Do Land Leases Have Anything To Do With Texas Gold?
Tim posted a question on FB asking if, when the land leases on NorthPark Center expire, the owner of the lease gets to keep the improvements — i.e. NorthPark. Then he got his answer: no. But it was a great question: I wonder how many people know that many major developments are erected on dirt not necessarily owned by the developer or the person who owns the improvement? In Mexico, for example, until very recently foreigners who bought homes there owned the structure but leased the land from the state. (Beach property is still available in Mexico only as a land lease.) Usually the land leases are extended, sometimes they actually run out at which point the developer/owner can negotiate to buy the dirt. This happened to a developer friend recently who bought a condo in California on a land lease — the lease was up sooner than he realized and all the owners had to scramble to fork over several thousand dollars to buy out their dirt landlord, an Indian tribe. I am curious as to the origins of this and wonder if it has anything to do with oil? Do property owners like to hang onto dirt just in case of a Spindletop? Couldn’t that be done by maintaining the mineral rights?
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You can sell real estate and maintain the mineral rights. This is becoming more and more frequent with the Barnett Shale in DFW. In commercial real estate, retailers and office users sometimes “ground lease” land because they don’t want the money tied up in land ownership (lower returns on land investments than the IRR of their operation). On a ground lease, tenants can erect and own the building on the land which gives them the tax benefit of depreciation. They cannot depreciate the land. McDonald’s, banks and other single tenant retailers frequently practice this.
Depending on who you talk to, you’ll learn that The Ritz currently stands on a site that was not their first choice. They originally wanted the vacant unused land that takes up the block at Turtle Creek, Cedar Springs, Sale, and Dickason, otherwise known as 3015, 3415, 3427, 3431, 3435 Cedar Springs and 3440 Dickason which are all owned by General Electric. (Who knows what that would have done to The Rosewood Mansion since it would have been just a block over?) Allegedly, General Electric did not want to sell and wanted a hundred year lease. The deal probably would have gone through except for the fact that The Ritz wanted to build one of the new hybrids (Hotel + Condo) and that lease would be a conflict in selling units to others.
Don’t think that had anything to do with what you asked; just wanted to mention it.
Ground leases originated in Europe as a device for maintaining generational wealth. The London district of Mayfair, for example, is almost entirely owned by the Duke of Devonshire. The Mercantile Bank land in Dallas is owned by four families on a ground lease and has been since R.L. Thornton first built the bank. Ground leases are very common in New York City.