Having a diversified portfolio is an important part of being a wise investor, but have you ever considered adding a ground lease to your investment portfolio? A ground lease can offer several advantages to investors, but there are some important things to consider.
First, what exactly is a ground lease? An investor can purchase undeveloped commercial land and then lease that land to a tenant that plans to build on it. Ground leases are usually very long term (think 50-99 years) but at lease end (or if the tenant ever defaults on their lease), the investor takes ownership of the building.
Often at lease end the tenant will offer to purchase the land they’ve been leasing, thus giving the investor decades of rental income and ultimately a lump-sum payment for the property.
That’s not the only benefit for an investor of a ground lease. There are very few responsibilities for the investor because ground leases are typically net leases, therefore tenants are responsible for property taxes, insurance and maintenance expenses. In many instances, there is no upfront cost on the part of the investor; if they own a piece of property in a desirable location, they can lease it without pulling any permits or making any improvements. This means the investor is gaining long-term, stable income from a vacant property.
As previously mentioned, it’s also a low-risk investment because of the protection for the landowner if the lessee happens to stop paying their rent. It’s possible that at the end of the lease term the structure is no longer viable, but if the lessee defaults on their lease before then, the landowner now owns a commercial building in addition to their land.
I imagine you’re thinking this sounds really promising, but I’d be remiss if I didn’t mention the downside of a ground lease investment. There are some tax benefits that an investor will miss out on if they own a ground lease; they don’t own the building, so they don’t get depreciation to offset their taxable income.
Overall, this scenario is a win-win for investor and lessee. Tenants are drawn to ground leases because they can secure a piece of property that might be out of their budget to own, and investors can secure a low-risk investment that offers long-term, stable income.
Justin Langlois, CCIM is a Commercial Real Estate Investment Advisor with Stirling Properties servicing Baton Rouge, Louisiana and surrounding markets. Please reach out to Justin to discuss your real estate investment strategies.