August 22, 2005

Commercial Financing and Land Leases

Commercial Land Owners Will Sometimes Lease Their Land for 99 Years

Suppose Dr. Smith owns the hottest corner parcel in the city. The parcel is vacant, and Dr. Smith refuses to sell. "I'm saving it for my grandchildren," he tells every real estate broker who approaches him with a purchase offer.

Then an enterprising developer approaches Dr. Smith and suggests, "Hey, if you won't SELL me your land, will you at least lease it to me for the next 50 years?" Dr. Smith says, "Sure, the grandkids need the cash flow to pay for their college educations." So then the developer leases the land (land lease) for the next 50 years for, say, $2,000 per month.

Then - get this - the developer errects a nice new commercial building on the land that he doesn't even own. Helloooo? What happens to the building when the land lease expires? It reverts back to land owner, which by then will probably be the grandkids.

Is the commercial property developer crazy? Why build a brand new office building on someone else's land? Because the developer may be able to lease out the building for $30,000 be month. He might have only $10,000 per month in expenses, and after paying the $2,000 per month in land lease payments, he pockets the remaining $18,000 every month for the next 50 years! Maybe this commercial property developer is not so stupid after all.

Can the developer get a construction loan, and later a permanent loan, on this land that is on a land lease. Absolutely! Many banks will finance commercial buildings resting on land leases, as long as the remaining term of the land lease is 10 to 15 years longer than the amortization of their loan.

Obviously, the longer the land lease, the better from a lender's point of view. However, the longest legal land lease is for 99 years. If a land owner mistakenly leases his land for longer than 99 years, the courts will deem it an outright sale.

You can find scores of banks willing to make commercial loans on land leases on C-Loans.com.