Do you own land, possibly with worn out residential or commercial property on it? One way to extract value from the land is to sign a ground lease. This will permit you to earn earnings and possibly capital gains. In this post, 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), an occupant establishes a piece of land during the lease period. Once the lease ends, the renter turns over the residential or commercial property improvements to the owner, unless there is an exception.
  
  Importantly, the occupant is accountable for paying all residential or commercial property taxes throughout the lease period. The acquired enhancements permit 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 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 diminishes the enhancements throughout the lease period. That control reverts to the owner/lessor upon the expiration of the lease.
  
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  Ground Lease Subordination
  
  One important element of a ground lease is how the lessee will fund enhancements to the land. A key arrangement is whether the property manager will accept 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 manager asks for greater lease on the residential or commercial property.
  
  Alternatively, an unsubordinated ground lease preserves the property manager's top concern claims if the leaseholder defaults on his payments. However this might dissuade lenders, who wouldn't be able to occupy in case of default. Accordingly, the property owner 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 elements that enter into structuring a ground lease:
  
  1. Term
  
  The lease should be adequately long to permit the lessee to amortize the cost of the enhancements it makes. To put it simply, the lessee needs to make enough earnings throughout the lease to pay for the lease and the improvements. Furthermore, the lessee should make a reasonable return on its financial investment after paying all costs.
  
  The most significant driver of the lease term is the financing 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 durations may have a 20-year lease term.
  
  2. Rights and Responsibilities
  
  Beyond the plans for paying lease, a ground lease has a number of distinct features.
  
  For instance, when the lease expires, what will happen to the enhancements? The lease will define whether they go back to the lessor or the lessee should eliminate them.
  
  Another function is for the lessor to assist the lessee in acquiring needed licenses, licenses and zoning differences.
  
  3. Financeability
  
  The loan provider should have recourse to safeguard 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 in the case of default. The lending institution only can claim the leasehold.
  
  However, one remedy is a clause that needs the follower lessee to utilize the loan provider to finance the brand-new GL. The topic of financeability is complex and your legal professionals will need to learn the numerous complexities.
  
  Keep in mind that Assets America can help finance the building or restoration of business residential or commercial property through our network of private investors and banks.
  
  4. Title Insurance
  
  The lessee must arrange title insurance for its leasehold. This needs unique recommendations to the routine owner's policy.
  
  5. Use Provision
  
  Lenders want the broadest use provision in the lease. Basically, the arrangement would enable 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 might can authorization in any new function for the residential or commercial property. However, the lending institution will seek to limit this right. If the lessor feels highly about prohibiting specific uses for the residential or commercial property, it ought to define them in the lease.
  
  6. Casualty and Condemnation
  
  The lender controls insurance coverage proceeds originating from casualty and condemnation. However, this might contrast with the basic phrasing of a ground lease, which gives some control to the lessor.
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  Unsurprisingly, loan providers desire the insurance coverage proceeds to go toward 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 consent.
  
  Regarding condemnation, lending institutions firmly insist upon taking part in the proceedings. The lending institution's requirements for using the condemnation profits and controlling termination rights mirror those for casualty occasions.
  
  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 preserving an unsubordinated position with respect to default.
  
  If there is a preexisting mortgage, the mortgagee must concur to an SNDA contract. Usually, the GL lender desires very first top priority regarding subtenant defaults.
  
  Moreover, lending institutions require that the ground lease remains in force if the lessee defaults. If the lessor sends out a notice of default to the lessee, the lender needs to receive a copy.
  
  Lessees want the right to get a leasehold mortgage without the lending institution's authorization. Lenders want the GL to function as security should 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 wish to limit 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 maintains market-level leas. A "cog" increase uses the lessee no protection in the face of an economic downturn.
  
  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 offer decommissioned shipping containers as an environmentally friendly option to standard building and construction. 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 four 5-year choices to extend.
  
  This provides the GL a maximum regard to thirty years. The lease escalation stipulation provided for a 10% lease increase every 5 years. The lease value was simply 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 disadvantages.
  
  The advantages of a ground lease include:
  
  Affordability: Ground rents allow occupants 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 broaden their empires. This enables them to grow without saddling the companies with too much debt. No Deposit: Lessees do not have to put any cash down to take a lease. This stands in plain contrast to residential or commercial property purchasing, which may require as much as 40% down. The lessee gets to conserve money it can deploy in other places. It also improves its return on the leasehold financial investment. Income: The lessor gets a constant stream of earnings while retaining ownership of the land. The lessor preserves the value of the income through using an escalation stipulation in the lease. This entitles the lessor to increase rents regularly. Failure to pay lease provides the lessor the right to evict the occupant.
  
  The disadvantages 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 sold the land, it would have qualified for capital gains treatment. Instead, it will pay normal business rates on its lease income. Control: Without the essential lease language, the owner might lose control over the land's development and usage. 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 a terrific commercial lease calculator. You enter the area, rental rate, and agent's cost. It does the rest.
  
  How Assets America Can Help
  
  Assets America ® will organize financing for industrial projects starting at $20 million, with no upper limitation. We invite you to contact us for additional information about our total monetary services.
  
  We can help fund the purchase, construction, or remodelling of commercial residential or commercial property through our network of personal investors and banks. For the finest in industrial property financing, Assets America ® is the smart option.
  
  - What are the different kinds of leases?
  
  They are gross leases, modified gross leases, single net leases, double net leases and triple net leases. The also include absolute leases, percentage leases, and the topic of this post, ground leases. All of these leases offer advantages and drawbacks 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 ends, the lessor becomes responsible for paying the residential or commercial property taxes.
  
  - What occurs at the end of a ground lease?
  
  The land constantly goes back to the lessor. Beyond that, there are two possibilities for the end of a ground lease. The first is that the lessor acquires all enhancements that the lessee made throughout the lease. The second is that the lessee should demolish the enhancements it made.
  
  - For how long do ground leases usually last?
  
  Typically, a ground lease term at lease 5 to 10 years beyond the leasehold mortgage. For example, if the lessee takes a 30-year mortgage on its improvements, the lease term will run for at least 35 to 40 years. Some ground rents extend as far as 99 years.
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