Do you own land, perhaps with dilapidated 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 earn income and perhaps capital gains. In this post, we'll check out,
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- 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), an occupant develops a piece of land throughout 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 throughout the lease duration. The allow the owner to offer the residential or commercial property for more money, if so wanted.
  
  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 currently on it that the lessee need to demolish.
  
  The GL specifies 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 period. That control reverts to the owner/lessor upon the expiration of the lease.
  
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  Ground Lease Subordination
  
  One essential element of a ground lease is how the lessee will fund enhancements to the land. A crucial arrangement is whether the landlord will concur to subordinate his concern on claims if the lessee defaults on its financial obligation.
  
  That's precisely what occurs in a subordinated ground lease. Thus, the residential or commercial property deed becomes collateral for the lending institution if the lessee defaults. In return, the proprietor requests greater lease on the residential or commercial property.
  
  Alternatively, an unsubordinated ground lease maintains the landlord's leading concern claims if the leaseholder defaults on his payments. However this might dissuade lending institutions, who would not be able to take belongings in case of default. Accordingly, the landlord will typically charge lower lease on unsubordinated ground leases.
  
  How to Structure a Ground Lease
  
  A ground lease is more complicated than regular business leases. Here are some parts that go into structuring a ground lease:
  
  1. Term
  
  The lease must be adequately long to permit the lessee to amortize the expense of the improvements it makes. Simply put, the lessee must make sufficient revenues during the lease to pay for the lease and the improvements. Furthermore, the lessee should make a sensible return on its investment after paying all costs.
  
  The most significant motorist 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.
  
  On a 30-year mortgage, that indicates a lease regard to at least 35 to 40 years. However, junk food ground rents with much shorter amortization periods may have a 20-year lease term.
  
  2. Rights and Responsibilities
  
  Beyond the plans for paying lease, a ground lease has a number of distinct features.
  
  For instance, when the lease ends, what will take place to the improvements? The lease will specify whether they revert to the lessor or the lessee should remove them.
  
  Another feature is for the lessor to help the lessee in acquiring required licenses, permits and zoning variations.
  
  3. Financeability
  
  The lender needs to draw on safeguard its loan if the lessee defaults. This is tough in an unsubordinated ground lease because the lessor has initially top priority in the case of default. The loan provider just deserves to claim the leasehold.
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  However, one solution is a stipulation that needs the successor lessee to utilize the lending institution to fund the new GL. The subject of financeability is intricate and your legal specialists will require to wade through the various complexities.
  
  Bear in mind that Assets America can assist fund the building or renovation of commercial residential or commercial property through our network of personal financiers and banks.
  
  4. Title Insurance
  
  The lessee should set up title insurance for its leasehold. This needs unique recommendations to the regular owner's policy.
  
  5. Use Provision
  
  Lenders want the broadest usage arrangement in the lease. Basically, the arrangement would allow any legal purpose for the residential or commercial property. In this method, the loan provider can more quickly offer the leasehold in case of default.
  
  The lessor might can consent in any new purpose for the residential or commercial property. However, the lender will seek to limit this right. If the lessor feels highly about forbiding particular usages for the residential or commercial property, it ought to specify them in the lease.
  
  6. Casualty and Condemnation
  
  The lender controls insurance coverage proceeds coming from casualty and condemnation. However, this might conflict with the standard wording of a ground lease, which gives some control to the lessor.
  
  Unsurprisingly, lending institutions desire the insurance proceeds to approach the loan, not residential or commercial property repair. Lenders likewise need that neither lessors nor lessees can terminate ground leases due to a casualty without their permission.
  
  Regarding condemnation, lending institutions insist upon participating in the procedures. The lender'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 improvements to the ground lease residential or commercial property. Typically, lending institutions balk at lessor's keeping an unsubordinated position with regard to default.
  
  If there is a pre-existing mortgage, the mortgagee should accept an SNDA arrangement. Usually, the GL lender wants first priority concerning subtenant defaults.
  
  Moreover, lenders require that the ground lease stays in force if the lessee defaults. If the lessor sends out a notice of default to the lessee, the loan provider should receive a copy.
  
  Lessees desire the right to acquire a leasehold mortgage without the lender's authorization. Lenders want the GL to act as collateral needs to the lessee default.
  
  Upon foreclosure of the residential or commercial property, the lender receives the lessee's leasehold interest in the residential or commercial property. Lessors might desire to restrict the type of entity that can hold a leasehold mortgage.
  
  8. Rent Escalation
  
  Lessors want the right to increase rents after specified periods so that it preserves market-level leas. A "ratchet" boost uses the lessee no protection in the face of a financial decline.
  
  Ground Lease Example
  
  As an example of a ground lease, think about one signed for a Starbucks drive-through shipping container store in Portland.
  
  Starbucks' concept is to sell decommissioned shipping containers as an eco-friendly option to standard building. The first store opened in Seattle, followed by Kansas City, Denver, Chicago, and one in Portland, OR.
  
  It was a rather unusual ground lease, in that it was a 10-year triple-net ground lease with four 5-year alternatives to extend.
  
  This provides the GL a maximum term of thirty years. The lease escalation stipulation attended to a 10% rent increase every 5 years. The lease worth 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 downsides.
  
  The advantages of a ground lease include:
  
  Affordability: Ground rents enable occupants to develop on residential or commercial property that they can't manage to buy. Large chain stores like Starbucks and Whole Foods use ground leases to broaden their empires. This allows them to grow without saddling the companies with excessive financial obligation. No Deposit: Lessees do not need to put any money down to take a lease. This stands in stark contrast to residential or commercial property purchasing, which may need as much as 40% down. The lessee gets to conserve cash it can release elsewhere. It likewise enhances its return on the leasehold investment. Income: The lessor receives a constant stream of earnings while keeping ownership of the land. The lessor keeps the value of the earnings through the use of an escalation provision in the lease. This entitles the lessor to increase rents periodically. Failure to pay rent provides the lessor the right to force out the tenant.
  
  The downsides of a ground lease include:
  
  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 gotten approved for capital gains treatment. Instead, it will pay ordinary business rates on its lease income. Control: Without the essential lease language, the owner might lose control over the land's development and usage. Borrowing: Typically, ground leases restrict the lessor from borrowing against its equity in the land during the ground lease term.
  
  Ground Lease Calculator
  
  This is an excellent industrial lease calculator. You go into the area, rental rate, and representative's cost. It does the rest.
  
  How Assets America Can Help
  
  Assets America ® will organize financing for commercial jobs starting at $20 million, without any upper limit. We welcome you to call us for more details about our total monetary services.
  
  We can help fund the purchase, construction, or renovation of industrial residential or commercial property through our network of private investors and banks. For the very best in commercial real estate funding, Assets America ® is the clever 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 consist of outright leases, portion leases, and the topic of this post, ground leases. All of these leases provide 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 implies 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 happens at the end of a ground lease?
  
  The land constantly goes back to the lessor. Beyond that, there are two possibilities for the end of a ground lease. The very first is that the lessor acquires all enhancements that the lessee made throughout the lease. The second is that the lessee should demolish the improvements it made.
  
  - For how long do ground leases normally 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 enhancements, the lease term will run for at least 35 to 40 years. Some ground leases extend as far as 99 years.