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 make earnings and possibly capital gains. In this post, we'll check out,
commercialappeal.com
- 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), an occupant develops a piece of land throughout the lease duration. Once the lease expires, the occupant 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 duration. The inherited improvements enable 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 destroy.
  
  The GL defines who owns the land and the improvements, i.e., residential or commercial property that the lessee constructs. Typically, the lessee controls and depreciates the improvements during the lease duration. That control reverts to the owner/lessor upon the expiration of the lease.
  
  Get Financing
  
  Ground Lease Subordination
  
  One important element of a ground lease is how the lessee will finance enhancements to the land. A crucial plan is whether the proprietor will consent to subordinate his concern on claims if the lessee defaults on its debt.
  
  That's precisely what happens in a subordinated ground lease. Thus, the residential or commercial property deed becomes security for the loan provider if the lessee defaults. In return, the proprietor asks for higher lease on the residential or commercial property.
  
  Alternatively, an unsubordinated ground lease keeps the proprietor's leading priority claims if the leaseholder defaults on his payments. However this might dissuade lenders, who would not have the ability to occupy in case of default. Accordingly, the proprietor will usually charge lower lease on unsubordinated ground leases.
  
  How to Structure a Ground Lease
  
  A ground lease is more complicated than regular commercial leases. Here are some parts that go into structuring a ground lease:
  
  1. Term
  
  The lease must be sufficiently long to permit the lessee to amortize the expense of the improvements it makes. Simply put, the lessee should make during the lease to spend for the lease and the improvements. Furthermore, the lessee should make an affordable return on its investment after paying all costs.
  
  The most significant motorist of the lease term is the financing that the lessee arranges. Normally, the lessee will want a term that is 5 to ten years longer than the loan amortization schedule.
  
  On a 30-year mortgage, that suggests a lease regard to a minimum of 35 to 40 years. However, fast 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 numerous special features.
  
  For instance, when the lease expires, what will happen to the improvements? The lease will define whether they revert to the lessor or the lessee must remove them.
  
  Another feature is for the lessor to help the lessee in acquiring essential licenses, permits and zoning differences.
  
  3. Financeability
  
  The lending institution should draw on secure its loan if the lessee defaults. This is tough in an unsubordinated ground lease since the lessor has first concern when it comes to default. The lending institution only deserves to declare the leasehold.
  
  However, one treatment is a stipulation that needs the follower lessee to utilize the lender to fund the brand-new GL. The topic of financeability is intricate and your legal experts will require to wade through the various complexities.
  
  Bear in mind that Assets America can help fund the construction or renovation of commercial residential or commercial property through our network of private investors and banks.
  
  4. Title Insurance
  
  The lessee should organize title insurance coverage for its leasehold. This needs special recommendations to the routine owner's policy.
  
  5. Use Provision
  
  Lenders want the broadest usage arrangement in the lease. Basically, the arrangement would enable any legal function for the residential or commercial property. In this method, the lending institution can more easily sell the leasehold in case of default.
  
  The lessor might deserve to permission in any brand-new purpose for the residential or commercial property. However, the lender will look for to restrict this right. If the lessor feels strongly about forbiding certain uses for the residential or commercial property, it should define them in the lease.
  
  6. Casualty and Condemnation
  
  The lender manages insurance coverage proceeds coming from casualty and condemnation. However, this may contravene the basic wording of a ground lease, which offers some control to the lessor.
  
  Unsurprisingly, lenders want the insurance proceeds to go toward the loan, not residential or commercial property remediation. Lenders likewise require that neither lessors nor lessees can terminate ground leases due to a casualty without their consent.
  
  Regarding condemnation, lending institutions insist upon getting involved in the procedures. The lending institution's requirements for applying the condemnation earnings 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 preserving an unsubordinated position with respect to default.
  
  If there is a pre-existing mortgage, the mortgagee must accept an SNDA contract. Usually, the GL lender desires first concern regarding 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 should get a copy.
  
  Lessees desire the right to get a leasehold mortgage without the lender's approval. Lenders desire the GL to serve as security needs to the lessee default.
  
  Upon foreclosure of the residential or commercial property, the loan provider receives the lessee's leasehold interest in the residential or commercial property. Lessors might desire to limit the kind of entity that can hold a leasehold mortgage.
  
  8. Rent Escalation
  
  Lessors desire the right to increase rents after specified periods so that it preserves market-level leas. A "cog" increase provides the lessee no security in the face of a financial recession.
  
  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 eco-friendly alternative to standard building. The 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 four 5-year choices to extend.
  
  This provides the GL an optimal regard to 30 years. The lease escalation clause provided for a 10% lease increase every 5 years. The lease value was just under $1 million with a cap rate of 5.21%.
  
  The preliminary 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 advantages and drawbacks.
  
  The benefits of a ground lease include:
  
  Affordability: Ground rents permit occupants to develop on residential or commercial property that they can't afford to buy. Large store like Starbucks and Whole Foods utilize ground leases to expand their empires. This permits them to grow without saddling the companies with excessive debt. No Down Payment: Lessees do not need to put any money down to take a lease. This stands in stark contrast to residential or commercial property getting, which may require as much as 40% down. The lessee gets to conserve cash it can deploy elsewhere. It likewise improves its return on the leasehold investment. Income: The lessor gets a constant stream of income while maintaining ownership of the land. The lessor maintains the worth of the earnings through using an escalation provision in the lease. This entitles the lessor to increase rents regularly. Failure to pay rent offers the lessor the right to force out the occupant.
  
  The disadvantages 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 merely sold the land, it would have received capital gains treatment. Instead, it will pay ordinary business rates on its lease earnings. Control: Without the required lease language, the owner might lose control over the land's advancement and usage. Borrowing: Typically, ground leases prohibit the lessor from obtaining against its equity in the land throughout the ground lease term.
  
  Ground Lease Calculator
  
  This is a great industrial lease calculator. You go into the location, rental rate, and agent's charge. It does the rest.
  
  How Assets America Can Help
  
  Assets America ® will arrange financing for industrial jobs starting at $20 million, with no upper limitation. We invite you to contact us for more information about our total financial services.
  
  We can assist finance the purchase, building, or renovation of business residential or commercial property through our network of private investors and banks. For the finest in business real estate financing, Assets America ® is the clever 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 also consist of outright leases, portion leases, and the topic of this post, ground leases. All of these leases offer benefits and disadvantages to the lessor and lessee.
  
  - Who pays residential or commercial property taxes on a ground lease?
  
  Typically, ground leases are triple net. That means 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 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 very first is that the lessor acquires all improvements that the lessee made during the lease. The second is that the lessee needs to demolish the improvements it made.
  
  - For how long do ground leases normally last?
  
  Typically, a ground lease term reaches 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 a minimum of 35 to 40 years. Some ground rents extend as far as 99 years.