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What is a Land Lease Agreement?
A land lease agreement is a legal document that allows the owner of a piece of land to rent that land to another person or company. The rented piece of land can be used for various reasons, including but not limited to, farming or agriculture, commercial reasons such as putting up advertisements on the freeway, or for land development such as building restaurants, hotels, etc.
It is also known as a land agreement or ground lease agreement. The lease agreement is a land rental contract that allows the renter to occupy real estate comprised of only dirt and soil. The tenant can use the land for multiple reasons such as agricultural, commercial, or residential, among others.
Depending on its use, the land lease agreement is also known for various names such as:
- Ground Lease Agreement
- Billboard Land Lease Agreement
- Cash Farm Lease Agreement
- Crop Share Cash Farm Lease
- Farm Land Lease Agreement
- Hunting Lease Contract
- Land Contract
- Land Lease Agreement
- Pasture Lease Form
- Pasture Rental Arrangement
Generally, land leases range from 50 to 99 years and allow tenants to build on the land. In essence, in a land lease agreement, the lessor is the landowner and is not the owner of the improvements or buildings that were established on the land.
In short, a ground lease can save tenants money and allot them for other investments while at the same time, it allows land or property owners to monetize their property without capital expenditures.
Components of a Land Lease Agreement
No matter how the rental land will be used, having a land lease agreement allows both parties to clarify, specify, and memorialize important details relevant to the transaction and to avoid future disputes and confusion. A simple land lease contract generally has at least the following details:
How to Write a Land Lease Agreement
Like any other contract, a simple land lease agreement is a legal document that should spell out clearly all responsibilities and expectations to avoid miscommunications and misunderstandings. It should not leave room for doubt between the parties involved as to how the land will be used and managed. Here are some tips on how to write a simple land lease agreement template.
Step 1: Specify Contracting Parties and Dates
Before anything else, the beginning of the land lease agreement should name all parties involved, the dates that they agreed, and the general description of what the lease is all about. This section of the agreement lays out the foundation for making sure that the contract is clear from the start as to who are the people and entities involved in the said agreement.
Step 2: Describe Property Description
Describe the land property as specific as possible. This should include the total land area that the lessor owns and the portions that will be leased if the lessee is using only a portion of the land. Boundaries of the property should be clearly delineated to avoid land conflicts as well as to ensure that there will be no property infringement on the part of the property that the lessee is not allowed to use. Setting the boundaries will also prevent any conflicts that may arise not only between the property owner and the renter but also with owners of adjacent properties not involved in the agreement.
Step 3: Stipulate Land Use
Usually, a land lease agreement is created for a specific purpose and this purpose should be included in it. The utilization of the land property should be written in details such as permitting farmers to plant crops or for hunters to use the land as grounds during the hunting season. Aside from how it will be used, the land lease agreement should also detail how the property will be maintained and who is responsible for its maintenance and improvements.
Possible improvements must be stipulated in the rental contract especially if it’s a long-term land lease agreement. Any other activities that were not initially agreed upon or not indicated in the contract are typically disallowed and considered a breach of contract.
Step 4: Include General Terms of the Lease
Before signing a land lease agreement, make sure that the lease duration is clear between parties and among involved in the agreement. There should be specific start and end dates in the contract or a provision written into the document in the event of an extension within the specified period. Lessors must not forget to indicate that they reserve the right to evict the tenant or end the agreement if the lessee did not use the land in accordance with the agreement or as stated in the leasehold.
Terms and conditions of the land lease agreement vary depending on the agreement between the parties involved. A ground lease agreement typically outlines the acceptable uses of the land and it also stipulates what land improvements can become the property of the landowner at the end of the lease.
Step 5: Clarify Financial Terms
Another important thing to include in the land lease agreement is the payment terms. The agreed-upon amount should be clearly stated and the lessor should require insurance protection from the lessee. Renters of the property must be able to produce proof of liability insurance to support the activities that they intend to do within the property. As an added precaution, the lessor may also have their own liability insurance coverage to protect themselves from any potential damages, injuries to people, and property.
