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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 enable you to earn earnings 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
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 during the lease period. Once the lease ends, the tenant turns over the residential or commercial property improvements to the owner, unless there is an exception.

Importantly, the tenant is responsible for paying all residential or commercial property taxes during the lease period. The inherited improvements permit the owner to sell the residential or commercial property for more money, 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 building on it. Sometimes, the land has a structure already 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 enhancements 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 aspect of a ground lease is how the lessee will fund improvements to the land. A crucial plan is whether the property manager will accept subordinate his priority on claims if the lessee defaults on its debt.

That’s specifically what happens in a subordinated ground lease. Thus, the residential or commercial property deed ends up being collateral for the lender if the lessee defaults. In return, the property owner requests for 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 may dissuade loan providers, who would not have the ability to occupy in case of default. Accordingly, the property manager will usually charge lower rent on unsubordinated ground leases.
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How to Structure a Ground Lease

A ground lease is more complex than routine business leases. Here are some components that go 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. Simply put, the lessee must make sufficient profits during the lease to spend for the lease and the improvements. Furthermore, the lessee should make a reasonable return on its financial investment after paying all expenses.

The biggest motorist of the lease term is the funding that the lessee arranges. Normally, the lessee will want a term that is 5 to 10 years longer than the loan amortization schedule.

On a 30-year mortgage, that suggests a lease term of a minimum of 35 to 40 years. However, junk food ground rents 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 several special features.

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

Another feature is for the lessor to assist the lessee in obtaining required licenses, licenses and zoning differences.

3. Financeability

The lender must draw on secure its loan if the lessee defaults. This is challenging in an unsubordinated ground lease due to the fact that the lessor has first top priority when it comes to default. The loan provider only deserves to declare the leasehold.

However, one treatment is a provision that needs the successor lessee to utilize the loan provider to fund the new GL. The topic of financeability is complex and your legal experts will need to learn the different complexities.

Keep in mind that Assets America can help finance the construction or renovation of commercial residential or commercial property through our network of personal investors and banks.

4. Title Insurance

The lessee needs to organize title insurance coverage for its leasehold. This requires special endorsements to the regular owner’s policy.

5. Use Provision

Lenders want the broadest usage provision in the lease. Basically, the arrangement would enable any legal purpose for the residential or commercial property. In this way, the loan provider can more easily sell the leasehold in case of default.

The lessor may deserve to consent in any brand-new function for the residential or commercial property. However, the loan provider will look for to limit this right. If the lessor feels strongly about prohibiting certain usages for the residential or commercial property, it should define them in the lease.

6. Casualty and Condemnation

The lending institution controls insurance coverage profits originating from casualty and condemnation. However, this may contrast with the standard wording of a ground lease, which offers some control to the lessor.

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

Regarding condemnation, lenders firmly insist upon taking part in the procedures. The lender’s requirements for using the condemnation earnings 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 keeping an unsubordinated position with respect to default.

If there is a pre-existing mortgage, the mortgagee needs to accept an SNDA arrangement. Usually, the GL lending institution desires very first concern regarding subtenant defaults.

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

Lessees want the right to acquire a leasehold mortgage without the lender’s consent. Lenders desire the GL to serve as security should the lessee default.

Upon foreclosure of the residential or commercial property, the loan provider gets the lessee’s leasehold interest in the residential or commercial property. Lessors may want to limit the kind of entity that can hold a leasehold mortgage.

8. Rent Escalation

Lessors desire the right to increase rents after defined durations so that it maintains market-level leas. A “ratchet” boost uses the lessee no security in the face of a financial decline.

Ground Lease Example

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

Starbucks’ principle is to sell decommissioned shipping containers as an eco-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, because it was a 10-year triple-net ground lease with four 5-year alternatives to extend.

This provides the GL a maximum regard to thirty years. The lease escalation stipulation supplied for a 10% rent increase every five 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 downsides.

The benefits of a ground lease consist of:

Affordability: Ground rents enable renters to develop on residential or commercial property that they can’t afford to purchase. Large chain stores like Starbucks and Whole Foods use ground leases to expand their empires. This enables them to grow without saddling the companies with excessive debt. No Deposit: Lessees do not have to put any cash down to take a lease. This stands in stark contrast to residential or commercial property getting, which might need as much as 40% down. The lessee gets to conserve cash it can release somewhere else. It likewise improves its return on the leasehold investment. Income: The lessor gets a stable stream of income while keeping ownership of the land. The lessor preserves the value of the earnings through the use of an escalation clause in the lease. This entitles the lessor to increase rents periodically. Failure to pay rent provides the lessor the right to evict the occupant.

The drawbacks 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 qualified for capital gains treatment. Instead, it will pay ordinary business rates on its lease income. Control: Without the necessary lease language, the owner may lose control over the land’s advancement and use. Borrowing: Typically, ground leases prohibit the lessor from obtaining against its equity in the land throughout the ground lease term.

Ground Lease Calculator

This is a fantastic business 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 funding for commercial projects beginning at $20 million, with no ceiling. We invite you to contact us for additional information about our complete monetary services.

We can help finance the purchase, building and construction, or restoration of commercial residential or commercial property through our network of private financiers and banks. For the best in industrial 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 include absolute leases, portion leases, and the topic of this short article, ground leases. All of these leases offer advantages and disadvantages to the lessor and lessee.

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

Typically, ground leases are triple web. That implies that the lessee pays the residential or commercial property taxes during the lease term. Once the lease expires, the lessor becomes responsible 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 very first is that the lessor acquires all improvements that the lessee made throughout the lease. The second is that the lessee must demolish the improvements it made.

- How long do ground leases typically last?

Typically, a ground lease term reaches at lease 5 to 10 years beyond the leasehold mortgage. For instance, 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.