To buy property or take a ground lease? That is the question facing businesses when they consider moving or expanding to a new location.
A ground lease permits a tenant to use and develop property. When that lease term ends, the developed property is turned over to the landlord. A ground lease tends to be long term, allowing the tenant to make and depreciate costly improvements. Typically the tenant pays its landlord a monthly rent, all real estate taxes and insurance expenses for the property.
There are advantages to both buying and ground leasing. Buying land gives a business absolute control over the property, whereas ground leasing enables a business to make a more limited investment.
The lease-versus-purchase decision involves the consideration of a number of factors, including:
■ Financing: Some bankers may be reluctant to make loans with a lease as collateral, as opposed to ownership of the property.
■ Cash flow: A ground lease may not require as great an outlay of cash up front.
■ Taxes: Purchasing and ground leasing have different effects on a company's taxes and accounting. In addition, realty transfer taxes may be lower for a ground lease than a purchase. A lease of less than 30 years is not subject to transfer tax, and transfer tax on a longer lease may be less than for a purchase, since taxes on the lease are based on the property's assessed value, rather than purchase price.
■ Control: A ground tenant does not have as much control over leased property as it would as the owner of that property.
Whether to purchase or ground lease is an important decision, but it is complicated and therefore requires the input of a company's lawyers, accountants, and tax advisers.
-- Sarah Reigle, Meyer, Unkovic & Scott, firstname.lastname@example.org
Business workshop is a weekly feature from local experts offering tidbits on matters affecting business. To contribute, email email@example.com.