Do you own land, maybe with dilapidated residential or commercial property on it? One way to extract value from the land is to sign a ground lease. This will enable you to make income and potentially capital gains. In this short article, we'll explore,

- 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 expires, the renter turns over the residential or commercial property improvements to the owner, unless there is an exception.

Importantly, the tenant is accountable for paying all residential or commercial property taxes throughout the lease duration. The inherited improvements 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 should demolish.

The GL specifies who owns the land and the improvements, i.e., residential or commercial property that the lessee constructs. Typically, the lessee controls and diminishes the improvements throughout the lease duration. That control reverts 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 enhancements to the land. An essential plan is whether the proprietor will agree to subordinate his priority on claims if the lessee defaults on its debt.

That's specifically what occurs in a subordinated ground lease. Thus, the residential or commercial property deed becomes collateral for the lender if the lessee defaults. In return, the property manager requests for higher rent on the residential or commercial property.

Alternatively, an unsubordinated ground lease keeps the property manager's leading concern claims if the leaseholder defaults on his payments. However this might discourage lending institutions, who would not have the ability to occupy in case of default. Accordingly, the landlord will generally charge lower lease on unsubordinated ground leases.

How to Structure a Ground Lease

A ground lease is more complex than regular industrial leases. Here are some components that enter into structuring a ground lease:

1. Term

The lease needs to be adequately long to permit the lessee to amortize the expense of the improvements it makes. In other words, the lessee must make sufficient earnings during the lease to pay for the lease and the improvements. Furthermore, the lessee needs to make an affordable return on its investment after paying all expenses.

The greatest chauffeur of the lease term is the funding that the lessee sets up. 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 implies a lease term of at least 35 to 40 years. However, junk food ground leases with shorter amortization durations might have a 20-year lease term.

2. Rights and Responsibilities

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

For example, when the lease expires, what will happen to the enhancements? The lease will specify whether they revert to the lessor or the lessee need to remove them.

Another feature is for the lessor to help the lessee in obtaining required licenses, permits and zoning variations.

3. Financeability

The loan provider must draw on protect its loan if the lessee defaults. This is hard in an unsubordinated ground lease because the lessor has initially top priority in the case of default. The loan provider only can claim the leasehold.

However, one solution is a stipulation that needs the successor lessee to use the loan provider to finance the brand-new GL. The subject of financeability is intricate and your legal specialists will need to wade through the numerous complexities.

Keep in mind that Assets America can help 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 coverage for its leasehold. This requires unique endorsements to the routine owner's policy.

5. Use Provision

Lenders want the broadest usage provision in the lease. Basically, the arrangement would permit 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 can authorization in any brand-new function for the residential or commercial property. However, the lender will seek to limit this right. If the lessor feels strongly about forbiding specific uses for the residential or commercial property, it must define them in the lease.

6. Casualty and Condemnation

The loan provider manages insurance proceeds stemming from casualty and condemnation. However, this may contrast with the basic wording of a ground lease, which offers some control to the lessor.

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

Regarding condemnation, lenders insist upon taking part in the procedures. The loan provider'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 improvements to the ground lease residential or commercial property. Typically, loan providers balk at lessor's keeping an unsubordinated position with regard to default.

If there is a preexisting mortgage, the mortgagee needs to accept an SNDA agreement. Usually, the GL loan provider wants first top priority relating to subtenant defaults.

Moreover, loan providers require 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 should get a copy.

Lessees desire the right to acquire a leasehold mortgage without the lending institution's consent. Lenders want the GL to function as collateral needs to 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 might want to restrict the kind of entity that can hold a leasehold mortgage.

8. Rent Escalation

Lessors want the right to increase leas after specified periods so that it preserves market-level leas. A "cog" boost offers the lessee no defense in the face of an economic recession.

Ground Lease Example

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

Starbucks' idea is to offer decommissioned shipping containers as an eco-friendly option to conventional building. The very first shop 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 alternatives to extend.

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

The preliminary 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 advantages of a ground lease include:

Affordability: Ground rents enable renters to build on residential or commercial property that they can't pay for to buy. Large chain stores like Starbucks and Whole Foods utilize ground leases to expand their empires. This permits them to grow without saddling the companies with too much debt.
No Down Payment: Lessees do not have to put any cash 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 money it can deploy somewhere else. It also improves its return on the leasehold investment.
Income: The lessor gets a stable stream of earnings while maintaining ownership of the land. The lessor keeps the worth of the earnings through making use of an escalation stipulation in the lease. This entitles the lessor to increase leas regularly. Failure to pay lease gives the lessor the right to force out the renter.

The downsides 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 received capital gains treatment. Instead, it will pay normal corporate rates on its lease earnings.
Control: Without the needed lease language, the owner may lose control over the land's development and usage.
Borrowing: Typically, ground leases restrict the lessor from obtaining versus its equity in the land during the ground lease term.

Ground Lease Calculator

This is an excellent business lease calculator. You enter the area, rental rate, and representative's cost. It does the rest.

How Assets America Can Help

Assets America ® will set up funding for commercial jobs beginning at $20 million, with no upper limitation. We welcome you to contact us to learn more about our complete financial services.

We can help finance the purchase, building and construction, or renovation of business residential or commercial property through our network of private investors and banks. For the finest in commercial realty financing, Assets America ® is the wise 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 also include absolute leases, portion leases, and the topic of this short article, ground leases. All of these leases provide advantages and downsides to the lessor and lessee.

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

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 becomes accountable for paying the residential or commercial property taxes.

- What happens at the end of a ground lease?

The land always goes back to the lessor. Beyond that, there are 2 possibilities for completion of a ground lease. The very first is that the lessor seizes all enhancements that the lessee made during the lease. The 2nd is that the lessee needs to demolish the enhancements it made.

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