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.
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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.