ROI vs risks of commercial ground lease (vacant land lease)

[Jason Vo]

Hi BP community,

A friend of mine wants to list his commercial land for lease. It’s about 15 acres lot with 10 acres sit vacant and 5 acres with improvements.

I’m looking for advices on whether or not it’s a good investment strategy. What are the potential risks vs benefits for commercial ground lease?

Thanks you so much.

[Joel Owens]

Usually ground leases I see are on one building of an acre. Sometimes a retail strip center on 10 acres where the owner would not give up the land and the developer agreed to the ground lease because location was A+++ to develop.

It can causes issues when buildings are sold if lender wants landowner to subordinate their rights to a junior position.

Usually you get much less rent for a ground lease versus other investment strategies. If buildings start to go vacant the building owner could have 2 payments one to the lender and one to the landowner. Usually ROFR rights are included in the ground lease and rental increases I see usually of 10% every 5 years. Sometimes it is annual increases.