How to rent the best location in town for your business

Why would anyone rent dirt instead of buying?

Some have no choice. They want the best location in town, right now, but no one has anything for sale. If that company is going to be in business in that marketplace, it is forced to ground lease. Others choose this vehicle because they do not want any ownership headaches when they elect to abandon a site. If, after twenty years, the marketplace has changed, they can simply pack up and leave. There is no property to maintain on the books, no insurance to keep up, no maintenance, and no real estate broker to pay.

I see "For Lease" signs on raw land all over my community. Does this mean it is a very popular investment strategy in this area?

In some markets, ground leasing is very popular with property owners, even if it is not popular with potential tenants. Every other piece of land has a "For Lease" sign on it. As a practical matter, the ground lease marketplace is not that large. Before leaping into it, pay attention to the signs around town. Are they in places you consider good locations? Are the asking rents reasonable, in your opinion? How long do the signs stay up? If the signs have been up so long that the letters have faded in the sun, it might not be such a good market or location.

I have a lot of experience leasing other properties. Can I negotiate my own ground leases?

Ground lease documents are usually written by high-powered lawyers who charge US Dollars 500 per hour and work on the 40th floor of office towers in big cities. This is not an area in which you can read a lease yourself and understand what you are signing.Your real estate broker, if you have one, will not be able to advise you. Pay the money for an expert attorney to review the lease. You might want to hold down legal fees by doing your own negotiating and keeping your lawyer in the background for consultations.

Can you give an example of a dangerous clause in a ground lease?

It is common for ground leases to have a subordination clause buried somewhere after the point you go cross-eyed reading dozens of pages of fine print. If you sign, you are agreeing to subordinate to the tenant's construction lender or possibly even any other lender. That means that the lender will take a mortgage on the leasehold interest (the only thing your tenant "owns") and on your property. If the ground tenant defaults on its mortgage, you lose your land also.

Without the subordination clause, the lender who forecloses on the building and the leasehold interest must keep paying you the ground rent every month. If they do not, you can declare the lease in default and then you will own everything free and clear - the dirt, the building, and all other improvements.

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