Do you own land, maybe 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 enable you to make income and perhaps capital gains. In this article, 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
  
  What is a Ground Lease?
  
  In a ground lease (GL), a renter establishes a piece of land during the lease period. Once the lease ends, the tenant turns over the residential or commercial property improvements 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 acquired enhancements enable the owner to offer 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 building on it. Sometimes, the land has a structure already on it that the lessee need to 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.
  
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  Ground Lease Subordination
  
  One essential aspect of a ground lease is how the lessee will fund enhancements to the land. An essential arrangement is whether the property owner will consent to subordinate his priority on claims if the lessee defaults on its debt.
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  That's precisely what occurs in a subordinated ground lease. Thus, the residential or commercial property deed ends up being security for the lender if the lessee defaults. In return, the property owner asks for higher rent on the residential or commercial property.
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  Alternatively, an unsubordinated ground lease preserves the landlord's top priority claims if the leaseholder defaults on his payments. However this might dissuade lenders, who wouldn't be able to take ownership in case of default. Accordingly, the property owner will normally charge lower lease on unsubordinated ground leases.
  
  How to Structure a Ground Lease
  
  A ground lease is more complex than routine commercial leases. Here are some elements that enter into structuring a ground lease:
  
  1. Term
  
  The lease should be sufficiently long to enable the lessee to amortize the cost of the enhancements 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 should make an affordable return on its investment after paying all costs.
  
  The most significant driver of the lease term is the financing 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 implies a lease regard to a minimum of 35 to 40 years. However, junk food ground leases with much shorter amortization durations might 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 expires, what will take place to the enhancements? The lease will define whether they revert to the lessor or the lessee need to remove them.
  
  Another feature is for the lessor to help the lessee in acquiring required licenses, licenses and zoning variances.
  
  3. Financeability
  
  The lender should have option to secure its loan if the lessee defaults. This is challenging in an unsubordinated ground lease because the lessor has initially concern when it comes to default. The lender just has the right to claim the leasehold.
  
  However, one treatment is a stipulation that requires the successor lessee to use the lending institution to finance the new GL. The topic of financeability is intricate and your legal experts will require to wade through the different complexities.
  
  Bear in mind that Assets America can assist finance the building or remodelling of commercial residential or commercial property through our network of personal investors and banks.
  
  4. Title Insurance
  
  The lessee needs to arrange title insurance coverage for its leasehold. This requires special endorsements to the routine owner's policy.
  
  5. Use Provision
  
  Lenders want the broadest use arrangement in the lease. Basically, the provision would permit any legal function for the residential or commercial property. In this way, the lending institution can more easily sell the leasehold in case of default.
  
  The lessor may have the right to approval in any new function for the residential or commercial property. However, the lending institution will look for to restrict this right. If the lessor feels strongly about prohibiting certain usages for the residential or commercial property, it should specify them in the lease.
  
  6. Casualty and Condemnation
  
  The lending institution controls insurance coverage earnings coming from casualty and condemnation. However, this may clash with the basic phrasing of a ground lease, which provides some control to the lessor.
  
  Unsurprisingly, lenders desire the insurance coverage continues to go toward the loan, not residential or commercial property remediation. Lenders likewise need that neither lessors nor lessees can end ground leases due to a casualty without their permission.
  
  Regarding condemnation, lending institutions firmly insist upon taking part in the proceedings. The lending institution's requirements for using the condemnation profits and managing termination rights mirror those for casualty occasions.
  
  7. Leasehold Mortgages
  
  These are mortgages financing the lessee's improvements to the ground lease residential or commercial property. Typically, loan providers balk at lessor's maintaining an unsubordinated position with respect to default.
  
  If there is a pre-existing mortgage, the mortgagee must concur to an SNDA agreement. Usually, the GL lender wants very first concern relating to subtenant defaults.
  
  Moreover, lenders require that the ground lease remains in force if the lessee defaults. If the lessor sends out a notification of default to the lessee, the lending institution must get a copy.
  
  Lessees want the right to get a leasehold mortgage without the lender's approval. Lenders desire the GL to act as security ought to 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 want to restrict the type of entity that can hold a leasehold mortgage.
  
  8. Rent Escalation
  
  Lessors want the right to increase leas after specified periods so that it maintains market-level rents. A "ratchet" increase uses the lessee no protection in the face of a financial decline.
  
  Ground Lease Example
  
  As an example of a ground lease, consider one signed for a Starbucks drive-through shipping container shop in Portland.
  
  Starbucks' idea is to sell decommissioned shipping containers as an eco-friendly option to standard construction. The first store 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 alternatives to extend.
  
  This gives the GL an optimal regard to 30 years. The lease escalation provision offered a 10% lease increase every 5 years. The lease worth was simply under $1 million with a cap rate of 5.21%.
  
  The initial 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 consist of:
  
  Affordability: Ground rents permit renters to build on residential or commercial property that they can't afford to purchase. Large store like Starbucks and Whole Foods use ground leases to broaden their empires. This permits them to grow without saddling the business with excessive financial obligation. No Down Payment: Lessees do not need to put any money 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 save money it can deploy somewhere else. It likewise improves its return on the leasehold investment. Income: The lessor gets a steady stream of earnings while maintaining ownership of the land. The lessor keeps the value of the income through using an escalation provision in the lease. This entitles the lessor to increase leas regularly. Failure to pay rent gives 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 merely sold the land, it would have gotten approved for capital gains treatment. Instead, it will pay normal corporate rates on its lease income. Control: Without the required lease language, the owner might lose control over the land's development and usage. Borrowing: Typically, ground leases forbid the lessor from obtaining 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 location, rental rate, and representative's cost. It does the rest.
  
  How Assets America Can Help
  
  Assets America ® will organize funding for industrial jobs starting at $20 million, without any ceiling. We invite you to contact us for more details about our complete financial services.
  
  We can assist fund the purchase, building, or remodelling of commercial residential or commercial property through our network of personal financiers and banks. For the very best in business real estate financing, Assets America ® is the clever option.
  
  - What are the different kinds of leases?
  
  They are gross leases, gross leases, single net leases, double net leases and triple net leases. The also consist of absolute leases, portion leases, and the topic of this post, ground leases. All of these leases supply 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 ends up being responsible for paying the residential or commercial property taxes.
  
  - What takes place at the end of a ground lease?
  
  The land always goes back to the lessor. Beyond that, there are two 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 second is that the lessee must demolish the improvements it made.
  
  - 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 instance, 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 leases extend as far as 99 years.