantages

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