Pros and Cons of Ground Leases from a Commercial Real Estate Broker in Austin

  • February 10, 2023
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Commercial real estate brokers in Austin serve as liaisons between parties in commercial transactions. They should be well-versed in information about the location of and the demographic surrounding a property. This way, their client is able to get the most out of a deal. If the client is a tenant, a broker’s focus is on securing space that will support their business’s growth. On the other hand, if the client is a landlord, the broker’s job is to market to tenants and negotiate the best returns.

You might assume that a typical commercial real estate investment will entail the purchase, development, and eventual sale of the property. But not every development opportunity ends after the planned holding period. When a property owner is hesitant to sell, they may instead opt for a ground lease, also known as a land lease. Learn from a commercial real estate broker in Austin what a ground lease entails.

What Should Ground Leases Include?

Ground leases define who owns the building and the land, as well as what improvements are to be made to the property. They make it easier for tenants to develop on what are often expensive pieces of property. Typically, ground leases are used by franchises and commercial entities. Once the land is purchased and an agreement is made, the tenant is able to construct a facility. The tenant’s lease will run from anywhere between 50 to 99 years, wherein the landowner is given ownership of the facility.

A ground lease is made up of these parts:

  • Fees
  • Terms of the lease
  • Title insurance
  • Use provisions
  • Default conditions
  • Financing conditions
  • Landlord rights
  • Tenant rights

Advantages and Disadvantages of Ground Leases

Ground leases are chosen by landowners because they hope to retain property ownership for planning reasons. These leases have a structure that can benefit both tenants and landlords. Of course, like any rental agreement, there are stipulations that must be met in a ground lease. Here is some insight into the reasons for and against a ground lease.

Advantages For Tenants

With a ground lease, tenants have access to prime real estate. Prime real estate refers to properties that have the most desirable assets in a specific area. These new and highly specified assets are reflected in the price of the property. Were they to attempt to buy this property outright, it would be quite costly. With a ground lease, tenants are not required to have a down payment, meaning less equity is involved. Therefore, commercial real estate brokers in Austin find that tenants are able to put more of their money into improving the land rather than acquiring it. They even get a reduction in their overall tax burden because rent paid on a ground lease could be deductible.

Advantages For Landlords

Commercial property owners can monetize their property with a ground lease. This means that landlords are able to have a steady stream of income. Plus, they are capable of doing this without relinquishing control over the land, given that certain provisions allow them to keep a degree of control. A landowner, thus, has the ability to approve or deny changes to the land. This would not be the case in an outright sale. So, while a tenant is taking on the hassle of making improvements to the land, the landlord is freed from worry and reaps the benefits of the improvements in the end.

Disadvantages for Tenants

Given that landowners often have the final say about changes to the land, tenants have less flexibility than they do with an outright sale. Due to the restrictive terms of the lease agreement, tenants may experience setbacks throughout the development process. Landlords are also able to drive up the costs for tenants with ground leases, making these properties expensive investments. The escalation clause that is built into the lease may turn out to be much higher than the tenant had expected. Before committing to a ground lease, make sure to consult a commercial real estate broker in Austin. With their knowledge of the market, they will be able to secure you the best deal possible.

Disadvantages for Landlords

One of the biggest problems for property owners when it comes to ground leases is the higher tax implications. Of course, this will vary based on the property’s location. But, in general, landlords face an increase in their tax burden due to the rent they charge being considered as income. It is taxed at ordinary rates rather than capital gain rates. A landlord must also have their lease reviewed before signing to ensure that there are the proper provisions to retain their control of the land.

Types of Ground Leases

Terms and conditions of a lease vary between parties. However, there are two main types of ground leases—subordinated and unsubordinated. The difference is how a tenant’s financial difficulties during the terms of the lease are responded to. In either of these cases, though, a commercial real estate broker in Austin will be able to act as your guide.

Subordinated Ground Leases

The landowner takes a lower position in the claim hierarchy with a subordinated ground lease agreement. By giving up the first claim on the land, they are allowed to negotiate more favorable terms, such as higher rent. And in the case that a tenant defaults on a loan, the landlord is allowing the property deed to act as collateral. Landlords, therefore, take on additional risk with a subordinated ground lease while aiming to increase the property’s value.

Unsubordinated Ground Leases

On the opposite hand, landlords who sign an unsubordinated ground lease agreement retain top priority. Should a tenant default on their loan, their lenders will not have to foreclose on the land. Prospective lenders might not want to extend a mortgage because they are unable to take ownership of the land if tenants do not pay their loan. So, while landlords have to charge lower rent, an unsubordinated ground lease is a much less risky position for them.


Are you in need of a commercial real estate broker in Austin? The Commercial Industrial Properties team has you covered. Our brokers have an average tenure of over two decades and have worked with clients from all backgrounds, ranging from start-ups to Fortune 500 companies. With our emphasis on building relationships and executing ethical practices, we are sure to help you exceed your goals. Fill out our contact form to hear back from one of the commercial real estate professionals at CIP.


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