What Is A Ground Lease

Do you own land, maybe with shabby residential or commercial property on it? One way to extract value from the land is to sign a ground lease. This will allow you to make earnings and potentially capital gains. In this post, we'll explore,


- 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), a tenant 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 renter is accountable for paying all residential or commercial property taxes throughout the lease period. The acquired improvements 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 structure on it. Sometimes, the land has a structure currently on it that the lessee need to destroy.


The GL specifies who owns the land and the enhancements, 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 important element of a ground lease is how the lessee will finance improvements to the land. An essential arrangement is whether the landlord will accept subordinate his priority on claims if the lessee defaults on its debt.


That's precisely what occurs in a subordinated ground lease. Thus, the residential or commercial property deed becomes security for the loan provider if the lessee defaults. In return, the proprietor asks for greater lease on the residential or commercial property.


Alternatively, an unsubordinated ground lease preserves the property manager's leading concern claims if the leaseholder defaults on his payments. However this might prevent loan providers, who wouldn't be able to occupy in case of default. Accordingly, the property manager will usually charge lower rent on unsubordinated ground leases.


How to Structure a Ground Lease


A ground lease is more complicated than regular business leases. Here are some elements that go into structuring a ground lease:


1. Term


The lease should be sufficiently long to enable the lessee to amortize the expense of the improvements it makes. In other words, the lessee should make sufficient earnings throughout the lease to pay for the lease and the improvements. Furthermore, the lessee needs to make a sensible return on its financial investment after paying all expenses.


The most significant motorist of the lease term is the financing that the lessee arranges. 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 regard to at least 35 to 40 years. However, fast food ground leases with shorter amortization durations may have a 20-year lease term.


2. Rights and Responsibilities


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


For example, when the lease expires, what will occur to the improvements? The lease will specify whether they go back to the lessor or the lessee must remove them.


Another feature is for the lessor to assist the lessee in getting necessary licenses, licenses and zoning variations.


3. Financeability


The lending institution needs to have option to safeguard its loan if the lessee defaults. This is challenging in an unsubordinated ground lease due to the fact that the lessor has first priority in the case of default. The lending institution only can claim the leasehold.


However, one remedy is a clause that requires the successor lessee to utilize the loan provider to fund the new GL. The topic of financeability is complex and your legal professionals will need to wade through the various complexities.


Remember that Assets America can help finance the construction or restoration of business residential or commercial property through our network of personal investors and banks.


4. Title Insurance


The lessee must arrange title insurance for its leasehold. This needs unique recommendations to the routine owner's policy.


5. Use Provision


Lenders want the broadest use provision in the lease. Basically, the arrangement would permit any legal purpose for the residential or commercial property. In this method, the loan provider can more easily sell the leasehold in case of default.


The lessor might have the right to approval in any brand-new function for the residential or commercial property. However, the lending institution will look for to limit this right. If the lessor feels highly about prohibiting specific uses for the residential or commercial property, it needs to specify them in the lease.


6. Casualty and Condemnation


The lending institution manages insurance coverage earnings stemming from casualty and condemnation. However, this might contrast with the standard phrasing of a ground lease, which gives some control to the lessor.


Unsurprisingly, loan providers desire the insurance proceeds to approach the loan, not residential or commercial property repair. Lenders likewise need that neither lessors nor lessees can leases due to a casualty without their authorization.


Regarding condemnation, loan providers firmly insist upon participating in the procedures. The lender's requirements for using the condemnation profits and managing termination rights mirror those for casualty events.


7. Leasehold Mortgages


These are mortgages funding the lessee's enhancements to the ground lease residential or commercial property. Typically, lenders balk at lessor's preserving an unsubordinated position with respect to default.


If there is a preexisting mortgage, the mortgagee needs to consent to an SNDA agreement. Usually, the GL lending institution wants very first concern regarding subtenant defaults.


Moreover, lenders need that the ground lease remains in force if the lessee defaults. If the lessor sends a notification of default to the lessee, the lender should get a copy.


Lessees want the right to acquire a leasehold mortgage without the lender's approval. Lenders want the GL to serve as security 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 restrict the type of entity that can hold a leasehold mortgage.


8. Rent Escalation


Lessors want the right to increase leas after defined durations so that it keeps market-level leas. A "cog" increase uses 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 sell decommissioned shipping containers as an eco-friendly option to conventional building. 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 offers the GL a maximum regard to thirty years. The lease escalation provision attended to a 10% rent boost every 5 years. The lease worth was simply 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 benefits and downsides.


The benefits of a ground lease consist of:


Affordability: Ground leases enable occupants to build on residential or commercial property that they can't afford to buy. Large store like Starbucks and Whole Foods use ground leases to broaden their empires. This enables them to grow without saddling the companies with excessive financial obligation.
No Deposit: Lessees do not have to put any cash down to take a lease. This stands in plain contrast to residential or commercial property acquiring, which may need as much as 40% down. The lessee gets to conserve cash it can deploy somewhere else. It also enhances its return on the leasehold financial investment.
Income: The lessor gets a consistent stream of earnings while retaining ownership of the land. The lessor keeps the worth of the earnings through using an escalation clause in the lease. This entitles the lessor to increase rents regularly. Failure to pay lease provides 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 runs the danger of losing its residential or commercial property if the lessee defaults.
Taxes: Had the owner merely offered the land, it would have received capital gains treatment. Instead, it will pay normal business rates on its lease earnings.
Control: Without the needed lease language, the owner may lose control over the land's development and usage.
Borrowing: Typically, ground leases forbid the lessor from borrowing against its equity in the land throughout the ground lease term.


Ground Lease Calculator


This is a fantastic commercial lease calculator. You get in the location, rental rate, and representative's charge. It does the rest.


How Assets America Can Help


Assets America ® will arrange financing for commercial tasks beginning at $20 million, without any ceiling. We invite you to contact us to learn more about our total financial services.


We can assist fund the purchase, construction, or remodelling of commercial residential or commercial property through our network of private investors and banks. For the finest in business property financing, Assets America ® is the wise 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 likewise consist of outright leases, portion leases, and the topic of this short article, ground leases. All of these leases supply 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 means that the lessee pays the residential or commercial property taxes throughout the lease term. Once the lease ends, the lessor ends up being accountable for paying the residential or commercial property taxes.


- What takes place at the end of a ground lease?


The land constantly reverts to the lessor. Beyond that, there are 2 possibilities for completion 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 improvements it made.


- How long do ground leases typically 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 leases extend as far as 99 years.