Do you own land, possibly with dilapidated residential or commercial property on it? One way 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 explore,

- 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
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  What is a Ground Lease?
  
  In a ground lease (GL), an occupant establishes a piece of land throughout the lease duration. 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 throughout the lease period. The acquired improvements permit 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 ready land and constructs a structure on it. Sometimes, the land has a structure currently on it that the lessee must destroy.
  
  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 improvements throughout the lease period. That control goes back to the owner/lessor upon the expiration of the lease.
  
  Obtain Financing
  
  Ground Lease Subordination
  
  One important aspect of a ground lease is how the lessee will fund enhancements to the land. A key arrangement is whether the property manager will consent to subordinate his top priority on claims if the lessee defaults on its debt.
  
  That's exactly what occurs in a subordinated ground lease. Thus, the residential or commercial property deed becomes security for the lender if the lessee defaults. In return, the proprietor requests greater lease on the residential or commercial property.
  
  Alternatively, an unsubordinated ground lease preserves the proprietor's leading priority claims if the leaseholder defaults on his payments. However this may prevent lenders, who would not have the ability to occupy in case of default. Accordingly, the property manager will generally charge lower rent on unsubordinated ground leases.
  
  How to Structure a Ground Lease
  
  A ground lease is more complicated than regular industrial leases. Here are some elements that enter into structuring a ground lease:
  
  1. Term
  
  The lease should be sufficiently long to enable the lessee to amortize the cost of the improvements it makes. To put it simply, the lessee should make sufficient earnings during the lease to pay for the lease and the improvements. Furthermore, the lessee should make an affordable return on its investment after paying all costs.
  
  The most significant driver 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 indicates a lease regard to a minimum of 35 to 40 years. However, quick food ground rents with shorter amortization periods might have a 20-year lease term.
  
  2. Rights and Responsibilities
  
  Beyond the plans for paying rent, a ground lease has a number of special features.
  
  For instance, when the lease expires, what will occur to the improvements? The lease will define whether they revert to the lessor or the lessee need to remove them.
  
  Another feature is for the lessor to help the lessee in acquiring needed licenses, licenses and zoning variations.
  
  3. Financeability
  
  The lending institution needs to have option to secure its loan if the lessee defaults. This is difficult in an unsubordinated ground lease because the lessor has first priority in the case of default. The lender just deserves to claim the leasehold.
  
  However, one solution is a provision that requires the successor lessee to utilize the loan provider to finance the new GL. The topic of financeability is intricate and your legal specialists will need to learn the numerous complexities.
  
  Bear in mind that Assets America can assist fund the building and construction or restoration of industrial 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 requires special endorsements to the routine owner's policy.
  
  5. Use Provision
  
  Lenders want the broadest use provision in the lease. Basically, the provision would permit any legal function for the residential or commercial property. In this way, the lending institution can more easily offer the leasehold in case of default.
  
  The lessor might deserve to authorization in any new function for the residential or commercial property. However, the loan provider will look for to limit this right. If the lessor feels strongly about prohibiting particular uses for the residential or commercial property, it must define them in the lease.
  
  6. Casualty and Condemnation
  
  The loan provider controls insurance earnings stemming from casualty and condemnation. However, this might conflict with the basic phrasing of a ground lease, which gives some control to the lessor.
  
  Unsurprisingly, lending institutions want the insurance coverage continues to approach the loan, not residential or commercial property restoration. Lenders also require that neither lessors nor lessees can terminate ground leases due to a casualty without their approval.
  
  Regarding condemnation, loan providers firmly insist upon taking part in the proceedings. The loan provider's requirements for applying the condemnation proceeds and controlling termination rights mirror those for casualty occasions.
  
  7. Leasehold Mortgages
  
  These are mortgages financing the lessee's enhancements 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 pre-existing mortgage, the mortgagee needs to agree to an SNDA arrangement. Usually, the GL loan provider desires very first concern regarding subtenant defaults.
  
  Moreover, loan providers need that the ground lease stays in force if the lessee defaults. If the lessor sends a notification of default to the lessee, the loan provider needs to receive a copy.
  
  Lessees desire the right to acquire a leasehold mortgage without the loan provider's approval. Lenders want the GL to serve as collateral must 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 might wish to restrict 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 maintains market-level rents. A "cog" boost offers the lessee no security 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' concept is to sell decommissioned shipping containers as an environmentally friendly option to standard building and construction. The 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 choices to extend.
  
  This offers the GL a maximum regard to thirty years. The rent escalation provision attended to a 10% rent boost every 5 years. The lease worth 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 benefits of a ground lease include:
  
  Affordability: Ground leases enable occupants to develop on residential or commercial property that they can't afford to purchase. Large chain shops like Starbucks and Whole Foods utilize ground leases to expand their empires. This permits them to grow without saddling the business with excessive financial obligation. No Deposit: Lessees do not need to put any cash to take a lease. This stands in stark contrast to residential or commercial property acquiring, which may need as much as 40% down. The lessee gets to conserve cash it can deploy in other places. It also improves its return on the leasehold financial investment. Income: The lessor gets a constant stream of income while maintaining ownership of the land. The lessor maintains the value of the earnings through the usage of an escalation clause in the lease. This entitles the lessor to increase rents periodically. Failure to pay rent 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 runs the threat of losing its residential or commercial property if the lessee defaults. Taxes: Had the owner merely offered the land, it would have gotten approved for capital gains treatment. Instead, it will pay common corporate rates on its lease earnings. Control: Without the necessary lease language, the owner might lose control over the land's development and usage. Borrowing: Typically, ground leases prohibit the lessor from borrowing versus its equity in the land during the ground lease term.
  
  Ground Lease Calculator
  
  This is a great commercial lease calculator. You enter the location, rental rate, and agent's charge. It does the rest.
  
  How Assets America Can Help
  
  Assets America ® will organize funding for business projects beginning at $20 million, with no upper limitation. We invite you to contact us to find out more about our complete monetary services.
  
  We can help fund the purchase, construction, or renovation of business residential or commercial property through our network of private investors and banks. For the very best in business property funding, Assets America ® is the clever option.
  
  - What are the various types of leases?
  
  They are gross leases, modified gross leases, single net leases, double net leases and triple net leases. The likewise consist of absolute leases, portion leases, and the subject of this article, ground leases. All of these leases supply 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 implies that the lessee pays the residential or commercial property taxes during the lease term. Once the lease expires, the lessor ends up being for paying the residential or commercial property taxes.
  
  - What takes place 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 first is that the lessor acquires all improvements that the lessee made throughout the lease. The second is that the lessee must destroy the improvements it made.
  
  - The length of time do ground leases generally last?
  
  Typically, a ground lease term encompasses at lease 5 to 10 years beyond the leasehold mortgage. For example, if the lessee takes a 30-year mortgage on its enhancements, the lease term will run for a minimum of 35 to 40 years. Some ground leases extend as far as 99 years.