You’re likely familiar with the concept of a car lease, but what about a land lease?
Land leases combine purchasing a home or building and renting the land it sits on.
It’s a great path for those who want a path toward homeownership but are having trouble attaining the capital that it requires.
Here’s what you should know if a land lease is on your mind.
1. What is a land lease?
A land lease — also known as a ground lease — is an arrangement where a landowner (or lessor) rents out land to a tenant (or lessee).
A land lease can be used to purchase a home plus land or just purchase land that you plan to develop later on.
These instruments are most common for commercial businesses, but there are some instances where they are used for residential real estate.
For example, those in New York City may pay to lease the land their homes are on because many of the properties were built on land leases.
2. What are the two main types of land leases?
The two main types of land leases are subordinated and unsubordinated.
Subordinated ground leases are when a landowner is at risk if the tenant defaults on the mortgage loan or construction loan used to fund the improvements.
If the bank must foreclose on the building, then it could have the right to take the land.
This means that the land is subordinated to the mortgage, so the lender has the first claim to the property.
With an unsubordinated land lease, the land and the property are kept separately.
If the tenant defaults, no one can make a claim to the land.
The American Bar Association highly advocates for unsubordinated over subordinated leases.
In most cases, you (as a landowner) should only agree to a subordinated lease except in extremely compelling circumstances.
Some mortgage lenders may require subordination.
If this is the case, then you could demand additional compensation or another guarantee from the tenant.
3. How do land leases work?
If you’re considering a land lease, you’ll be acting as both the homeowner and renter in this situation.
You’ll either need to secure a mortgage for the physical property, or you’ll need to pay all cash if you can afford it.
You should also keep in mind that there could be other fees associated with ownership as well.
For example, some land lease properties belong to a homeowner’s association (HOA).
This membership comes with a fee that you’ll be responsible for paying.
4. Who are land leases most useful for?
A land lease is useful for the following groups of people…
People who live in manufactured houses
Farmers who require fertile land for growing crops or raising animals
Businesses that want to construct their own buildings on a rented piece of land
Companies and developers who need space in certain locations for a cell phone tower, wind turbine, or other structure
5. Where do you find a land lease?
There are around 40,000 land lease communities in the U.S.
They mostly consist of manufactured housing and mobile homes.
However, there are a few other places where you can find a land lease as well.
These may be in retirement communities or high-rise buildings in New York City.
It just depends on how the properties were built.
If you’re looking for a leased-land property, reach out to a real estate agent.
They’re one of the best resources, and they’ll allow you to get a sense of properties available in your area.
6. What are the advantages?
Here are the pros of a land lease:
They require a lower upfront price
If you’ve been trying to get into the market, but you’re feeling discouraged based on the prices, a land lease could be a great option.
These properties are often much more affordable.
They have lower property taxes
For a land lease, you’re only taxed on the improvements and not the land itself.
This means your property tax bill could be lower depending on where you’re located.
They provide a steady source of income
Landowners will have a reliable source of income through a long-term tenant or developer (see the sections about wind farms below) without losing ownership of their land.
This can be incredibly convenient passive income.
They allow tenants to gain access to prime locations
Land leases can allow tenants to live in excellent locations that they may not be able to access or afford otherwise.
Because they don’t need to purchase the land, they can get a better location.
They allow landowners to become the owner of any improvements when the lease ends
Some commercial land lease agreements have a revisionary clause that allows the landowner to become the new owner of improvements on the land once the lease expires.
So, if the tenant made improvements because they were living there, that ultimately benefits you.
7. What are the disadvantages of a land lease?
Here are the cons of a land lease:
They could have rising costs
This is one of the greatest disadvantages.
It has the potential for rising costs, which could create trouble for homeowners (like those with mobile homes).
In recent years, private equity firms have acquired manufactured home parks and increased monthly fees almost immediately.
If you choose to purchase a mobile or manufactured home, make sure you negotiate a multi-year lease to prevent this from happening to you.
They aren’t as flexible
A land lease agreement can be difficult to get out of.
If you’re renting an apartment and your landlord fails to maintain the property, you can stop renewing the lease and move.
However, with a manufactured home with a land lease, moving the home can cost as much as $20,000.
This doesn’t give you as many options for immediate action.
They could make getting a mortgage tricky
Lenders may want more details about your plans if you’re applying for a 30-year mortgage.
If you’re planning to live on leased land, the lender might want to hear that you’re able to stay there for 30 years.
As plans can consistently change, many owners aren’t able to give this reassurance.
They don’t allow you to build equity the same way
Unlike traditional homeowners, those who pursue a land lease for their mobile home or manufactured home only build equity in their home…not on the land.
This can make selling your home difficult in the long term.
