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Posts Tagged ‘ground lease’

  1. We Thought it was a Property Problem, but it Turned out to Be a Contract Problem.

    May 30, 2023 by lowens

    By Lauren Thomas

    Lauren Thomas, Spring 2023 CDC Fellow, in the UMass Law Library

    A ground lease is a long-term commercial lease which typically lasts for 99 years [End Note 1]. With the ability to provide benefits to both landowners and tenants, in recent years, ground leases have gained traction for businesses and investors alike. [End Note 2]. While the process for creating a ground lease seems straightforward enough—draft a contract that is pleasing to both sides and sign—there are oftentimes wrinkles that require careful consideration by both parties. For example, what do you do if contained within the land to be leased is a building which is already being leased to another? And what if the landowner desires that already existing lease to remain in existence for a few more years? 

    Initially, the presence of an already existing lease on the land could seem to create quite the conundrum. Thankfully though it isn’t a deal breaker and there are several solutions to this otherwise troublesome situation. First, with the permission of the current tenant, the landowner could terminate the existing lease, sign the ground lease, and, so long as it was written in as a condition to the ground lease, require the developer to sign a new lease with the tenant. This however, comes with several risks as it requires not only an early termination of the existing lease, but also because it requires a mutual agreement between the tenant, landowner, and developer, something that each party rightfully might be very hesitant to agree to. 

    Second, the landowner could choose to hold off on signing the ground lease until the natural termination of the existing lease. This is perhaps the easiest solution depending on how long the term is for the existing lease. However, if the landowner wishes the current tenant to have an option to renew their lease, pushing back that natural termination even further, the landowner may miss out on a great opportunity to enter into a ground lease should the developer not also be willing to wait until the natural termination of the existing lease. 

    Third, the landowner could include a clause in the ground lease detailing that while the existing lease is not a part of the current ground lease, the ground lease may be amended to include that land at the time of the existing lease’s termination [End Note 3]. In essence, rather than approach the situation as it pertains to property law, the landowner would approach it as it relates to contract law—finding solace in a carefully drafted clause. The amendment would then be included as an exhibit to the ground lease which could easily be finalized and recorded when the time came. [End Note 4]. 

    Which option makes the most sense? Although true that the third option requires a little bit more effort than options one or two, it is safe to say that it also provides the best security for every party involved. The landowner gets to keep their tenant, the tenant gets to keep their lease, and the developer and the landowner get to begin their ground lease. 

    —

    1. Michael Allan Wolf, Powell on Real Property §37.26 (2023)
    2. See generally Monte Mann, Ground Leases Offer Potential Benefits for both Tenants and Landowners, JDSupra, Jun. 9, 2022, https://www.jdsupra.com/legalnews/ground-leases-offer-potential-benefits-7432027/
    3. See U.S. Securities and Exchange Commission, https://www.sec.gov/Archives/edgar/data/1124610/000119312511208390/dex1026.htm (last visited Apr. 25, 2023).
    4. See U.S. Securities and Exchange Commission, https://www.sec.gov/Archives/edgar/data/908652/000119312505052626/dex1026.htm (last visited Apr. 25, 2023).

    Category Legal Practice, Spring 2023 Fellows | Tags: ,,,, | No Comments

  2. How can a Massachusetts 501(c)(3) organization be exempt from property tax when leasing real property in a ground lease?

    May 30, 2023 by lowens

    By Philip Light

    Philip Light, Spring 2023 CDC Fellow, in the UMass Law Library

    Property tax represents the largest source of revenue for Massachusetts when compared to any other tax collected at state or local level. [End Note 1]. Nevertheless, there are ways to be exempted from paying property tax, one such way is by being a 501(c)(3) organization. A 501(c)(3) organization also known as a charitable organization is granted special tax exemptions from the Internal Revenue Service (IRS). [End Note 2]. Under certain circumstances such as a ground lease for real property, a 501(c)(3) organization must meet special requirements to qualify for a property tax exemption.

    A ground lease also known as a land lease, is when an owner leases their land to another party for long-term, typically 99 years, during which the tenant will develop the land, and at termination of the lease the property will go back to the owner with all improvements. [End Note 3]. A ground lease provides numerous benefits to both the landlord and the tenant leasing the land, including tax benefits. The ground lease can be drafted to make either the landlord or the tenant responsible for specific types of taxes during the duration of the lease. So, what will happen when a Massachusetts, 501(c)(3) organization is drafted to be responsible for the property tax as the tenant of a ground lease?

