Do you own land, perhaps with worn out residential or commercial property on it? One way to extract value from the land is to sign a ground lease. This will permit you to earn earnings and possibly capital gains. In this post, we'll check out,

- What is a Ground Lease?

• How to Structure Them
• Examples of Ground Leases
• Pros and Cons
• 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), a tenant develops 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 occupant is accountable for paying all residential or commercial property taxes during the lease duration. The inherited enhancements permit 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 enhancements, 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 important element of a ground lease is how the lessee will fund enhancements to the land. A crucial arrangement is whether the proprietor will accept subordinate his concern on claims if the lessee defaults on its debt.
  
  That's precisely 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 proprietor asks for higher rent on the residential or commercial property.
  
  Alternatively, an unsubordinated ground lease maintains the property manager's leading concern claims if the leaseholder defaults on his payments. However this might prevent lending institutions, who would not have the ability to occupy in case of default. Accordingly, the property owner will generally charge lower lease on unsubordinated ground leases.
  
  How to Structure a Ground Lease
  
  A ground lease is more complex than routine business leases. Here are some elements that go into structuring a ground lease:
  
  1. Term
  
  The lease needs to be sufficiently long to enable the lessee to amortize the expense of the enhancements it makes. Simply put, the lessee should make enough profits during the lease to pay for the lease and the improvements. Furthermore, the lessee must make an affordable return on its investment after paying all costs.
  
  The greatest driver of the lease term is the financing that the lessee sets up. 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 regard to a minimum of 35 to 40 years. However, junk food ground rents with much shorter amortization periods might have a 20-year lease term.
  
  2. Rights and Responsibilities
  
  Beyond the arrangements for paying lease, a ground lease has several unique functions.
  
  For example, when the lease expires, what will occur to the improvements? The lease will specify whether they revert to the lessor or the lessee must remove them.
  
  Another function is for the lessor to assist the lessee in obtaining necessary licenses, licenses and zoning differences.
  
  3. Financeability
  
  The lending institution should have recourse to protect its loan if the lessee defaults. This is tough in an unsubordinated ground lease since the lessor has initially top priority in the case of default. The lender just can declare the leasehold.
  
  However, one solution is a provision that needs the successor lessee to utilize the loan provider to finance the brand-new GL. The topic of financeability is intricate and your legal experts will need to wade through the different complexities.
  
  Bear in mind that Assets America can help finance the building and construction or restoration of commercial residential or commercial property through our network of private financiers and banks.
  
  4. Title Insurance
  
  The lessee needs to organize title insurance for its leasehold. This requires unique recommendations to the regular owner's policy.
  
  5. Use Provision
  
  Lenders want the broadest usage provision in the lease. Basically, the provision would allow any legal function for the residential or commercial property. In this way, the lending institution can more quickly sell the leasehold in case of default.
  
  The lessor may have the right to approval in any brand-new purpose for the residential or commercial property. However, the lender will seek to limit this right. If the lessor feels strongly about restricting specific usages for the residential or commercial property, it ought to define them in the lease.
  
  6. Casualty and Condemnation
  
  The lender manages insurance profits coming from casualty and condemnation. However, this might contravene the standard wording of a ground lease, which gives some control to the lessor.
  
  Unsurprisingly, lending institutions want the insurance coverage proceeds to approach the loan, not residential or commercial property remediation. Lenders also need that neither lessors nor lessees can end ground leases due to a casualty without their authorization.
  
  Regarding condemnation, loan providers firmly insist upon taking part in the procedures. The lending institution's requirements for applying the condemnation profits and managing 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, lending institutions balk at lessor's maintaining an unsubordinated position with regard to default.
  
  If there is a preexisting mortgage, the mortgagee should consent to an SNDA arrangement. Usually, the GL lending institution desires very first top priority concerning subtenant defaults.
  
  Moreover, lending institutions need that the ground lease stays in force if the lessee defaults. If the lessor sends a notice of default to the lessee, the lending institution should get a copy.
  
  Lessees want the right to acquire a leasehold mortgage without the loan provider's permission. Lenders desire the GL to serve as collateral must 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 may wish to limit the kind of entity that can hold a leasehold mortgage.
  
  8. Rent Escalation
  
  Lessors want the right to increase leas after defined periods so that it maintains market-level rents. A "ratchet" increase offers the lessee no defense 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 shop in Portland.
  
  Starbucks' principle is to offer decommissioned shipping containers as an environmentally friendly option 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 unusual ground lease, because it was a 10-year triple-net ground lease with four 5-year choices to extend.
  
  This gives the GL an optimal term of thirty years. The lease escalation stipulation offered a 10% lease boost every five years. The lease worth was simply under $1 million with a cap rate of 5.21%.
  
  The initial 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 advantages of a ground lease include:
  
  Affordability: Ground leases permit occupants to build on residential or commercial property that they can't manage to purchase. Large store like Starbucks and Whole Foods use ground leases to broaden their empires. This enables them to grow without saddling the business with excessive debt. No Deposit: Lessees do not have to put any money down to take a lease. This stands in stark contrast to residential or commercial property purchasing, which may require as much as 40% down. The lessee gets to conserve money it can release elsewhere. It likewise enhances its return on the leasehold financial investment. Income: The lessor gets a constant stream of income while keeping ownership of the land. The lessor preserves the worth of the earnings through the usage of an escalation clause in the lease. This entitles the lessor to increase leas periodically. Failure to pay rent gives the lessor the right to force out the renter.
  
  The downsides 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 received capital gains treatment. Instead, it will pay ordinary business rates on its lease income. 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 obtaining versus its equity in the land throughout the ground lease term.
  
  Ground Lease Calculator
  
  This is a fantastic business lease . You enter the location, rental rate, and agent's fee. It does the rest.
  
  How Assets America Can Help
  
  Assets America ® will arrange funding for industrial jobs starting at $20 million, with no ceiling. We welcome you to call us for additional information about our complete monetary services.
  
  We can help finance the purchase, construction, or restoration of industrial residential or commercial property through our network of private financiers and banks. For the finest in industrial property funding, Assets America ® is the smart choice.
  
  - What are the various types 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 post, 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 net. 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 responsible 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 two possibilities for completion of a ground lease. The first is that the lessor acquires all enhancements that the lessee made during the lease. The second is that the lessee needs to destroy the improvements it made.
  
  - For how long do ground leases usually last?
  
  Typically, a ground lease term reaches at lease 5 to ten years beyond the leasehold mortgage. For instance, 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 leases extend as far as 99 years.