8. Should you buy a home on leased land?
When you see the price tag, you might immediately think that leased land is the way to go.
However, the potential for unexpected increases can quickly erase immediate financial gain.
Most people don’t want to deal with that type of uncertainty.
If you’re thinking about purchasing a home on leased land, you should consider…
How long the lease will last
What the monthly homeowner fees are on top of the lease expense
The fine print of the lease
- Are there limitations on the amount that the lease can increase in a given term?
- What happens if the land is sold to another party?
Although there can be some situations where it works out for residential properties, most people are likely to be better off in a traditional living arrangement — either renting or owning a home.
If neither of these is feasible, you could also explore other types of arrangements like rent-to-own.
This would allow you to both own the property and the land underneath it eventually.
9. What is a land lease for a wind farm?
Land leasing for wind farms is an agreement that developers and property owners enter into that grants the developer the necessary rights to develop turbines at the agreed-upon location.
Wind farms are a cost-effective solution for land developers looking to produce and sell energy.
Unlike other renewable energy sources, wind turbines can be fully operational quickly (in as little as three months).
When you lease your land for a wind farm, you (the property owner) receive rental payments from the developer for a set period (normally 35 years).
10. How do I obtain a wind farm lease?
While landowners can reach out to energy developers about leasing their land for a wind farm, in most cases the developer reaches out to the property owner instead.
Energy developers are constantly surveying the landscape for potential wind farm sites, so they often know the areas that are their best options.
However, if you think you have a good potential site, you can always reach out to see what they say.
11. What type of land is good for a wind farm?
If you’re interested in a land lease for a wind farm, you may wonder if your property is suitable.
Should you go this route, you won’t have to decide all on your own.
Once a developer gets in contact with a property owner, they’ll normally send a surveyor out to understand if the property meets their criteria.
Here are the factors they look for, so you can “prequalify” your land.
This is the largest determinant of whether a piece of land is suitable for a wind farm.
The property must receive minimum wind speeds of 4.5 m/s.
It must be free of wind obstructing obstacles, and it must be in a region where there is an energy need or need to reduce carbon emissions.
Furthermore, the site must be in close proximity to existing grid infrastructure to save time and money in laying additional power lines.
Quantity of Land Available
Wind farms often require at least 60 acres of land per megawatt produced.
That said, only a small portion of this land (roughly 3 percent) will be used for the placement of wind turbines and other supporting infrastructure.
The remaining land (97 percent of it) will be kept just the way it is to ensure there are no airflow restrictions.
Quality of Land Available
The quality of the land impacts whether you can develop a wind farm on it.
The development of a wind farm (specifically installing turbines) adds a tremendous amount of stress to the soil.
Therefore, the land must be able to support these structures without becoming unstable.
To determine this, the developer will likely hire a geologist to determine the quality of the land.
If the property meets all the above qualifiers, then you may be asked to lease your land to a wind farm.
12. How much will a wind farm lease pay me?
If your property qualifies for a land lease for a wind farm, and you place a single wind turbine on your land, it can pay you up to $8,000 per year.
If you’re able to host more than one turbine on your land, this can become valuable pretty quickly.
That said, wind farm lease rates will vary from location to location.
You should also keep in mind the factors that will reduce the value of the lease offered to you (for example, if your neighbor has land that meets these requirements).
You’ll receive the highest value wind energy lease when your land qualifies, and you’re in a region where there’s energy demand without lots of local competition.
13. What are some frequently asked questions?
Are land leases a good investment?
They can be, but they aren’t right for everyone.
If the land lease is designed properly, then it can be a win-win scenario for both parties.
Land leases don’t require down payments on often-expensive land.
This can allow the tenant to use their cash toward improving the development instead.
How does a land lease work?
A land lease combines buying a home and renting the land it sits on.
This agreement can be a less expensive route toward homeownership since it doesn’t require a large down payment.
It can also work well for those who have extra land and want to lease it out for developments like wind farms.
What happens when a land lease expires?
If a land lease went to the end of its term without renewal, the building would revert to the leaseholder.
This means that co-op or condo owners could face eviction or become tenants in their own homes.
That said, this is a rare situation.
Make sure you read your leases carefully and stay on top of it with your landlord if you’re a tenant!
Land leases come with pros and cons.
It can be a solid option for those looking toward a path toward homeownership without substantial capital, but it also has its flaws.
If you’re a property owner, then this can be a great way to make passive income on land you already own.
Make sure you draw up a firm contract that keeps you safe!
If you are looking to buy affordable land, you can check out our Listings page. And before you buy land, make sure you check out Gokce Land Due Diligence Program. If you are looking to sell land, visit our page on how to Sell Your Land.
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Disclaimer: we are not lawyers, accountants, or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.