Step 6: Have a Lawyer Take a Look at the Agreement
Since a land lease agreement is a legally binding document, both the lessor and the lessee must have their legal representatives review the documents to ensure compliance with contract laws. Lawyers can also help both parties to settle any disputes without going to court. Their representatives can help verify the language used and that the conditions in the agreement are enforceable in case any legal action arises from using the land.
Benefits of a Land Lease Agreement
While it seems strange for someone to rent or build establishments on another person’s land, a land lease agreement actually provides advantages to the contracting parties. Since land purchase requires higher tax rates and other expenses compared to a land lease, it helps both the lessor and lessee save on real estate taxes associated with a sale of a property. Below are other reasons why a land lease makes sense.
Benefits to the Lessee
- Unlike a typical purchase of a property, upfront payment during a lease is not required so the lessee can free up some of their funds and allot it to other developments or investments, increasing yield, and providing liquidity for other projects.
- Another key benefit of land leasing especially to the lessee is that it gives them access to prime spots and locations where it’s otherwise difficult or impossible to purchase the land outright. A ground lease allows them to build properties in prime locations.
- The lessee enjoys a reduction of the tax burden. Since rents that are paid on a ground lease are tax-deductible for both federal and state income taxes, the overall tax burden and obligations of the lessee are reduced.
Benefits to the Lessor
- Provide a steady income stream for the lessor from rental payments while still maintaining ownership of the property.
- Tax savings from the sale of the property. Instead of terms of reporting gains, leases, from the rent that lessors receive, have fewer tax implications than property sale.
- A ground lease provides ownership retention to the lessor. Also, all the improvements made on the land can be owned by the lessor once the lease is up.
Two Main Types of Land Lease Agreements
Subordinated and unsubordinated are the two main types of land lease agreements. The main difference between the two has to do with the tenant’s loan financing on the property’s improvements.
Subordinated Ground Lease
Through this type of lease, the landowner agrees that the property in itself will be used as a mortgage or collateral for the tenant’s loan on property improvements. Using the property as mortgage collateral increases the tenant’s chances of getting their loan approved. However, in the event that the tenant fails to make payments, it may result in foreclosure of the property and the landowner will lose their title to the estate or property.
Unsubordinated Ground Lease
Another option is an unsubordinated ground lease agreement. This means that the landowner does not allow the tenant to use the property’s title to be the leasehold’s mortgage and does not put their property at risk of foreclosure. As this type of lease is less risky, the tenant can negotiate for a lower rental fee.
Is going into the business of land leasing profitable?
Leasing is one of the most common alternative forms of land tenure. It allows owners to retire early and still get a steady income stream for a specific period and gives the lessee quick access to land to scale up their operations without having to shell out capital for land purchase. Given these situations, it is a win-win situation for both the landowner and the tenant.
What is a leasehold?
A leasehold is an accounting term that refers to an asset or property that the tenant wants to rent from the land or property owner. In other words, the piece of land that a lessor will be renting from the lessor for an agreed-upon time in exchange for a scheduled payment scheme. Leasehold improvements are usually made within the interiors of a building and any exterior improvements are not considered as such.
Aside from land development, what are the other responsibilities of the tenant?
Tenants generally assume the responsibility of all financial obligations of the land lease including rent, taxes, and construction insurance, as well as financing costs associated with the property.
Who uses ground lease agreements?
This type of deal can be used in many situations, including:
- Farmers who need fertile land to raise livestock or grow crops
- Businesses who want to construct their own building on prime locations but unable to acquire or purchase one a site.
- Companies who need to build structures essential to their business such as cell towers, windmill, and other structures.
Unlike most cases where properties are sold with building and land as a package, in a ground lease, one person or entity owns the land while another owns the improvements made on the land. This process can get complicated so there is a need to set up a ground lease contract. Both the property owner and the tenant need to be involved and consult professionals in order to draft an equitable and fair contract. Given the numerous benefits one can gain from a ground lease, it is crucial that both parties comply with these real estate needs.