Do you own land, possibly with shabby residential or commercial property on it? One method to extract value from the land is to sign a ground lease. This will enable you to earn income and possibly capital gains. In this article, we'll check out,

- What is a Ground Lease?
- How to Structure Them
- Examples of Ground Leases
- Benefits and drawbacks
- 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 period. Once the lease ends, the occupant turns over the residential or commercial property improvements to the owner, unless there is an exception.

Importantly, the occupant is accountable for paying all residential or commercial property taxes during the lease duration. The acquired improvements permit the owner to offer the residential or commercial property for more cash, 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 already on it that the lessee should demolish.

The GL specifies who owns the land and the enhancements, 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 important aspect of a ground lease is how the lessee will finance improvements to the land. A crucial arrangement is whether the proprietor will accept subordinate his concern on claims if the lessee defaults on its debt.

That's specifically what takes place in a subordinated ground lease. Thus, the residential or commercial property deed ends up being security for the loan provider if the lessee defaults. In return, the property manager asks for greater rent on the residential or commercial property.

Alternatively, an unsubordinated ground lease maintains the landlord's leading priority claims if the leaseholder defaults on his payments. However this might discourage lenders, who wouldn't have the ability to occupy in case of default. Accordingly, the proprietor will typically charge lower lease on unsubordinated ground leases.

How to Structure a Ground Lease

A ground lease is more complex than routine commercial leases. Here are some parts that enter into structuring a ground lease:

1. Term

The lease must be sufficiently long to enable the lessee to amortize the cost of the enhancements it makes. Simply put, the lessee needs to make sufficient earnings throughout the lease to pay for the lease and the enhancements. Furthermore, the lessee should make a reasonable return on its financial investment after paying all costs.

The greatest chauffeur of the lease term is the financing that the lessee arranges. Normally, the lessee will desire a term that is 5 to 10 years longer than the loan amortization schedule.

On a 30-year mortgage, that means a lease regard to at least 35 to 40 years. However, quick food ground rents with much shorter amortization periods might have a 20-year lease term.

2. Rights and Responsibilities

Beyond the arrangements for paying rent, a ground lease has numerous unique functions.

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

Another feature is for the lessor to help the lessee in getting essential licenses, licenses and zoning differences.

3. Financeability

The loan provider must draw on protect its loan if the lessee defaults. This is tough in an unsubordinated ground lease due to the fact that the lessor has initially priority when it comes to default. The lender only can declare the leasehold.

However, one treatment is a stipulation that requires the follower lessee to utilize the lender to finance the brand-new GL. The subject of financeability is complex and your legal professionals will require to wade through the different intricacies.

Remember that Assets America can help fund the building and construction or remodelling of industrial residential or commercial property through our network of personal investors and banks.

4. Title Insurance

The lessee should organize title insurance for its leasehold. This needs special endorsements to the regular owner's policy.

5. Use Provision

Lenders desire the broadest usage arrangement in the lease. Basically, the arrangement would allow any legal purpose for the residential or commercial property. In this method, the lending institution can more easily offer the leasehold in case of default.

The lessor might deserve to consent in any new function for the residential or commercial property. However, the lender will look for to restrict this right. If the lessor feels highly about forbiding certain usages for the residential or commercial property, it needs to define them in the lease.

6. Casualty and Condemnation

The lender manages insurance earnings originating from casualty and condemnation. However, this may clash with the standard wording of a ground lease, which provides some control to the lessor.

Unsurprisingly, lenders want the insurance coverage continues to approach 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 authorization.

Regarding condemnation, lenders insist upon taking part in the proceedings. The lender's requirements for applying the condemnation profits and controlling termination rights mirror those for casualty events.

7. Leasehold Mortgages

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

If there is a pre-existing mortgage, the mortgagee needs to concur to an SNDA agreement. Usually, the GL loan provider wants first priority relating to subtenant defaults.

Moreover, loan providers need that the ground lease remains in force if the lessee defaults. If the lessor sends a notification of default to the lessee, the lending institution must get a copy.

Lessees want the right to obtain a leasehold mortgage without the lender's permission. Lenders desire the GL to serve as security should the lessee default.

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

8. Rent Escalation

Lessors want the right to increase rents after defined periods so that it preserves market-level rents. A "cog" increase provides the lessee no security in the face of a financial recession.

Ground Lease Example

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

Starbucks' principle is to sell decommissioned shipping containers as an ecologically friendly option to standard building and construction. The very first shop 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 four 5-year choices to extend.

This offers the GL an optimal regard to thirty years. The rent escalation clause attended to a 10% rent increase every five years. The lease value was just under $1 million with a cap rate of 5.21%.

The preliminary lease terms, on a yearly 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 downsides.

The benefits of a ground lease include:

Affordability: Ground rents permit renters to build on residential or commercial property that they can't manage to buy. Large store like Starbucks and Whole Foods use ground leases to expand their empires. This allows them to grow without saddling the business with too much debt.
No Deposit: Lessees do not have to put any cash down 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 somewhere else. It likewise enhances its return on the leasehold investment.
Income: The lessor gets a consistent stream of income while maintaining ownership of the land. The lessor maintains the value of the earnings through using an escalation provision in the lease. This entitles the lessor to increase leas occasionally. Failure to pay rent offers the lessor the right to force out the renter.

The downsides of a ground lease consist of:

Foreclosure: In a subordinated ground lease, the owner runs the risk of losing its residential or commercial property if the lessee defaults.
Taxes: Had the owner merely offered the land, it would have received capital gains treatment. Instead, it will pay regular business rates on its lease income.
Control: Without the required lease language, the owner may lose control over the land's advancement and use.
Borrowing: Typically, ground leases forbid the lessor from borrowing against its equity in the land throughout the ground lease term.

Ground Lease Calculator

This is an excellent business lease calculator. You get in the location, rental rate, and representative's charge. It does the rest.

How Assets America Can Help

Assets America ® will arrange funding for industrial projects beginning at $20 million, without any ceiling. We invite you to contact us to find out more about our total financial services.

We can assist fund the purchase, building and construction, or restoration of business residential or commercial property through our network of personal investors and banks. For the very best in business property funding, Assets America ® is the wise option.

- What are the various types of leases?

They are gross leases, modified gross leases, single net leases, double net leases and triple net leases. The likewise consist of outright leases, portion leases, and the subject of this post, ground leases. All of these leases offer benefits and drawbacks to the lessor and lessee.

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

Typically, ground leases are triple net. That indicates that the lessee pays the residential or commercial property taxes during 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 goes back to the lessor. Beyond that, there are 2 possibilities for the end of a ground lease. The first is that the lessor seizes all improvements that the lessee made throughout the lease. The second is that the lessee should destroy the improvements it made.

- The length of time do ground leases typically last?

Typically, a ground lease term extends to 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 rents extend as far as 99 years.