With little vacant land left in Los Angeles County land leases are a viable option for owners; as a result, lawyers are busy working on contracts with the legalities of commercial land leases.
Land leases are two separate assets with two separate owners. The owner of the land and the owner of the building. Land leases are leases that only lease the land, and the lessee builds a commercial building on the land.
For example, an owner of a commercial zoned property lot who does not want to sell may be approached by a business who needs a bank located in that neighborhood; however, there is nothing available for lease or sale. As a result, the company asks the owner if they can build on his land and pay him to lease the property. This is a win for both parties involved. The lessee pays for the construction of the building. They are responsible for their own maintenance, utilities and upkeep of the building. They don’t have to answer to the landlord.
The land owner gets an income on the land that he or she was not earning previously and gets to keep the building at the end of the lease unless he is ready to sell the land to the lessee.
The positives of leasing land compared to buying the land are many; however, there are some negative aspects involved in the transaction if the contract is not drafted correctly and followed through by both parties.
Below is a list of items to concentrate on in a land lease contract:
• Length of lease • Lease re-sets • Land valuation • Underwriting • Inflation protection • Property taxes • Commercial Property Taxes • Commercial Property after the Lease Ends • Subleasing the Land • Environmental Contamination • Selling the land • Selling the Commercial Building
The average lease is 50 to 99 years; however, some are less or more depending on the contract. For example, one land owner had a bank built on his property and leased the land to the bank for 20 years. In the contract the building would belong to him after 20 years. It has been 40 years, and they are still doing business together; however, technically the land owner owns the building.
This is a win for the landowner who wants to keep the property in his portfolio and continue to earn an income without the hassle of property management.
In addition, it is a win for the lessee because it provides access to develop a building in a highly desirable area with no available open land to develop. Leasing the land saves the lessee on a lot of money up front to purchase the land.
The landowner must be sure to add in rent increases over the span of the lease, or he could lose out on valuable income in the future. The lessee must also make sure he or she has lease extensions in the lease and an option to purchase the land if they are intending to stay there for longer than 99 years.