Ground Leases of Government Land

Governmental entities¹ frequently acquire property which, over time, becomes suitable for development. The entities are often loath to sell the property to developers, preferring instead to maintain ownership for future needs they may have.

There is a way to permit such land to be used for development while maintaining governmental ownership. The land can be leased to a developer in a way which permits the construction of improvements on the land without the land’s fee simple ownership being conveyed. These leases, commonly known as land leases or ground leases, can be valuable tools to encourage development, but only if they are properly crafted to protect the governmental entity, the developer, and the developer’s lender.

While there are many issues to be addressed in a well-drafted ground lease, here are some of the most important considerations:

• The ground lease needs to clearly specify the land is not being sold, but any improvements on the land will be owned by the developer/tenant in fee simple, subject to the reversionary rights of the governmental entity/landlord set forth in the lease.

• The ground lease needs to clearly permit the tenant’s leasehold interest in the land and its fee simple interest in the improvements to be mortgaged.

• The ground lease should specify what rights the tenant’s lender will have upon default (and those rights should apply to the tenant’s first lender and all subsequent lenders).

• The ground lease needs to permit a collateral assignment of the tenant’s interests under the lease to the tenant’s lender.

• The ground lease must specify costs to be paid by the tenant (typically, the tenant is responsible for paying all costs, but there may be reasons [for example, encouraging the development activity] why this won’t always be the case).

• The ground lease should identify any limitations on use which the governmental entity requires.

• The ground lease should clearly specify which party has the right to do things like: grant easements over the property, engage in construction activity, etc.

The above points are just a starting place for a well-drafted lease. Whether you’re a landlord or tenant, you should consult with an experienced real estate attorney in any ground lease transaction.