§18.4 - Ground Leases

• Jurisdiction: Washington

§18.4 Ground Leases

Ground leases are leases with terms of 50 years or more that normally involve real property leased to a developer for the purpose of constructing a commercial development. Ground leases are better viewed as a financing mechanism for the acquisition of real property, because during the term of the lease, the landlord has virtually no control over the property and all of the benefits and burdens of ownership are passed to the tenant. Many of the issues in ground leases are the same as in other leases, but ground leases present some unique challenges due to the duration of the agreement. A sample form of ground lease financing provisions is provided as Form 18-6 on the CD accompanying this deskbook.

(1) Rent

To obtain financing, the amount of rent to be paid needs to be fixed or at least determinable for an initial portion of the term, which is usually 15 years and perhaps longer. If the rent escalates during this time based on an index, such as the consumer price index, then there must be limits on the amount of the increase so that expenses associated with the ground lease can be predicted accurately by the lender that is financing the development. This feature of ground leases creates a risk that the annual rent paid will begin to diverge over time from the fair market rental value of the property. From the tenant's standpoint, however, the risk that the ground rent will increase dramatically from one adjustment period to the next creates significant risk, because the ground lease tenant may not be able to adjust the rents being charged to the subtenants occupying the development quickly enough to match the increase in the ground rent.

(2) Periodic appraisals

The most common method of attempting to keep...