Land Lease or Development: Finding Your Best Option

Richard Montgomery
Mon, 09 Mar 2026 23:00:00 -0700
Lifestyle

Dear Monty: I own four contiguous lots in a small town in the Midwest. I have owned them for years and have been considering leasing the land out as opposed to developing it myself. I have done some research on land leases and am strongly considering it. What is your opinion about looking to lease the land vs. developing it?

Monty's Answer: Thoroughly researching one option can create false certainty. Have you evaluated it against development alternatives with equal rigor? Like determining market value, finding the right strategy requires examining a "range of options" where different approaches yield different results, none universally superior.

Some Options to Consider:
Updated: Tue Mar 10, 2026

Dear Monty: I own four contiguous lots in a small town in the Midwest. I have owned them for years and have been considering leasing the land out as opposed to developing it myself. I have done some research on land leases and am strongly considering it. What is your opinion about looking to lease the land vs. developing it?

Monty's Answer: Thoroughly researching one option can create false certainty. Have you evaluated it against development alternatives with equal rigor? Like determining market value, finding the right strategy requires examining a "range of options" where different approaches yield different results, none universally superior.

Some Options to Consider:

Option 1: Ground lease the land. You retain ownership while transferring development risk to a tenant. The Appraisal Institute states that Ground leases typically span 50-99 years with rent escalations tied to CPI or fixed percentages. You receive passive income without capital outlay and improvements eventually revert to you. However, you're locked into terms that may underperform decades later and may surrender control over what gets built. This works if you lack capital, want passive income or are estate planning in your 60s and 70s.

Option 2: Develop and hold as rentals. Build apartments, townhomes or commercial space and operate them. The U.S. Census Bureau reports Midwest rental vacancy rates at 6.4%, suggesting moderate demand. You control the asset, capture appreciation and cash flow and gain tax advantages through depreciation. Downsides: you need considerable capital, must manage construction risk and become a landlord. Best suited if you have $500K+ available and the temperament for property management.

Option 3: Develop and sell immediately. Build market-rate homes, mixed-use or condos and exit completely. According to the National Association of Home Builders, single-family builders averaged 8.7% net profit margins in 2023, though individual results vary significantly by market and execution. This generates immediate capital but sacrifices long-term income. Consider this if you need liquidity or believe your market has peaked.

Option 4: Joint venture partnership. Partner with an experienced developer who provides expertise while you contribute land equity. Determine split percent and reduce risk — never 50/50. Structure matters; consult an attorney and establish mediation provisions upfront to resolve disputes without litigation costs.

How to Decide:

— Evaluate critical factors determining feasibility. Zoning flexibility, utility availability, access rights, soil types, drainage, topography and parcel configuration. These directly dictate what's buildable and at what cost.

— Obtain competitive intelligence. Request proposals from two to three local developers outlining both ground lease terms and joint venture structures. Get preliminary cost estimates from contractors and feasibility opinions from commercial agents. This costs nothing and provides actual market feedback.

— Assess local market dynamics honestly. In towns under 25,000 population, feasibility depends on employment trends, population growth and existing inventory. Check your county economic development office for demographic projections.

— Calculate opportunity cost with a CPA experienced in real estate. Ground leases create ordinary income taxed at your marginal rate. Development offers depreciation benefits and potential 1031 exchange opportunities. The after-tax return difference can be substantial.

— Evaluate your involvement preference without self-deception. Ground leases are genuinely passive after execution. Development demands active oversight even with property managers.

Your optimal strategy exists within a range rather than at a single point and requires examining comparable approaches with honest adjustments for your unique circumstances.