Do you own land, perhaps with dilapidated 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 perhaps capital gains. In this 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), an occupant establishes a piece of land throughout the lease period. Once the lease expires, the renter 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 inherited enhancements permit 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 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 depreciates the improvements during the lease duration. 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 fund enhancements to the land. An essential plan is whether the property owner will accept subordinate his priority on claims if the lessee defaults on its financial obligation.

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

Alternatively, an unsubordinated ground lease keeps the property manager's leading priority claims if the leaseholder defaults on his payments. However this might discourage lenders, who would not be able to occupy in case of default. Accordingly, the property manager will typically charge lower rent on unsubordinated ground leases.

How to Structure a Ground Lease

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

1. Term

The lease should be adequately long to enable the lessee to amortize the cost of the enhancements it makes. In other words, the lessee must make sufficient revenues during the lease to pay for the lease and the improvements. Furthermore, the lessee should make a reasonable return on its investment after paying all costs.

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 ten 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, junk food ground rents with shorter amortization periods may have a 20-year lease term.

2. Rights and Responsibilities

Beyond the plans for paying lease, a ground lease has numerous special features.

For example, when the lease ends, what will take place to the improvements? The lease will define whether they revert to the lessor or the lessee should eliminate them.

Another function is for the lessor to help the lessee in acquiring needed licenses, licenses and zoning differences.

3. Financeability

The loan provider should have recourse to secure its loan if the lessee defaults. This is tough in an unsubordinated ground lease because the lessor has first concern when it comes to default. The lender only has the right to claim the leasehold.

However, one remedy is a provision that requires the successor lessee to use the lending institution to finance the brand-new GL. The subject of financeability is complex and your legal specialists will need to learn the various intricacies.

Keep in mind that Assets America can assist fund the building or restoration of business residential or commercial property through our network of personal financiers and banks.

4. Title Insurance

The lessee should set up title insurance for its leasehold. This requires special endorsements to the regular owner's policy.

5. Use Provision

Lenders want the broadest use 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 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 prohibiting certain uses for the residential or commercial property, it needs to specify them in the lease.

6. Casualty and Condemnation

The loan provider controls insurance profits originating from casualty and condemnation. However, this might contravene the basic wording of a ground lease, which provides some control to the lessor.

Unsurprisingly, loan providers desire the insurance coverage proceeds to go toward the loan, not residential or commercial property remediation. Lenders also require that neither lessors nor lessees can terminate ground leases due to a casualty without their consent.

Regarding condemnation, lending institutions firmly insist upon participating in the proceedings. The lender's requirements for using the condemnation proceeds and controlling termination rights mirror those for casualty events.

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 maintaining an unsubordinated position with respect to default.

If there is a pre-existing mortgage, the mortgagee should accept an SNDA arrangement. Usually, the GL loan provider desires first priority regarding subtenant defaults.

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

Lessees desire the right to get a leasehold mortgage without the lender's consent. Lenders desire the GL to serve as collateral ought to 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 might want to limit the type of entity that can hold a leasehold mortgage.

8. Rent Escalation

Lessors want the right to increase leas after defined durations so that it preserves market-level leas. A "cog" boost uses the lessee no protection in the face of a financial downturn.

Ground Lease Example

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

Starbucks' concept is to offer decommissioned shipping containers as an ecologically friendly alternative to conventional building. The first shop opened in Seattle, followed by Kansas City, Denver, Chicago, and one in Portland, OR.

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

This provides the GL a maximum regard to thirty years. The rent escalation clause offered a 10% rent increase every 5 years. The lease worth was just 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 benefits and drawbacks.

The benefits of a ground lease consist of:

Affordability: Ground rents permit tenants to develop on residential or commercial property that they can't afford to purchase. Large store like Starbucks and Whole Foods use ground leases to broaden their empires. This allows them to grow without saddling the companies with excessive financial obligation.
No Deposit: 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 may require as much as 40% down. The lessee gets to save cash it can deploy somewhere else. It also enhances its return on the leasehold financial investment.
Income: The lessor gets a consistent stream of earnings while keeping ownership of the land. The lessor maintains the value of the income through making use of an escalation provision in the lease. This entitles the lessor to increase rents periodically. Failure to pay rent offers the lessor the right to force out the occupant.

The downsides of a ground lease include:

Foreclosure: In a subordinated ground lease, the owner runs the danger of losing its residential or commercial property if the lessee defaults.
Taxes: Had the owner just offered the land, it would have certified for capital gains treatment. Instead, it will pay ordinary corporate rates on its lease income.
Control: Without the needed lease language, the owner might lose control over the land's development 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 great business 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 industrial jobs starting at $20 million, with no ceiling. We welcome you to call us for more details about our total monetary services.

We can help fund the purchase, building and construction, or remodelling of commercial residential or commercial property through our network of personal financiers and banks. For the finest in industrial realty financing, Assets America ® is the wise choice.

- 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 likewise consist of absolute leases, percentage leases, and the subject of this short article, ground leases. All of these leases supply advantages and disadvantages to the lessor and lessee.

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

Typically, ground leases are triple internet. That indicates that the lessee pays the residential or commercial property taxes during 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 constantly 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 belongings of all improvements 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 typically last?

Typically, a ground lease term encompasses at lease 5 to ten 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 leases extend as far as 99 years.