    Massachusetts law allows for a charitable organization that leases property a tax exemption under specific conditions. First the organization must be found as a 501(c)(3) charitable organization recognized by the IRS. A charitable organization is an organization that is a corporation, trust or non-profit established for literary, benevolent, charitable, or scientific or temperance purposes. [End Note 4]. With its principal purpose and activities for the benefit of the public and not limited to certain groups of people. [End Note 5]. Additionally, at any point during operation or if dissolved the organization cannot use its income or assets for non-charitable purposes, nor for the benefit and enrichment of the directors, officers, and shareholders. [End Note 6]. After being recognized as a 501(c)(3) charitable organization under the IRS, the next step is to show that the real property was acquired for a charitable purpose. [End Note 7]. However, even if the organization is found as a 501(c)(3) organization with real property acquired for charitable purposes, the landlord of the lease plays a crucial role in determining if the 501(c)(3) tenant can be exempt from property tax.

    If the landlord of the ground lease is a religious organization or another 501(c)(3) organization?

    The 501(c)(3) tenant must apply to the local city or town for property tax exemption. [End Note 8]. Exemptions are granted by the town’s assessor’s office; they will check the application and determine if the organization meets the criteria for property tax exemption. [End Note 9]. If criteria are met and they are granted exemption the 501(c)(3) tenant’s property tax for the duration of the lease will be tax exempt.

    If the landlord of the ground lease is not a 501(c)(3) religious or charitable organization?

    The 501(c)(3) tenant will be required to pay for property tax if the ground lease drafted the responsibility to the tenant. This is due to the fact that the landlord is a taxable individual or entity, making it so the 501(c)(3) tenant will be taxable for the property tax. [End Note 10].

    In conclusion, when it comes to property tax exemption as a 501(c)(3) tenant in a ground lease, Massachusetts law allows for the organization to stay tax exempt under specific criteria. By meeting these criteria and applying for the exemption with the local city or towns assessor’s office the organization can save significant money that can be used to develop the land in furtherance of their charitable purpose. 

    —

    1. Phineas Baxandall, MA Property Taxes: Who Pays? Recommendations for More Progressive Policies, MassBudget, Feb. (2020), https://www.massbudget.org/reports/pdf/Making%20Property%20Taxes%20Progressive%20(long%20report).pdf
    2. Exemption Requirements -501(c)(3) Organizations, IRS, https://www.irs.gov/charities-non-profits/charitable-organizations/exemption-requirements-501c3-organizations
    3. GROUND LEASE Definition & Legal Meaning, The Law Dictionary, https://thelawdictionary.org/ground-lease/
    4. M. G. L. c. 59, §5, https://malegislature.gov/Laws/GeneralLaws/PartI/TitleIX/Chapter59/Section5
    5. Taxpayer’s Guide to Local Property Tax exemption, Division of Local Services, https://www.mass.gov/doc/religious-and-charitable-organizations/download
    6. Id.
    7. Id.
    8. Id.
    9. Id.
    10. Id.

    Category Legal Practice, Spring 2023 Fellows | Tags: ,,,, | No Comments

  3. Ground Leases: Private Contracts for the Public Good

    April 18, 2023 by lowens

    By Nicole Egan

    Nicole Egan, CDC Fellow Fall 2022

    Property values have doubled in the past twenty years (i), and recently, mortgages hit their highest rate in a decade (ii). These rising costs have led to substantial declines in home ownership statistics because potential buyers are priced out of the market. (iii) Unfortunately, despite being portrayed as a modern trend, housing affordability crises are nothing new. Throughout history, land ownership has always been a source of wealth reserved for a lucky and disproportionate few (half of the land in England, for instance, is still owned by less than 1% of the country’s total population) (iv). To be fair, inequalities in land ownership do make sense. Land is humanity’s most valuable resource: providing food, water, shelter, and enjoyment for people who are unable to simply make more of it.

    However, as lucrative as land ownership may be, merely having the right to use it can be equally as desirable. Large corporate retailers, for example, frequently agree to build and operate businesses on land they do not own. The advantages of doing so are clear—instead of purchasing expensive property, a land Tenant simply pays rent while Landlord-Landowners profit on otherwise unused land. Upon expiration of the contract, the right to possess the property returns to the landowner, leaving the Tenant free to pursue their next business venture without being tied to the land. But agreements like this are not confined to commercial transactions—anyone fortunate enough to hold vacant property can temporarily assign their rights by entering into a Ground Lease.

