Advantages of Investing in Ground Lease

Dean Britton studied real estate at the University of Wisconsin. He is the principal of AIA, a leading asset management company. In this role, Dean Britton works with investors and developers on various transactions, including involving a ground lease.

A ground lease is a form of lease agreement where a tenant leases a particular piece of land on a long-term basis. Under this arrangement, the land owner retains ownership of the property. At the same time, the tenant can make specific improvements to the property to suit their intended function and purpose.

One of the significant advantages of a ground lease is that it provides a form of financial security for the land owner. Because the land subject to ground lease is often sited in strategic locations, they are often subject to higher rent, generating more income for the land owner.

Furthermore, ground leases often come with tax advantages for the landowner. Specifically, while the landlord might be required to pay taxes on the property and rent received, a considerable amount of taxation falls on the tenant.

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Advantages of Investing in Ground Lease

Dean Britton studied real estate at the University of Wisconsin. He is the principal of AIA, a leading asset management company. In this role, Dean Britton works with investors and developers on various transactions, including involving a ground lease.

A ground lease is a form of lease agreement where a tenant leases a particular piece of land on a long-term basis. Under this arrangement, the land owner retains ownership of the property. At the same time, the tenant can make specific improvements to the property to suit their intended function and purpose.

One of the significant advantages of a ground lease is that it provides a form of financial security for the land owner. Because the land subject to ground lease is often sited in strategic locations, they are often subject to higher rent, generating more income for the land owner.

Furthermore, ground leases often come with tax advantages for the landowner. Specifically, while the landlord might be required to pay taxes on the property and rent received, a considerable amount of taxation falls on the tenant.

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What Is Driving Modern Ground Lease Salience in New York?

 A New York City financial leader specializing in real estate finance and underwriting, Dean Britton has served as the managing principal of AIA Terra Partners since 2013. Dean Britton is responsible for capital structuring for real estate development deals and recapitalization initiatives and identifying and structuring new ground lease opportunities.

A ground lease is a contract in which a tenant (holder of leasehold land) pays a rental fee to a landowner at predetermined intervals in exchange for permission to use the land for real estate development and commercial activity. This will continue for decades until the contract expires and the tenant moves away and finds another property. In New York, modern ground lease space is expanding at an impressive pace dating back to 2019. Modern ground lease space is comprised of private and publicly traded firms that buy and lease lands to other entities.

Pioneered by the publicly-traded commercial real estate firm and ground lease operator Safehold, modern ground lease in New York pushes the envelope of commercial real estate investment options and income opportunities for investors. Some subsequent entrants, like Haven Capital, have cemented positive reputations in the private ground lease space.

Ground lease offers an opportunity for investors to build sustainable nest eggs amid the COVID-19 pandemic and unexpected economic turbulence. This merit is attributed to increased income predictability.

According to experts, older ground lease contracts lack flexibility, and the value of the properties is improperly sized. One instance of a property that is improperly sized right from the start is when the value of land triples the value of a building erected on it. Flaws in property sizing subject real estate partners to erratic cash flow streams as a consequence of fair market value rent resets, and this risk is the norm with traditional ground leases. Modern ground lease contracts have strategically extricated investors from these risks, revitalizing the ground lease space and making it less risky for investors.

A Typical Indication for 754 Election – Real Estate Acquisition

An alumnus of Brown University, Dean Britton is a financial and real estate executive who started his career in the late1980s as a debt and equity originations professional at MONY. Dean Britton joined Allegiance Investment Advisors (AIA) in 2008 as a managing principal. His responsibilities include seeking and negotiating financing arrangements for real estate projects.

When investors look to inject capital into real estate properties, they consider the tax consequences of the investment option, especially when a sponsor intends to use the funds for refinancing or property recapitalization. Some investors obtain ownership interests in appreciated properties, which means their partnership basis will differ from those of early investors. In this case, their tax obligation may need to be adjusted to ensure that they can enjoy impartial tax benefits. 754 Election may be instrumental in this regard.

For instance, three partner investors may initially acquire a property for $600,000 (a cost divided among the investors). After a year, the property may appreciate by $900,000. If one of the partners sells his shares to a new investor, he transfers the ownership to the entity for $300,000. His taxable gain would be $100,00 (the amount of appreciation).

The transfer of ownership also subjects the new owner to a $100,000 taxable gain, although the appreciation occurred before they became partners. As a result, if all investors decide to sell their shares, the new investor will be subject to a taxable event. Applying for a 754 election can prevent this from happening.

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Crucial Clauses of Ground Lease

An accomplished real estate investment professional, Dean Britton draws upon his experience in all aspects of related finance and underwriting to serve as managing principal and lead partner at Allegiance Investment Advisors (AIA). In this role, Dean Britton identifies and structures new ground lease opportunities. He has also pioneered structural characteristics that have become the industry norm in ground lease bifurcation.

Ground leasing enables tenants to develop commercial real estate properties on parcels of land they may otherwise be unable to afford if they were to acquire such land. In these contracts, lessors (landlords) allow tenants to use their lands for property development and commercial purposes in exchange for monthly rent payments. There are several key clauses in a ground lease contract, including lease terms, taxes and maintenance fees, sublet policy, improvements, and terms of termination.

Lease terms explain the major agreement between the two parties (lessor and lessee). These include how long the contract is expected to last, how much the monthly rent dues will be, and how payments will be made.

Tax obligations generally concern the lessee throughout the contract duration. Likewise is the cost incurred on property maintenance, utilities, and insurance. Lessors generally assume zero obligations throughout the duration of the contract. It is important to state these terms in the contract explicitly.

Sublet policies may vary from landlord to landlord. Some lessees allow tenants to lease parts of the land to third parties, while others proscribe this action. This clause needs to be explicitly stated in the contract.

The terms of termination are the proviso given by the lessor (landlord). Most landlords lease their land with the provision that the contract will expire if the tenant uses the land for illegal activities, defaults on rent, causes damage to the property, or violates other terms. These conditions should be stated in terms of termination.

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