Can someone explain land leasing to me?

Question

I've looking at a commercial real estate web site. One of the sections is "Land Leasing."

These are vacant parcels of land zoned commercially. The listings will say "great location for retail" or something like that.

So someone rents this land from them, and the owners allow the renters to build a structure on the land? What happens when the renters want to leave or are evicted? Do they demolish the building? Or did the owners get a free building?

Wouldn't it make more sense for the renters to rent somewhere that already has a building so they don't have to pay to build one?

Joel Owens · Answer

Depends on what the lease says. They are all custom crafted and negotiated differently with commercial attorneys. Typically when the tenant leaves or doesn't renew the building reverts to the owner. That could be a plus or a negative depending on the age of the building by then. If it's way outdated or not usable then land owner has to spend costs to scrape the building. By then land value hopefully has appreciated enough to justify new construction on the site.

Martin Shaw · Answer

@Joel Owens

So at the end of the lease period (25-99 years) what happens to the building that the tenant/leassee paid to have built? Does the owner/lessor now own the building or are they required to sell it to you ?

Joel Owens · Answer

In a ground lease the owner is saying they DO NOT want to sell the land. If the location is that great and a developer wants to develop the land or a direct user wants to go on the land as a business then they agree to a ground lease. Only a small amount of tenants agree to ground leases versus NN, NNN, or buying the land outright.

If a developer builds the building then usually 2 payments. One for the building the tenant pays and one for the land. If tenant builds the building for cash then the tenant just has a ground lease with the land owner for XX rent per month. There are usually rental increases and possibly an early buyout option for a discounted value versus the full term of the primary lease.

Usually in the option period if tenant does not renew the landlord gets the building for free buy default.

Patrick Philip · Answer

So the renters are basically giving the owners an expensive building for free?

John Thedford · Answer

The building belongs to the land owners. A land lease is typically a long term proposition. Some are 99 years.

Can someone explain land leasing to me?

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