Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Land Lease Option

What it is:

A land lease option is a section of a lease contract that allows a renter to lengthen his or her use of a piece of land beyond the term specified in the contract.

How it works (Example):

An individual who intends to rent a piece of property may ask the owner to include a land lease option as part of the lease contract. This lets the renter opt for an extension on the term of the lease at the same rate. An owner typically includes this option for a small fee which is paid each year ( a premium) around the original anniversary of the lease.

For example, suppose Bob leases a plot of land from Jack. Bob agrees to pay Jack $1,000 each month for a one-year term that begins on September 1, 2011 and terminates on August 31, 2012. At the outset, Bob pays Jack an extra $100 for the inclusion of a land lease option as part of the contract. This gives Bob the option, but not the obligation, to continue leasing the land for a specified number of months after August 31, 2012 at the same $1,000 rate. On September 1, 2012, Bob agrees to again pay Jack $100 for the inclusion of the land lease option.

Why it Matters:

For a renter, a land lease option reduces the risk associated with fluctuations in prices from year to year. In other words, if renters believe that rents will increase in the future, a land lease option allows them to remain on the leased property for an extended period of time without sustaining a monthly increase in rent. In exchange for locking in the price via the land lease option, the owner receives a nonrefundable premium.