Do you own land, possibly with worn out 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 short article, we'll check out,

- 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 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 period. The acquired improvements enable the owner to sell the residential or commercial property for more cash, if so wanted.

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 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 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.

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Ground Lease Subordination

One important element of a ground lease is how the lessee will fund enhancements to the land. A key arrangement is whether the property owner will accept subordinate his priority on claims if the lessee defaults on its financial obligation.

That's precisely what takes place in a subordinated ground lease. Thus, the residential or commercial property deed ends up being collateral for the loan provider if the lessee defaults. In return, the property owner requests for higher rent on the residential or commercial property.

Alternatively, an unsubordinated ground lease keeps the proprietor's top concern claims if the leaseholder defaults on his payments. However this might dissuade lenders, who wouldn't have the ability to take belongings in case of default. Accordingly, the property owner will typically charge lower lease on unsubordinated ground leases.

How to Structure a Ground Lease

A ground lease is more complicated than routine industrial 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. 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 must make a sensible return on its investment after paying all expenses.

The greatest motorist of the lease term is the funding 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 suggests a lease regard to a minimum of 35 to 40 years. However, fast food ground rents with shorter amortization periods may have a 20-year lease term.

2. Rights and Responsibilities

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

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

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

3. Financeability

The lending institution must draw on protect its loan if the lessee defaults. This is hard in an unsubordinated ground lease due to the fact that the lessor has first concern in the case of default. The lender just deserves to claim the leasehold.

However, one treatment is a clause that needs the successor lessee to utilize the loan provider to finance the brand-new GL. The subject of financeability is intricate and your legal professionals will need to learn the numerous intricacies.

Bear in mind that Assets America can help finance the building and construction or remodelling of industrial residential or commercial property through our network of personal financiers and banks.

4. Title Insurance

The lessee needs to organize title insurance for its leasehold. This needs unique endorsements to the routine 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 method, the lender can more quickly sell the leasehold in case of default.

The lessor might can permission in any new purpose for the residential or commercial property. However, the lender will look for to limit this right. If the lessor feels highly about prohibiting certain uses for the residential or commercial property, it must define them in the lease.

6. Casualty and Condemnation

The loan provider manages insurance profits originating from casualty and condemnation. However, this might clash with the standard phrasing of a ground lease, which gives some control to the lessor.

Unsurprisingly, lending institutions desire the insurance proceeds to go toward the loan, not residential or commercial property remediation. Lenders also need that neither lessors nor lessees can end ground leases due to a casualty without their authorization.

Regarding condemnation, lenders insist upon participating in the procedures. 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 respect to default.

If there is a preexisting mortgage, the mortgagee needs to accept an SNDA arrangement. Usually, the GL loan provider wants first top priority regarding subtenant defaults.

Moreover, lenders need that the ground lease stays in force if the lessee defaults. If the lessor sends out a notice of default to the lessee, the loan provider needs to get a copy.

Lessees want the right to acquire a leasehold mortgage without the lender's approval. Lenders desire the GL to act as collateral should 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 wish to limit the type of entity that can hold a leasehold mortgage.

8. Rent Escalation

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

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 sell decommissioned shipping containers as an environmentally 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 uncommon 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 30 years. The lease escalation clause provided for a 10% lease increase every 5 years. The lease value was just 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 advantages and disadvantages.

The advantages of a ground lease include:

Affordability: Ground rents enable tenants to build on residential or commercial property that they can't manage to purchase. Large chain shops like Starbucks and Whole Foods use ground leases to expand their empires. This allows them to grow without saddling the business with excessive debt.
No Down Payment: Lessees do not need to put any cash to take a lease. This stands in plain contrast to residential or commercial property buying, which may need as much as 40% down. The lessee gets to save cash it can deploy elsewhere. It also enhances its return on the leasehold financial investment.
Income: The lessor gets a steady stream of earnings while maintaining ownership of the land. The lessor maintains the value of the income through using an escalation clause in the lease. This entitles the lessor to increase rents occasionally. Failure to pay rent gives the lessor the right to evict the occupant.

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 just offered the land, it would have received capital gains treatment. Instead, it will pay common corporate rates on its lease earnings.
Control: Without the required lease language, the owner may lose control over the land's development and usage.
Borrowing: Typically, ground leases prohibit 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 get in the location, rental rate, and representative's cost. It does the rest.

How Assets America Can Help

Assets America ® will organize funding for business jobs starting at $20 million, without any upper limitation. We welcome you to call us for more details about our total monetary services.

We can assist fund the purchase, building, or restoration of commercial residential or commercial property through our network of private investors and banks. For the finest in industrial realty 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 also consist of outright leases, percentage leases, and the topic of this article, ground leases. All of these leases provide benefits 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 suggests that the lessee pays the residential or commercial property taxes during the lease term. Once the lease expires, the lessor becomes accountable for paying the residential or commercial property taxes.

- What occurs at the end of a ground lease?

The land constantly 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 improvements that the lessee made during the lease. The second is that the lessee should destroy the enhancements it made.

- For how long do ground leases typically last?

Typically, a ground lease term extends to 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 at least 35 to 40 years. Some ground rents extend as far as 99 years.