A Ground Lease Might Be An Option
Ground Leases offer benefits to both landlord and tenant
A commercial ground lease is usually defined as a lease on land for a relatively long term (50 to 100 years) where all expenses are the obligation of the tenant (taxes, insurance, financing costs.)
A very simple approach to the valuing and pricing of a ground lease is to establish the market value of the land, take a 10 percent return, which will be the approximate annual rent, and divide by 12 to get the monthly rent.
For example: Ground Value is $100,000.
Annual 10 percent return is $10,000.
$10,000 / 12 = $833.33 per month in rent.
Landlords like ground leases because:
A. Avoids tax consequences of a sale and taxes are only due on rental income.
B. Retains ownership of the land and provides a long-term stream of income.
Tenants like ground leases because:
A. A ground lease substantially reduces the development costs because you don’t need to include the cost of the land.
B. All rent payments are deductible as expenses.
Fast food restaurants particularly like ground leases for both reasons because they will make their money/profit in selling their product rather than have money tied up in land ownership. Other examples of businesses that like ground leases are coffee drive-thru’s and banks.
Ground lease options are favored especially by national tenants. Here are some examples from across the United States:
Chick-Fil-A has a 70,437 SF ground lease in North Carolina that rents at $1.44/SF.
Del Taco has a 101,230 SF ground lease in California that rents at $3.66/SF.
McDonald’s has a 43,660 SF ground lease in Arizona that rents at $2.18/SF.
Ground leases can be complex and are significantly different from a commercial office or retail lease. When considering any of these kinds of leases, always contact a professional commercial real estate broker.