What is a Ground Lease?

Do you own land, maybe with worn out residential or commercial property on it? One way to extract worth from the land is to sign a ground lease.

Do you own land, perhaps with shabby 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 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


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 improvements to the owner, unless there is an exception.


Importantly, the renter is responsible for paying all residential or commercial property taxes throughout the lease duration. The acquired enhancements allow 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 ready land and constructs a building on it. Sometimes, the land has a structure already on it that the lessee need to demolish.


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 enhancements 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 crucial aspect of a ground lease is how the lessee will finance enhancements to the land. A crucial plan is whether the property manager will concur to subordinate his priority on claims if the lessee defaults on its financial obligation.


That's exactly what takes place in a subordinated ground lease. Thus, the residential or commercial property deed ends up being collateral for the lending institution if the lessee defaults. In return, the property owner requests greater lease on the residential or commercial property.


Alternatively, an unsubordinated ground lease preserves the property owner's top priority claims if the leaseholder defaults on his payments. However this might dissuade lending institutions, who wouldn't be able to occupy in case of default. Accordingly, the proprietor will typically charge lower rent on unsubordinated ground leases.


How to Structure a Ground Lease


A ground lease is more complicated than routine commercial leases. Here are some parts that go into structuring a ground lease:


1. Term


The lease needs to be sufficiently long to allow the lessee to amortize the cost of the enhancements it makes. Simply put, the lessee should make sufficient profits throughout the lease to pay for the lease and the enhancements. Furthermore, the lessee should make a sensible return on its investment after paying all expenses.


The greatest chauffeur of the lease term is the funding that the lessee sets up. Normally, the lessee will want a term that is 5 to 10 years longer than the loan amortization schedule.


On a 30-year mortgage, that suggests a lease term of at least 35 to 40 years. However, junk food ground rents with shorter amortization durations might have a 20-year lease term.


2. Rights and Responsibilities


Beyond the arrangements for paying lease, a ground lease has numerous special functions.


For instance, when the lease ends, what will happen to the enhancements? The lease will specify whether they go back to the lessor or the lessee must eliminate them.


Another function is for the lessor to assist the lessee in acquiring required licenses, authorizations and zoning variations.


3. Financeability


The lender needs to draw on protect its loan if the lessee defaults. This is difficult in an unsubordinated ground lease because the lessor has initially top priority when it comes to default. The lender just can declare the leasehold.


However, one solution is a provision that requires the follower lessee to utilize the loan provider to fund the new GL. The topic of financeability is complex and your legal experts will require to wade through the different complexities.


Bear in mind that Assets America can assist finance the building or renovation of business residential or commercial property through our network of private financiers and banks.


4. Title Insurance


The lessee must arrange title insurance coverage for its leasehold. This requires unique recommendations to the regular owner's policy.


5. Use Provision


Lenders desire the broadest usage provision in the lease. Basically, the arrangement would permit any legal function for the residential or commercial property. In this way, the lender can more quickly sell the leasehold in case of default.


The lessor might deserve to authorization 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 uses for the residential or commercial property, it must define them in the lease.


6. Casualty and Condemnation


The lender controls insurance proceeds coming from casualty and condemnation. However, this may conflict with the basic wording of a ground lease, which gives some control to the lessor.


Unsurprisingly, lending institutions desire the insurance coverage continues to go toward the loan, not residential or commercial property restoration. Lenders also require that neither lessors nor lessees can end ground leases due to a casualty without their approval.


Regarding condemnation, lending institutions firmly insist upon getting involved in the procedures. The lending institution's requirements for using the condemnation earnings 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, lenders balk at lessor's keeping an unsubordinated position with respect to default.


If there is a pre-existing mortgage, the mortgagee should consent to an SNDA contract. Usually, the GL lender desires first concern regarding subtenant defaults.


Moreover, loan providers require that the ground lease remains in force if the lessee defaults. If the lessor sends out a notice of default to the lessee, the loan provider must receive a copy.


Lessees want the right to get a leasehold mortgage without the lending institution's permission. Lenders desire the GL to serve as security must 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 may 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 periods so that it maintains market-level leas. A "ratchet" increase uses the lessee no security in the face of an economic slump.


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 sell decommissioned shipping containers as an environmentally friendly option to standard building and 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 four 5-year options to extend.


This gives the GL an optimal term of thirty years. The lease escalation stipulation offered a 10% rent increase every five years. The lease value was simply 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 benefits and disadvantages.


The advantages of a ground lease include:


Affordability: Ground leases enable occupants to build on residential or commercial property that they can't pay for to purchase. Large store like Starbucks and Whole Foods utilize ground leases to expand their empires. This enables them to grow without saddling the companies with too much financial obligation.
No Deposit: Lessees do not need to put any money 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 save money it can deploy somewhere else. It also improves its return on the leasehold investment.
Income: The lessor receives a steady stream of earnings while maintaining ownership of the land. The lessor maintains the worth of the income through making use of an escalation provision in the lease. This entitles the lessor to increase rents periodically. Failure to pay rent offers the lessor the right to kick out the tenant.


The downsides 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 sold the land, it would have received capital gains treatment. Instead, it will pay normal corporate rates on its lease income.
Control: Without the necessary lease language, the owner may lose control over the land's development and use.
Borrowing: Typically, ground leases prohibit the lessor from borrowing against its equity in the land throughout the ground lease term.


Ground Lease Calculator


This is a fantastic business lease calculator. You get in the area, rental rate, and agent's cost. It does the rest.


How Assets America Can Help


Assets America ® will set up financing for industrial jobs starting at $20 million, with no upper limitation. We welcome you to contact us for additional information about our complete financial services.


We can assist fund the purchase, building, or renovation of industrial residential or commercial property through our network of private financiers and banks. For the very best in commercial property funding, Assets America ® is the smart choice.


- What are the various kinds of leases?


They are gross leases, modified gross leases, single net leases, double net leases and triple net leases. The also include absolute leases, percentage leases, and the topic of this short article, ground leases. All of these leases offer benefits and drawbacks to the lessor and lessee.


- Who pays residential or commercial property taxes on a ground lease?


Typically, ground leases are triple web. That means that the lessee pays the residential or commercial property taxes during the lease term. Once the lease ends, the lessor becomes responsible for paying the residential or commercial property taxes.


- What happens at the end of a ground lease?


The land always goes back to the lessor. Beyond that, there are two possibilities for completion of a ground lease. The first is that the lessor seizes all enhancements that the lessee made throughout the lease. The 2nd is that the lessee should destroy the improvements it made.


- How long do ground leases generally 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 enhancements, the lease term will run for at least 35 to 40 years. Some ground rents extend as far as 99 years.


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