joehaydenrealtor.com
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 allow you to make income and possibly 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), an occupant develops a piece of land throughout the lease period. Once the lease ends, the occupant turns over the residential or commercial property enhancements to the owner, unless there is an exception.
  
  Importantly, the renter is responsible for paying all residential or commercial property taxes during the lease duration. The acquired enhancements 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 ready land and constructs a building on it. Sometimes, the land has a structure currently on it that the lessee need to 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 throughout the lease duration. That control reverts to the owner/lessor upon the expiration of the lease.
  
  Get Financing
  
  Ground Lease Subordination
  
  One crucial aspect of a ground lease is how the lessee will fund improvements to the land. A key arrangement is whether the property manager will concur to subordinate his top priority on claims if the lessee defaults on its debt.
  
  That's specifically what happens in a subordinated ground lease. Thus, the residential or commercial property deed ends up being collateral for the loan provider if the lessee defaults. In return, the property manager requests higher rent on the residential or commercial property.
  
  Alternatively, an unsubordinated ground lease keeps the property owner's leading concern claims if the leaseholder defaults on his payments. However this may prevent loan providers, who wouldn't be able to occupy in case of default. Accordingly, the property owner will typically charge lower lease on leases.
  
  How to Structure a Ground Lease
  
  A ground lease is more complex than regular industrial leases. Here are some parts that go into structuring a ground lease:
  
  1. Term
  
  The lease should be sufficiently long to permit the lessee to amortize the cost of the enhancements it makes. Simply put, the lessee should make sufficient revenues throughout the lease to pay for the lease and the enhancements. Furthermore, the lessee must make a reasonable return on its financial investment after paying all costs.
  
  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 ten years longer than the loan amortization schedule.
  
  On a 30-year mortgage, that means a lease term of at least 35 to 40 years. However, junk food ground leases with shorter amortization durations may have a 20-year lease term.
  
  2. Rights and Responsibilities
  
  Beyond the plans for paying lease, a ground lease has several unique features.
  
  For example, when the lease expires, what will occur to the enhancements? The lease will specify whether they go back to the lessor or the lessee need to eliminate them.
  
  Another function is for the lessor to help the lessee in getting required licenses, authorizations and zoning differences.
  
  3. Financeability
  
  The lending institution must draw on secure its loan if the lessee defaults. This is tough in an unsubordinated ground lease because the lessor has initially priority when it comes to default. The loan provider just has the right to declare the leasehold.
  
  However, one treatment is a clause that requires the follower lessee to utilize the lender to fund the brand-new GL. The subject of financeability is complex and your legal professionals will require to learn the numerous intricacies.
  
  Remember that Assets America can help finance the building and construction or renovation of industrial residential or commercial property through our network of personal financiers and banks.
  
  4. Title Insurance
  
  The lessee needs to set up title insurance coverage for its leasehold. This requires unique recommendations to the routine owner's policy.
  
  5. Use Provision
  
  Lenders desire the broadest usage 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 quickly sell the leasehold in case of default.
  
  The lessor may have the right to authorization in any brand-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 restricting certain uses for the residential or commercial property, it ought to specify them in the lease.
  
  6. Casualty and Condemnation
  
  The lending institution manages insurance earnings stemming from casualty and condemnation. However, this may contravene the basic phrasing of a ground lease, which gives some control to the lessor.
  
  Unsurprisingly, lenders want the insurance coverage continues 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 permission.
  
  Regarding condemnation, loan providers insist upon getting involved in the procedures. The loan provider's requirements for applying the condemnation proceeds 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, lenders balk at lessor's maintaining an unsubordinated position with respect to default.
  
  If there is a preexisting mortgage, the mortgagee should consent to an SNDA agreement. Usually, the GL lending institution wants very first concern concerning subtenant defaults.
  
  Moreover, lending institutions 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 loan provider must get a copy.
  
  Lessees want the right to obtain a leasehold mortgage without the loan provider's consent. Lenders desire the GL to function as security 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 wish to limit the type of entity that can hold a leasehold mortgage.
  
  8. Rent Escalation
  
  Lessors desire the right to increase leas after specified durations so that it keeps market-level leas. A "cog" increase provides the lessee no protection in the face of an economic slump.
  
  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 alternative to conventional 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 uncommon ground lease, in that it was a 10-year triple-net ground lease with 4 5-year alternatives to extend.
  
  This gives the GL an optimal term of 30 years. The rent escalation provision provided for a 10% lease boost every five years. The lease value was just under $1 million with a cap rate of 5.21%.
  
  The initial 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 benefits and disadvantages.
  
  The advantages of a ground lease include:
  
  Affordability: Ground rents allow renters to build 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 excessive financial obligation. No Down Payment: Lessees do not have to put any money to take a lease. This stands in plain contrast to residential or commercial property acquiring, which may need as much as 40% down. The lessee gets to save cash it can deploy somewhere else. It also enhances its return on the leasehold investment. Income: The lessor receives a constant stream of income while maintaining ownership of the land. The lessor preserves the worth of the income through the usage of an escalation provision in the lease. This entitles the lessor to increase rents occasionally. Failure to pay lease gives the lessor the right to evict the occupant.
  
  The drawbacks of a ground lease consist of:
  
  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 business rates on its lease income. Control: Without the needed lease language, the owner may lose control over the land's advancement and usage. Borrowing: Typically, ground leases restrict the lessor from borrowing against its equity in the land during the ground lease term.
  
  Ground Lease Calculator
  
  This is a terrific business lease calculator. You go into the location, rental rate, and representative's fee. It does the rest.
  
  How Assets America Can Help
  
  Assets America ® will arrange financing for industrial tasks beginning at $20 million, without any upper limitation. We invite you to call us for more details about our complete monetary services.
  
  We can assist finance the purchase, construction, or restoration of business residential or commercial property through our network of private financiers and banks. For the finest in industrial real estate funding, Assets America ® is the smart option.
  
  - 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 include outright leases, percentage leases, and the subject of this post, ground leases. All of these leases provide 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 indicates that the lessee pays the residential or commercial property taxes during 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 2 possibilities for completion of a ground lease. The very first is that the lessor seizes all improvements that the lessee made throughout the lease. The 2nd is that the lessee should demolish the enhancements it made.
  
  - For how long do ground leases normally last?
  
  Typically, a ground lease term encompasses at lease 5 to 10 years beyond the leasehold mortgage. For instance, if the lessee takes a 30-year mortgage on its enhancements, the lease term will run for at least 35 to 40 years. Some ground rents extend as far as 99 years.