Do you own land, perhaps with worn out residential or commercial property on it? One way to extract worth from the land is to sign a ground lease. This will permit you to earn earnings and potentially capital gains. In this article, we'll check out,

- What is a Ground Lease?
- How to Structure Them
- Examples of Ground Leases
- Pros and Cons
- Commercial Lease Calculator
- How Assets America Can Help
- Frequently Asked Questions

What is a Ground Lease?

In a ground lease (GL), a tenant develops a piece of land during the lease duration. Once the lease expires, the tenant turns over the residential or commercial property enhancements to the owner, unless there is an exception.

Importantly, the renter is accountable for paying all residential or commercial property taxes during the lease period. The inherited improvements enable the owner to sell the residential or commercial property for more money, if so desired.

Common Features

Typically, a ground lease lasts from 35 to 99 years. Normally, the lessee takes a lease on some raw or prepared land and constructs a building on it. Sometimes, the land has a structure currently on it that the lessee need to destroy.

The GL specifies who owns the land and the improvements, i.e., residential or commercial property that the lessee constructs. Typically, the lessee controls and diminishes the improvements throughout the lease period. That control goes back to the owner/lessor upon the expiration of the lease.

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Ground Lease Subordination

One crucial element of a ground lease is how the lessee will finance enhancements to the land. A key arrangement is whether the landlord will accept subordinate his concern on claims if the lessee defaults on its financial obligation.

That's specifically what occurs in a subordinated ground lease. Thus, the residential or commercial property deed ends up being collateral for the lending institution if the lessee defaults. In return, the proprietor requests for greater rent on the residential or commercial property.

Alternatively, an unsubordinated ground lease keeps the property owner's leading priority claims if the leaseholder defaults on his payments. However this may discourage lending institutions, who wouldn't be able to occupy in case of default. Accordingly, the property owner will typically charge lower rent on unsubordinated ground leases.

How to Structure a Ground Lease

A ground lease is more complicated than regular industrial leases. Here are some components that enter into structuring a ground lease:

1. Term

The lease should be adequately long to permit the lessee to amortize the expense of the improvements it makes. To put it simply, the lessee should make enough profits throughout the lease to pay for the lease and the enhancements. Furthermore, the lessee should make a sensible return on its investment after paying all expenses.

The most significant driver of the lease term is the financing that the lessee organizes. Normally, the lessee will want a term that is 5 to ten years longer than the loan amortization schedule.

On a 30-year mortgage, that implies a lease term of a minimum of 35 to 40 years. However, junk food ground leases with much shorter amortization durations might have a 20-year lease term.

2. Rights and Responsibilities

Beyond the arrangements for paying lease, a ground lease has a number of distinct functions.

For example, when the lease expires, what will occur to the enhancements? The lease will specify whether they revert to the lessor or the lessee must eliminate them.

Another feature is for the lessor to assist the lessee in obtaining essential licenses, permits and zoning variances.

3. Financeability

The loan provider should draw on secure its loan if the lessee defaults. This is hard in an unsubordinated ground lease due to the fact that the lessor has initially concern when it comes to default. The lending institution just can declare the leasehold.

However, one remedy is a stipulation that requires the successor lessee to utilize the lending institution to finance the brand-new GL. The subject of financeability is intricate and your legal professionals will require to learn the different intricacies.

Bear in mind that Assets America can assist finance the building and construction or restoration of business residential or commercial property through our network of personal investors and banks.

4. Title Insurance

The lessee needs to arrange title insurance for its leasehold. This needs special recommendations to the regular owner's policy.

5. Use Provision

Lenders want the broadest use arrangement in the lease. Basically, the arrangement would enable any legal function for the residential or commercial property. In this way, the loan provider can more easily sell the leasehold in case of default.

The lessor might deserve to permission in any new purpose for the residential or commercial property. However, the loan provider will seek to limit this right. If the lessor feels strongly about forbiding particular usages for the residential or commercial property, it must define them in the lease.

6. Casualty and Condemnation

The lender controls insurance proceeds coming from casualty and condemnation. However, this might contravene the standard phrasing of a ground lease, which provides some control to the lessor.

Unsurprisingly, lenders want the insurance coverage proceeds to go towards the loan, not residential or commercial property remediation. Lenders also require that neither lessors nor lessees can end ground leases due to a casualty without their approval.

Regarding condemnation, lenders insist upon getting involved in the procedures. The loan provider's requirements for applying the condemnation profits and managing termination rights mirror those for casualty occasions.

7. Leasehold Mortgages

These are mortgages funding the lessee's enhancements to the ground lease residential or commercial property. Typically, lending institutions balk at lessor's preserving an unsubordinated position with respect to default.