    A Ground Lease is defined as a “long-term (usually 99-year) lease of land only. Such a lease typically involves commercial property, and any improvements built by the lessee usually revert to the lessor ” (v) In other words, in a Ground Lease, individuals or entities retain title to their land while another party has the right to enter, possess, and use it for any agreed-upon purpose (vi). In general, there are two types of Ground Leases (vii). In a subordinated Ground Lease, the Tenant’s bank usually receives a security interest in the property when it is used as collateral in a loan (viii). This poses a risk to Landlords because their land may be subject to repossession in the event of a default by the Tenant. On the other hand, in an unsubordinated Ground Lease, Landlords maintain superior rights for all claims against their land—so even if a Tenant defaults on a construction loan, the Landlord still maintains ownership of their property in an unsubordinated Ground Lease (ix).

    Of course, as with any contract, there are certain risks that must be anticipated before signing. One common issue is that Ground Leases are often entered into during the early stages of ambitious construction projects—frequently before a Tenant has received all required zoning and building approvals (x). Thus, there may be no guarantee that a new business will actually ever open its doors in the event a Tenant is unable to obtain all of the permits necessary to begin construction. Moreover, even if a commercial Tenant is able to build and subsequently run a profitable organization, there’s always a risk that the business may not be sustainable.

    Nonetheless, issues like this can be prepared for by drafting periodic reappraisal options into the lease for the Landlord’s benefit (xi). This provision allows for landowners to request periodic reassessments of their property’s value in order to renegotiate rent payment amounts or other applicable lease terms to protect their investment over time (xii). Additional considerations like insurance liability and coverage, duration, and defined business purposes should also be drafted into the agreement to clarify ambiguities and avoid disagreements down the line. But in essence, Ground Leases allow landlords to avoid typical lessor risks and obligations while securing rental income for a set duration.

    Accordingly, Ground Leases should be used to provide affordable housing opportunities. An unsubordinated Ground Lease could potentially provide public housing facilities, owned and operated by Non-Profit companies that cannot afford to purchase land outright in pursuit of their cause. In that example, the landowner benefits by receiving rent payments while also providing an urgent public need for housing, all the while knowing that their land will likely increase in value over time anyway. As long as the Non-Profit Ground Lease Tenant has the experience and qualifications necessary to turn their dreams into a reality, all the landowner needs to do is patiently wait to collect on their investment.

    In sum, Ground Leases are tools by which individuals or entities who cannot afford to purchase real estate via traditional financing methods can still possess and use land, just like a titleholder would. Unlike in typical rental agreements, Ground Leases allow tenants to build and use land for any agreed-upon purpose. Additionally, Landowners may lease their property for profit while waiting for its value to increase over time. Therefore, Ground Leases could help rebalance inequalities in the housing market—and all landowners need to do is sign.

    ——————–

    i Nick Routley, Charting 20 Years of Home Price Changes in Every U.S. City, VISUALIST CAPITALIST, Oct. 22, 2020, https://www.visualcapitalist.com/20-years-of-home-price-changes-in-every-u-s-city.

    ii Thomas Yeung, Housing Crisis 2022: 3 Graphs That Show How Wild Home Prices Have Become, INVESTORPLACE, Oct. 13, 2022, https://investorplace.com/2022/10/housing-crisis-2022-3-graphs-that-show-how-wild-home-prices-have-become.

    iii 2022 State of the Nation’s Housing Report, HABITAT FOR HUMANITY, https://www.habitat.org/costofhome/2022-state-nations-housing-report-lack-affordable-housing.

    iv Rob Evans, Half of England is Owned by Less Than 1% of the Population, THE GUARDIAN, Apr. 17, 2019, https://www.theguardian.com/money/2019/apr/17/who-owns-england-thousand-secret-landowners-author.

    v LEASE, Black’s Law Dictionary (11th ed. 2019) (emphasis added).

    vi See Jonathan Stein, Tax Considerations for Ground Leases, GOULSTON & STORRS, Feb. 22, 2022, https://www.goulstonstorrs.com/publications/tax-considerations-for-ground-leases (stating that ground leases usually last from 25-99 years and are preferred by property owners who are underutilizing their land).

    vii See Jeri Frank, What Are Land or Ground Leases and How Do They Work? STRATAFOLIO, Jun. 17, 2020, https://stratafolio.com/what-are-land-or-ground-leases-and-how-do-they-work (describing the benefits of unsubordinated and subordinated ground leases).

    viii Id.

    ix Id.

    x See Jerome D. Whalen, Six Things You Should Know About Ground Leases, 33 No. 3 Prac. Real. Est. L. 19 (2017).

    xi Id.

    xii Id.

    Category Fall 2022 Fellows, Legal Practice | Tags: ,, | No Comments

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