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

- 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 renter develops a piece of land throughout the lease period. Once the lease ends, the tenant turns over the residential or commercial property improvements to the owner, unless there is an exception.

Importantly, the tenant is accountable for paying all residential or commercial property taxes during the lease duration. The acquired improvements allow the owner to sell the residential or commercial property for more money, if so preferred.

Common Features

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

The GL defines who owns the land and the improvements, i.e., residential or commercial property that the lessee constructs. Typically, the lessee controls and depreciates the enhancements during the lease period. That control reverts to the owner/lessor upon the expiration of the lease.

Obtain Financing

Ground Lease Subordination

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

That's exactly what occurs in a subordinated ground lease. Thus, the residential or commercial property deed becomes collateral for the loan provider if the lessee defaults. In return, the property manager requests for higher rent on the residential or commercial property.

Alternatively, an unsubordinated ground lease preserves the proprietor's leading concern claims if the leaseholder defaults on his payments. However this may prevent loan providers, who wouldn't be able to occupy in case of default. Accordingly, the proprietor will normally 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 go into structuring a ground lease:

1. Term

The lease needs to be adequately long to enable the lessee to amortize the expense of the improvements it makes. Simply put, the lessee needs to make sufficient revenues during the lease to spend for the lease and the enhancements. Furthermore, the lessee must make a reasonable return on its financial investment after paying all expenses.

The biggest driver of the lease term is the funding that the lessee organizes. Normally, the lessee will want 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, junk food ground rents with much shorter amortization periods might have a 20-year lease term.

2. Rights and Responsibilities

Beyond the plans for paying rent, a ground lease has a number of special functions.

For example, when the lease expires, what will occur to the improvements? The lease will specify whether they go back to the lessor or the lessee need to eliminate them.

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

3. Financeability

The lender should have option to secure its loan if the lessee defaults. This is difficult in an unsubordinated ground lease since the lessor has first concern in the case of default. The lender only has the right to claim the leasehold.

However, one solution is a provision that requires the follower lessee to utilize the loan provider to finance the brand-new GL. The topic of financeability is complex and your legal experts will need to learn the numerous intricacies.

Keep in mind that Assets America can assist fund the building or remodelling of business residential or commercial property through our network of private financiers and banks.

4. Title Insurance

The lessee should set up title insurance coverage for its leasehold. This requires special recommendations to the regular owner's policy.

5. Use Provision

Lenders want the broadest usage provision in the lease. Basically, the arrangement would allow any legal function for the residential or commercial property. In this way, the lender can more quickly offer the leasehold in case of default.

The lessor may can permission in any new function for the residential or commercial property. However, the lender will seek to limit 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 lending institution manages insurance coverage earnings originating from casualty and condemnation. However, this may contrast with the basic wording of a ground lease, which gives some control to the lessor.

Unsurprisingly, loan providers want the insurance continues to approach the loan, not residential or commercial property remediation. Lenders also need that neither lessors nor lessees can terminate ground leases due to a casualty without their approval.

Regarding condemnation, lenders insist upon participating in the procedures. The lending institution's requirements for using the condemnation earnings and controlling termination rights mirror those for casualty occasions.

7. Leasehold Mortgages

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

If there is a pre-existing mortgage, the mortgagee should consent to an SNDA contract. Usually, the GL loan provider wants first top priority concerning subtenant defaults.

Moreover, loan providers require that the ground lease stays in force if the lessee defaults. If the lessor sends a notice of default to the lessee, the lender needs to get a copy.

Lessees want the right to acquire a leasehold mortgage without the lender's approval. Lenders desire the GL to work as security needs to the lessee default.

Upon foreclosure of the residential or commercial property, the loan provider receives the lessee's leasehold interest in the residential or commercial property. Lessors might desire to restrict the kind of entity that can hold a leasehold mortgage.

8. Rent Escalation

Lessors want the right to increase leas after specified periods so that it keeps market-level rents. A "ratchet" boost offers the lessee no defense in the face of a financial 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 option to conventional building. 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, because it was a 10-year triple-net ground lease with four 5-year alternatives to extend.

This gives the GL an optimal term of thirty years. The lease escalation provision attended to a 10% rent increase every five years. The lease value was simply under $1 million with a cap rate of 5.21%.

The initial 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 benefits and disadvantages.

The benefits of a ground lease include:

Affordability: Ground leases enable occupants to build on residential or commercial property that they can't afford to buy. Large chain shops like Starbucks and Whole Foods utilize ground leases to expand their empires. This enables them to grow without saddling the companies with excessive financial obligation.
No Deposit: Lessees do not need to put any money down to take a lease. This stands in stark contrast to residential or commercial property purchasing, which might require as much as 40% down. The lessee gets to save cash it can deploy in other places. It likewise improves its return on the leasehold investment.
Income: The lessor gets a constant stream of income while keeping ownership of the land. The lessor preserves the worth of the income through making use of an escalation stipulation in the lease. This entitles the lessor to increase leas regularly. Failure to pay lease offers 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 offered the land, it would have received capital gains treatment. Instead, it will pay ordinary corporate rates on its lease income.
Control: Without the required lease language, the owner may lose control over the land's advancement and usage.
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 terrific commercial lease calculator. You enter the area, rental rate, and agent's cost. It does the rest.

How Assets America Can Help

Assets America ® will organize funding for business projects beginning at $20 million, without any ceiling. We invite you to call us to learn more about our complete monetary services.

We can help fund the purchase, building and construction, or remodelling of industrial residential or commercial property through our network of personal financiers and banks. For the finest in industrial realty funding, Assets America ® is the clever option.

- What are the different kinds of leases?

They are gross leases, modified gross leases, single net leases, double net leases and triple net leases. The also include absolute leases, percentage leases, and the topic of this post, ground leases. All of these leases supply benefits and drawbacks to the lessor and lessee.

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

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

- What happens at the end of a ground lease?

The land always reverts to the lessor. Beyond that, there are two possibilities for the end of a ground lease. The very first is that the lessor acquires all enhancements that the lessee made during the lease. The second is that the lessee should destroy the enhancements it made.

- How long do ground leases usually last?

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