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Do you own land, possibly with worn out 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 earn income and possibly capital gains. In this article, we’ll explore,

- 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), a renter establishes a piece of land throughout 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 duration. The inherited enhancements allow 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 prepared land and constructs a structure on it. Sometimes, the land has a structure already on it that the lessee must destroy.

The GL specifies who owns the land and the enhancements, i.e., residential or commercial property that the lessee constructs. Typically, the lessee controls and diminishes 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 important element of a ground lease is how the lessee will fund enhancements to the land. An essential arrangement is whether the property manager will accept subordinate his concern on claims if the lessee defaults on its financial obligation.

That’s exactly 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 proprietor requests higher rent on the residential or commercial property.

Alternatively, an unsubordinated ground lease keeps the landlord’s top priority claims if the leaseholder defaults on his payments. However this may discourage lenders, who wouldn’t be able to occupy 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 enhancements it makes. In other words, the lessee should make adequate earnings throughout the lease to spend for the lease and the enhancements. Furthermore, the lessee must make an affordable return on its financial investment after paying all expenses.

The biggest driver of the lease term is the funding that the lessee sets up. Normally, the lessee will want a term that is 5 to 10 years longer than the loan amortization schedule.
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On a 30-year mortgage, that implies a lease regard to at least 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 a number of distinct features.

For example, when the lease expires, what will take place to the enhancements? The lease will define whether they go back to the lessor or the lessee need to eliminate them.

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

3. Financeability

The lending institution should draw on safeguard its loan if the lessee defaults. This is difficult in an unsubordinated ground lease due to the fact that the lessor has initially concern when it comes to default. The loan provider just deserves to declare the leasehold.

However, one remedy is a provision that needs the successor lessee to utilize the lending institution to fund the brand-new GL. The subject of financeability is complex and your legal specialists will need to wade through the various intricacies.

Bear in mind that Assets America can help fund the building and construction or renovation of industrial residential or commercial property through our network of personal investors and banks.
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4. Title Insurance

The lessee must organize title insurance for its leasehold. This needs unique recommendations to the routine owner’s policy.

5. Use Provision

Lenders desire the broadest use provision in the lease. Basically, the arrangement would allow any legal purpose for the residential or commercial property. In this way, the lender can more easily sell the leasehold in case of default.

The lessor may can authorization in any new purpose for the residential or commercial property. However, the lending institution will look for to limit this right. If the lessor feels highly about prohibiting specific usages for the residential or commercial property, it needs to define them in the lease.

6. Casualty and Condemnation

The lending institution manages insurance profits originating from casualty and condemnation. However, this might contravene the basic wording of a ground lease, which offers some control to the lessor.

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

Regarding condemnation, loan providers firmly insist upon taking part in the proceedings. The lender’s requirements for using the condemnation profits and managing termination rights mirror those for casualty events.

7. Leasehold Mortgages

These are mortgages funding the lessee’s enhancements to the ground lease residential or commercial property. Typically, lending institutions 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 very first top priority relating to subtenant defaults.

Moreover, lenders need that the ground lease remains in force if the lessee defaults. If the lessor sends a notification of default to the lessee, the lending institution needs to receive a copy.

Lessees desire the right to acquire a leasehold mortgage without the lender’s authorization. Lenders desire the GL to act as collateral should the lessee default.

Upon foreclosure of the residential or commercial property, the lender receives the lessee’s leasehold interest in the residential or commercial property. Lessors may want to limit the type of entity that can hold a leasehold mortgage.

8. Rent Escalation

Lessors desire the right to increase leas after specified durations so that it maintains market-level leas. A “ratchet” increase offers the lessee no defense in the face of an economic decline.

Ground Lease Example

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

Starbucks’ principle is to offer decommissioned shipping containers as an ecologically friendly option to conventional construction. The first store 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 4 5-year options to extend.

This provides the GL a maximum term of 30 years. The rent escalation provision provided for a 10% lease boost every 5 years. The lease worth was just under $1 million with a cap rate of 5.21%.

The 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 benefits and drawbacks.

The benefits of a ground lease consist of:

Affordability: Ground rents permit occupants to construct on residential or commercial property that they can’t manage to buy. Large chain shops like Starbucks and Whole Foods utilize ground leases to broaden their empires. This permits them to grow without saddling the companies with too much debt. No Deposit: Lessees do not need to put any money down to take a lease. This stands in plain contrast to residential or commercial property acquiring, which might require as much as 40% down. The lessee gets to conserve cash it can deploy in other places. It also enhances its return on the leasehold investment. Income: The lessor receives a constant stream of income while keeping ownership of the land. The lessor maintains the value of the earnings through using an escalation stipulation in the lease. This entitles the lessor to increase leas periodically. 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 simply sold the land, it would have gotten approved for capital gains treatment. Instead, it will pay regular business rates on its lease income. Control: Without the required lease language, the owner might lose control over the land’s development and use. 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 commercial 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 arrange funding for commercial jobs beginning at $20 million, without any upper limitation. We invite you to call us to find out more about our complete financial services.

We can help fund the purchase, construction, or restoration of industrial residential or commercial property through our network of personal investors and banks. For the very best in commercial real estate funding, Assets America ® is the clever option.

- What are the different types of leases?

They are gross leases, modified gross leases, single net leases, double net leases and triple net leases. The likewise include absolute leases, portion leases, and the subject of this article, ground leases. All of these leases supply 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 becomes accountable for paying the residential or commercial property taxes.

- What happens 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 first is that the lessor takes belongings of all enhancements that the lessee made during the lease. The 2nd is that the lessee must demolish the enhancements it made.

- The length of time do ground leases typically 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.