The headline-making transactions in commercial real estate usually involve big high-rise buildings, major portfolio trades with gargantuan price tags, or company mergers with even more zeros attached to the transaction. It’s a rare occasion, however, that the industry gets excited over ownership of something that is an inseparable part of every real estate transaction: land. Most owners of multifamily properties, office towers, and other property types own the whole “kit and caboodle,” the land as well as the building on which it sits. Yet, there are plenty of instances in which the land and the building are owned separately, with the building owner occupying the property under a ground lease agreement with the landowner. Ground lease, or land lease, transactions don’t account for a large percentage of commercial real estate transactions, but they have significant value. The addressable market for ground leases in the United States totals $2.5 trillion. There may not be as many bragging rights to owning a ground lease or leasing land compared to owning or leasing a trophy asset, but such an arrangement has its advantages on both sides of the ownership table.
In the development arena, traditional ground leases involve a long-term lease agreement, typically 50 to 99 years, during which time a developer constructs a building on the leased site and is landlord of everything but the land itself, taking responsibility for any building improvements and applicable taxes. With transactions involving existing buildings on ground leases, the same ownership obligations apply.
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