Franchise ground lease agreements are long-term real estate contracts where the franchisee leases land from the landowner to develop and operate their business, often constructing their own building. These leases are structured to provide stability for both parties, and typically contain predictable terms and financial escalations to accommodate inflation and market growth. The specifics can vary by region, tenant type, and landowner leverage, but there are widely accepted industry standards.
1. Lease Term Length
- Standard ground leases for franchise use are 20 to 30 years.
- Many agreements include multiple 5- or 10-year renewal options.
- The full lease duration, including options, may stretch to 50–60 years.
- Long terms are essential to justify the franchisee’s upfront construction investment.
- Renewal terms typically require written notice and sometimes market rent adjustments.
2. Base Rent Structure
- Base rent is usually calculated per square foot of land, often between $2.00 and $5.00 per sq ft annually depending on market and location.
- Alternatively, it may be expressed as a flat monthly or annual payment (e.g., $60,000–$120,000 annually).
- Rent commencement generally begins once permits are issued or construction starts, not immediately upon signing.
- A pre-construction or option period rent may be negotiated at a lower rate.
- Ground leases are usually triple-net (NNN), with the tenant responsible for taxes, insurance, and maintenance.
3. Rent Escalations
- Annual escalations of 2% to 3% are standard in most ground lease contracts.
- Some leases use 5-year step increases (e.g., 10% every 5 years).
- A Consumer Price Index (CPI) adjustment clause may be included to align with inflation.
- Escalation terms are clearly stated and non-negotiable once executed.
- Rent escalation continues through renewal periods unless renegotiated.
4. Tenant Responsibilities and Improvements
- Franchisees typically cover all site development, permitting, and building costs.
- The tenant maintains the structure, landscaping, and access areas during the lease term.
- At lease end, the tenant may be required to remove or leave improvements, based on lease terms.
- Lease may prohibit subletting or require landlord approval for ownership transfers.
- Franchisee assumes responsibility for operational liabilities and code compliance.
5. Default Clauses and Termination Rights
- Lease agreements define specific default events, such as missed payments or failure to open.
- Cure periods (typically 10–30 days) are provided before legal remedies apply.
- Termination rights are limited for tenants but may be included if permits are denied or sales thresholds are unmet.
- Landlords may negotiate a reversion clause, where land and improvements revert back upon default.
- Guarantees or corporate backing may be required for franchise operators with limited credit.
