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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 enable 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
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What is a Ground Lease?

In a ground lease (GL), a renter develops a piece of land during the lease duration. Once the lease expires, the occupant turns over the residential or commercial property enhancements 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 enhancements enable the owner to sell 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 ready land and constructs a building on it. Sometimes, the land has a structure already on it that the lessee must 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 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 essential element of a ground lease is how the lessee will finance enhancements to the land. A crucial arrangement is whether the property owner will agree to his concern on claims if the lessee defaults on its debt.

That's precisely 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 landlord requests greater rent on the residential or commercial property.

Alternatively, an unsubordinated ground lease preserves the landlord's leading priority claims if the leaseholder defaults on his payments. However this might dissuade lending institutions, who would not have the ability to take belongings 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 complicated than regular industrial leases. Here are some elements that enter into structuring a ground lease:

1. Term

The lease must be adequately long to enable the lessee to amortize the cost of the improvements it makes. Simply put, the lessee should make sufficient revenues throughout the lease to spend for the lease and the improvements. Furthermore, the lessee should make an affordable return on its financial investment after paying all costs.

The most significant driver of the lease term is the financing that the lessee sets up. 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 regard to a minimum of 35 to 40 years. However, junk food ground leases with much shorter amortization durations may 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 happen 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 obtaining needed licenses, permits and zoning variations.

3. Financeability

The loan provider must draw on secure its loan if the lessee defaults. This is hard in an unsubordinated ground lease since the lessor has first concern in the case of default. The lending institution just can declare the leasehold.

However, one solution is a provision that needs the follower lessee to utilize the lender to fund the brand-new GL. The topic of financeability is complicated and your legal professionals will require to learn the numerous complexities.

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

4. Title Insurance

The lessee must arrange title insurance coverage for its leasehold. This requires unique endorsements to the routine owner's policy.

5. Use Provision

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

The lessor might deserve to approval in any new purpose for the residential or commercial property. However, the loan provider will look for to limit this right. If the lessor feels highly about prohibiting particular uses for the residential or commercial property, it should define them in the lease.

6. Casualty and Condemnation

The lending institution controls insurance coverage proceeds coming from casualty and condemnation. However, this might contravene the standard wording of a ground lease, which gives some control to the lessor.

Unsurprisingly, lenders desire the insurance coverage proceeds to go towards the loan, not residential or commercial property repair. Lenders also need that neither lessors nor lessees can terminate ground leases due to a casualty without their approval.

Regarding condemnation, loan providers firmly insist upon taking part in the procedures. The lender's requirements for applying the condemnation proceeds 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, lenders balk at lessor's preserving an unsubordinated position with regard to default.

If there is a preexisting mortgage, the mortgagee must concur to an SNDA arrangement. Usually, the GL lender wants very 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 out a notification of default to the lessee, the lender should get a copy.

Lessees desire the right to acquire a leasehold mortgage without the loan provider's consent. Lenders want the GL to work as security 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 limit the type of entity that can hold a leasehold mortgage.

8. Rent Escalation

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

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 offer decommissioned shipping containers as an ecologically friendly option to standard building. The first shop opened in Seattle, followed by Kansas City, Denver, Chicago, and one in Portland, OR.

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

This offers the GL a maximum regard to thirty years. The rent escalation clause offered a 10% lease boost every five years. The lease worth 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 drawbacks.

The advantages of a ground lease include:

Affordability: Ground rents allow renters to construct on residential or commercial property that they can't pay for to purchase. Large chain shops like Starbucks and Whole Foods use ground leases to broaden their empires. This allows them to grow without saddling the business with excessive financial obligation. No Deposit: Lessees do not need to put any cash down to take a lease. This stands in plain contrast to residential or commercial property getting, which may require as much as 40% down. The lessee gets to save money it can release elsewhere. It also enhances its return on the leasehold financial investment. Income: The lessor gets a stable stream of income while maintaining ownership of the land. The lessor preserves the value of the income through using an escalation clause in the lease. This entitles the lessor to increase rents occasionally. Failure to pay lease gives the lessor the right to kick out the renter.

The downsides 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 sold the land, it would have gotten approved for capital gains treatment. Instead, it will pay regular business rates on its lease earnings. Control: Without the essential lease language, the owner may lose control over the land's advancement and usage. Borrowing: Typically, ground leases restrict the lessor from borrowing versus its equity in the land during the ground lease term.

Ground Lease Calculator

This is a great commercial lease calculator. You get in the location, rental rate, and agent's charge. It does the rest.

How Assets America Can Help

Assets America ® will arrange funding for business jobs starting at $20 million, with no upper limit. 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 business residential or commercial property through our network of personal financiers and banks. For the very best in commercial realty financing, Assets America ® is the clever option.

- 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 consist of absolute leases, percentage leases, and the topic of this article, 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 net. That suggests that the lessee pays the residential or commercial property taxes throughout the lease term. Once the lease ends, the lessor becomes accountable for paying the residential or commercial property taxes.

- What takes place 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 seizes all enhancements that the lessee made throughout the lease. The 2nd is that the lessee must destroy the enhancements it made.

- How long do ground leases usually last?

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