Lovett_43_background_RGBSo I don’t know about you, but every time I turn on NPR lately there is some discussion about President Trump’s conflict of interest because of his Washington D.C. Hotel built in the former U.S. Post Office with a ground lease from the GSA. For those of you who do not spend your days analyzing ground leases, I thought it might be helpful to know what they are and why anyone would want one.

In short, ground leases are a method of transferring most of a property owner’s interest in a piece of real estate to a tenant while allowing the property owner to retain a residual interest, and therefore some control, in the real estate. Ground leases typically have lengthy terms (75-99 years) and often include renewal options.

With a ground lease, the real estate owner gets a steady stream of income from the lease payments, which are usually based upon the value of the real estate plus interest amortized over the term of the lease. If the tenant defaults, the landlord gets the property back (usually after very generous cure periods). At the end of the term of the lease, the real estate and the improvements go back to the property owner. There are often covenants in the lease that require the developer/tenant to complete the intended project.

The advantage of a ground lease to the developer/tenant is that they “pay for” the land over the term of the lease rather than up front. The tenant ends up with all other ownership rights and obligations for the term of the lease. Sometimes, as I imagine is the case in President Trump’s deal with the GSA, it may be the only way that the developer can have access to the real estate. The GSA may have to go through a process to determine that it will never need this real estate in the future.  Once the GSA determines that it does not need the real estate, the GSA would then need to take competitive bids on the sale. This process would make it difficult to strike a deal with any one particular developer.

I hope you have enjoyed your ground lease lesson for the day….

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Mary Forbes Lovett

Mary focuses her practice on real estate and business law and has significant experience handling the acquisition, financing (including new market, low income, and historic tax credit financing) and all development matters related to real property. She specializes in the development and financing…

Mary focuses her practice on real estate and business law and has significant experience handling the acquisition, financing (including new market, low income, and historic tax credit financing) and all development matters related to real property. She specializes in the development and financing of urban properties and was recognized by CREW for her work related to the largest HUD-financed project in Ohio. Mary is a frequent speaker on business and real estate topics including alternative financing techniques, historic tax credits (state and federal), new market tax credits, low income housing tax credits, urban development, negotiating acquisitions and leases, strategies for like-kind exchanges, preservation easements, urban sprawl and eminent domain. Mary has achieved the highest rating, AV Preeminent®, from Martindale-Hubbell®.