Do you own land, maybe with dilapidated residential or commercial property on it? One method to extract worth from the land is to sign a ground lease. This will enable you to make income and potentially capital gains. In this article, we'll explore,
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- 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), a tenant develops a piece of land during the lease period. Once the lease expires, the tenant turns over the residential or commercial property improvements to the owner, unless there is an exception.
  
  Importantly, the renter is accountable for paying all residential or commercial property taxes throughout the lease duration. The acquired improvements allow the owner to sell the residential or commercial property for more cash, 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 building on it. Sometimes, the land has a structure already on it that the lessee should 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 diminishes the improvements during the lease period. That control goes back to the owner/lessor upon the expiration of the lease.
  
  Look for Financing
  
  Ground Lease Subordination
  
  One essential element of a ground lease is how the lessee will finance enhancements to the land. A key plan is whether the property owner will accept subordinate his concern on claims if the lessee defaults on its debt.
  
  That's exactly what occurs in a subordinated ground lease. Thus, the residential or commercial property deed becomes collateral for the lender if the lessee defaults. In return, the property owner asks for higher rent on the residential or commercial property.
  
  Alternatively, an unsubordinated ground lease preserves the property manager's leading priority claims if the leaseholder defaults on his payments. However this might discourage lenders, who would not 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 complex than routine commercial leases. Here are some elements that go into structuring a ground lease:
  
  1. Term
  
  The lease needs to be adequately long to permit the lessee to amortize the cost of the improvements it makes. Simply put, the lessee should make adequate profits during the lease to spend for the lease and the enhancements. Furthermore, the lessee needs to make a sensible return on its financial investment after paying all expenses.
  
  The most significant chauffeur of the lease term is the funding that the lessee arranges. 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 durations might have a 20-year lease term.
  
  2. Rights and Responsibilities
  
  Beyond the arrangements for paying rent, a ground lease has several unique functions.
  
  For example, when the lease ends, what will take place to the enhancements? The lease will define whether they go back to the lessor or the lessee must remove them.
  
  Another function is for the lessor to assist the lessee in acquiring essential licenses, licenses and zoning variations.
  
  3. Financeability
  
  The loan provider needs to draw on protect its loan if the lessee defaults. This is tough in an unsubordinated ground lease because the lessor has first priority in the case of default. The loan provider just deserves to claim the leasehold.
  
  However, one remedy is a clause that needs the follower lessee to utilize the lender to finance the new GL. The topic of financeability is complex and your legal experts will need to learn the various intricacies.
  
  Keep in mind that Assets America can assist finance the building or remodelling of industrial residential or commercial property through our network of and banks.
  
  4. Title Insurance
  
  The lessee must set up title insurance for its leasehold. This needs special recommendations to the regular owner's policy.
  
  5. Use Provision
  
  Lenders want the broadest usage provision in the lease. Basically, the arrangement would allow any legal purpose for the residential or commercial property. In this method, the lender can more easily sell the leasehold in case of default.
  
  The lessor may deserve to consent in any brand-new function for the residential or commercial property. However, the lending institution will look for to restrict this right. If the lessor feels highly about restricting specific usages for the residential or commercial property, it ought to define them in the lease.
  
  6. Casualty and Condemnation
  
  The lender controls insurance earnings originating from casualty and condemnation. However, this might conflict with the basic wording of a ground lease, which gives some control to the lessor.
  
  Unsurprisingly, loan providers want the insurance coverage continues to go towards 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, lending institutions insist upon getting involved in the procedures. The lender's requirements for applying the condemnation profits and controlling termination rights mirror those for casualty occasions.
  
  7. Leasehold Mortgages
  
  These are mortgages funding the lessee's enhancements to the ground lease residential or commercial property. Typically, lending institutions balk at lessor's preserving an unsubordinated position with regard to default.
  
  If there is a pre-existing mortgage, the mortgagee needs to concur to an SNDA arrangement. Usually, the GL lender wants first concern regarding subtenant defaults.
  
  Moreover, lenders require that the ground lease remains in force if the lessee defaults. If the lessor sends out a notice of default to the lessee, the lending institution must get a copy.
  
  Lessees desire the right to obtain a leasehold mortgage without the lender's permission. 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 want the right to increase leas after specified periods so that it keeps market-level rents. A "ratchet" boost uses the lessee no security in the face of an economic 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 offer decommissioned shipping containers as an eco-friendly alternative to standard building. The very 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 4 5-year alternatives to extend.
  
  This gives the GL a maximum term of 30 years. The rent escalation provision 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 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 include:
  
  Affordability: Ground rents enable tenants to develop on residential or commercial property that they can't manage to buy. Large store like Starbucks and Whole Foods utilize ground leases to broaden their empires. This permits them to grow without saddling the business with excessive financial obligation. No Deposit: Lessees do not need to put any cash down to take a lease. This stands in plain contrast to residential or commercial property buying, which might require as much as 40% down. The lessee gets to save cash it can release elsewhere. It likewise improves its return on the leasehold investment. Income: The lessor gets a constant stream of income while maintaining ownership of the land. The lessor preserves the value of the earnings through making use of an escalation provision in the lease. This entitles the lessor to increase leas occasionally. Failure to pay rent gives the lessor the right to evict the renter.
  
  The downsides of a ground lease include:
  
  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 simply offered the land, it would have received capital gains treatment. Instead, it will pay ordinary corporate rates on its lease earnings. Control: Without the necessary lease language, the owner might lose control over the land's development and usage. Borrowing: Typically, ground leases restrict the lessor from obtaining against its equity in the land throughout the ground lease term.
  
  Ground Lease Calculator
  
  This is an excellent commercial lease calculator. You enter the area, rental rate, and agent's fee. It does the rest.
  
  How Assets America Can Help
  
  Assets America ® will set up funding for commercial projects starting at $20 million, with no ceiling. We welcome you to call us for additional information about our total monetary services.
  
  We can help fund the purchase, building and construction, or remodelling of commercial residential or commercial property through our network of personal financiers and banks. For the very best in commercial property funding, Assets America ® is the wise choice.
  
  - What are the different types of leases?
  
  They are gross leases, modified gross leases, single net leases, double net leases and triple net leases. The likewise include 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 net. That implies that the lessee pays the residential or commercial property taxes during the lease term. Once the lease ends, the lessor becomes 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 completion of a ground lease. The first is that the lessor seizes all improvements that the lessee made during the lease. The 2nd is that the lessee needs to demolish the improvements it made.
  
  - For how long do ground leases typically 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 improvements, the lease term will run for a minimum of 35 to 40 years. Some ground leases extend as far as 99 years.