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Do you own land, maybe 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 make income and perhaps capital gains. In this article, we'll check out,

- What is a Ground Lease?

How to Structure Them
Examples of Ground Leases
Advantages and disadvantages
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 during 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 renter is accountable for paying all residential or commercial property taxes during the lease duration. The acquired improvements allow the owner to offer the residential or commercial property for more cash, 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 prepared land and constructs a structure 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 throughout the lease period. That control goes back to the owner/lessor upon the expiration of the lease.

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Ground Lease Subordination

One important aspect of a ground lease is how the lessee will fund enhancements to the land. A crucial arrangement is whether the landlord will agree to subordinate his priority on claims if the lessee defaults on its debt.

That's precisely what takes place in a subordinated ground lease. Thus, the residential or commercial property deed becomes collateral for the loan provider if the lessee defaults. In return, the property owner requests greater lease on the residential or commercial property.

Alternatively, an unsubordinated ground lease keeps the landlord's top concern claims if the leaseholder defaults on his payments. However this may dissuade loan providers, who wouldn't be able to occupy in case of default. Accordingly, the proprietor will generally charge lower lease on unsubordinated ground leases.

How to Structure a Ground Lease

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

1. Term

The lease should be sufficiently long to permit the lessee to amortize the expense of the enhancements it makes. To put it simply, the lessee should make enough earnings throughout the lease to pay for the lease and the enhancements. Furthermore, the lessee needs to make a reasonable return on its investment after paying all costs.

The greatest chauffeur of the lease term is the financing that the lessee sets up. 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 indicates a lease term of a minimum of 35 to 40 years. However, junk food ground rents with shorter amortization durations may have a 20-year lease term.

2. Rights and Responsibilities

Beyond the arrangements for paying lease, a ground lease has a number of special functions.

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

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

3. Financeability

The lending institution must have recourse to secure its loan if the lessee defaults. This is difficult in an unsubordinated ground lease since the lessor has initially top priority in the case of default. The lending institution just can 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 intricate and your legal specialists will need to wade through the different complexities.

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

4. Title Insurance

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

5. Use Provision

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

The lessor may can approval in any brand-new purpose for the residential or commercial property. However, the lender will seek to limit this right. If the lessor feels highly about restricting certain uses for the residential or commercial property, it should define them in the lease.

6. Casualty and Condemnation

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

Unsurprisingly, lenders want the insurance coverage continues to approach the loan, not residential or commercial property restoration. Lenders likewise require that neither lessors nor lessees can end ground leases due to a casualty without their approval.

Regarding condemnation, loan providers insist upon taking part in the proceedings. The lender's requirements for applying the condemnation earnings 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 maintaining an unsubordinated position with regard to default.

If there is a preexisting mortgage, the mortgagee needs to concur to an SNDA arrangement. Usually, the GL lending institution wants very first priority regarding subtenant defaults.

Moreover, loan providers need 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 needs to receive a copy.

Lessees desire the right to get a leasehold mortgage without the lender's approval. Lenders want the GL to function as security must the lessee default.

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

8. Rent Escalation

Lessors want the right to increase leas after specified periods so that it keeps market-level rents. A "cog" boost offers the lessee no protection in the face of a financial downturn.

Ground Lease Example

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

Starbucks' principle is to offer decommissioned shipping containers as an environmentally 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, because it was a 10-year triple-net ground lease with 4 5-year alternatives to extend.

This provides the GL a maximum regard to 30 years. The lease escalation stipulation offered for a 10% rent increase every five years. The lease worth was just under $1 million with a cap rate of 5.21%.

The initial 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 advantages and downsides.

The benefits of a ground lease include:

Affordability: Ground leases permit tenants to develop on residential or commercial property that they can't manage to buy. Large store like Starbucks and Whole Foods use ground leases to expand their empires. This enables them to grow without saddling the business with too much financial obligation. No Down Payment: Lessees do not have to put any money down to take a lease. This stands in stark contrast to residential or commercial property buying, which may require as much as 40% down. The lessee gets to conserve cash it can deploy elsewhere. It likewise enhances its return on the leasehold investment. Income: The lessor receives a constant stream of earnings while keeping ownership of the land. The lessor keeps the value of the earnings through using an escalation clause in the lease. This entitles the lessor to increase leas occasionally. Failure to pay rent gives the lessor the right to kick out the tenant.

The disadvantages of a ground lease include:

Foreclosure: In a subordinated ground lease, the owner runs the threat 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 normal business rates on its lease income. Control: Without the required lease language, the owner might lose control over the land's advancement and use. Borrowing: Typically, ground leases forbid the lessor from borrowing versus its equity in the land throughout the ground lease term.

Ground Lease Calculator
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This is an excellent industrial lease calculator. You get in the area, rental rate, and agent's cost. It does the rest.

How Assets America Can Help

Assets America ® will organize financing for business jobs beginning at $20 million, with no upper limitation. We welcome you to call us to find out more about our total financial services.

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

- What are the different types of leases?

They are gross leases, customized gross leases, single net leases, double net leases and triple net leases. The also include outright leases, portion leases, and the subject of this article, ground leases. All of these leases supply benefits and downsides to the lessor and lessee.

- Who pays residential or commercial property taxes on a ground lease?
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Typically, ground leases are triple web. That means that the lessee pays the residential or commercial property taxes throughout the lease term. Once the lease ends, the lessor ends up being responsible for paying the residential or commercial property taxes.

- What occurs at the end of a ground lease?

The land always reverts to the lessor. Beyond that, there are two possibilities for completion of a ground lease. The very first is that the lessor acquires all enhancements that the lessee made throughout the lease. The 2nd is that the lessee must demolish the improvements it made.

- How long do ground leases generally 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 improvements, the lease term will run for a minimum of 35 to 40 years. Some ground leases extend as far as 99 years.