Do you own land, maybe with dilapidated residential or commercial property on it? One method to extract worth from the land is to sign a ground lease. This will allow you to make earnings and possibly capital gains. In this post, we'll check out,

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

What is a Ground Lease?

In a ground lease (GL), a tenant establishes a piece of land throughout the lease duration. Once the lease ends, 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 throughout the lease period. The acquired improvements permit 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 should demolish.

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.

Obtain Financing

Ground Lease Subordination

One essential aspect of a ground lease is how the lessee will finance improvements to the land. An essential plan is whether the property manager will consent to subordinate his concern on claims if the lessee defaults on its debt.

That's exactly what happens in a subordinated ground lease. Thus, the residential or commercial property deed becomes security for the lender if the lessee defaults. In return, the property manager asks for higher lease on the residential or commercial property.

Alternatively, an unsubordinated ground lease maintains the landlord's top priority claims if the leaseholder defaults on his payments. However this might discourage lending institutions, who would not have the ability to take possession in case of default. Accordingly, the property manager will usually charge lower lease on unsubordinated ground leases.

How to Structure a Ground Lease

A ground lease is more complex than regular business leases. Here are some components that go into structuring a ground lease:

1. Term

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

The biggest chauffeur 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 means a lease term of a minimum of 35 to 40 years. However, fast food ground leases with much shorter amortization periods may have a 20-year lease term.

2. Rights and Responsibilities

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

For example, when the lease ends, what will happen to the improvements? The lease will define whether they go back to the lessor or the lessee should eliminate them.

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

3. Financeability

The lender should draw on secure its loan if the lessee defaults. This is tough in an unsubordinated ground lease due to the fact that the lessor has initially top priority when it comes to default. The lending institution just has the right to declare the leasehold.

However, one solution is a provision that requires the successor lessee to use the lending institution to fund the new GL. The subject of financeability is complex and your legal specialists will need to learn the numerous complexities.

Bear in mind that Assets America can assist finance the construction or restoration of industrial residential or commercial property through our network of private financiers and banks.

4. Title Insurance

The lessee needs to set up title insurance for its leasehold. This requires unique endorsements to the routine owner's policy.

5. Use Provision

Lenders want the broadest use provision in the lease. Basically, the provision would permit any legal function for the residential or commercial property. In this way, the lending institution can more quickly offer the leasehold in case of default.

The lessor may deserve to approval in any new function for the residential or commercial property. However, the loan provider will look for to limit this right. If the lessor feels highly about forbiding particular usages for the residential or commercial property, it should specify them in the lease.

6. Casualty and Condemnation

The lending institution controls insurance proceeds coming from casualty and condemnation. However, this may clash with the basic wording of a ground lease, which offers some control to the lessor.

Unsurprisingly, loan providers want the insurance coverage continues to go towards the loan, not residential or commercial property repair. Lenders also need that neither lessors nor lessees can end ground leases due to a casualty without their permission.

Regarding condemnation, lending institutions insist upon getting involved in the procedures. The lender's requirements for using the condemnation profits and controlling termination rights mirror those for casualty events.

7. Leasehold Mortgages

These are mortgages financing the lessee's improvements to the ground lease residential or commercial property. Typically, lenders balk at lessor's maintaining an unsubordinated position with respect to default.

If there is a preexisting mortgage, the mortgagee should accept an SNDA contract. Usually, the GL lending institution wants very first top priority relating to subtenant defaults.

Moreover, lenders require that the ground lease stays in force if the lessee defaults. If the lessor sends a notification of default to the lessee, the loan provider must get a copy.

Lessees want the right to get a leasehold mortgage without the lender's approval. Lenders desire the GL to serve as security must 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 want to restrict the kind of entity that can hold a leasehold mortgage.

8. Rent Escalation

Lessors desire the right to increase leas after specified periods so that it preserves market-level leas. A "cog" increase uses the lessee no protection in the face of an economic slump.

Ground Lease Example

As an example of a ground lease, think about 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 traditional building and construction. The very 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 alternatives to extend.

This gives the GL a maximum term of 30 years. The lease escalation provision offered a 10% rent increase every 5 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 drawbacks.

The advantages of a ground lease consist of:

Affordability: Ground rents allow renters to develop on residential or commercial property that they can't afford to buy. Large store like Starbucks and Whole Foods use ground leases to expand their empires. This allows them to grow without saddling the companies with too much debt.
No Down Payment: Lessees do not need to put any cash down to take a lease. This stands in stark contrast to residential or commercial property getting, which may 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 financial investment.
Income: The lessor receives a steady stream of earnings while maintaining ownership of the land. The lessor maintains the worth of the earnings through the usage of an escalation provision in the lease. This entitles the lessor to increase leas periodically. Failure to pay lease provides the lessor the right to force out the tenant.

The downsides of a ground lease consist of:

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 regular 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 restrict the lessor from borrowing versus its equity in the land throughout the ground lease term.

Ground Lease Calculator

This is a fantastic industrial lease calculator. You go into the location, rental rate, and representative's charge. It does the rest.

How Assets America Can Help

Assets America ® will organize financing for commercial jobs beginning at $20 million, with no upper limit. We welcome you to contact us for more details about our complete financial services.

We can assist fund the purchase, construction, or remodelling of industrial residential or commercial property through our network of personal investors and banks. For the very best in industrial real estate financing, Assets America ® is the wise choice.

- 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 also consist of absolute leases, portion leases, and the subject of this article, ground leases. All of these leases offer benefits and disadvantages 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 during the lease term. Once the lease expires, the lessor ends up being responsible for paying the residential or commercial property taxes.

- What happens at the end of a ground lease?

The land always goes back to the lessor. Beyond that, there are two possibilities for completion of a ground lease. The first is that the lessor seizes all enhancements that the lessee made throughout the lease. The 2nd is that the lessee should demolish the enhancements it made.

- For how long do ground leases usually 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 a minimum of 35 to 40 years. Some ground leases extend as far as 99 years.