Do you own land, perhaps with dilapidated residential or commercial property on it? One way to extract value from the land is to sign a ground lease. This will allow you to make earnings and perhaps capital gains. In this short article, 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 renter develops a piece of land throughout the lease period. Once the lease ends, 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 throughout the lease period. The inherited enhancements allow the owner to offer the residential or commercial property for more cash, 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 must demolish.

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 finance improvements to the land. An essential arrangement is whether the landlord will accept subordinate his priority on claims if the lessee defaults on its debt.

That's precisely what happens in a subordinated ground lease. Thus, the residential or commercial property deed ends up being security for the lending institution if the lessee defaults. In return, the proprietor requests for greater rent on the residential or commercial property.

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

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 should be sufficiently long to enable the lessee to amortize the cost of the enhancements it makes. In other words, the lessee must make enough earnings throughout the lease to pay for the lease and the enhancements. Furthermore, the lessee must make a sensible 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 desire a term that is 5 to 10 years longer than the loan amortization schedule.

On a 30-year mortgage, that indicates a lease term of at least 35 to 40 years. However, fast food ground rents with much 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 instance, when the lease expires, what will occur to the improvements? The lease will define whether they revert to the lessor or the lessee must remove them.

Another feature is for the lessor to assist the lessee in obtaining necessary licenses, authorizations and zoning variations.

3. Financeability

The loan provider must draw on safeguard 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 has the right to declare the leasehold.

However, one solution is a stipulation that needs the successor lessee to utilize the lending institution to fund the new GL. The subject of financeability is intricate and your legal experts will require to wade through the various complexities.

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

4. Title Insurance

The lessee should organize title insurance for its leasehold. This requires special endorsements to the routine owner's policy.

5. Use Provision

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

The lessor may have the right to consent in any brand-new purpose for the residential or commercial property. However, the loan provider will seek to restrict this right. If the lessor feels highly about forbiding specific uses for the residential or commercial property, it should specify them in the lease.

6. Casualty and Condemnation

The loan provider controls insurance profits coming from casualty and condemnation. However, this may contravene the standard wording of a ground lease, which offers some control to the lessor.

Unsurprisingly, lending institutions desire the insurance proceeds to go towards 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, loan providers firmly insist upon taking part in the procedures. The loan provider's requirements for using the condemnation profits and managing 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, lending institutions balk at lessor's keeping an unsubordinated position with respect to default.

If there is a pre-existing mortgage, the mortgagee must consent to an SNDA agreement. Usually, the GL lender wants very first concern relating to subtenant defaults.

Moreover, lenders need that the ground lease stays in force if the lessee defaults. If the lessor sends out a notice of default to the lessee, the lender should receive a copy.

Lessees desire the right to get a leasehold mortgage without the lending institution's permission. Lenders desire the GL to serve as collateral needs to the lessee default.

Upon foreclosure of the residential or commercial property, the lending institution gets the lessee's leasehold interest in the residential or commercial property. Lessors may want to restrict the type of entity that can hold a leasehold mortgage.

8. Rent Escalation

Lessors desire the right to increase leas after specified periods so that it maintains market-level leas. A "cog" boost provides the lessee no security in the face of a financial recession.

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 sell decommissioned shipping containers as an eco-friendly option to standard building and construction. 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 four 5-year options to extend.

This provides the GL a maximum regard to 30 years. The rent escalation clause supplied for a 10% lease increase every 5 years. The lease value was just under $1 million with a cap rate of 5.21%.

The preliminary 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 benefits and downsides.

The benefits of a ground lease include:

Affordability: Ground rents permit tenants to construct on residential or commercial property that they can't manage to buy. 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 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 save money it can release in other places. It likewise improves its return on the leasehold investment.
Income: The lessor receives a constant stream of earnings while keeping ownership of the land. The lessor maintains the worth of the income through the usage of an escalation stipulation in the lease. This entitles the lessor to increase rents periodically. Failure to pay rent provides the lessor the right to kick out the occupant.

The drawbacks of a ground lease consist of:

Foreclosure: In a subordinated ground lease, the owner runs the risk 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 advancement and use.
Borrowing: Typically, ground leases forbid the lessor from obtaining against its equity in the land during the ground lease term.

Ground Lease Calculator

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

How Assets America Can Help

Assets America ® will arrange financing for industrial projects beginning at $20 million, with no upper limitation. We welcome you to contact us for more information about our total monetary services.

We can help finance the purchase, building, or remodelling of commercial residential or commercial property through our network of personal investors and banks. For the finest in business property funding, Assets America ® is the smart choice.

- What are the various kinds of leases?

They are gross leases, modified 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 drawbacks to the lessor and lessee.

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

Typically, ground leases are triple internet. That suggests that the lessee pays the residential or commercial property taxes throughout the lease term. Once the lease expires, the lessor ends up being 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 2 possibilities for the end of a ground lease. The very first is that the lessor acquires all enhancements that the lessee made during the lease. The 2nd is that the lessee needs to destroy the enhancements it made.

- For how long do ground leases generally last?

Typically, a ground lease term reaches 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.