Do you own land, maybe with dilapidated residential or commercial property on it? One method to extract value from the land is to sign a ground lease. This will permit you to earn earnings and perhaps capital gains. In this 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 during the lease period. Once the lease expires, the renter turns over the residential or commercial property enhancements to the owner, unless there is an exception.
  
  Importantly, the tenant is accountable for paying all residential or commercial property taxes during the lease duration. The inherited enhancements permit the owner to offer the residential or commercial property for more cash, 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 building on it. Sometimes, the land has a structure already 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 enhancements during the lease duration. That control goes back to the owner/lessor upon the expiration of the lease.
  
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  Ground Lease Subordination
  
  One important element of a ground lease is how the lessee will fund improvements to the land. A crucial arrangement is whether the property owner will consent to subordinate his priority 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 ends up being security for the lending institution if the lessee defaults. In return, the proprietor requests greater lease on the residential or commercial property.
  
  Alternatively, an unsubordinated ground lease preserves the landlord's leading concern claims if the leaseholder defaults on his payments. However this might prevent lending institutions, who wouldn't have the ability to occupy in case of default. Accordingly, the property manager will normally charge lower lease on unsubordinated ground leases.
  
  How to Structure a Ground Lease
  
  A ground lease is more complex than regular commercial leases. Here are some elements that enter into structuring a ground lease:
  
  1. Term
  
  The lease should be sufficiently long to allow the lessee to amortize the cost of the improvements it makes. To put it simply, the lessee must make sufficient profits throughout the lease to spend for the lease and the improvements. Furthermore, the lessee must make a reasonable return on its investment after paying all costs.
  
  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 implies a lease term of at least 35 to 40 years. However, quick food ground leases with shorter amortization periods may have a 20-year lease term.
  
  2. Rights and Responsibilities
  
  Beyond the arrangements for paying rent, a ground lease has numerous unique features.
  
  For instance, when the lease expires, what will occur to the enhancements? The lease will specify whether they revert to the lessor or the lessee should remove them.
  
  Another function is for the lessor to assist the lessee in getting necessary licenses, permits and zoning variations.
  
  3. Financeability
  
  The loan provider needs to have option to secure its loan if the lessee defaults. This is difficult in an unsubordinated ground lease since the lessor has initially top priority in the case of default. The lending institution only can declare the leasehold.
  
  However, one solution is a clause that requires the follower lessee to use the lending institution to fund the brand-new GL. The topic of financeability is complex and your legal experts will need to learn the different intricacies.
  
  Bear in mind that Assets America can assist fund the building or renovation of business residential or commercial property through our network of personal investors and banks.
  
  4. Title Insurance
  
  The lessee needs to organize title insurance 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 provision would enable any legal purpose for the residential or commercial property. In this way, the loan provider can more quickly sell the leasehold in case of default.
  
  The lessor might can permission in any brand-new function for the residential or commercial property. However, the lender will seek to restrict this right. If the lessor feels strongly about restricting certain usages for the residential or commercial property, it ought to define them in the lease.
  
  6. Casualty and Condemnation
  
  The lender manages insurance profits stemming from casualty and condemnation. However, this may contrast with the standard wording of a ground lease, which provides some control to the lessor.
  
  Unsurprisingly, lending institutions want the insurance coverage continues 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 approval.
  
  Regarding condemnation, lenders firmly insist upon participating in the proceedings. The lender's requirements for using the condemnation earnings and rights mirror those for casualty events.
  
  7. Leasehold Mortgages
  
  These are mortgages financing the lessee's enhancements 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 preexisting mortgage, the mortgagee should consent to an SNDA arrangement. Usually, the GL loan provider desires first concern relating to subtenant defaults.
  
  Moreover, lending institutions require that the ground lease remains in force if the lessee defaults. If the lessor sends a notification of default to the lessee, the lender must receive a copy.
  
  Lessees desire the right to obtain a leasehold mortgage without the loan provider's approval. Lenders desire the GL to serve as security should the lessee default.
  
  Upon foreclosure of the residential or commercial property, the lender gets the lessee's leasehold interest in the residential or commercial property. Lessors might desire to restrict the type of entity that can hold a leasehold mortgage.
  
  8. Rent Escalation
  
  Lessors desire the right to increase leas after defined durations so that it maintains market-level rents. A "cog" increase provides the lessee no security in the face of an economic 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' idea is to sell decommissioned shipping containers as an environmentally 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 choices to extend.
  
  This gives the GL an optimal regard to thirty years. The rent escalation stipulation attended to a 10% rent 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 drawbacks.
  
  The benefits of a ground lease include:
  
  Affordability: Ground leases enable occupants to develop on residential or commercial property that they can't pay for to buy. Large store like Starbucks and Whole Foods utilize ground leases to broaden their empires. This permits them to grow without saddling the business with too much debt. No Down Payment: Lessees do not have to put any cash to take a lease. This stands in stark contrast to residential or commercial property acquiring, which may require as much as 40% down. The lessee gets to conserve money it can deploy elsewhere. It also improves its return on the leasehold investment. Income: The lessor gets a stable stream of earnings while maintaining ownership of the land. The lessor maintains the value of the income through using an escalation provision in the lease. This entitles the lessor to increase rents regularly. Failure to pay lease offers the lessor the right to kick out the occupant.
  
  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 offered the land, it would have certified for capital gains treatment. Instead, it will pay ordinary business rates on its lease income. Control: Without the necessary lease language, the owner might lose control over the land's development and usage. Borrowing: Typically, ground leases restrict the lessor from obtaining versus its equity in the land during the ground lease term.
  
  Ground Lease Calculator
  
  This is a fantastic business lease calculator. You get in the location, rental rate, and representative's fee. It does the rest.
  
  How Assets America Can Help
  
  Assets America ® will arrange funding for industrial jobs beginning at $20 million, without any ceiling. We welcome you to contact us for additional information about our complete financial services.
  
  We can assist finance the purchase, building and construction, or renovation of industrial residential or commercial property through our network of personal investors and banks. For the very best in business property funding, Assets America ® is the smart choice.
  
  - What are the different types of leases?
  
  They are gross leases, customized gross leases, single net leases, double net leases and triple net leases. The also consist of absolute leases, percentage leases, and the subject of this article, ground leases. All of these leases provide benefits and downsides to the lessor and lessee.
  
  - Who pays residential or commercial property taxes on a ground lease?
  
  Typically, ground leases are triple web. That suggests that the lessee pays the residential or commercial property taxes during 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 constantly reverts to the lessor. Beyond that, there are 2 possibilities for the end of a ground lease. The first is that the lessor acquires all improvements that the lessee made throughout the lease. The 2nd is that the lessee must demolish the improvements it made.
  
  - How long do ground leases typically 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 enhancements, the lease term will run for a minimum of 35 to 40 years. Some ground rents extend as far as 99 years.