What is a Land Lease Property?
We’re all familiar with leasing a property, whether residential or commercial. But what about leasing just the land itself? Even more so, imagine living in a building that you fully own, however, the land underneath it is not yours.
That is quite the scenario to consider, but surprisingly, it is actually an arrangement that exists.
This form of home ownership is called a land lease. In this article we’re going to explore how land leases work, some pros as to why people consider signing up for land leases, and of course, some of the drawbacks and compromises involved.
How Do Land Leases Work?
The premise of a land lease is actually quite straightforward. The land is owned by someone who is leasing it out to people so that they can use it to build whatever they might desire on it.
Typically, the landowner will designate specific uses for the land they are leasing out (ie whether it’s going to be used for commercial, residential, or industrial purposes and so on). This is also subject to the local zoning bylaws and regulations imposed by the city.
From the buyer’s perspective, customers typically have several options out there. Some land lease offers are just the land itself, and you can lease it out to build your home on top of your leased parcel of land.
Otherwise, you can also find homes that are for sale that are already built and happen to be on a land lease. A third alternative is leasing the land itself for use with a mobile home or trailer.
You have rights to the land under certain conditions and instead of building something on it, you simply use it for your mobile home.
Why Some People Opt for Land Leases
The primary advantage of land leases boils down to the price. Land lease properties, because the land is not owned, are understandably very affordable.
This makes it so that people who opt for a land lease can get homes that are larger, in better areas, and overall more dazzling than what they otherwise would afford.
This of course comes at the compromise of living on rented land. Similarly, for those looking to build their own home, renting the land may be a means of cutting back on costs, making the overall construction project a lot more affordable.
It’s worth noting that if you are looking to lease land for a construction project, you need to make sure that your plan is compliant with local bylaws and zoning regulations (otherwise, you might be setting yourself up for complications down the road).
Leasing land can also be an attractive option if there is no construction involved at all. A lot of times, trailers and mobile homes can be parked on lots which are leased instead of owned outright.
Once again, the appeal is in the cost savings when not having to deal with purchasing land. This keeps the logistics simple and straightforward for those who just want to get a vacationing spot set up with their mobile home, for example.
Similarly, pre-manufactured and modular homes are becoming more and more popular. With the portable setup of these types of homes, land leases are a viable means of cutting back on costs given that construction and relocation logistics aren’t as much of a concern.
Drawbacks of Land Leases
As you can imagine, the primary drawback of land leases is the fact that you do not actually own the land. This can cause some tricky ramifications for homeowners, which is why it’s essential to carefully review all land lease agreements and also research options thoroughly before committing.
At the end of the day, when you do not own the land, you do not have control over the land. This means that your stay there is dependent on your lease term and your landlord’s willingness to renew it, if applicable.
Typically, land lease terms are for fairly long periods of time, but that period does eventually run out. This is even more important if you are buying a property from someone else that is already built and already part of an ongoing land lease.
If you’re buying from someone else, it may be possible that you are assuming the remainder of their term (similar to subletting), which means you may not get a full term’s worth of time in that location.
In any case, when considering a land lease property, one of the first things to verify is the timeframe involved as well as the options of renewal with the landlord.
After seeing what the situation is regarding the term, you should take a look at the rental price. In some situations, the rental price could be paid upfront for the entirety of the term or it can be paid monthly similar to any other type of rental agreement.
You should, of course, factor these costs into your budget for the purchase. In addition to the rental fee, the landlord might impose additional costs such as maintenance fees, common area management fees, and so on.
This all depends on the landlord as well as the type of arrangement you are entering. You should always make sure to do your homework to find out exactly what your total costs will be looking like.
While the pricetag of many land lease opportunities is usually very tempting (even after fees are all factored in), there is still one more obstacle to overcome. Financing is the one big hurdle to clear. Lenders are shy to give out mortgages on properties that reside on leased land.
This makes a lot of sense because it’s a lot riskier when you don’t own the very ground under your feet. Typically, deposits for mortgages on land lease properties that qualify can be as high as 30%.
At the same time, lenders will use the remaining term on the lease as a measuring stick for how long the mortgage should be. If the lease will be up in the next 10-20 years, they prefer to see the loan amortized about 5 years before the term of the lease is up.
This is the lender’s way of covering their bases and protecting their investment. On the equity front, potential buyers should be aware that they may not get the benefit of rising land and property values in the area.
One of the advantages of regular home ownership is the fact that your residence (or the land that it is on) has a chance to go up in value with the real estate market over the years you’ve lived there.
Therefore, when you sell, you get to benefit from that appreciation. With land leases, quite the opposite is in effect. Since you are renting the land, any appreciation in the value of the land will actually be to your disadvantage.
If land is more valuable and more in demand, that cost is passed down to renters in the form of higher monthly rent costs. Instead of benefiting from a real estate investment, you could actually be bearing the burden of rising land costs, so do proceed carefully.
Finally, you should be aware that land leases are not regulated in the same way traditional residential leases are. For example, when you rent an apartment for yourself, you have a number of rights as a tenant.
Among many things, you are protected from excessive rent increases and you also cannot be removed from your residence without proper reasons to do so (ie the landlord cannot simply choose to evict you because they want to do something else with the property).
In the case of land leases, this is very much NOT the case. All types of price increases are fair game and subject to market conditions. Additionally, at the end of the term, it’s the landlord’s discretion entirely if they want to renew your lease or if they want to get somebody else in.
They can also choose to tear everything down and redevelop the land altogether. The only rights you have in this arrangement are the right be on the land for the time of the term, plus any additional provisions that are explicitly stated in your contract (if at all applicable).
If a landlord chooses not to renew a term, but the tenant owns or has constructed their home on the land, the landlord will typically buy the building from the tenant at fair market price.
However, this does vary with each scenario and the contract itself will specify what will be done upon termination. All of the above, once again, makes it crucial to review the agreement carefully and know what you are getting into.
There are advantages that come with these types of deals, but you are also opening yourself up to many vulnerabilities. It’s up to you to make sure you know what’s going on so that you can make the best of the land lease arrangement.