Do you own land, perhaps with worn out residential or commercial property on it? One method 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 article, we'll check out,

- 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
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  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 renter 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 throughout the lease period. The acquired improvements allow the owner to offer 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 ready land and constructs a structure on it. Sometimes, the land has a structure already on it that the lessee need to 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.
  
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  Ground Lease Subordination
  
  One important aspect of a ground lease is how the lessee will finance improvements to the land. A key arrangement is whether the proprietor will agree to subordinate his concern on claims if the lessee defaults on its financial obligation.
  
  That's exactly what occurs 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 higher lease on the residential or commercial property.
  
  Alternatively, an unsubordinated ground lease keeps the landlord's leading concern claims if the leaseholder defaults on his payments. However this might discourage loan providers, who would not have the ability to occupy in case of default. Accordingly, the landlord 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 parts that enter into structuring a ground lease:
  
  1. Term
  
  The lease needs to be adequately long to allow the lessee to amortize the expense of the improvements it makes. In other words, the lessee must make adequate profits during the lease to pay for the lease and the enhancements. Furthermore, the lessee needs to make an affordable return on its financial investment after paying all expenses.
  
  The most significant motorist of the lease term is the funding that the lessee organizes. 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, quick food ground rents with shorter amortization durations may have a 20-year lease term.
  
  2. Rights and Responsibilities
  
  Beyond the arrangements for paying rent, a ground lease has several distinct functions.
  
  For instance, when the lease ends, what will happen to the improvements? The lease will specify whether they revert to the lessor or the lessee need to remove them.
  
  Another feature is for the lessor to assist the lessee in acquiring needed licenses, permits and zoning variances.
  
  3. Financeability
  
  The lending institution should have option to protect its loan if the lessee defaults. This is challenging in an unsubordinated ground lease due to the fact that the lessor has first concern when it comes to default. The loan provider only has the right to claim the leasehold.
  
  However, one treatment is a stipulation that needs the successor lessee to use the lending institution to finance the brand-new GL. The topic of financeability is complex and your legal professionals will need to wade through the various intricacies.
  
  Bear in mind that Assets America can assist finance the building or remodelling of industrial residential or commercial property through our network of personal financiers and banks.
  
  4. Title Insurance
  
  The lessee needs to insurance coverage for its leasehold. This needs unique recommendations to the regular owner's policy.
  
  5. Use Provision
  
  Lenders desire the broadest use provision in the lease. Basically, the arrangement would allow any legal purpose for the residential or commercial property. In this method, the loan provider can more easily sell the leasehold in case of default.
  
  The lessor might have the right to permission in any new function for the residential or commercial property. However, the lender will seek to limit this right. If the lessor feels strongly about forbiding particular usages for the residential or commercial property, it needs to define them in the lease.
  
  6. Casualty and Condemnation
  
  The lending institution controls insurance coverage earnings stemming from casualty and condemnation. However, this may contrast with the standard phrasing of a ground lease, which gives some control to the lessor.
  
  Unsurprisingly, lenders desire the insurance coverage continues to go toward the loan, not residential or commercial property restoration. Lenders likewise require that neither lessors nor lessees can end ground leases due to a casualty without their approval.
  
  Regarding condemnation, lenders firmly insist upon taking part in the procedures. The loan provider's requirements for applying the condemnation proceeds and managing termination rights mirror those for casualty occasions.
  
  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 regard to default.
  
  If there is a preexisting mortgage, the mortgagee should concur to an SNDA agreement. Usually, the GL lender wants first concern concerning subtenant defaults.
  
  Moreover, lenders require that the ground lease stays in force if the lessee defaults. If the lessor sends out a notice of default to the lessee, the lending institution needs to get a copy.
  
  Lessees want the right to obtain a leasehold mortgage without the lender's authorization. Lenders want the GL to work as collateral ought 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 may wish to restrict the type of entity that can hold a leasehold mortgage.
  
  8. Rent Escalation
  
  Lessors want the right to increase rents after specified durations so that it keeps market-level rents. A "ratchet" boost offers the lessee no defense in the face of a financial 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 sell decommissioned shipping containers as an ecologically friendly option to traditional 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, in that it was a 10-year triple-net ground lease with four 5-year alternatives to extend.
  
  This gives the GL an optimal term of 30 years. The lease escalation provision supplied for a 10% lease boost every five years. The lease value was just 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 downsides.
  
  The advantages of a ground lease include:
  
  Affordability: Ground leases permit tenants to develop on residential or commercial property that they can't afford to buy. Large chain stores like Starbucks and Whole Foods utilize ground leases to expand their empires. This permits them to grow without saddling the companies with excessive financial obligation. No Down Payment: Lessees do not have to put any money down to take a lease. This stands in stark contrast to residential or commercial property getting, which might require as much as 40% down. The lessee gets to conserve money it can release somewhere else. It also improves its return on the leasehold investment. Income: The lessor receives a stable stream of income while keeping ownership of the land. The lessor maintains the worth of the earnings through using an escalation clause in the lease. This entitles the lessor to increase rents periodically. Failure to pay rent offers the lessor the right to kick out the renter.
  
  The drawbacks of a ground lease consist of:
  
  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 simply offered the land, it would have received capital gains treatment. Instead, it will pay regular business rates on its lease earnings. Control: Without the essential 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 throughout 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 financing for commercial projects starting at $20 million, without any upper limitation. We invite you to call us for more details about our complete financial services.
  
  We can help finance the purchase, building and construction, or restoration of commercial residential or commercial property through our network of private financiers and banks. For the very best in commercial realty funding, Assets America ® is the wise option.
  
  - 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, percentage leases, and the subject of this article, ground leases. All of these leases supply advantages and disadvantages to the lessor and lessee.
  
  - Who pays residential or commercial property taxes on a ground lease?
  
  Typically, ground leases are triple internet. That suggests that the lessee pays the residential or commercial property taxes during the lease term. Once the lease expires, the lessor ends up being responsible for paying the residential or commercial property taxes.
  
  - What occurs 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 takes belongings of all improvements that the lessee made during the lease. The second is that the lessee must demolish the enhancements it made.
  
  - The length of time do ground leases generally last?
  
  Typically, a ground lease term encompasses at lease 5 to ten 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.
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