Leasehold Interest

In real estate, a leasehold interest refers to a structure where an individual or entity (lessee) leases the land (i.e. ground lease) from the fee simple owner (lessor) of the land for an extended period of time. The lessee of a leasehold estate will generally own the improvements on the land and use the land and improvements as if the lessee were the owner of the land. During the term of the ground lease, the lessee will pay rent to the lessor for use of the land. At the end of the ground lease term, the lessee must return use of the land, and any improvements thereon, to the land owner.

Real estate investors are willing to lease the land when the cash flow from the improvements alone, after paying the ground lease payment, make the investment feasible. This is common with high-quality locations where the leasehold owner wants the location but the land owner is only willing to lease the land rather than sell.

Many office buildings in gateway cities (e.g. New York) are leasehold estates where the owner of the building leases the land underneath the building from a separate individual or entity for an extended period of time. One such example is the World Trade Center in New York City. The land is owned by the Port Authority of New York and New Jersey, but controlled by a separate group under a 99-year ground lease originally executed in July 2001.

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