Ground Leasing? How feasible is it?

Question

Does anyone have experience with using land for a ground lease?

Situation: My family is due to inherit some land in a soon-to-be hot area of DFW. The older generation wants to sell it and take the cash. The younger generation (me and others) want to hold it for cash flow and appreciation. We've discussed ground leasing it. 3.4 acres are on the road and next to an interstate (I35W). Anyone here have a similar experience with this?

Richard F. · Answer

First you need to check local laws and whatever restrictions might apply. Then find a local RE Attorney familiar with ground leases to get a ballpark figure for creating one or more such leases (depending on if you want to lease it all to one entity, or multiple). Then, depending on type of use is anticipated, investigate getting water, sewer, power to, or onto the property for the desired use. At that point you should have an idea whether or not it would be worthwhile to take the next steps.

In general, we have a fair amount of ground lease properties here, many with high rise condo projects on them, others split into smaller parcels suitable for detached homes or smaller walkup multi-fams. Still others are Ag land or lots for crops or small "farms" with a single home and AG use.

In general, we have a fair amount of ground lease properties here, many with high rise condo projects on them, others split into smaller parcels suitable for detached homes or smaller walkup multi-fams. Still others are Ag land or lots for crops or small "farms" with a single home and AG use.

Alan Hale · Answer

We wouldn't do seller financing because intent is not to sell it at all (at least not yet).  We'd like to have it generate some sort of cash flow, but hold the land itself.  We believe the land will be worth more years down the road. And update for all: As we've dug into in since I originally posted this, we've determined that only the acreage near the road would be usable commercially. This leaves the majority of the acreage in the back, which is overgrown and in a flood plain. One idea is to allow a small solar farm to be put in, in an area where there are no legacy trees that would have to be removed. The property, turns out, isn't in the city limits and probably won't be annexed for some time. It has a basic residential water connection and septic. No city = no sewer = severely limits interest.

Alan Hale · Answer

I think I understand.  Get the equity loan and pay them up front for their share (there are 8 of us in this deal), is that right? Then we can proceed as needed.

Chris Seveney · Answer

@Alan Hale I was referring to financing it from family that wants to sell it. Get a loan from a bank for their equity and they are paid off. If it's not enough to cover their portion have them finance the rest to you

Chris Seveney · Answer

If it is single family residential you most likely cannot ground lease the land. if it is commercial use then possibly but will need a land use attorney. Why would you not do seller financing of some sort or have those for cash flow get a bank loan from it so family can get some of the funds now and possibly have a seller carry for the remainder?

Richard F. · Answer

@Beth Tysdal    I have not personally reviewed land leases for the small farm lots I mentioned, but I do know they needed to meet a certain size requirement to qualify for the AG zoning, as well as limits on construction.

#2 makes no sense to me. ADU by definition is part of the same piece of dirt as the "main" unit. That does not mean you can not rent each structure separately, delineating the yard space for each one, to different people, but these are "normal" rental agreements, usually 1 year term, although some can be up to 5 years, but are not usually a benefit for the property owner. Perhaps you are not clear on the typical "ground lease" terms...they are usually a 99 year term, with specified "step ups" that may, or may not, be tied to CPI or other metric. At the end of the 99 years, absent any re-negotiation, the residents must walk away, and may be responsible to demolish and remove the structures, depending on original terms.

#3 financing is for structure only, so typically lenders base their loan rates and terms on the amount of time and scheduled step ups remaining on the land lease. As you approach the end of the land lease, usually the last 10 years, it can be nearly impossible to borrow unless you have other significant assets.

Beth Tysdal · Answer

Hi Richard,

Thanks for your reply to the original post.  Can I ask a few follow-up questions (hopefully without hijaking the thread)?  Some land leases are common (like commercial or condo) while others are rare - like rural land.  I'm specifically looking at land leases on rural land and you mentioned small "farms"...

Three questions...

1) Have you run into any legal/permitting issues with this (understanding your jurisdiction is different, but still may provide valuable insights).

2) Have you ever leased land for, say, a home and and ADU in the same parcel but separate leases with defined land areas that are different than the overall parcel description?

3) What types of loans do your buyers usually use?

Thanks in advance!

Ground Leasing? How feasible is it?

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