Do you own land, perhaps with shabby residential or commercial property on it? One method to extract value from the land is to sign a ground lease. This will permit you to earn earnings and potentially capital gains. In this short 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 renter develops a piece of land throughout the lease period. Once the lease expires, the occupant turns over the residential or commercial property enhancements 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 enable the owner to sell the residential or commercial property for more cash, 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 currently on it that the lessee should demolish.

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

Look for Financing

Ground Lease Subordination

One important element of a ground lease is how the lessee will finance improvements to the land. A key arrangement is whether the proprietor will concur to subordinate his top priority on claims if the lessee defaults on its financial obligation.

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

Alternatively, an unsubordinated ground lease preserves the landlord's leading concern claims if the leaseholder defaults on his payments. However this might prevent lenders, who wouldn't be able to occupy in case of default. Accordingly, the landlord will usually 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 needs to be sufficiently long to enable the lessee to amortize the expense of the improvements it makes. To put it simply, the lessee needs to make sufficient revenues 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 biggest chauffeur of the lease term is the funding that the lessee organizes. 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 indicates a lease term of a minimum of 35 to 40 years. However, quick food ground leases with much shorter amortization periods might have a 20-year lease term.

2. Rights and Responsibilities

Beyond the plans for paying lease, a ground lease has several unique features.

For instance, when the lease expires, what will take place to the improvements? The lease will specify whether they go back to the lessor or the lessee should remove them.

Another function is for the lessor to assist the lessee in getting essential licenses, authorizations and zoning differences.

3. Financeability

The loan provider must have recourse to safeguard its loan if the lessee defaults. This is tough in an unsubordinated ground lease due to the fact that the lessor has initially priority in the case of default. The lender just can declare the leasehold.

However, one remedy is a provision that needs the follower lessee to use the loan provider to fund the brand-new GL. The topic of financeability is intricate and your legal experts will need to wade through the different complexities.

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

4. Title Insurance

The lessee must set up title insurance for its leasehold. This requires unique recommendations 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 way, the lending institution can more easily offer the leasehold in case of default.

The lessor might have the right to authorization 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 restricting specific uses for the residential or commercial property, it must specify them in the lease.

6. Casualty and Condemnation

The lending institution controls insurance proceeds originating from casualty and condemnation. However, this may contravene the basic phrasing of a ground lease, which offers some control to the lessor.

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

Regarding condemnation, lending institutions insist upon participating in the proceedings. The loan provider's requirements for using the condemnation profits and controlling termination rights mirror those for casualty occasions.

7. Leasehold Mortgages

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

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

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

Lessees desire the right to get a leasehold mortgage without the loan provider's consent. Lenders want the GL to act as collateral should 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 may 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 durations so that it keeps market-level leas. A "cog" boost offers the lessee no protection in the face of an economic recession.

Ground Lease Example

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

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

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

This gives the GL an optimal term of thirty years. The lease escalation stipulation offered a 10% lease increase every five years. The lease worth was simply under $1 million with a cap rate of 5.21%.

The initial 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 downsides.

The advantages of a ground lease consist of:

Affordability: Ground rents enable tenants to construct on residential or commercial property that they can't pay for to buy. Large chain stores like Starbucks and Whole Foods use ground leases to broaden 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 getting, which may need as much as 40% down. The lessee gets to save money it can deploy elsewhere. It likewise enhances its return on the leasehold investment.
Income: The lessor receives a consistent stream of earnings while maintaining ownership of the land. The lessor keeps the worth of the earnings through the usage of an escalation provision in the lease. This entitles the lessor to increase rents regularly. Failure to pay rent provides the lessor the right to kick out the renter.

The downsides 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 merely offered the land, it would have gotten approved for capital gains treatment. Instead, it will pay common business rates on its lease income.
Control: Without the needed lease language, the owner might lose control over the land's advancement and use.
Borrowing: Typically, ground leases forbid the lessor from obtaining versus its equity in the land throughout the ground lease term.

Ground Lease Calculator

This is a terrific commercial lease calculator. You enter the area, rental rate, and representative's charge. It does the rest.

How Assets America Can Help

Assets America ® will set up financing for business projects beginning at $20 million, without any upper limit. We invite you to call us for additional information about our complete financial services.

We can help fund the purchase, building and construction, or restoration of industrial residential or commercial property through our network of personal investors and banks. For the finest in business property financing, Assets America ® is the smart option.

- What are the various kinds of leases?

They are gross leases, customized gross leases, single net leases, double net leases and triple net leases. The likewise consist of outright leases, portion leases, and the topic of this post, ground leases. All of these leases provide advantages and drawbacks to the lessor and lessee.

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

Typically, ground leases are triple internet. That suggests that the lessee pays the residential or commercial property taxes throughout the lease term. Once the lease ends, the lessor becomes responsible 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 2 possibilities for completion of a ground lease. The very first is that the lessor seizes all improvements that the lessee made throughout the lease. The 2nd is that the lessee needs to demolish the enhancements it made.

- How long do ground leases typically last?

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