Do you own land, possibly with dilapidated residential or commercial property on it? One method to extract worth from the land is to sign a ground lease. This will allow you to make earnings and perhaps capital gains. In this short 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
  
  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 occupant 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 period. The inherited enhancements enable the owner to sell the residential or commercial property for more money, 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 prepared land and constructs a structure 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 improvements, i.e., residential or commercial property that the lessee constructs. Typically, the lessee controls and depreciates 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 crucial element of a ground lease is how the lessee will fund improvements to the land. A key arrangement is whether the landlord will consent to subordinate his top priority on claims if the lessee defaults on its debt.
  
  That's exactly what takes place in a subordinated ground lease. Thus, the residential or commercial property deed becomes security for the lending institution if the lessee defaults. In return, the landlord asks for higher lease on the residential or commercial property.
  
  Alternatively, an unsubordinated ground lease maintains the property manager's top priority claims if the leaseholder defaults on his payments. However this might discourage lenders, who wouldn't be able to take belongings in case of default. Accordingly, the property owner will normally charge lower rent on unsubordinated ground leases.
  
  How to Structure a Ground Lease
  
  A ground lease is more complex than regular commercial leases. Here are some parts that enter into structuring a ground lease:
  
  1. Term
  
  The lease must be adequately long to enable the lessee to amortize the cost of the enhancements it makes. In other words, the lessee must make sufficient profits during 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 most significant driver of the lease term is the funding that the lessee sets up. Normally, the lessee will desire a term that is 5 to ten years longer than the loan amortization schedule.
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  On a 30-year mortgage, that suggests a lease regard to a minimum of 35 to 40 years. However, quick food ground leases with shorter amortization periods might have a 20-year lease term.
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  2. Rights and Responsibilities
  
  Beyond the plans for paying rent, a ground lease has several unique functions.
  
  For example, when the lease expires, what will take place to the enhancements? The lease will define whether they go back to the lessor or the lessee should remove them.
  
  Another function is for the lessor to assist the lessee in obtaining necessary licenses, authorizations and zoning variances.
  
  3. Financeability
  
  The lender should draw on secure its loan if the lessee defaults. This is hard in an unsubordinated ground lease since the lessor has initially top priority when it comes to default. The loan provider just deserves to declare the leasehold.
  
  However, one solution is a provision that needs the follower lessee to utilize the loan provider to fund the brand-new GL. The topic of financeability is complicated and your legal experts will require to learn the various intricacies.
  
  Bear in mind that Assets America can help fund the building and construction or restoration of business residential or commercial property through our network of private financiers and banks.
  
  4. Title Insurance
  
  The lessee should organize title insurance coverage for its leasehold. This needs special recommendations to the regular owner's policy.
  
  5. Use Provision
  
  Lenders desire the broadest use arrangement in the lease. Basically, the arrangement would enable any legal purpose for the residential or commercial property. In this method, the lending institution can more quickly sell the leasehold in case of default.
  
  The lessor might can authorization in any brand-new function for the residential or commercial property. However, the lender will look for to restrict this right. If the lessor feels highly about restricting particular uses for the residential or commercial property, it ought to specify them in the lease.
  
  6. Casualty and Condemnation
  
  The lending institution manages insurance coverage profits coming from casualty and condemnation. However, this may conflict with the standard phrasing of a ground lease, which offers some control to the lessor.
  
  Unsurprisingly, lenders desire the insurance continues to approach the loan, not residential or commercial property remediation. Lenders also require that neither lessors nor lessees can end ground leases due to a casualty without their consent.
  
  Regarding condemnation, lenders firmly insist upon taking part in the proceedings. The lending institution's requirements for using the condemnation profits and controlling termination 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, lenders balk at lessor's maintaining an unsubordinated position with regard to default.
  
  If there is a preexisting mortgage, the mortgagee needs to accept an SNDA contract. Usually, the GL lending institution wants 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 notification of default to the lessee, the loan provider must receive a copy.
  
  Lessees desire the right to obtain a leasehold mortgage without the loan provider's consent. Lenders want the GL to serve as collateral ought to 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 restrict the kind of entity that can hold a leasehold mortgage.
  
  8. Rent Escalation
  
  Lessors desire the right to increase rents after defined periods so that it maintains market-level leas. A "ratchet" increase offers the lessee no defense in the face of an economic decline.
  
  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 offer decommissioned shipping containers as an ecologically friendly alternative to conventional building and construction. The first store 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 offers the GL an optimal term of thirty years. The lease escalation stipulation attended to a 10% rent boost every 5 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 disadvantages.
  
  The benefits of a ground lease include:
  
  Affordability: Ground leases permit renters to develop on residential or commercial property that they can't pay for to buy. Large chain shops like Starbucks and Whole Foods use ground leases to expand their empires. This allows them to grow without saddling the companies with excessive debt. No Down Payment: Lessees do not have to put any money to take a lease. This stands in plain contrast to residential or commercial property purchasing, which might require as much as 40% down. The lessee gets to conserve cash it can deploy elsewhere. It also improves its return on the leasehold financial investment. Income: The lessor receives a stable stream of income while maintaining ownership of the land. The lessor preserves the worth of the earnings through the usage of an escalation provision in the lease. This entitles the lessor to increase rents regularly. Failure to pay rent provides the lessor the right to force out the tenant.
  
  The disadvantages of a ground lease 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 qualified for capital gains treatment. Instead, it will pay regular business rates on its lease income. Control: Without the needed lease language, the owner might lose control over the land's advancement and usage. Borrowing: Typically, ground leases restrict 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 go into the area, rental rate, and agent's cost. It does the rest.
  
  How Assets America Can Help
  
  Assets America ® will arrange financing for business projects beginning at $20 million, with no upper limit. We invite you to call us for more details about our total monetary services.
  
  We can assist finance the purchase, building, or remodelling of commercial residential or commercial property through our network of private financiers and banks. For the best in business property funding, Assets America ® is the clever 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, portion leases, and the topic of this 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 suggests that the lessee pays the residential or commercial property taxes throughout 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 reverts to the lessor. Beyond that, there are 2 possibilities for the end of a ground lease. The first is that the lessor seizes all enhancements that the lessee made during the lease. The second is that the lessee should destroy the enhancements it made.
  
  - How long do ground leases normally last?
  
  Typically, a ground lease term extends to at lease 5 to 10 years beyond the leasehold mortgage. For instance, 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 rents extend as far as 99 years.