Understanding Ground Leasing

A lead partner at AIA in New York, Dean Britton is responsible for sourcing and structuring new ground lease opportunities. Dean Britton liaises with sponsors, developers, and other stakeholders on an ongoing basis and ensures that the ground leasing and the accompanying developments go according to plan.

A ground lease is an agreement where the tenant can develop the property over the lease period. There is an arrangement that the land and the improvements are reverted to the property owner upon lease period expiry. One of the primary highlights of a ground lease is the cost ownership, especially tax, of the improvements. The clause should explicitly indicate who is liable for the costs over the lease period.

The lease enables the landlord to sell the property at a higher rate, as they initially leased out the land only, but at the end of the lease period, it has developments and improvements. A typical ground lease contains several variables that apply to both parties. These include the default property settings, terms, rights, fees for both parties, and usage and financing conditions.

As the lease is long-term, typically between 50 to 99 years, other significant clauses include property ownership over the period, with any agreed exceptions, and a profile of the improvements on the property. For the landlord, the benefits include avoiding capital gains, retaining property ownership, especially for long-term planning reasons, and assured revenue on an otherwise redundant property.

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How Ground Leases Enable Developments to Move Forward

Dean Britton is a New York City professional who oversees complex ground leasing arrangements involving buildings’ residential and retail components. The foundation of Dean Britton’s business is the understanding that many development projects funnel money into two very different types of investments.

All buildings sit on land, which typically presents a predictable, low-risk/low-return proposition. By contrast, what building owners do with a property (how they rehabilitate and position it) presents a high-risk/high-reward scenario. Many real estate projects encompass these two elements: the volatile building development and operation side, as well as a lower-yield land component.

With ground leases, developers do not purchase land, but instead lease it from the landowner, usually for a 99-year period. When the lease comes to an end, all improvements undertaken by the developer transition to the landowner. This enables families and institutions to make an income from land without having to sell it. At the same time, developers find their capital-raising needs substantially reduced, particularly in sought-after urban areas such as Manhattan.

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