Land Lease Financing

Land lease arrangements are common throughout the United States for both commercial and industrial users and for farmers, anything other than fee ownership of residential land is unthinkable in many areas.

Yet in some parts of the United States (for example, Baltimore, Maryland; Orange County, California; throughout Hawaii; and in parts of Florida) homes with long-term land leases are an accepted practice. Typically, these leases are from 55 to 99 years in length and, barring an agreement to the contrary, the improvements to the land become the property of the fee owner at the end of the lease. Rents may be fixed in advance for the life of the lease, renegotiated at preset points during the life of the lease, or a combination of both. 

To hedge against inflation, when fixed rents are used in a long-term lease, it is common practice to use step-up rentals. For example, under a 55-year house-lot lease, the rent may be set at $400 per year for the first 15 years, $600 per year for the next 10 years, $800 for the next 10 years, and so forth. An alternative is to renegotiate the rent at various points during the life of the lease so that the effects of land value changes are more closely equalized between the lessor and the lessee. For example, a 60-year lease may contain renegotiation points at the fifteenth, thirtieth, and forty-fifth years. At those points the property would be reappraised and the lease rent adjusted to reflect any changes in the value of the property. Finally, if the lessor is responsible for paying the property taxes on the land, he will include an escalation clause in the lease contract that permits him to raise the lease rent by the amount of any property tax increase. The alternative is for the lessee to assume direct responsibility for paying property taxes.

Land Lease To Creative Real Estate Financing