The Perfect Ground Lease – Lease Terms, Lease Terms, Lease Terms

The old adage of location, location, location has been uttered many times when discussing commercial property values, and whilst it still has a marginal effect on value for commercial ground rents, what in fact have a far greater impact are the covenants contained within the lease.

Referring back to our article on the Holy Trinity of ground lease creation, what investors are looking for are effective Triple A incomes and Triple Net incomes. Here the lease terms are key to achieving both goals.

Creating the Perfect Ground Lease

Key areas to consider are:-

Triple Net – Ground Lease

• Freeholder indemnification
• Repair clauses
• Insurance clauses

Triple A – Ground Lease

• Change of Use – Impact on reversionary value
• Repairing obligations
• Insurance requirements

The key is creating a lease where by the reversionary value is maintained. In real life scenarios the interests of both the Freeholder and long Leaseholder are aligned however the creation of an AAA interest relies on this also being the case by law.

Creating the Perfect Long Leasehold Investment

Whilst the value of the Freehold can be maximised by drafting overly restrictive clauses within a lease, there is a balance to be had between creating value from the Freehold and maintaining the value of the Long Leasehold Interest. There is a perfect equilibrium where both the value newly created Freehold and the resultant Long Leasehold are maximised.