Do you own land, perhaps with worn out residential or commercial property on it? One way 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 post, we'll explore,

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

What is a Ground Lease?

In a ground lease (GL), an occupant establishes a piece of land during the lease period. Once the lease expires, the renter 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 period. The acquired enhancements allow the owner to offer 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 prepared land and constructs a structure on it. Sometimes, the land has a structure currently 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 diminishes the enhancements during 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 essential aspect of a ground lease is how the lessee will fund enhancements to the land. An essential arrangement is whether the proprietor will accept subordinate his priority on claims if the lessee defaults on its financial obligation.

That's precisely what occurs 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 greater lease on the residential or commercial property.

Alternatively, an unsubordinated ground lease preserves the property manager's top concern claims if the leaseholder defaults on his payments. However this might dissuade loan providers, who wouldn't be able to occupy in case of default. Accordingly, the property owner will usually charge lower rent on unsubordinated ground leases.

How to Structure a Ground Lease

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

1. Term

The lease needs to be sufficiently long to allow the lessee to amortize the cost of the enhancements it makes. Simply put, the lessee should make enough revenues throughout the lease to pay for the lease and the enhancements. Furthermore, the lessee should make an affordable return on its financial investment after paying all expenses.

The most significant 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 term of a minimum of 35 to 40 years. However, fast food ground leases with shorter amortization durations may have a 20-year lease term.

2. Rights and Responsibilities

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

For instance, when the lease expires, what will occur to the improvements? The lease will define whether they revert to the lessor or the lessee need to remove them.

Another feature is for the lessor to assist the lessee in obtaining necessary licenses, licenses and zoning variations.

3. Financeability

The lending institution must have option to safeguard its loan if the lessee defaults. This is tough in an unsubordinated ground lease since the lessor has initially priority when it comes to default. The lender just has the right to declare the leasehold.

However, one remedy is a stipulation that needs the follower lessee to utilize the loan provider to fund the new GL. The topic of financeability is complex and your legal experts will require to wade through the various complexities.

Bear in mind that Assets America can assist fund the building and construction or renovation of industrial residential or commercial property through our network of private investors and banks.

4. Title Insurance

The lessee should organize title insurance coverage for its leasehold. This needs unique recommendations to the regular owner's policy.

5. Use Provision

Lenders want the broadest use provision in the lease. Basically, the provision would enable any legal purpose for the residential or commercial property. In this method, the loan provider can more easily offer the leasehold in case of default.

The lessor may can consent in any brand-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 particular uses for the residential or commercial property, it must specify them in the lease.

6. Casualty and Condemnation

The loan provider controls insurance coverage profits stemming from casualty and condemnation. However, this may conflict with the basic phrasing of a ground lease, which offers some control to the lessor.

Unsurprisingly, loan providers desire the insurance continues to approach the loan, not residential or commercial property restoration. Lenders likewise need that neither lessors nor lessees can end ground leases due to a casualty without their approval.

Regarding condemnation, lenders firmly insist upon getting involved in the procedures. The lending institution's requirements for using the condemnation profits and managing 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 preexisting mortgage, the mortgagee must accept an SNDA contract. Usually, the GL loan provider desires first priority concerning subtenant defaults.

Moreover, loan providers need that the ground lease stays 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 get a leasehold mortgage without the loan provider's consent. Lenders want the GL to function as collateral ought 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 may wish to restrict the kind of entity that can hold a leasehold mortgage.

8. Rent Escalation

Lessors want the right to increase rents after defined durations so that it preserves market-level leas. A "ratchet" boost offers the lessee no security in the face of a financial decline.

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' idea is to sell decommissioned shipping containers as an environmentally friendly alternative to standard 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, in that it was a 10-year triple-net ground lease with four 5-year options to extend.

This provides the GL an optimal term of thirty years. The rent escalation clause offered a 10% rent increase every 5 years. The lease value 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 benefits and disadvantages.

The advantages of a ground lease consist of:

Affordability: Ground rents allow tenants to develop on residential or commercial property that they can't afford to purchase. Large store like Starbucks and Whole Foods utilize ground leases to expand their empires. This allows them to grow without saddling the companies with excessive financial obligation.
No Down Payment: Lessees do not have to put any money down to take a lease. This stands in stark contrast to residential or commercial property getting, which might require as much as 40% down. The lessee gets to conserve money it can release somewhere else. It also improves its return on the leasehold financial investment.
Income: The lessor gets a steady stream of income while keeping ownership of the land. The lessor keeps the worth of the income through making use of an escalation clause in the lease. This entitles the lessor to increase leas periodically. Failure to pay rent provides the lessor the right to kick out the renter.

The disadvantages of a ground lease include:

Foreclosure: In a subordinated ground lease, the owner risks of losing its residential or commercial property if the lessee defaults.
Taxes: Had the owner simply offered the land, it would have gotten approved for capital gains treatment. Instead, it will pay regular corporate rates on its lease income.
Control: Without the needed lease language, the owner may lose control over the land's advancement and usage.
Borrowing: Typically, ground leases restrict the lessor from obtaining against its equity in the land during the ground lease term.

Ground Lease Calculator

This is a fantastic industrial lease calculator. You get in the area, rental rate, and agent's fee. It does the rest.

How Assets America Can Help

Assets America ® will organize funding for industrial tasks beginning at $20 million, without any upper limit. We invite you to call us for additional information about our total financial services.

We can assist finance the purchase, building and construction, or restoration of commercial residential or commercial property through our network of personal investors and banks. For the best in commercial property financing, Assets America ® is the smart choice.

- What are the various types of leases?

They are gross leases, customized gross leases, single net leases, double net leases and triple net leases. The likewise include absolute leases, percentage leases, and the subject of this post, ground leases. All of these leases offer advantages 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 during the lease term. Once the lease ends, the lessor ends up being responsible for paying the residential or commercial property taxes.

- What occurs at the end of a ground lease?

The land always goes back to the lessor. Beyond that, there are two possibilities for the end of a ground lease. The very first is that the lessor takes possession of all improvements that the lessee made during the lease. The second is that the lessee should destroy the improvements it made.

- For how long do ground leases generally last?

Typically, a ground lease term encompasses at lease 5 to 10 years beyond the leasehold mortgage. For instance, 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.