Understanding Land Leases

If someone offers to lease your land, what exactly is this person asking? What’s the difference between leasing land and leasing a building? Here’s a quick look at how land leases work.

How Land Leases Work

Land leases are financial arrangements that lease land, not the building. A building may sit on the land, but it has no connection with the land lease.

Most land leases occur when a real estate investor wants to retain a piece of land without developing it. The investor might have a developer create a land lease contract, which allows the developer to build a structure that is for sale or rent.

Overall, lease contracts run for at least fifty years. When the lease is almost up, the landowner can opt to renew it, provided the building that sits on the land is in good condition and turning a profit. Since the property value usually increases, so do any rent prices.

What You Need To Know About Land Leasing

There are two things to be concerned about when negotiating a lease -- how much money will you be paid per acre and how much interest you will gain. The money paid per acre is the bonus, while the interest is the royalty earned. These figures are predetermined and it is important to know how much these will be. Hiring an attorney is extremely advisable to help you negotiate the best deal, as well as hammer out the best contract.

Without the proper preparation, landowners may get caught in some sticky situations. For example, you can be tied down to the land forever, or have something built on the land without your knowledge, such as an oil well. Without setting up the legal boundaries first, you are taking an unnecessary risk.

Land Leases and Renters

Those renting space in a building do not need to know the terms of a land lease. However, people who want to buy a space inside the building should, since it affects the quality of the investment.

Buying a structure on a land lease is more difficult if the lease is about to run out. However, if the lease does not expire until much later, it’s easier to purchase. Plus, it’s certainly a reliable investment, since the building is often cheaper than other real estate in the neighborhood.