Land Lease

Yesterday I recieved a call from a residential real estate agent who wanted to refer an established restaurant for sale. He said the restaurant was doing quite well and the building was very nice. He had been trying to sell the business and the building for quite some time with no success. He indicated that the owner of the restaurant owned the building, but not the land under the building nor the parking lot. I asked him how much time remained on the land lease and if there were any options to renew. He informed that there was less than five years remaining on the lease and there were no options to renew.

I told him that regardless how successful the restuarant has been and how nice the building was, without a long term ground lease, either with a long initial term, a number of options to renew, or both, he had nothing to sell. No savvy business person would pay for a building and a restaurant business without knowing if they would still have the right to remain on the property after a few years. Also, no bank would lend on the property for the same reason. I said the first priority is to negotiate a new ground lease or extensions to the existing ground lease which would allow the current or future restaurant owner to remain on the property for at least 30 to 40 years or even more. This would allow the owner of the restaurant to improve the property, grow the business and reap the rewards over time.

Some owners are dead set against owning a building with a ground lease. However, many major companies such as Wendy's, Walgreens and Burger King own buildings, but lease the land. The difference is that their ground leases give them control of the property for many years.