Ground Lease vs. Build-to-suit - What's better for me?

Jennifer Camille

So you have a prime piece of land you want to do something with. You know you can get a good price if you sell it, but something in the back of your mind says “I wonder if it would be better to lease it to someone for 20 years instead?”. Who leases empty land anyway?

The answer is… Plenty of people would, and do, all of the time!

Many landlords fancy themselves developers and attempt to develop or redevelop their own land. For the unsophisticated, non-developer landlord this can be risky and costly. It’s the landlords who see the risk, understand how their probable lack of knowledge could be a detriment and make the decision to let someone else take on that cost/risk Who sign ground leases. Well, it might also have something to do with retaining their interest in the property!

On the other hand, many tenants want to avoid the costs associated with buying land to build out. He (or she) can focus their capital on the actual building of their store, restaurant, gym, etc. Tenants actually receive quite a few benefits from leasing their land! For one, the improvements are depreciable whereas the land the improvement sits on is a non-depreciable asset. Secondly, the rent the tenant pays can be deducted as a business expense when filing taxes. each year.

“So what about a 'build to suit' option? I see that printed on signs all the time. What’s what about?

In the simplest terms, for a ground lease the landlord is “hands off“. The tenant does everything, including finding his own construction team, buying supplies and materials, etc. On a build-to-suit lease, the contract is part lease and part construction agreement. This is typically seen in the form of a letter outlining the work the landlord will do. This means that the tenant doesn’t have to go through the trouble of finding, managing and paying separately for all of the construction cost; they are included in his lease.

In general, neither option is better or worse than the other. Many tenants prefer the build to suit option because it means they don’t have to front capital for the construction of their building. There is also potentially less risk for the tenant with the build to suit option because they may be able to walk away if construction falls significantly behind (depending on how their agreement is written). For a landlord, that common phrase in real estate “it depends“ applies. It all depends on how comfortable they are as landlord and developer or if they prefer to oversee the property from afar.

In the end, it’s up to both tenant and landlord to do their research and come to a mutually beneficial arrangement.

Jennifer Camille is the Administrator and Marketing Coordinator for Berkshire Hathaway HomeServices Verani Realty Commercial Division. She is currently in the process of becoming a licensed REALTOR® in the State of New Hampshire. Currently Jennifer focuses on driving visibility for Verani Realty Commercial Division through the use of social media, news articles and blog posts. She can be reached via email at jennifer.camille@verani.com or by phone at 603-845-2225.

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