A ground lease is one made for the rental of a parcel of unimproved land for a term of years. The agreement usually contains the provision that a building shall be erected on the land by the tenant. It frequently contains a further provision regarding the disposition of the building at the end of the term. The building although erected at the expense of the tenant legally becomes real property and is, therefore, unless otherwise provided, the property of the landlord, subject, however, to the tenant's right of possession for the term of the lease. In order that the tenant get back the cost of the building, the lease must provide that the landlord, at the expiration of the term, shall pay the tenant all or part of the cost or appraised value of the building, or in the absence of such a provision, the term of the lease or the renewal privileges, must give the tenant sufficient time to amortize the entire cost of the building during the period of his occupancy. Ground rent is often computed on the basis of a certain percentage of the value of the land. The tenant pays all taxes and other charges, the landlord's rent being net. In order that the landlord obtain the benefit of an increasing land value, it may be provided that with each renewal of the lease a re-appraisal of the land be made and the rent increased proportionately. It may be provided that at the end of a term, the landlord may either pay the tenant for the building, or renew the lease at his option. There are no set rules which govern leases of this kind, each bargain being consummated upon negotiations by the parties concerned. The provisions above mentioned are merely suggestive of what may be agreed upon.
The problem of the tenant erecting a building on leased ground is either to use it for himself, or to sub-let it to tenants, his own rent or the rent he obtains from sub-tenants being sufficient to make the operation profitable. He must figure that the building rent will cover the following items:
(a) The ground rent payable to the owner.
(c) Premiums on policies of insurance against fire, liability, workmen's compensation and plate glass, charges for water, heat, light and power.
(d) Labor and repairs, including all charges for upkeep and maintenance and service to tenants.
(e) Interest on capital invested, that is, on the amount expended in erection of building.
(f) An amount sufficient to amortize the cost of the building during the term of the lease or by the end of the last renewal of the lease.
(g) A sufficient amount over and above all the foregoing charges to compensate the operator for his services and the risk involved in the enterprise.
In computing the rent expected to be realized from the building provision must be made for vacancies and losses through bad debts.