If there is a pre-existing mortgage, the mortgagee must agree to an SNDA agreement. Usually, the GL lender wants first top priority relating to subtenant defaults.

Moreover, lending institutions require that the ground lease stays in force if the lessee defaults. If the lessor sends out a notification of default to the lessee, the loan provider needs to receive a copy.

Lessees want the right to acquire a leasehold mortgage without the lender's permission. Lenders desire the GL to act as security must the lessee default.

Upon foreclosure of the residential or commercial property, the lending institution receives the lessee's leasehold interest in the residential or commercial property. Lessors might wish to restrict the type of entity that can hold a leasehold mortgage.

8. Rent Escalation

Lessors desire the right to increase rents after specified periods so that it keeps market-level leas. A "ratchet" increase uses the lessee no defense in the face of an economic downturn.

Ground Lease Example

As an example of a ground lease, consider one signed for a Starbucks drive-through shipping container store in Portland.

Starbucks' principle is to offer decommissioned shipping containers as an eco-friendly alternative to conventional building. The first store opened in Seattle, followed by Kansas City, Denver, Chicago, and one in Portland, OR.

It was a rather unusual ground lease, in that it was a 10-year triple-net ground lease with 4 5-year choices to extend.

This offers the GL a maximum term of thirty years. The rent escalation provision supplied for a 10% lease increase every five years. The lease worth was simply under $1 million with a cap rate of 5.21%.

The preliminary lease terms, on an annual basis, were:

- 09/01/2014 - 08/31/2019 @ $52,000.
- 09/01/2019 - 08/31/2024 @ $57,200.
- 09/01/2024 - 08/31/2029 @ $62,920.
- 09/01/2029 - 08/31/2034 @ $69,212.
- 09/01/2034 - 08/31/2039 @ $76,133.
- 09/01/2039 - 08/31/2044 @ $83,747

Ground Lease Pros & Cons

Ground leases have their advantages and drawbacks.

The advantages of a ground lease consist of:

Affordability: Ground rents enable renters to develop on residential or commercial property that they can't afford to buy. Large store like Starbucks and Whole Foods utilize ground leases to broaden their empires. This permits them to grow without saddling the business with excessive financial obligation.
No Down Payment: Lessees do not need to put any money to take a lease. This stands in stark contrast to residential or commercial property purchasing, which might need as much as 40% down. The lessee gets to save money it can deploy elsewhere. It likewise improves its return on the leasehold financial investment.
Income: The lessor gets a constant stream of income while maintaining ownership of the land. The lessor preserves the worth of the income through the use of an escalation provision in the lease. This entitles the lessor to increase rents periodically. Failure to pay rent provides the lessor the right to force out the occupant.

The drawbacks of a ground lease consist of:

Foreclosure: In a subordinated ground lease, the owner runs the threat of losing its residential or commercial property if the lessee defaults.
Taxes: Had the owner simply sold the land, it would have gotten approved for capital gains treatment. Instead, it will pay ordinary corporate rates on its lease income.
Control: Without the required lease language, the owner might lose control over the land's development and use.
Borrowing: Typically, ground leases forbid the lessor from borrowing against its equity in the land during the ground lease term.

Ground Lease Calculator

This is a fantastic business lease calculator. You go into the area, rental rate, and representative's fee. It does the rest.

How Assets America Can Help

Assets America ® will set up financing for industrial tasks starting at $20 million, without any ceiling. We invite you to call us for additional information about our complete monetary services.

We can assist finance the purchase, construction, or remodelling of commercial residential or commercial property through our network of private financiers and banks. For the best in commercial realty financing, Assets America ® is the clever option.

- What are the different types of leases?

They are gross leases, customized gross leases, single net leases, double net leases and triple net leases. The also consist of outright leases, percentage leases, and the subject of this short article, ground leases. All of these leases offer advantages and downsides to the lessor and lessee.

- Who pays residential or commercial property taxes on a ground lease?

Typically, ground leases are triple web. That implies that the lessee pays the residential or commercial property taxes throughout the lease term. Once the lease expires, the lessor ends up being responsible for paying the residential or commercial property taxes.

- What takes place at the end of a ground lease?

The land always reverts to the lessor. Beyond that, there are 2 possibilities for the end of a ground lease. The very first is that the lessor seizes all enhancements that the lessee made during the lease. The second is that the lessee must demolish the improvements it made.

- How long do ground leases usually last?

Typically, a ground lease term reaches at lease 5 to 10 years beyond the leasehold mortgage. For example, if the lessee takes a 30-year mortgage on its improvements, the lease term will run for at least 35 to 40 years. Some ground leases extend as far as 99 years.