Commercial Ground Lease properties allow for a tenant to rent the land for a period of time. During the lease term, the tenant is able to construct a building on the property. The type of structure erected must meet all zoning requirements and local code.
After the expiration of the lease, the land reverts back to the owner. Technically, the tenant owns the building they had constructed, but a future negotiation determines the outcome of the building constructed on the land.
Commercial Ground lease Properties
The lease term must be long enough and economically feasible for a tenant to construct a building on the premises. The duration is usually 15 or 20 years, we options to renew. The financial commitment to erect a commercial building is significant. A tenant will not want to spend a large sum of money to have the lease terms end shortly after.
Commercial ground lease properties are especially popular with various franchisees and national commercial tenants. Brands such as Burger King, Wendys and other Restaurant Groups will typically custom build a property and lease the land for a period of time.
Commercial ground lease properties offer depreciation benefits for the tenant, but not the owner of the property. The tenant is able to depreciate the building, since the physical structure is their asset.
On the other hand, the landlords simply owns the land, which is not a depreciable asset. Since they do not own the building structure, this is not depreciable over time.
This concept is key, as many owners do not realize they may not be able to depreciate a commercial ground lease property.
1031 Exchange Purchases
Many 1031 exchange buyers will review a handful of triple net lease properties. Some of those assets will inevitably be ground lease purchases. This may be a strong, investment purchase for a 1031 exchange client, but make sure the buyer understands all aspects of a ground lease. To a real estate novice, this concept can be very confusing and difficult to grasp.
At JSG Realty, we assist clients find high quality commercial ground lease properties. Please contact us for your next commercial real estate purchase.