Do you own land, perhaps with dilapidated 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 earn 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
• 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 develops a piece of land during the lease period. Once the lease expires, the tenant turns over the residential or commercial property improvements to the owner, unless there is an exception.
  
  Importantly, the tenant is accountable for paying all residential or commercial property taxes during the lease period. The acquired improvements enable the owner to sell the residential or commercial property for more cash, if so desired.
  
  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 improvements, i.e., residential or commercial property that the lessee constructs. Typically, the lessee controls and diminishes the improvements throughout the lease duration. That control reverts to the owner/lessor upon the expiration of the lease.
  
  Obtain Financing
  
  Ground Lease Subordination
  
  One essential aspect of a ground lease is how the lessee will fund improvements to the land. An essential arrangement is whether the landlord will accept subordinate his top priority on claims if the lessee defaults on its financial obligation.
  
  That's specifically what occurs 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 requests higher rent on the residential or commercial property.
  
  Alternatively, an unsubordinated ground lease maintains the property owner's leading concern claims if the leaseholder defaults on his payments. However this might discourage lenders, who wouldn't be able to take possession in case of default. Accordingly, the landlord will usually charge lower rent on unsubordinated ground leases.
  
  How to Structure a Ground Lease
  
  A ground lease is more complex than regular business leases. Here are some elements that go into structuring a ground lease:
  
  1. Term
  
  The lease should be sufficiently long to allow the lessee to amortize the cost of the enhancements it makes. In other words, the lessee should make enough revenues during the lease to pay for the lease and the improvements. Furthermore, the lessee needs to make an affordable return on its investment after paying all costs.
  
  The biggest chauffeur 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, fast food ground rents with much shorter amortization periods may have a 20-year lease term.
  
  2. Rights and Responsibilities
  
  Beyond the arrangements for paying rent, a ground lease has a number of special functions.
  
  For example, when the lease ends, what will occur to the improvements? The lease will specify whether they go back to the lessor or the lessee should remove them.
  
  Another feature is for the lessor to help the lessee in getting necessary licenses, licenses and zoning variations.
  
  3. Financeability
  
  The lending institution should have recourse to safeguard its loan if the lessee defaults. This is difficult in an unsubordinated ground lease since the lessor has first concern when it comes to default. The lending institution only can declare the leasehold.
  
  However, one solution is a stipulation that needs the follower lessee to utilize the loan provider to finance the brand-new GL. The of financeability is intricate and your legal experts will need to wade through the different intricacies.
  
  Bear in mind that Assets America can assist fund the construction or renovation of industrial residential or commercial property through our network of personal financiers and banks.
  
  4. Title Insurance
  
  The lessee must arrange title insurance coverage for its leasehold. This requires unique recommendations to the routine owner's policy.
  
  5. Use Provision
  
  Lenders want the broadest use arrangement in the lease. Basically, the provision would allow any legal purpose for the residential or commercial property. In this way, the loan provider can more easily offer the leasehold in case of default.
  
  The lessor might can approval in any new function for the residential or commercial property. However, the loan provider will seek to limit this right. If the lessor feels highly about prohibiting certain usages for the residential or commercial property, it ought to specify them in the lease.
  
  6. Casualty and Condemnation
  
  The lending institution controls insurance earnings stemming from casualty and condemnation. However, this might conflict with the standard phrasing of a ground lease, which gives some control to the lessor.
  
  Unsurprisingly, lenders desire the insurance proceeds to approach 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 authorization.
  
  Regarding condemnation, lenders firmly insist upon taking part in the proceedings. The lending institution's requirements for applying the condemnation proceeds and controlling 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 maintaining an unsubordinated position with respect to default.
  
  If there is a preexisting mortgage, the mortgagee should accept an SNDA agreement. Usually, the GL lender desires first top priority regarding subtenant defaults.
  
  Moreover, lenders require that the ground lease stays in force if the lessee defaults. If the lessor sends a notice of default to the lessee, the loan provider should get a copy.
  
  Lessees want the right to acquire a leasehold mortgage without the lender's consent. Lenders desire the GL to work as collateral ought to the lessee default.
  
  Upon foreclosure of the residential or commercial property, the lending institution receives 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 rents after defined durations so that it preserves market-level rents. A "cog" boost uses the lessee no defense 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 store in Portland.
  
  Starbucks' principle is to sell decommissioned shipping containers as an eco-friendly alternative to conventional 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 options to extend.
  
  This provides the GL an optimal regard to 30 years. The lease escalation provision attended to a 10% rent boost every five years. The lease worth 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 benefits and disadvantages.
  
  The benefits of a ground lease consist of:
  
  Affordability: Ground leases permit renters to develop on residential or commercial property that they can't manage to purchase. Large store like Starbucks and Whole Foods utilize ground leases to expand their empires. This enables them to grow without saddling the business with too much debt. No Down Payment: Lessees do not have to put any cash down to take a lease. This stands in stark contrast to residential or commercial property getting, which may need as much as 40% down. The lessee gets to conserve cash it can release in other places. It also improves its return on the leasehold investment. Income: The lessor gets a stable stream of income while retaining ownership of the land. The lessor preserves the value of the income through using an escalation clause in the lease. This entitles the lessor to increase leas periodically. Failure to pay rent provides the lessor the right to kick out the tenant.
  
  The disadvantages 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 qualified for capital gains treatment. Instead, it will pay ordinary corporate rates on its lease earnings. Control: Without the essential lease language, the owner may lose control over the land's advancement and use. Borrowing: Typically, ground leases prohibit the lessor from borrowing versus its equity in the land during the ground lease term.
  
  Ground Lease Calculator
  baidu.com
  This is an excellent commercial lease calculator. You get in the area, rental rate, and agent's charge. It does the rest.
  
  How Assets America Can Help
  
  Assets America ® will set up financing for commercial projects starting at $20 million, without any upper limit. We welcome you to call us for more details about our total monetary services.
  
  We can assist fund the purchase, building, or restoration of industrial residential or commercial property through our network of personal financiers and banks. For the best in business real estate funding, Assets America ® is the wise 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 likewise include outright leases, percentage leases, and the topic of this short article, ground leases. All of these leases provide 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 indicates that the lessee pays the residential or commercial property taxes throughout the lease term. Once the lease ends, the lessor ends up being accountable for paying the residential or commercial property taxes.
  
  - What occurs at the end of a ground lease?
  
  The land always 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 must demolish the enhancements it made.
  
  - For how long do ground leases normally last?
  
  Typically, a ground lease term extends to 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 at least 35 to 40 years. Some ground leases extend as far as 99 years.