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Do you own land, perhaps with shabby 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 earn income and potentially capital gains. In this article, we'll check out,
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- 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 tenant establishes a piece of land throughout the lease duration. Once the lease expires, the renter turns over the residential or commercial property enhancements to the owner, unless there is an exception.

Importantly, the occupant is accountable for paying all residential or commercial property taxes throughout the lease duration. The acquired improvements enable the owner to sell 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 building on it. Sometimes, the land has a structure currently on it that the lessee need to demolish.

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 enhancements 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. An is whether the property manager will agree to subordinate his top priority on claims if the lessee defaults on its financial obligation.

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

Alternatively, an unsubordinated ground lease maintains the property owner's top concern claims if the leaseholder defaults on his payments. However this might dissuade lenders, who would not have the ability to take possession in case of default. Accordingly, the landlord will normally charge lower lease on unsubordinated ground leases.

How to Structure a Ground Lease

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

1. Term

The lease needs to be sufficiently long to enable the lessee to amortize the expense of the improvements it makes. Simply put, the lessee must make adequate earnings during the lease to pay for the lease and the improvements. Furthermore, the lessee must make a reasonable return on its financial investment after paying all costs.

The greatest driver 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 implies a lease regard to at least 35 to 40 years. However, quick food ground rents with much shorter amortization periods might 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 example, when the lease ends, what will happen to the enhancements? The lease will specify whether they go back to the lessor or the lessee should remove them.

Another feature is for the lessor to help the lessee in getting necessary licenses, authorizations and zoning differences.

3. Financeability

The lender should have option to protect its loan if the lessee defaults. This is tough in an unsubordinated ground lease because the lessor has initially top priority in the case of default. The lending institution just can declare the leasehold.

However, one remedy is a clause that needs the successor lessee to use the loan provider to finance the new GL. The topic of financeability is complex and your legal experts will need to learn the various complexities.

Bear in mind that Assets America can assist finance the building and construction or restoration of business residential or commercial property through our network of private financiers and banks.

4. Title Insurance

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

5. Use Provision

Lenders want the broadest use arrangement in the lease. Basically, the arrangement would allow any legal function for the residential or commercial property. In this way, the lender can more quickly offer the leasehold in case of default.

The lessor might have the right to consent in any new purpose for the residential or commercial property. However, the lending institution will look for to restrict this right. If the lessor feels strongly about prohibiting certain usages for the residential or commercial property, it must define them in the lease.

6. Casualty and Condemnation

The loan provider controls insurance coverage profits stemming from casualty and condemnation. However, this may clash with the basic phrasing of a ground lease, which gives some control to the lessor.

Unsurprisingly, loan providers want the insurance coverage proceeds to go toward the loan, not residential or commercial property restoration. Lenders likewise require that neither lessors nor lessees can terminate ground leases due to a casualty without their consent.

Regarding condemnation, lending institutions firmly insist upon taking part in the procedures. The lender's requirements for using the condemnation proceeds and managing termination rights mirror those for casualty events.

7. Leasehold Mortgages

These are mortgages funding 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 needs to accept an SNDA arrangement. Usually, the GL lending institution desires first top priority relating to subtenant defaults.

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

Lessees desire the right to get a leasehold mortgage without the loan provider's permission. Lenders want the GL to function 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 wish to limit the kind of entity that can hold a leasehold mortgage.

8. Rent Escalation

Lessors want the right to increase rents after defined durations so that it preserves market-level leas. A "cog" boost uses the lessee no defense in the face of a financial slump.

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 standard construction. The first shop 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 choices to extend.

This gives the GL a maximum term of 30 years. The lease escalation provision attended to a 10% rent boost every five years. The lease value 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 benefits and drawbacks.

The benefits of a ground lease include:

Affordability: Ground rents permit tenants to develop on residential or commercial property that they can't pay for to purchase. Large store like Starbucks and Whole Foods use 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 need to put any cash down to take a lease. This stands in plain contrast to residential or commercial property acquiring, which might need as much as 40% down. The lessee gets to save cash it can release somewhere else. It likewise enhances its return on the leasehold financial investment. Income: The lessor receives a stable stream of earnings while retaining ownership of the land. The lessor preserves the value of the earnings through using an escalation clause in the lease. This entitles the lessor to increase leas regularly. Failure to pay rent offers the lessor the right to evict the occupant.

The disadvantages of a ground lease include:

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 simply sold the land, it would have gotten approved for capital gains treatment. Instead, it will pay normal corporate rates on its lease income. Control: Without the necessary lease language, the owner might lose control over the land's development and use. Borrowing: Typically, ground leases restrict the lessor from obtaining against its equity in the land during the ground lease term.

Ground Lease Calculator

This is an excellent commercial lease calculator. You go into the area, rental rate, and agent's charge. It does the rest.

How Assets America Can Help

Assets America ® will arrange financing for industrial projects starting at $20 million, without any ceiling. We invite you to call us to find out more about our total financial services.

We can help finance the purchase, building, or restoration of industrial residential or commercial property through our network of personal financiers and banks. For the very best in industrial real estate funding, Assets America ® is the smart choice.

- 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 outright leases, percentage leases, and the topic of this short article, ground leases. All of these leases offer advantages and downsides 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 throughout 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 two possibilities for the end of a ground lease. The very first is that the lessor seizes all enhancements that the lessee made during the lease. The second is that the lessee must demolish the enhancements it made.

- How long do ground leases generally last?

Typically, a ground lease term extends to 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 rents extend as far as 99 years.